Module “Strategy”

Strategic Analysis – The Business Environment 1

Building Competence. Crossing Borders.

Institute for Organizational Viability

Learning Objectives & Compulsory Reading

Students…
− understand the PESTEL framework and are able to apply it.
− know models for analyzing industries and are able to explain these models.
− are able to explain the key assumptions of these models.
− are able to apply these models in case examples.

Compulsory reading:
− Whittington et al. (2020)
− Reader (Moodle)

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 Strategic Management Process

Business environment analysis Company analysis

Strategic
Analysis SWOT
(Strategic Position) Strengths / Weaknesses
Opportunities / Threats

Development of strategies
Strategy
Evaluation of strategies
Formulation Business Strategy Corporate Strategy

(Strategic Choices)
Decision

Implementing
Implementation and control
Strategy
(Strategy in Action)

Source: Based on Hungenberg (2014), p. 9 and Johnson et al. (2014), pp. 10-15 3
Agenda

− Analysis of the macro-environment

− Analysis of industry structures

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 The Business Environment

Source: Whittington et al. (2020), p. 35 5

Challenges with Impacts on Organizations

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 Abolition of the Euro minimum rate 2015 - good or bad?

"Four years ago, on 15 January 2015, the

Swiss economy suffered a shock. On that
day, the Swiss National Bank (SNB)
unexpectedly lifted the minimum euro
exchange rate. Many investors and
companies were caught on the wrong foot
and posted heavy losses. The trust
between the market and the SNB was no
longer at its best. Although Switzerland
came to terms with the stronger franc
better than expected afterwards, the event
still has an impact today. And not only in
the form of high negative interest rates.
Rather, it has also been clear for four years
that the SNB's balance sheet cannot grow
indefinitely.

Source: NZZ 15.1.2019 7

 PESTEL Framework

Checklist:
P Political
E Economic
environment:
- economic growth
T
E Economic P Political / legal - interest rate level
- inflation
Technological
environment: environment:
- legal standards - unemployment - basic technologies
L - organization and - general economic
situation
- key technologies
stability of political - pacemaker
S Socio-cultural system - exchange rates technologies

T Technological Macro-environment

Ecological Social environment:

E environment: - population structure S
- locations - education level
E Environmental - availability of - cultural, ethical, and
natural resources religious values
- emissions

L Legal

Source: Hungenberg (2014), p. 95 8

 Megatrends und globale Top-Themen

Quelle: www.mckinsey.com 9
 Disruptive Technologies (1/2)

Source: www.mckinsey.com 10
 Disruptive Technologies (2/2)

Source: www.mckinsey.com 11
 Gartner Hype Cycle for Emerging Technologies 2019

Quelle: www.gartner.com 12
 Gartner Hype Cycle for Emerging Technologies 2020

Quelle: www.gartner.com 13
 ABB und Megatrends

Source: ABB (2020) 14

 Siemens und Megatrends

Source: Siemens (2018) 15

Agenda

− Analysis of the macro-environment

− Analysis of industry structures

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 The Business Environment

Source: Whittington et al. (2020), p. 35 17

 Strategic Management: Objectives and Initiatives

Initiatives Objectives

Market Position
Competitive Long-Term
Advantage Success
Resource Basis

Source: Based on Hungenberg (2014), p. 81 18

 Market-Based View

“A basic assumption of the market-based view is that the

uniqueness and thus the success of organizations is
determined by their position in a market. To be successful, an
organization must therefore try to build and defend competitive
advantage over its competitors in these markets.

Thereby, the formulation of a promising competitive strategy is

based on how a company understands its markets. Central
theoretical model of the market-based approach is the so-called
“structure-conduct-performance paradigm”, which describes –
Perfor- building on the findings of the industrial economy – a link
Structure Conduct
mance between the market conditions and competitive conditions
(structure), the behavior of competitors (conduct) and the
results of the competition (performance). A basic assumption of
this paradigm is that the behavior of competitors is directly
determined by the market structure and that the behavior of
competitors in turn determines the market outcome, whereby
this, at least indirectly, is also influenced by the market
structure. Although there are feedback effects between these
variables, it is primarily the understanding of the market
structure which is most important for competition and business
success (...). Especially Porter has anchored these industrial
economic relationships within the fields of strategic
management, amongst others, by developing sophisticated
instruments to analyze industries and competitive structures.
(…)."
Source: Hungenberg (2014), p. 515 19
 Five-Forces Framework

https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
Source: www.isc.hbs.edu 20
 Five-Forces Framework: Factors Influencing Competitive
Forces

New entrants:
- economies of scale
- product differentiation
- capital requirement
- switching costs
- access to distribution
channels
- government influence

Suppliers: Buyers:
- product differentiation - product differentiation
- switching costs - switching costs
Competitors:
- concentration of - concentration of
- number of competitors
suppliers customers
- excess capacity
- threat of forward - threat of backward
- product differentiation
integration integration
- exit barriers

Substitutes:
- price-performance ratio
- switching costs
- customer preference

Source: Hungenberg (2014), p. 104 21

 Five-Forces Framework: Airline Industry

Source: IATA Vision 2050 (2011), p. 22 22

Five-Forces Framework: Pros & Cons

Pros Cons
− Systematical and comprehensive − Describes only a snapshot.
view on relevant factors in − Limits industry to competition and
competition. neglects collaborations.
− Appropriate for understanding a − Takes only one industry into account.
specific industry.
− Helps evaluate opportunities and
threats.
− Useful for examining complex
relationships in an industry.

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 Five-Forces Framework: Impact of Forces on Profitability

Profit = Sales - Costs

If threat of new entrants profitability because sales and costs

If power of suppliers profitability and costs

If power of buyers profitability because sales and costs

If threat of substitutes profitability because sales and costs

If competitive rivalry profitability because sales and costs

Source: Magretta (2012) 24

 Busted banking barriers?

Source: Whittington et al. (2020), p. 68 25

 The Industry Life Cycle

Source: Whittington et al. (2020), p. 77 26

 Converging Industries

Source: Hungenberg (2014), p. 115 27

 Value Chain Architectures: Layer Player

Characteristics:
− Specializing in one value chain layer
− Economies of scale and multiplying expertise
− Growing across industries

Example:
− Foxconn

Source: Müller-Stewens & Lechner (2005), p. 394 28

 Value Chain Architectures: Pioneer

Characteristics:
− Implementing new value chain layer
− Using information advantages in a specific
industry and later across other industries

Examples:
− Paypal
− Sabre

Source: Müller-Stewens & Lechner (2005), p. 394 29

 Value Chain Architectures: Orchestrator

Characteristics:
− Focusing on a few acitivities in the coordination
of other value chain activities

Examples:
− Nike
− Adidas

Source: Müller-Stewens & Lechner (2005), p. 394 30

 Value Chain Architectures: Integrator

Characteristics:
− Control of the whole value chain
− Own activities in (almost) all value chain layers
− Little or no outsourcing of activities

Example:
− Benetton

Source: Müller-Stewens & Lechner (2005), p. 394 31

Five-Forces Framework: Fictitious Case (1/5)

Using the following case description, how would you assess the attractiveness of
furniture retailing in Switzerland from the perspective of a traditional furniture store like
MUELLER FURNITURE?

1. Qualify each of the characteristics of the five-forces framework with two statements.
In addition, briefly evaluate each competitive force.
2. Which competitive force would you mention to Erich Wiederkehr, CEO of MUELLER
FURNITURE, as the most relevant and economically dominant one? Why?

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Five-Forces Framework: Fictitious Case (2/5)

Erich Wiederkehr is CEO of the furniture retailer MUELLER FURNITURE AG in Winterthur. The furniture store can look back on
75 years of tradition and experience. After financial difficulties five years ago, the company was transformed into a stock
corporation and since then has no longer been managed solely by a member of the founding family. The three-member board of
directors comprises two family members and a representative of a real estate company. The board of directors has set the
objective of achieving a sales growth of 4% in the coming year.

Thanks to qualified in-store customer advisors and an established product range, MUELLER FURNITURE has enjoyed a good
reputation in and around Winterthur for several decades. MUELLER FURNITURE purchases its product selection from various
unnamed furniture manufacturers in Switzerland and other countries. Turnover has been stagnating for three years and sales
during the last Christmas period were not acceptable to the owner. The manager observed that hardly any customers were under
35 years of age and young families did not shop there.

MUELLER FURNITURE employs 15 people and owns a two-floor sales area including a small warehouse in the historic center of
Winterthur. Also, MUELLER FURNITURE has a large warehouse on the outskirts of Winterthur close to a motorway junction
linking Winterthur with the cities of Zurich and St. Gallen and their environs.

Apart from one competitor, HUGENTOBLER, most of the traditional furniture stores which used to operate in Winterthur have
ceased their original business activities in recent years:

− Some of them have sold their attractive properties to larger national or international furniture store chains (e.g., FLY, TOPTIP,
or INTERIO).
− Others have given up their original non-branded product range and have become exclusive distribution partners of
international furniture manufacturers such as LIGNE ROSET, which has professional brand management and wants to
involve trading partners in developing a brand environment.
− HUGENTOBLER has established itself as an independent outlet in the premium price segment. HUGENTOBLER has almost
doubled its sales area in recent years by acquiring or renting adjacent buildings in the historic center of Winterthur.

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Five-Forces Framework: Fictitious Case (3/5)

The Swiss furniture retail industry has, along with Swiss society in general, changed dramatically in the last 20 years. Sales
revenue for furniture in the retail sector has grown in recent years by an average of about 1% per year. It is noticeable that
traditional, independent furniture stores that sell non-branded furniture in small stores have lost a substantial share of the market.
At the same time, some furniture store chains that concentrate on volume business have been able to increase their market
share considerably (e.g., IKEA). They operate in the low-price segment with production and sales tightly linked. In addition,
furniture stores which sell quality brands in the high-end sector as exclusive distribution partners of international furniture
manufacturers have enjoyed an above-average increase in market share. There are only a small number of furniture stores which
operate in the premium segment by offering a broad range of well-known furniture brands and exclusive consulting and other
services. Furthermore, it is apparent that customers are increasingly turning to neighboring countries when making a purchase.
These non-Swiss retailers display an extensive range of well-known furniture brands on sizable shop floors. Although the
declining Euro exchange rate has helped Swiss furniture traders to import from abroad recently, competitors in Southern
Germany have been offering lower purchase prices as well as offering to refund the (higher) German VAT, arranging for customs
clearance, and even delivering within Switzerland at no additional charge.

Statistics published by the Swiss Furniture Association show that hardly any new independent furniture store has opened in
recent years. The growth of sales space in the industry, therefore, stems primarily from established furniture store chains opening
new branches. In the meantime, established retailers have secured all the attractive - and expensive - locations in the cities as
well as the lower cost, out-of-town locations for themselves.

Overall, customers have become significantly more price sensitive, and there is now a segment of the market based on the motto
"greed is cool." In traditional furniture stores, greater price awareness manifests itself, for example, by customers preferring to
assemble the furniture themselves and thereby making a saving. Customers are also increasingly comparing prices online and
then asking retailers to match the prices of their competitors.

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Five-Forces Framework: Fictitious Case (4/5)

Some years ago, independent furniture retailers in Switzerland formed a purchasing cooperative (procurement partnership).
During price negotiations, manufacturers kept coming up with rising or strongly fluctuating raw material prices (e.g., leather,
energy costs). Many small to medium-sized furniture manufacturers provided good quality but – due to their poorly differentiated
products (such as cupboards and beds) – primarily focused on optimizing production capacity.

Alarmed by reports of pesticides and other hazardous chemicals (formaldehyde) detected in furniture, Swiss consumers
increasingly demanded furniture which presented no health or safety risks. Furthermore, consumer organizations in Switzerland
and elsewhere now insist on compliance with ethical principles (e.g., fair wages, minimum wages, no child labor) and
environmental sustainability in the production of furniture. Consequently, wood – the most significant raw material – must be
sourced from sustainable forests. Any furniture without the corresponding accreditations can only be sold at the lowest end of the
market.

There is also a trend towards so called flat pack furniture. Customers want to be able to take their furniture home immediately
and, if this is not possible, arrange the quickest possible delivery date (e.g., IKEA).

Several companies have tried to succeed by focusing on online sales but, so far, customers have been slow to accept this
business model.

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 Five-Forces Framework: Fictitious Case (5/5)

Competitive forces Description Assessment

Competitors

Customers

Suppliers

Substitutes

New entrants

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