Student Learning Notes
MCR008 – Corporate Strategy
Student Learning Notes
Topic 2: Evaluating a Firm’s External and Industry Environment
(Chapter 4 – Industry Analysis)
1. Identify the characteristics and principal elements of a PESTEL analysis.
The external environment determines the context in which the organisation has to do its business,
but is generally beyond the control of the organisation. The major components of the external
environment represented by the PESTEL analysis are political, economic, socio-cultural,
technological, environmental (sustainability) and legal issues. The political environment is difficult
to predict but this can have a significant impact on the strategies of the organisation. The
economic environment is easier to predict in the medium to long-term, and is an essential
consideration as it will impact upon the demand for the organisation’s products and services. The
sociocultural environment represents a combination of concerns (such as cultural resistances) and
opportunities (such as helping to identify high discretional spending groups). The environmental
aspect of the PESTEL analysis is becoming increasingly important as companies are forced to
increase their emphasis on sustainable operations and, at the same time, sustainable operations
have started to become the differentiating factor.
2. Identify five key environmental characteristics that could be general opportunities and five
key characteristics that could be general threats for most industries.
Threats:
 economic downturn
 political instability (unless the company manufactured ordinance)
 rapid rates of technology development
 high levels of pollution (as China is now experiencing)
 corrupt legal systems
 increases in the price of energy and crude oil
Opportunities:
 economic prosperity
 strong social demand for a product or service
 strong legal system which would protect holders of patents and licences
 free trade agreements between countries
 increased labour flexibility laws
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3. Describe the purpose and basic method of scenario planning.
A scenario is a hypothetical situation which has a number of specifically selected key
characteristics which the organisation can use to identify its likely responses and ability to cope.
Originally developed at Shell, scenario planning provides an organisation with an understanding of
its readiness for certain environmental events. Factors that should be considered in the design of
scenarios include:
– identifying the timeframe
– describing alternative futures that fit into this timeframe
– identifying the risks and benefits associated with each possible scenario.
The process involves identifying a possible environmental factor which could impact upon the
appropriate strategies the organisation should adopt (such as an economic downturn or a shift in
social behaviours that may impact upon customers’ preferences). The actual effect upon the
organisation, if this were to happen, is then determined by internally examining the organisation’s
ability to respond to these new conditions. The ability of (or lack of) the organisation to respond
to these conditions will then influence future strategies. For example, if the organisation
manufactures plastic products (which is normally derived from crude oil), and there is a significant
increase in the price of crude oil, this would then dramatically increase the price of the
organisation’s end products. If the organisation were unable to continue to make its products
attractive to its market, it would be facing a serious loss in revenue.
4. Describe the major elements of a five forces analysis.
If the influence of customer preferences on the organisation is strong, strategies must make
particular allowance for customer satisfaction. If the influence of suppliers (due to the rarity of
raw materials, for example) is strong, strategies need to attempt to increase the loyalty of
suppliers (for example by involving them in parts of the strategy setting process). If rivalry is high
in the industry, competition is likely to be on the basis of either price, differentiation or both —
again, this will affect the strategies adopted by the organisation. If there are many substitutes
available to customers, strategies will have to focus on reducing the impact of these alternative
customer choices, or ultimately moving into the industries in which the most successful
substitutes lie. If new market entrants pose a significant threat, the strategies may need to focus
on either defending the market share or increasing the barriers to entry (for example by
negotiating with regulatory authorities to keep out new entrants).
5. Explain how industry attractiveness can be determined using a five forces analysis.
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The attractiveness of the industry represents a balance between the industry forces upon the
organisation. Some forces will increase the attractiveness of the industry, whilst others will
decrease it. For example, a small amount of rivalry is desirable as it reduces the force of new
entrants (by increasing the barriers to entry). On the other hand, an industry where the influence
of customers is mildly strong will become much less attractive if the strength of suppliers also
increases, even to a moderate level. This is because, in such a situation, the organisation will find
itself stretched between the two forces, facing high expectations of its products or services from
its customers and, at the same time, facing difficulty in gaining the correct supplies/inputs at
reasonable prices. The attractiveness of a particular industry needs to be determined on the basis
of a considered evaluation of how the various forces balance out. This will then affect the strategy
adopted. If for example, both suppliers and customers exert significant influence and the other
forces are weak, then the strategies must be directed towards these; i.e., reflect an external
orientation, and consider the role of the organisation in the larger value chain and to possibly
attempt to integrate both suppliers and customers into the organisation (even as virtual members)
to increase their alignment with the organisation.
6. List and describe the major components of the characteristic and scope factors of a network
environment.
Network factors will assist or hinder the success of the organisation’s operations in the industry.
The characteristic factors of a network environment are: 1) the trust levels which refers also to the
transparency, shared understandings, experiences and language, 2) transferability (or benefits), 3)
network membership in particular ongoing requirements, and 4) attributes (such as professional
qualifications).
The scope factors of a network environment involve: 1) the size of network (the number of
members within the network or the geographical coverage), 2) the areas of the impact (such as
politics, capital market access and competition), the influence of network relative to other local
institutions such as government and professional associations, and finally 3) the longevity of the
network.
7. Describe why a strategic group analysis is conducted.
A strategic group analysis enables the organisation to identify clusters of competitors in the
industry who have adopted similar strategies (as evidenced by the similarities in their
characteristics such as brand position, product cost, geographical coverage, range of products or
services, and size). Evaluating the total amount of turnover of each of these groups will provide an
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indication of how attractive the strategies are as well as indicating the opportunities available for
an organisation adopting those strategies.
8. Describe the framework for competitor analysis.
A competitor analysis comprises two dimensions: identifying the type of competitor and then
identifying their particular characteristics. Types of competitors include:
– direct competitors
– indirect competition
– substitutes
– potential competitive
The framework for competitor analysis should comprise the following components:
– compare response characteristics
– letters future goals
– competitors assumptions about themselves and the industry
– competitors strategies
– to better capabilities
9. The major forces shaping the business environment of the fixed-line telecommunications
industry are technology and government policy. The industry has been influenced by fibre
optics technology, which greatly increases transmission capacity, new modes of
telecommunication (e.g. wireless and internet telephony), deregulation and privatisation.
Using the five forces of competition framework, show how each of these developments has
influenced competition in the fixed-line telecommunications industry.
From a customer power perspective, deregulation and privatisation have provided opportunities
to many other competitors who are able to offer a similar service and thus have reduced their
switching costs. This has increased the customers’ bargaining power. The substitution of wireless
and Internet telephony has introduced a number of powerful substitutes, whilst deregulation has
introduced new market entrants where government regulations previously blocked this. The
above conditions would have had limited impact on the power of suppliers other than perhaps
creating shortages in some materials such as fibre optics due to the increased demand from the
new market entrants. Rivalry would of course become much higher in this industry which was
indeed the intention for privatisation. This would have driven prices down in the industry. The
combination of these factors means that, apart from putting extra pressure onto suppliers, fixed
line telephone service providers are trapped between a number of powerful forces.This would
consequently make the industry very unattractive.
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10. Manufacturers of inkjet printers (e.g. HP, Canon, and Lexmark) make most of their profits on
the sales of ink cartridges. Why are cartridges more profitable than printers? If cartridges
were manufactured by different organisations to those that make the printers, would the
situation be different? Explain.
Once a customer has invested in a printer, their bargaining power is reduced by the high switching
costs associated with buying a new printer and disposing of the old printer (and the associated
negative environmental considerations). As supplier power and substitutes power are fairly low,
with new entrants being constrained to the imitation ink cartridge and new printer market,
organisations in this industry need tomainly consider the rivalry among competitors’ brands,
particularly around the initial printer purchase decision. This enables printer manufacturers to
focus on differentiation and high profit margins for their ink cartridges, whilst price-based
competition would be required for the much more competitive printer market.
11. Select a high-profit industry and a low-profit industry. From what you know of the structure
of your selected industries, use the five forces framework to explain why profitability has
been, respectively, high and low.
The banking industry in Australia has proven to be a high profit industry. This is due to the fact
that customer power is relatively low due to moderately high switching costs (fees, stress and
effort required to switch banks), new market entrants are a minor force as they are generally less
interested in the Australian market, substitutes are a minor force because of their relatively low
scales of economy and suppliers (particularly capital) represent the only significant force. This
makes it possible to establish strategies focused around the power suppliers which consequently
makes the industry fairly attractive. The Australian wine industry, on the other hand, suffers from
a glut and has proven to be a low profit industry. The huge availability of wine coupled with the
desire of manufacturers to sell their products has meant that switching costs for customers are
very low. In addition, suppliers of some of the raw materials, such as bottles are few in number in
Australia and represent a fairly significant force. The huge numbers of wine producers in Australia
(albeit mostly small-scale) has also resulted in high levels of rivalry. Substitutes are plentiful in the
form of spirits, flavoured spirit-based drinks, beer and health drinks. The presence of significant
levels of all five of Porter’s forces and no real opportunities from complements makes this a very
unattractive industry and explains the low levels of productivity within this industry. Wine
producers remain in the industry because of family traditions (many producers have been in
operation for over 100 years) or because of lifestyle choices.
12. Why is rivalry not a major force in the generic pharmaceuticals industry?
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The rivalry between competitors is not really considered as a major force in the generic
pharmaceuticals industry due to the fact that the industry is already mature. In this industry stage,
the rate of change to new developed products is low, the opportunities to offer significant
differences to customers have all been explored by the competitors, and all the competitors have
more or less substantial and similar internal resources. There is nothing unique about these
competitors. Their pricing is relatively similar, their marketing strategies are the same, even their
distribution channels are not unique to each other. These competitors have settled on their
relative market shares between them, not creating a major force that needs to be considered.
13. What could interfere with the complementary force benefits of third-party generated
applications for open architecture systems such as Windows and Nintendo games?
One aspect that could interfere with the complementary force benefits of third-party generated
applications is when these applications become a commodity. In the early days of Nintendo, the
company earned huge profits through the sale of their video game consoles. They could charge
excessively for their sales of the software that was bought for the game consoles, even though
these softwares were mostly produced by independent developers. Similarly, Windows allowed
the operating system to become a proprietary standard through the use of third-party developers
in developing the system. PCs gradually became commodity items. Over the long term, the
companies were not able to keep proprietary control over the operating systems (Windows) and
the softwares (Nintendo). Therefore, it is important to ensure that the companies need to
maintain proprietary control over its product development.
14. The ALDI supermarket chain competes in several countries of the world. Most shoppers
choose retailers that are within a few kilometres of their homes. For the purposes of
analysing profitability and competitive strategy, should ALDI consider the discount retailing
industry to be global, national or local? Why?
From the competitive strategy perspective, discount retailing is a nationally focused industry. The
characteristics that differentiate retailers in one country will be quite different to those that
differentiate retailers in another country. The levels of rivalry and new entrants will also vary
significantly between countries. Some features of the industry are local – supply of fresh products
and customer power being influenced by local conditions (access to other local retailers). A few
features which may drive profitability would occur at the global level where global supply chains
may enable the organisation to gain some cost advantages.
15. Identify one industry in which networks have a strong influence over the environmental
conditions and a second industry in which they do not. Identify the reasons for both with
reference to the characteristic and scope factors for a network environmental analysis.
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One industry that has a strong influence over the environmental conditions is the fast food
industry. Although external conditions play a role, these however do not have much significant
impacts in this industry. In terms of the characteristics factors, the fast food companies have
instilled trust in the minds of customers; customers are well aware of what they are getting when
they purchase their foods from these fast food outlets. The fast food companies also have certain
attributes – obviously they sell something quick, relatively cheap, and convenient. They provide
drive-through services, and some outlets are even open 24 hours. Their attributes provide
customers with such assurance of quality, service and convenience. In terms of the scope factors,
these fast food outlets cover a wide geographical scope, they are sometimes even closely located
near to each other. This obviously provides more opportunities for their customers to purchase
such convenience, thereby reducing the effect of the environmental conditions on their earnings
potential.
One industry that does not have a strong influence over the environmental conditions is the airline
industry. Fuel prices are something beyond the airlines’ control. Weather conditions such as the
volcanic ash that recently disrupted worldwide travel is similarly beyond the airlines’ control. In
terms of the characteristic factors, the airline needs to continuously instill confidence and trust in
the minds of customers. Disasters such as the Asiana Airline crash in San Fransisco in July 2013
could dent the reputation of the airline. The airline must also instill complete confidence with its
track record and performance to continually be a part of the network membership to obtain more
customers. In terms of the scope factors, the geographical coverage plays a role; this is one of the
reasons why many airlines want to join the alliance network to provide seamless connectivity for
the customers, to obviously attract new customers and retain existing ones. The environmental
conditions in the airline industry have a strong influence over this industry.
16. What do you think are key success factors for:
(a) the home delivery and takeaway pizza industry?
(b) the investment banking industry?
The key success factors for the home delivery and takeaway pizza industry are location, price and
consistency. All of these are focused on the customer because of their high power at the industry
level, due to the low switching costs and number of substitutes (such as other fast food products).
The key success factors for the investment banking industry are the ability to predict currency and
industry trends, access to capital markets and financial analysis skills. All of these are focused on
suppliers (and economic conditions) which are the principal forces in this industry.