THE BUSINESS ENVIRONMENT - I

Environment and its characteristics

Environmental Sectors
Environmental Scanning and Appraisal
Porter’s Five Forces
Layers of the business environment
 The PESTEL framework
 The PESTEL framework categorises
environmental influences into six main types:
political, economic, social, technological, environmental,
legal

 PESTEL provides a comprehensive list of

influences on the possible success or failure of
particular strategies
 Key drivers of change
Key drivers for change:
• The environmental factors likely to have a high
impact on the success or failure of strategy
• For example, the birth rate is a key driver for those
planning nursery education provision in the public
sector
• Typically key drivers vary by industry or sector
 Using the PESTEL framework
• Apply selectively –identify specific factors which impact
on the industry, market and organisation in question
• Identify factors which are important currently but also
consider which will become more important in the next
few years
• Use data to support the points and analyse trends
using up to date information
• Identify opportunities and threats – the main point of
the exercise!
 Scenarios
Scenarios are detailed and plausible views of how the
environment of an organisation might develop in the
future based on key drivers of change about which there
is a high level of uncertainty

• Build on PESTEL analysis

• Identify key drivers of change – PESTEL factors that
have the most impact in the future but have uncertain
outcomes
• For each key driver select opposing outcomes where
each leads to very different consequences
 Carrying out scenario analysis
• Develop scenario ‘stories’ - That is, coherent and
plausible descriptions of the environment that
result from opposing outcomes
• Identify the impact of each scenario on the
organisation and evaluate future strategies in the
light of the anticipated scenarios
• Scenario analysis is used in industries with long
planning horizons for example, the oil industry or
airlines
Consider the construction industry in UAE.
Construct scenarios for the evolution of the
future environment. What are the implications
for firm strategy?
 Industries, markets and sectors
An industry is a group of firms producing products and
services that are essentially the same. For example,
automobile industry and airline industry
A market is a group of customers for specific products
or services that are essentially the same (e.g. the
market for luxury cars in Germany)
A sector is a broad industry group (or a group of
markets) especially in the public sector (e.g. the health
sector)
The Five Forces Framework
 Porter’s Five Forces
• Developed by Michael Porter: forces that shape and influence the
industry or market the organisation operates in.
– Strength of Barriers to Entry - how easy is it
for new rivals to enter the industry?
– Extent of rivalry between firms – how competitive
is the existing market?
– Supplier power – the greater the power, the less control the
organisation has on the supply of its inputs
– Buyer power – how much power do customers
in the industry have?
– Threat from substitutes – what alternative products
and services are there and what is the extent
of the threat they pose?

• The ‘SIXTH FORCE’:

How the wider environment shapes the other 5 Forces
How Complements interact to create value
 Elements of Industry Structure: Porter’s Five-Forces
Barriers to Entry Rivalry Among Competitors
- Economies of scale - Concentration & balance among competitors
- Product differentiation New Entrants - Industry growth
- Brand identification - Fixed (or storage) cost
- Switching cost - Product differentiation
- Access to distribution channels - Intermittent capacity increasing
- Capital requirements - Switching costs
- Access to latest technology - Corporate strategic stakes
- Experience & learning effects

Government Action Barriers to Exit

- Industry protection - Asset specialization
- Industry regulation - One-time cost of exit
- Consistency of policies - Strategic interrelationships with other businesses
- Capital movements among countries Industry - Emotional barriers
- Custom duties - Government & social restrictions
Competitors
- Foreign exchange
- Foreign ownership
- Assistance provided to competitors Intensity
of Rivalry
Suppliers Buyers
Bargaining Power of Suppliers Bargaining Power of Buyers

Power of Suppliers Power of Buyers

- Number of important suppliers - Number of important buyers
- Availability of substitutes for the supplier's products - Availability of substitutes for the industry products
- Differentiation or switching cost of supplier's products - Buyer's switching costs
- Supplier's threat of forward integration - Buyer's threat of backward integration
- Industry threat of backward integration Substitutes - Industry threat of forward integration
- Supplier's contribution to quality or service of the - Contribution to quality or service of buyer's products
industry products - Total buyer's cost contributed by the industry
- Total industry cost contributed by suppliers Availability of Substitutes - Buyer's profitability
- Importance of the industry to supplier's profit - Availability of close substitutes
- User's switching costs
- Substitute producer's profitability
& aggressiveness
- Substitute price-value
 Porter’s Five-Forces Model Applied to the
Pharmaceutical Industry in the Early 1990s
Barriers to Entry (Very Attractive)
- Steep R&D experience curve effects
- Large economies-of-scale barriers in R&D and sales force Bargaining Power of Buyers
- Critical mass in R&D and marketing require global scale (Mildly Unattractive)
- Significant R&D and marketing costs
- High risk inherent in the drug development process - The traditional purchasing process
was highly price insensitive: the
- Increasing threat of new entrants coming
from biotechnology companies consumer (the patient) did not buy,
and the buyer (the physician) did
not pay
- Large power of buyers, particularly
plan sponsors and cost containment
organizations, are influencing the
decisions to prescribe less expensive
Intensity drugs
Bargaining Power of Suppliers
(Very Attractive) of Rivalry - Mail-order pharmacies are obtaining
& large discounts on volume drugs
- Mostly commodities
- Individual scientists may Competition - Large aggregated buyers (e.g., hospital
suppliers, large distributors, government
have some personal leverage institutions) are progressively replacing
the role of individual customers
- Important influence of the
government in the regulation of the
buying process
Threat of Substitutes (Mildly Unattractive)
- Generic and "Me-too" drugs are weakening branded, proprietary drugs
- More than half of the life of the drug patent is spent in the product development and approval process
- Technological development is making imitation easier
- Consumer aversion to chemical substances erodes the appeal for pharmaceutical drugs
Intensity of Rivalry (Attractive)
- Global competition concentrated among fifteen large companies
- Most companies focus on certain types of disease therapy
- Competition among incumbents limited by patent protection
SUMMARY ASSESSMENT OF
- Competition based on price and product differentiation THE INDUSTRY ATTRACTIVENESS
- Government intervention and growth of "Me-too" drugs increase rivalry (Attractive)
- Strategic alliances establish collaborative agreements among industry players
- Very profitable industry, however with declining margins
 THE BLACK SWAN:
The Impact of the Highly Improbable (Nassim Nicholas Taleb)

• Unexpected catastrophes and shortages dominated the headlines

in the 1st quarter of 2011
– Japan was hit by a magnitude of 9.0 earthquake (Sendai) and tsunami causing
a nuclear disaster, persistent power outages, and a host of other societal and
economic challenges
– Middle-East nations experienced severe political eruptions and regime-
shaking protests in Tunisia, Algeria, Egypt, Libya…, pushing oil prices to over
$100 per barrel
– Portugal and Greece tottered on the edge of insolvency
– Christchurch was hit by two major earthquakes
– Queensland suffered the worst floods in recorded history in six river systems
• All the above are illustrations of HIGH-IMPACT, LOW-FREQUENCY
UPHEAVALS
 The Black Swan attributes
• It is an outlier

• It carries an extreme impact

• Despite its outlier status, human nature makes us concoct

explanations for its occurrence after the fact, making it explainable
and predictable

• Therefore, Black Swans carry increased risks, negatively impacting

customers, suppliers and other stake holders

• Organizations rely on Enterprise Risk Management (ERM)

department to identify potential business disruptions, map out
their most likely effects, and develop mitigation plans and
preventive actions—ERM became indispensable post 9/11
 The ERM group and the Black Swan

• ERM groups focus on risks that business frequently encounter:

– Complying with regulations
– Suitable accounting for its activities
– Operating in an ethical and legal manner,
• rather than on Black Swans

• The reason:
– High invest in ERM solutions are essential
– High-impact, Low-frequency events can stem from numerous sources
and too varied
– Internal politics and culture of many large corporations create blind
spots that are difficult for ERM groups to comprehend using standard
ERM tools
 Hence, the recommendations:
• A disrupter analysis stress test
– Mapping the enterprise (focus groups)
• Geographic footprints, composition and construction of its supply chain, channel partners
and customers
• Apple’s supply of lithium-ion batteries used in iPods, dried up
• A critical polymer used to make batteries was supplied by the Kureha Corporation, where
operations were disrupted by the 2011 tsunami in Sendai—Kureha’s share of global market
in polyvinylidene fluoride is 70%
• So, map second-order relationships
– Create the disrupter list
• Possible catastrophe in environmental, economic, political, societal, technological events
• Categorize by the impact of the event and magnitude of the event
– Asking “what if”
• Likelihood of events occurring and the relative impact and consequences
• Off-shoring creates greater risks in far-flung locations—what if the labor unrest in southern
China develops into a disruptive labor movement
– Implementing contingency plans
• Involving the board, the executive team and the ERM staff
THE BLACK SWANS
THE CAGE DISTANCE FRAMEWORK:
Distance Still Matters:
The Hard Reality of Global Expansion
Pankaj Ghemawat, HBS
 The Impact of DISTANCE

• Why did U.S. media giant Star TV lose $500 million

trying to deliver TV programming to Asia?

• It was so dazzled by the foreign market’s immensity

that it ignored the difficulties of pioneering new
territories.

– It wrongly assumed that Asian viewers wanted English-

language-programming
• Companies routinely overestimate the attractiveness of foreign markets
• Dazzled by the sheer size of untapped markets, they lose sight of the difficulties of
pioneering new, often very different territories
• The problem lies in the use of analytic tools such as country portfolio analysis
(CPA) that focus on national wealth, consumer income, and people's propensity to
consume
• CPA emphasizes potential sales and ignores the costs and risks of doing business in
a new market that result from the barriers created by distance which does not
refer only to geography
• The CAGE framework of distance presented here considers four attributes:
– cultural distance (religious beliefs, race, social norms, and language);
– administrative or political distance (colony-colonizer links, common currency,
and trade arrangements);
– geographic distance (the physical distance between the two countries, the size
of the target country, access to waterways and the ocean, internal topography,
and transportation and communications infrastructures); and
– economic distance (disparities in the two countries' wealth and variations in
the cost and quality of financial and other resources)
The CAGE Distance Framework in practice
McKinsey’s 7-S Model
Three branches of Strategy
The Exploring Strategy Model
 The Fourteen Fundamental Questions
STRATEGIC POSITION STRATEGIC CHOICES
• What are the • How should business
environmental units compete?
opportunities & threats? • Which businesses to
• What are the include in the portfolio?
organization’s strengths & • Where should the
weaknesses? organization compete
• What is the basic purpose internationally?
of the organization? • Is the organization
• How does culture shape innovating appropriately?
strategy? • Should the organization
buy other companies, ally
or go it alone?
STRATEGY IN ACTION
• Which strategies are
suitable, acceptable and
feasible?
• What kind of strategy-
making process is
needed?
• What are the required
organization structures
and systems?
• How should the
organization manage
necessary changes?
• Who should do what in
the strategy process?
 Exploring strategy in different contexts

The Exploring Strategy Model can be applied in many

contexts.
In each context, the balance of strategic issues differs:
• Small Businesses (purpose and growth issues)
• Multinational Corporations (geographical scope and
structure/control issues)
• Public Sector Organisations (service/quality and
managing change issues)
• Not-For-Profit Organisations (purpose and funding
issues)
 What is a Business Model?
• The functions of a Business Model are to:
– Identify the market segment
– Articulate the value proposition
– Define the structure of the Value Chain
– Describe the position of the firm in the value network
– Formulate the competitive strategy
– Estimate the cost structure and profit potential
• All the functions are inter-related
• Creating a value proposition is a part of business strategy.
Kaplan and Norton: "Strategy is based on a differentiated
customer value proposition. Satisfying customers is the source
of sustainable value creation
The value Chain net
 What Market Leaders do?
“best product”

Product/Brand
Leadership

Product
differentiation
Zone of Mediocrity

Operational Customer
competence responsive

Operational Customer
Excellence Intimacy
“best total cost” “best total solution”
Resources & Capabilities & Activities underpin the
Delivery of the Disciplines

Resources &
Capabilities & Product/Brand
Activities

Operational Customer
Excellence Intimacy
 Reflection For Your Business
The Discipline of Market Leaders

• When you select a Discipline you also select a type of

customer
• Once selected, a Discipline needs to be focused in on with
resources, capabilities and activities aligned
• The key question, should you focus on one, two or three of
the Disciplines?
• If more than one Discipline chosen, how do you align the
organisation?
– An additional complication: you need to manage for today and build
for tomorrow
Quality/Differentiation
 There Are Many Drivers of Differentiation
- the Marketing P’s are Usefully Considered
Product/Service/Place/Promotion/People/Presence/Processes
• Quality of inputs, skill/experience of staff
• Technology employed in design/production
• Product quality/features/performance offered
• Ability to customise
• Product range/new products – innovation
• Brand/reputation/image
• Services offered, relationships built
• Location
• Linkages
• Management processes adopted (i.e. TQM)
• Functional/activity fit and reinforcement
• Partners (suppliers, alliances etc.)
 Positioning
- Definition of Market Perceived Quality*

• The customer’s judgment not yours

• Both the product and the associated services
• Product/Brand Leadership and Customer Intimacy
• Not absolute, but relative to competitors
• Does not include price

* Source Adapted from the : Profit Impact of Market Strategy Business Unit database
 "The Customers Judgement Not Yours"
• When you have not got information on the 'customer's
judgment'
– We do not want you to spend time and expense to get it
– 'guesstimate', get informed input 'painlessly' and move on
• But feel uncomfortable, research shows that on average:
– We think we are better at satisfying customer needs than customers
do
– We think competitors are worse at satisfying customer needs than
customers do
 Where You Have Customers
With Very Varied Needs
• Focus in on a segment of similar customers for the Assignment – or
even one customer
– This applies to both external and internal customer
Assignments
• When there are different stakeholders in the Decision Making
Unit/Decision Making Process (Marketing Course:
– Initiator, Influencer, Decider, Buyer, User)
Select one of the following approaches:
- Focus in on one stakeholder noting the influence of
other stakeholders
- List needs of each stakeholder in your evaluation
noting their relative importance
“If I had asked customers what they wanted they would have
told me a faster horse” – Henry Ford
• Customers may be unable to articulate their
product/service needs or the attributes/features they are
willing to pay for (despite discrete choice analysis)
• In many situations we have to lead rather than respond
• The focus is on understanding ‘the job to be done’
• Observe – get inside customers head
– Ethnographic research with anthropologists, sociologists etc. is
used by many companies