SM Lecture Two : The Environment

Strategic Management BUSM 3200

These Lecture Slides summarize the key points covered in the respective chapters in your
recommended text; these slides do NOT substitute, at all, the required reading of the assigned
chapter from the text. These slides also may contain additional supplementary material extracted
from other texts and sources outside your text book.

BUSM 3200- Strategic Management (Jan 2013) GDS 2-1

The Focus of part 1 of t he Text
The strategic position
• How to analyse an organisation’s position in the
external environment.
• How to analyse the determinants of strategic
capability – resources, competences and the
linkages between them.
• How to understand an organisation’s purposes,
taking into account corporate governance,
stakeholder expectations and business ethics.
• How to address the role of history and culture in
determining an organisation’s position.


Strategic Position

Chapter 3
Chapter 2

Chapter 5
Chapter 4

See page 46: 4 chapters comprise analysis of the Strategic Position


The Strategic Position Analysis
Essentially one of determining the answers to the
question “where are we now”
External analysis: opportunities and threats/
industry attractiveness
Internal analysis: strengths/weaknesses,
capabilities
TAKEN together we can do the SWOT and TOWS
analysis (discussed next lecture)
The Strategic Position Analysis guides the planner
on the type of STRATEGY/IES the company
should pursue: are they viable and attractive?


Learning outcomes of Chapter Two:

• Analyse the broad macro-environment of
organisations in terms of political, economic,
social, technological, environmental (‘green’) and
legal factors (PESTEL).

• Identify key drivers in this macro-environment and
use these key drivers to construct alternative
scenarios with regard to environmental change.


Learning outcomes of Chapter Two

• Use Porter’s five forces analysis in order to define
the attractiveness of industries and sectors and to
identify their potential for change.
• Identify successful strategic groups, valuable market
segments and attractive ‘Blue Oceans’ within
industries.
• Use these various concepts and techniques in order
to recognise threats and opportunities in the
marketplace.


OPPORTUNITIES AND THREATS
Opportunities and Threats is one-half of the
SWOT analysis. We still need to cover the internal
factors (next lecture)
Lots of confusion between SWOT and PEST- do
NOT use these terms interchangeably!
 Know this: PEST is part of SWOT PEST leads to the
identification of the O and T (opportunities and threats)
When you list the PEST factors:
 + factors are considered Opportunities
 - factors are considered Threats


OPPORTUNITIES AND THREATS
PESTEL analysis reveals
 Opportunities and threats
 Key drivers of change
 Different scenarios
Porter Five Forces
 Threats and opportunities arising from the specific set of
five forces in a given industry
Blue Ocean
 Reveals where companies can create new market spaces
or identify new success factors
We will cover these concepts in detail in this lecture.


THINKING STRATEGICALLY ABOUT A COMPANY‘S
INDUSTRY AND COMPETITIVE ENVIRONMENT
These set of points is taken from another text by Thompson and Strickland. I will use some
of the PWPT slides and intersperse them with our textbook content so as to give a fuller
dimension to External analysis. These seven questions will be examined throughout this
lecture topic. Read them now.

1. Does the industry offer attractive opportunities for growth?
2. What kinds of competitive forces are industry members facing,
and how strong is each force?
3. What factors are driving changes in the industry, and what
impact will these changes have on competitive intensity and
industry profitability?
4. What market positions do industry rivals occupy—who is
strongly positioned and who is not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for competitive success in the
industry?
7. Does the industry offer good prospects for attractive profits?

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–9 2-9

Layers of the business environment

Figure 2.1 Layers of the business environment


3.2 The Components of a Company’s Macro-Environment
This version shows how to place the industry five forces (Porter) within the context of the
broader External Macro Environmental forces


The External Environment

♦ The Macro-Environment
● Is the broad environmental context in
which a firm‘s industry is situated.
● Includes strategically relevant components
over which the firm has no direct control.
 General economic conditions

 Immediate industry and competitive
environment


The PESTEL framework (1)

The PESTEL framework categorises
environmental influences into six main types:
political, economic,
social, technological,
environmental legal

Thus PESTEL provides a comprehensive list of
influences on the possible success or failure of
particular strategies.



• Political Factors: For example, Government
policies, taxation changes, foreign trade
regulations, political risk in foreign markets,
changes in trade blocks (EU).

• Economic Factors: For example, business cycles,
interest rates, personal disposable income,
exchange rates, unemployment rates, GDP
trends.

• Socio-cultural Factors: For example, population
changes, income distribution, lifestyle changes,
consumerism, changes in culture and fashion.



• Technological Factors: For example, new
discoveries and technology developments, ICT
innovations, rates of obsolescence, increased
spending on R&D.
• Environmental (‘Green’) Factors: For example,
environmental protection regulations, energy
consumption, global warming, waste disposal and
re-cycling.
• Legal Factors: For example, competition laws,
health and safety laws, employment laws, licensing
laws, IPR laws.


NOTE: it is important to do a PESTEL analysis with a specific
emphasis on the industry you are studying (see page 51)

Keep the
PESTEL
factors specific
to the industry
you are
studying; avoid
using broad
generic factors
that have no
relevance to
your analysis.
Important to
note for your
Group
Assignment on
Strategic
Analysis!


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.
• (in you Group Assignment, make sure you
identify the correct ‘key drivers’)


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!
Note this well !!!


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.

• Builds on PESTEL analysis .
• Do not offer a single forecast of how the
environment will change.
• An organisation should develop a few alternative
scenarios (2–4) to analyse future strategic options.


Carrying out scenario analysis (1)

• Identify the most relevant scope of the study – the
relevant product/market and time span.
• 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 (2)

• 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.


Scenarios for the global financial
system, 2020

Illustration 2.2


Moving from Macro to Industry- Specific Analyses

Once you complete
your Macro-
environment analysis,
you then move down
to study the forces
impacting specifically
on the industry that
you company
operates in.


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)


QUESTION 2: WHAT KINDS OF COMPETITIVE
FORCES ARE INDUSTRY MEMBERS FACING,
AND HOW STRONG ARE THEY?

Porter’s five forces framework helps identify the
attractiveness of an industry in terms of five
competitive forces:
• the threat of entry,
• the threat of substitutes,
• the bargaining power of buyers,
• the bargaining power of suppliers and
• the extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.

The five forces framework (1)

Figure 2.2 The five forces framework
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and
Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved


The Threat of Entry & Barriers to Entry
• The threat of entry is low when the barriers to entry are
high and vice versa.
• The main barriers to entry are:
 Economies of scale/high fixed costs

 Experience and learning

 Access to supply and distribution channels

 Differentiation and market penetration costs

 Government restrictions (e.g. licensing)

• Entrants must also consider the expected retaliation from
organisations already in the market


3.5
Factors Affecting
the Threat of Entry



Threat of Substitutes
Substitutes are products or services that offer a similar
benefit to an industry’s products or services, but by a
different process.
Customers will switch to alternatives (and thus the threat
increases) if:
• The price/performance ratio of the substitute is
superior (e.g. aluminium maybe more expensive than
steel but it is more cost efficient for some car parts)
• The substitute benefits from an innovation that
improves customer satisfaction (e.g. high speed trains
can be quicker than airlines from city centre to city
centre)


3.6
Factors Affecting
Competition from
Substitute Products



The bargaining power of buyers
Buyers are the organisation’s immediate customers, not
necessarily the ultimate consumers.
If buyers are powerful, then they can demand cheap prices
or product / service improvements to reduce profits .
Buyer power is likely to be high when:
 Buyers are concentrated

 Buyers have low switching costs

 Buyers can supply their own inputs (backward vertical

integration)


3.8
Factors Affecting
the Bargaining
Power of Buyers


The bargaining power of suppliers
Suppliers are those who supply what organisations need to
produce the product or service. Powerful suppliers can eat
into an organisation’s profits.
Supplier power is likely to be high when:
 The suppliers are concentrated (few of them).

 Suppliers provide a specialist or rare input.

 Switching costs are high (it is disruptive or expensive to

change suppliers).
 Suppliers can integrate forwards (e.g. low cost airlines have

cut out the use of travel agents).


Matching Strategy to Competitive Conditions

1. Pursuing avenues that shield the firm from as
many competitive pressures as possible.
2. Initiating actions calculated to shift competitive
forces in the firm‘s favor by altering underlying
factors driving the five forces.
3. Spotting attractive arenas for expansion, where
competitive pressures in the industry are
somewhat weaker. We will discuss this in greater depth
when we cover Business and
Corporate Strategies later in the
course.


3.7
Factors Affecting
the Bargaining
Power of Suppliers


Rivalry between competitors
Competitive rivals are organisations with similar
products and services aimed at the same customer
group and are direct competitors in the same
industry/market (they are distinct from substitutes).
The degree of rivalry is increased when :
 Competitors are of roughly equal size
 Competitors are aggressive in seeking leadership
 The market is mature or declining
 There are high fixed costs
 The exit barriers are high
 There is a low level of differentiation

Some Practical Examples of the Common ―Weapons‖ for Competing with Rivals

Competitive Weapons Primary Effects
Price discounting, clearance sales, Lowers price (P), acts to boost total sales volume and market share,
―blowout‖ sales lowers profit margins per unit sold when price cuts are big and/or
increases in sales volume are relatively small
Couponing, advertising items on sale Acts to increase unit sales volume and total revenues, lowers price (P),
increases unit costs (C), may lower profit margins per unit sold (P – C)

Advertising product or service Boosts buyer demand, increases product differentiation and perceived
characteristics, using ads to enhance value (V), acts to increase total sales volume and market share, may
a company’s image or reputation increase unit costs (C) and/or lower profit margins per unit sold
Innovating to improve product Acts to increase product differentiation and value (V), boosts buyer
performance and quality demand, acts to boost total sales volume, likely to increase unit costs (C)
Introducing new or improved features, Acts to increase product differentiation and value (V), strengthens buyer
increasing the number of styles or demand, acts to boost total sales volume and market share, likely to
models to provide greater product increase unit costs (C)
selection
Increasing customization of product or Acts to increase product differentiation and value (V), increases
service switching costs, acts to boost total sales volume, often increases unit
costs (C)
Building a bigger, better dealer network Broadens access to buyers, acts to boost total sales volume and market
share, may increase unit costs (C)
Improving warranties, offering low- Acts to increase product differentiation and value (V), increases unit
interest financing costs (C), increases buyer costs to switch brands, acts to boost total
sales volume and market share


3.4
Factors Affecting the
Strength of Rivalry


Is the Collective Strength of the Five Competitive
Forces Conducive to Good Profitability?

♦ Is the state of competition in the industry
stronger than ―normal‖?
♦ Can industry firms expect to earn decent profits
given prevailing competitive forces?
♦ Are some of the competitive forces sufficiently
powerful to undermine industry profitability?
In your analysis of a case company, you must not only identify the
relevant factors for each force but you must be able to make a critical
judgment of which forces carry more impact and could pose a threat
to the firm. These factors need to be considered when the firm
develops its business and corporate strategies to mitigate the threat
of such competitive forces


Types of industry (1)

• Monopolistic industries - an industry with one firm and
therefore no competitive rivalry. A firm has ‘monopoly
power’ if it has a dominant position in the market. For
example, BT in the UK fixed line telephone market.
• Oligopolistic industries - an industry dominated by a few
firms with limited rivalry and in which firms have power
over buyers and suppliers.
• Perfectly competitive industries - where barriers to entry
are low, there are many equal rivals each with very similar
products, and information about competitors is freely
available. Few (if any) markets are ‘perfect’ but may have
features of highly competitive markets, for example, mini-
cabs in London.

Types of industry (2)

• Hypercompetitive industries - where the frequency,
boldness and aggression of competitor interactions
accelerate to create a condition of constant
disequilibrium and change.
• Hypercompetition often breaks out in otherwise
oligopolistic industries (e.g. mobile phones).
• Organisations interact in a series of competitive
moves in hypercompetition which often becomes
extremely rapid and aggressive as firms vie for
market leadership.


Implications of five forces analysis
Read Page 61 in detail !

• Identifies the attractiveness of industries – which
industries/markets to enter or leave.
• Identifies strategies to influence the impact of
the forces, for example, building barriers to
entry by becoming more vertically integrated.
• The forces may have a different impact on
different organisations e.g. large firms can deal
with barriers to entry more easily than small
firms.


Key Issues in using the five forces
framework
• Apply at the most appropriate level – not necessarily
the whole industry. E.g. the European low cost
airline industry rather than airlines globally.
• Note the convergence of industries – particularly in
the high tech sectors (e.g. digital industries - mobile
phones/cameras/mp3 players).
• Note the importance of complementary products
and services (e.g. Microsoft windows and McAfee
computer security systems are complements). This
can almost be considered as a sixth force.


The value net

Value Net: is a
model that maps
out the
organizations in
a business
environment that
create
opportunities for
value-creating
cooperation as
well as
competition

Figure 2.3 The value net
Reprinted by permission of Harvard Business Review. From ‗The Right Game‘ by A. Brandenburger and B. Nalebuff, July–August 1996, pp. 57–64.
Copyright © 1996 by the Harvard Business School Publishing Corporation. All rights reserved


QUESTION 3: WHAT FACTORS ARE DRIVING
INDUSTRY CHANGE, AND WHAT IMPACTS
WILL THEY HAVE?

♦ Strategic Analysis of Industry Dynamics:
1. Identifying the drivers of change.
2. Assessing whether the drivers of change
are, individually or collectively, acting to
make the industry more or less attractive.
3. Determining what strategy changes are
needed to prepare for the impacts of the
anticipated change.


3.3 The Most Common Drivers of Industry Change

1. Changes in the long-term industry growth rate
2. Increasing globalization
3. Changes in who buys the product and how they use it
4. Technological change
5. Emerging new Internet capabilities and applications
6. Product and marketing innovation
7. Entry or exit of major firms
8. Diffusion of technical know-how across companies and
countries
9. Improvements in efficiency in adjacent markets
10. Reductions in uncertainty and business risk
11. Regulatory influences and government policy changes
12. Changing societal concerns, attitudes, and lifestyles


Assessing the Impact of the Factors
Driving Industry Change

1. Overall, are the factors driving change causing
demand for the industry‘s product to increase
or decrease?
2. Is the collective impact of the drivers of change
making competition more or less intense?
3. Will the combined impacts of the change
drivers lead to higher or lower industry
profitability?


Developing a Strategy That Takes the Changes
in Industry Conditions into Account

♦ What strategy adjustments will be needed
to deal with the impacts of the changes in
industry conditions?
● What adjustments must be made immediately?
● What actions must we not take or should we cease
to do now?
● What can we do now to prepare for adjustments
we anticipate making in the future?
The industry and the market forces
are always in a state of flux!


Industry Life Cycles
Industries are not in a static state
Rather they evolve through different stages
In your strategic analysis, you need to find out
which stage your industry is in
Each stage creates different opportunities,
challenges and suits different types of business
strategies
See Figure 2.4


The industry life cycle

Figure 2.4 The industry life cycle


Comparative industry structure analysis
A mapping model used to mark the dimensions of
the various scores in the five forces model
Which force scores higher lower
Plot them down in a ‘radar map’
Analyze the implications of the ‘profile’
Compare plots over two or more periods
Analyze the implications of the ‘changes’
See Figure 2.5


Comparative industry structure analysis

Figure 2.5 Comparative industry structure analysis


Cycles of Competition (page 67)
Enables the planner to map out the competitive
moves of the firm versus its competitors
Show the chronology or sequence of strategic
actions
Sequence of ‘moves’ and ‘counter-moves’ = cycles
of competition (see Figure 2.6)
An analogy: remember your physics course we
learnt an important principle from Newton: “for
every action there is an equal and opposite
reaction” – seems also relevant in strategy.


Cycles of competition

Figure 2.6 Cycles of competition
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetitive Rivalries: Competing in Highly Dynamic Environments by Richard A.
D‘Aveni with Robert Gunther. Copyright © 1994, 1995 by Richard A. D‘Aveni. All rights reserved


QUESTION 4: HOW ARE INDUSTRY RIVALS
POSITIONED—WHO IS STRONGLY POSITIONED
AND WHO IS NOT?

♦ A Strategic Group
● Is a cluster of industry rivals that have similar
competitive approaches and market positions:
 Have comparable product-line breadth
 Sell in the same price/quality range
 Emphasize the same distribution channels
 Use the same product attributes to buyers
 Depend on identical technological approaches
 Offer similar services and technical assistance


Strategic Groups
Strategic groups are organisations within an industry
or sector with similar strategic characteristics,
following similar strategies or competing on similar
bases.
• These characteristics are different from those in
other strategic groups in the same industry or
sector.
• There are many different characteristics that
distinguish between strategic groups.
• Strategic groups can be mapped on to two
dimensional charts – maps. These can be useful
tools of analysis.

Characteristics for identifying strategic
groups

Figure 2.7 Some characteristics for identifying strategic groups


Using Strategic Group Maps to Assess
the Market Positions of Key Competitors

♦ Constructing a strategic group map:
● Identify the competitive characteristics that
differentiate firms in the industry.
● Plot the firms on a two-variable map using pairs
of differentiating competitive characteristics.
● Assign firms occupying about the same map
location to the same strategic group.
● Draw circles around each strategic group, making
the circles proportional to the size of the group‘s
share of total industry sales revenues.


Typical Variables for Differentiating the Market
Positions of Key Competitors on Group Maps

♦ Price/quality range (high, medium, low)
♦ Geographic coverage (local, regional, national, global)
♦ Product-line breadth (wide, narrow)
♦ Degree of service offered (no frills, limited, full)
♦ Distribution channels (retail, wholesale, Internet, multiple)
♦ Degree of vertical integration (none, partial, full)
♦ Degree of diversification into other industries (none,
some, considerable).


Choosing Variables for Group Maps

♦ Variables selected as map axes:
● Must not be highly correlated.
● Must reflect key approaches to customer
value and expose sizable differences in the
marketplace positions of rivals.
● May be quantitative, continuous, discrete
andor defined in terms of distinct classes
and combinations.


Guidelines for Constructing Group Maps

♦ Draw map circles proportional to the combined
sales of firms in each strategic group to reflect
the relative sizes of each group to the total size
of the industry.
♦ Use different variable sets to show different
views of relationships among competitive
positions in the industry‘s structure—there is no
one best map for portraying how competing
firms are positioned.


Strategic groups in the Indian pharmaceutical industry

Figure 2.8 Strategic groups in the Indian pharmaceutical industry
Source: Developed from R. Chittoor and S. Ray, ‗Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis‘, Journal of International Management, vol. 13 (2009),
pp. 338–55


An example of using
Strategic Group Analysis in
the US Retailing Sector.


What Can Be Learned from Strategic Group Maps?

♦ Maps are useful in identifying which industry
members are close rivals and which are
distant rivals.
♦ Not all map positions are equally attractive.
1. Prevailing competitive pressures in the industry
and drivers of change favor some strategic
groups and hurt others.
2. Profit prospects vary from strategic group to
strategic group.


Uses of strategic group analysis

• Understanding competition - enables focus on direct
competitors within a strategic group, rather than the
whole industry. (E.g. Tesco will focus on Sainsburys and
Asda)
• Analysis of strategic opportunities - helps identify
attractive ‘strategic spaces’ within an industry.
• Analysis of ‘mobility barriers’ i.e. obstacles to movement
from one strategic group to another. These barriers can be
overcome to enter more attractive groups. Barriers can be
built to defend an attractive position in a strategic group.


Market segments

A market segment is a group of customers who have similar
needs that are different from customer needs in other parts
of the market.
• Where these customer groups are relatively small, such
market segments are called ‘niches’.
• Customer needs vary. Focusing on customer needs that
are highly distinctive is one means of building a secure
segment strategy.
• Customer needs vary for a variety of reasons -these
factors can be used to identify distinct market segments.
• Not all segments are attractive or viable market
opportunities – evaluation is essential.


Bases of market segmentation (1)

Table 2.1 Some bases of market segmentation


Who are the strategic customers?

A strategic customer is the person(s) at whom the
strategy is primarily addressed because they have
the most influence over which goods or services are
purchased.
Examples:
• For a food manufacturer it is the multiple retailers
(e.g. Tesco) that are the strategic customers not the
ultimate consumer.
• For a pharmaceutical manufacturer it is the health
authorities and hospitals not the final patient.


The Remaining Three Questions on
Strategic External Analysis
♦ Before we move on to Blue Ocean
Strategy, let us review the last three
stages of external analysis as outlined by
Thompson and Strickland
5. What strategic moves are rivals likely to make next?
6. What are the key factors for competitive success in
the industry?
7. Does the industry offer good prospects for
attractive profits?


QUESTION 5: WHAT STRATEGIC MOVES
ARE RIVALS LIKELY TO MAKE NEXT?

♦ Competitive Intelligence
● Information about rivals that is useful in anticipating
their next strategic moves.
♦ Signals of the Likelihood of Strategic Moves:
● Rivals under pressure to improve financial
performance
● Rivals seeking to increase market standing
● Public statements of rivals‘ intentions
● Profiles developed by competitive intelligence units


Useful Questions to Help Predict the Likely
Actions of Important Rivals

♦ Which competitors‘ strategies are achieving good results?
♦ Which competitors are losing in the marketplace or badly
need to increase their unit sales and market share?
♦ Which rivals are likely make major moves to enter new
geographic markets or to increase sales and market share
in a particular geographic region?
♦ Which rivals can expand product offerings to enter new
product segments where they do not have a presence?
♦ Which rivals can be acquired? Which rivals are financially
able and looking to make an acquisition?


QUESTION 6: WHAT ARE THE KEY FACTORS
FOR FUTURE COMPETITIVE SUCCESS?

This is similar to the concept of critical

♦ Key Success Factors success factors which we will cover under
Blue Ocean Strategy

● Are the strategy elements, product and
service attributes, operational approaches,
resources, and competitive capabilities that
are necessary for competitive success by
any and all firms in an industry.
● Vary from industry to industry, and over time
within the same industry, as drivers of
change and competitive conditions change.


Identification of Key Success Factors

1. What product attributes and service features
buyers strongly affect buyers when choosing
between the competing brands of sellers?
2. What resources and competitive capabilities
are required for a firm to execute a successful
strategy in the marketplace?
3. What shortcomings will put a firm at a
significant competitive disadvantage?


QUESTION 7: DOES THE INDUSTRY OFFER
GOOD PROSPECTS FOR ATTRACTIVE
PROFITS?

♦ Industry Profitability Considerations:
● The industry‘s overall growth potential
● Effects of strong competitive forces
● Effects of prevailing drivers of change in the industry
● Competitive strength of the firm: its market position
relative to its rivals, its capability to withstand
competitive forces, and whether its position will
change in the course of competitive interactions
● The success of the firm‘s strategy in delivering on
the industry‘s key success factors

Blue ocean thinking
• ‘Blue oceans’ are new market spaces where competition is
minimised.
• ‘Red Oceans’ are where industries are already well defined
and rivalry is intense.
• Blue Ocean thinking encourages entrepreneurs and
managers to be different by finding or creating market
spaces that are not currently being served.
• A ‘strategy canvas’ compares competitors according to
their performance on key success factors in order to
develop strategies based on creating new market spaces.

Check the website: http://www.blueoceanstrategy.com/


© Strategy in Marketing (Pearson Asia 2009)

Blue Ocean Strategy: Create a New Value Curve

Competitor A
Attribute Strength

Competitor B

Competitor C

#1 #2 #3 #4 #5 #6 #7 #8 #9 #10

Attributes 2-76

Strategy canvas

Figure 2.9 Strategy canvas for electrical components companies
Source: Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, 2005, Harvard Business School Press


Blue Ocean: Critical success factors (CSFs)

• Critical success factors are those factors that are either
particularly valued by customers or which provide a
significant advantage in terms of cost.
• Critical success factors are likely to be an important source
of competitive advantage if an organisation has them (or a
disadvantage if an organisation lacks them).
• Different industries and markets will have different critical
success factors (e.g. in low cost airlines the CSFs will be
punctuality and value for money whereas in full service
airlines it is all about quality of service).
Note this point well!!


Blue Ocean Model
Value Curves: graphic depiction of how customers
perceive competitors’ relative performance across
the critical success factors.

Value Innovation: is the creation of a new market
space by excelling on established critical success
factors on which competitors are performing
badly and/or by creating new critical success
factors representing previously unrecognized
customer wants.


The budget airline market

Blue Ocean market space for budget airlines
BUSM 3200- Strategic
3-80 Management (Jan 2013)
2-80
GDS

© Strategy in Marketing (Pearson Asia 2009)

BO Strategy- more examples
 Innovate products and services
that redefine the market
 Create new categories not
thought of before
 Apple i-Pod is a good example
 Even marketing real estate-
DUBAI
 Palm
 The World

BUSM 3200- Strategic
3-83 Management (Jan 2013)
2-83
GDS

Chapter summary (1)
• Environmental influences can be thought of as layers
around an organisation, with the outer layer making up the
macro-environment, the middle layer making up the
industry or sector and the inner layer strategic groups and
market segments.
• The macro-environment can be analysed in terms of the
PESTEL factors, from which key drivers of change can be
identified. Alternative scenarios about the future can be
constructed according to how the key drivers develop.
• Industries and sectors can be analysed in terms of Porter’s
five forces – barriers to entry, substitutes, buyer power,
supplier power and rivalry. Together, these determine
industry or sector attractiveness.


Chapter summary (2)

• Industries and sectors are dynamic, and their changes
can be analysed in terms of the industry life cycle,
comparative five forces radar plots and hypercompetitive
cycles of competition.
• In the inner layer of the environment, strategic group
analysis, market segment analysis and the strategy canvas
can help identify strategic gaps or opportunities.
• Blue Ocean strategies characterised by low rivalry are likely
to be better opportunities than Red Ocean strategies with
many rivals.
• The most important reason for environmental analysis is to
identify OPPORTUNITIES AND THREATS


PRACTICE ESSAY QUESTIONS
IMPORTANT NOTE: →
 These questions are provided for your reference only – they are only
INDICATIVE of the standard of questions you might expect in the final exam.
 DO NOT use these questions to “spot”
 The RMIT examiner will post advice on the exam on the Learning Hub closer
to the exam; you are required to pay attention to that advise
 The questions here show the range of topics that could be tested from this
lecture; they are NOT exhaustive
 To score a high grade it is important to LINK the theory to applications and
examples. Where from?
 You have been assigned specific cases to read from the text. Each case

study will show you the kinds of strategic decisions the case company
needs to make. You can draw from these examples.
 You have selected a case company for your project; you may use

examples from there.
 You are supposed to read widely from the business press about local,

regional and international companies strategies. You can use examples
from there as well.


Sample Exam Question:
Why would you want to do an
environmental analysis? In answering the
question critically discuss the objectives
behind an environmental analysis as well as
discuss what two of the relevant tools will
tell the user and how they may collectively
contribute to achieving the desired
outcomes.



Discuss the various elements of the
firm’s macro-environment. Give
examples of how two of these
elements might influence a firm’s
business level strategy.


Sample Exam Questions:
Explain how Porter's Five Forces Analysis can be
used in the formulation of business level strategy.
Illustrate your answer with examples from any
case you have studied from the text or other
examples of your own.

 NOTE: this question is not strictly on the five forces model
alone because it needs to be LINKED to a future topic to
be covered on “Business Strategies”
 This however reminds us of the fact that exam questions
are often set with overlapping or linked themes. Be
prepared for this!


Discuss the following two forces in the
industry environment: power of suppliers
and power of buyers. Use examples to
support your answer.

 Note in this question, the examiner asks you to focus just
on two forces. It is therefore pointless to write about all
the five forces. Learn to be selective!


SM Lecture Two : The Environment

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