CB4303

STRATEGIC MANAGEMENT

Week 3
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 Exercise (Wk 2):
Understand your leadership style
and determine ways to improve your decision
making process

https://www.16personalities.com/free-personality-test

2
 Recap what have been discussed in Week 2

1. What is Strategic Leadership?

2. Give an Example how a Leader can “kill” a Business
3. What are the differences between Corporate Strategy, Business
Strategy & Functional Strategy?
4. What are the shortcomings of Top Down Strategic Planning
Approach?
5. How can we improve our decision making?

3
 WEEK 3
EXTERNAL ENVIRONMENTAL ANALYSIS

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 Learning Outcomes – Week 3:
1. Generate a PESTEL analysis to evaluate the impact of external factors on the firm.
2. Differentiate the roles of firm effects and industry effects in determining firm
performance.
3. Apply Porter’s five competitive forces to explain the profit potential of different
industries.
4. Examine how competitive industry structure shapes rivalry among competitors.
5. Describe the strategic role of complements in creating positive-sum co-opetition.
6. Explain the five choices required for market entry.
7. Appraise the role of industry dynamics and industry convergence in shaping the
firm’s external environment.
8. Generate a strategic group model to reveal performance differences between
clusters of firms in the same industry. 5
 Remember these companies?

How CEO
“react” to the
Changing
External
Environment

Observations? 6
External Environment: The PESTEL Framework

Strategic Group:
Companies
pursue a similar
strategy in the
same industry

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 The PESTEL Framework

Political Factors Economical Factors Sociocultural Factors

- Society’s cultures, norms, & values
- Driven by Government, NGOs, - Largely Macroeconomic - Demographic trends:
Social Movements - Examples: Growth rates. Interest e.g. Population characteristics.
- Influential: . Lobbying, PR, rates, Employment level, Price Age, gender, family size,
Contributions, Litigation stability (inflation and deflation),
ethnicity, sexual orientation,
- Closely related to Legal Factor Currency exchange rates. religion, and socioeconomic class.
- EXAMPLE: ….. - EXAMPLE: …..
- EXAMPLE: …..

Legal Factors Ecological Factors Technological Factors

- Application of knowledge to create:
- Official outcomes of political - Related to Broad environmental
New processes and products.
processes => Laws. Mandates. issues such as
- Innovations in process & product
Regulations, Court decisions Natural environment.
technology:
- Often coexist with or result from Climate change.
- Advances in AI and machine
a political will. Sustainable economic growth.
learning.
- EXAMPLE: ….. - EXAMPLE: …..
- EXAMPLE: …..

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The PESTEL Framework - Example

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 Industry vs. Firm Effects

Attribute firm performance

to strategic leaders’
actions.

The economic structure of the industry.

Elements in common to all 10
 Industry Analysis  Strategic Positioning

Industry Analysis:
Strategic Positioning
• To identify an • 5 Force Model
industry’s profit • Competitive Structure ✓ A firm’s ABILITY to:
potential. • Industry Growth Create customer VALUE (V).
• Strategic Group While containing COSTS (C).
• Derive • Value Net ✓ Goal: To generate a large
implications for a • Exit Barrier gap between V minus C.
firm’s strategic
position.

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 Value Vs Cost

VALUE Opportunity to
increase PRICE
PRICE

PROFIT

COST

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Value is a function of BENEFIT Vs Price, created by ACTIVITIES
 Industry Competition: The Five Forces Model

❖ It is a tool for examining the industry-level competitive

environment, especially the ability of firms in that
industry to set prices and minimize costs.
❖ The Five Forces are:
❑ The threat of new entrants;
❑ The bargaining power of buyers;
❑ The bargaining power of suppliers;
❑ The threat of substitute products and services;
❑ The intensity of rivalry among competitors
❖ Each of these forces affects a firm’s ability to
compete in a given market and determine the profit 13

potential for a particular industry.

Porter’s Five-Forces Model

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 The Threat of New Entrants
❖ May affect the profits of established firms in the industry and/or
lose share as eroded by new competitors.
❖ Entry barriers (Existing):
- Economies of scale.
- Network effects.
- Customer switching costs.
- Capital requirements.
- Advantages independent of size; e.g. Brand loyalty, Proprietary
technology, Preferential access to raw materials, distribution
channels, Favorable geographic locations, Cumulative
learning and experience effects.
- Government policy. 15
- Credible threat of retaliation.
 The Bargaining Power of Suppliers

❖ Suppliers can exert bargaining power by threatening to raise

prices or reduce the quality of purchased goods and services
❖ Supplier groups are powerful when:
- Only a few firms (Suppliers) dominate the industry
- No competition from substitute products
- Suppliers sell to several industries
- Buyer quality is affected by industry product
- Products are differentiated & have switching costs
- Forward integration is possible

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 The Bargaining Power of Buyers

❖ Buyers can force down prices, bargain for higher quality or more
services, play competitors against each other

❖ Buyer groups are powerful when:

- Purchasing standard products in large volumes
- Profits are low & switching costs are few
- Backward integration is possible (become your rival)
- Buyer’s product quality is not affected by industry product
- Price Sensitive

BUYER ===== END-USER/CONSUMERS ? 17

 Threat of Substitutes
❖ Substitutes meet the same basic customer need in a different way;
available from outside the given industry.
❖ Place a price ceiling that firms in an industry can profitably charge
❖ The more attractive the price/performance ratio, the more the
substitute erodes industry profits.
❖ Examples <Definition of Industry>:
- Software vs. professional services.
- Gasoline vs. biofuel.
- Energy drinks vs. coffee.
- Videoconferencing vs. business travel.
- Wireless phone services vs. internet-based services (Skype).
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SUBSTITUTE ===== POTENTIAL COMPETITOR ?
 The Intensity of Rivalry Among Competitors

❖ Rivalry tactics include price competition, advertising battles, new

product introductions, increased customer service or warranties
❖ Fighting for market share and/or profitability (Survival??).
❖ The other forces in the model pressure this rivalry.
❖ The stronger the forces, the stronger the competitive intensity.
❖ Interacting factors lead to intense rivalry:
- Numerous or equally balanced competitors
- Slow industry growth
- High fixed or shortage costs
- Lack of differentiation or switching costs
- Capacity augmented in large increments
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- High exit barriers
 Stronger force => Profitable industry => Attractive industry
Example: How Internet and Digital
Technologies Affect Retail Industry

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Industry Competitive Structures

Fragmented vs Consolidated

It is defined by
• No. & size of competitors.
• Firm’s = pricing power.
• Type of product or
service
• Height of entry barriers.
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Industry Growth

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 Industry Growth
❑ Directly affects intensity of rivalry among competitors.
❑ During periods of high growth:
• Consumer demand rises.
• Price competition among firms frequently decreases.
❑ During periods of negative growth:
• Rivalry is fierce.
• Rivals can only gain at the expense of one another.
• Price discounts, frequent new product releases with
minor modifications, promotional campaigns, and
retaliation abound.
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 Strategic Groups (Within Industries)
❖ Two unassailable assumptions in industry analysis:
❑ No two firms are totally different & exactly the same
❖ Strategic groups – clusters of firms that share similar strategies:
❑ Breadth of product & geographic scope
❑ Price/quality
❑ Degree of vertical integration
❑ Type of distribution
❖ Strategic groups as an analytical tool help
❑ Identify mobility barriers: Protect a group from attacks
❑ Identify groups whose competitive position may be marginal
❑ Chart the future direction of firms’ strategies
❑ Opportunities & Challenges by thinking through the implications of
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each industry trend for the strategic group as a whole.
Strategic Groups Examples (1)

U.S. Domestic Airline Industry

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Strategic Groups Examples (2)

Where is the Mobility Barrier?

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 Complement – Value Net

❖ It is based on game-
theory, represents all the
players in the game
❖ Analysing how their
interactions affect a firm’s
ability to generate and
appropriate value.
❖ Complements are
products or services that
have a potential impact
on the value of a firm’s Complements of App Store? 27
own products or services
 Co-opetition
❑ Key Concept: Competition is not a Zero-Sum Game
❑ Coopetition is the act of cooperation between competing
companies by forming a strategic alliance designed to help both
companies.
❑ Coopetition includes a mixture of cooperation with suppliers,
customers, and firms producing complementary or related
products.
❑ Coopetition is common in the technology industry, particularly
between software and hardware firms.
❑ Common in industries: automotive, airlines, mobile phone industries,
video games, food industry. EXAMPLE: Microsoft + Apple 28
 Other Factors affecting Industry Analysis

Industry Dynamics Entry Choices

Exit Barriers:
economic and ❑ Changing speed of an industry.
social factors ❑ Rate of innovation.
❑ Help capture structural changes
in the industry.

Industry Convergence
❑ When unrelated industries begin to satisfy the same
customer need.
❑ Caused by technological advances.
❑ Example: Media Industries: Content going online.
=>Newspapers, magazines, TV, movies, radio, music. 29
=> Will print media become obsolete?
 Case Study (Wk 3):
Porter 5 Forces Analysis
– Fast Food Chain Industry (HK)

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 Case : 5 Forces Analysis – Fast Food Chain Industry (HK)
Level of Power Impact on
The Forces Player (s) Rationale
(H,M,L) Profitability

Suppliers

Buyers

Substitutes

Rilvary of
Competition

Barrier of
Entrants 31
 Case : 5 Forces Analysis – Fast Food Chain Industry (HK)
Level of Power Impact on
The Forces Player (s) Rationale
(H,M,L) Profitability
Landlord, Material Suppliers, Food • Limited no. of major players
Suppliers Manufacturers, Advertising M/L • Limited Forward Integration Positive
Agents, … Opportunities, …..
• Low Switching Cost <=> Little
Differentiation
Buyers Consumers M Neutral
• Factors: Pricing/ Location/
Operation/Convenience
Dine at Home, Restaurants,
• Price/Performance Ratio???
Substitutes Convenience Stores with food H Negative
• No. of Options
counters, Food Delivery, …
Chinese/Western style fast food • Experienced players operated by
Rilvary of
chains, Small independent fast- H BIG firm Negative
Competition
food stores, …... • Consolidation
• High Capital requirement
Barrier of Any fast-food chains (Chinese, • High Exit Barrier
L Positive
Entrants Western) • Economic of Scale & Scope 32
• Local Consumer Preference
 Case : 5 Forces Analysis – Fast Food Chain Industry (HK)

Please think about the following questions and we will

discuss next week.

1. Is the Industry ATTRACTIVE? WHY?

2. What are other information/Analysis that you need to
answer Q1?

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CHAPTER REVIEW

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 Chapter review – Question 1
________ factors in the PESTEL framework result from the pressure
that various groups, such as government bodies,
nongovernmental organizations, and social movements, can
exert to influence the decisions and behaviors of firms.

A. Economic
B. Sociocultural
C. Ecological
D. Political

35
 Chapter review – Question 1
________ factors in the PESTEL framework result from the pressure
that various groups, such as government bodies,
nongovernmental organizations, and social movements, can
exert to influence the decisions and behaviors of firms.

A. Economic
B. Sociocultural
C. Ecological
D. Political

36
 Chapter review – Question 2
Which of the following firms most likely has the lowest bargaining power
as a buyer?

A. an automobile company that can backwardly integrate to produce

its own component parts
B. a fast-food chain that has multiple suppliers for processed meat
C. a government agency that buys large quantities of cement from a
private supplier
D. a cell phone company that requires highly customized software for
its phones

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 Chapter review – Question 2
Which of the following firms most likely has the lowest bargaining power
as a buyer?

A. an automobile company that can backwardly integrate to produce

its own component parts
B. a fast-food chain that has multiple suppliers for processed meat
C. a government agency that buys large quantities of cement from a
private supplier
D. a cell phone company that requires highly customized software for
its phones

38
 Chapter review – Question 3
Which of the following is a feature of a fragmented industry?

A. It tends to generate high profitability.

B. It consists of many small firms.
C. It allows firms to set prices.
D. One large firm dominates the industry.

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 Chapter review – Question 3
Which of the following is a feature of a fragmented industry?

A. It tends to generate high profitability.

B. It consists of many small firms.
C. It allows firms to set prices.
D. One large firm dominates the industry.

40
 Chapter review – Question 4
How do complements affect a primary product or service?

A. They reduce the value of the primary product.

B. They act as the strategic equivalent of the primary product.
C. They increase the demand for the primary product.
D, They lower the utility of the primary product.

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 Chapter review – Question 4
How do complements affect a primary product or service?

A. They reduce the value of the primary product.

B. They act as the strategic equivalent of the primary product.
C. They increase the demand for the primary product.
D, They lower the utility of the primary product.

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 Chapter review – Question 5
Which is considered a force in the five-forces model?

A. increased deregulation in an industry

B. the threat of government intervention
C. recent technological innovation
D. rivalry among competing firms

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 Chapter review – Question 5
Which is considered a force in the five-forces model?

A. increased deregulation in an industry

B. the threat of government intervention
C. recent technological innovation
D. rivalry among competing firms

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 Chapter review – Question 6
Which of the following would be an entry barrier?

A. easy access to raw materials

B. low switching costs
C. large economies of scale
D. low capital requirements

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 Chapter review – Question 6
Which of the following would be an entry barrier?

A. easy access to raw materials

B. low switching costs
C. large economies of scale
D. low capital requirements

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 Chapter review – Question 7
Generally speaking, which of these situations is likely to lead to greater
profits?

A. an industry that is about to undergo deregulation

B. a situation that encourages operating at excess capacity
C. a fragmented industry rather than a consolidated one
D. an industry with fewer but larger competitors

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 Chapter review – Question 7
Generally speaking, which of these situations is likely to lead to greater
profits?

A. an industry that is about to undergo deregulation

B. a situation that encourages operating at excess capacity
C. a fragmented industry rather than a consolidated one
D. an industry with fewer but larger competitors

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