U2 The Strategic Environment Flashcards
(170 cards)
1
Q
Where Are We in the Market Place? The Macro-Environment
Organizations do not exist in isolation—they exist ?
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within the environment in which they operate.
2
Q
The environment, in turn, influences ?
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the corporate strategy.
3
Q
A comparison can be made with the solar system, with our organization being ?
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the center and various factors orbiting around it, just as the planets move around the sun.
Each of these factors influences our strategic plan.
4
Q
The factors closer to the organization, ————————————————————————- are in the micro-environment.
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namely competitors, substitute products, suppliers, and buyers,
5
Q
The macro-environment consists of?
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political,
economic,
social,
technological,
environmental,
and legal factors that influence how business is conducted.
6
Q
Substitute products
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Substitute products can be used as replacements for existing products.
7
Q
Figure 2: The Macro-Environment of an Organization
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8
Q
Figure 2: The Macro-Environment of an Organization
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9
Q
Figure 2: The Macro-Environment of an Organization
A
10
Q
The PESTEL analysis can be used to?
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analyze the macro-environment of our organization.
11
Q
PESTEL is an acronym of?
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the first letters of all the factors in the macro-environment of an organization:
12
Q
A
Political factors
Economic factors
Social factors
13
Q
A
Technological factors
Environmental or ecological factors Legislative or legal factors
14
Q
The PESTEL analysis is a strategic and qualitative method that helps to?
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align the organization with its environment or with developments in the environment.
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Q
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It also looks at changes in the environment that may influence the future success or failure of the organization.
16
Q
PESTEL Analysis of an Airline
The following section applies a PESTEL analysis to?
A
an airline, exploring what is considered in each category.
17
Q
Political factors
This involves :
A
an analysis and forecast of political developments and trends.
18
Q
If the government enforces higher security standards in the airline industry, our company will have to invest more in ?
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its security measures.
19
Q
Investments in other projects will therefore need to be ?
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reduced or cut completely.
This has a direct impact on the company strategy.
20
Q
Economic factors
This involves:
A
This involves an analysis and forecast of economic developments and trends.
21
Q
Changes in the price of oil will influence ?
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the price of aviation gasoline. Since the price of gasoline is a critical factor for airline profitability, the oil price will have an influence on the bottom line of an airline company.
22
Q
A
If gas prices go up, airlines are forced to increase ticket prices. This could lead to a decline in air travel, which impacts the strategy of an airline.
23
Q
Social factors
This involves:
A
an analysis and forecast of socio-cultural developments such as trends in the areas of demography or changes in values of the customers.
24
Q
In the western world, the population is aging and many retire earlier. As such, there are many more elderly people traveling today than in the past. Airlines have to ?
A
accommodate this customer group and cater to their specific needs by providing wheelchairs and luggage services.
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Demography
Demography looks at the development of a population in terms of age, structure, etc.
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Technological factors
This involves :
an analysis and forecast of technological developments and trends.
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Check-in
Check-in is the process of registering travelers and their luggage in order to confirm their presence on the flight.
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The check-in process for flights has changed through the widespread use of the Internet for this procedure. A few years ago,
a traveler had to be at the airport on time in order to go through the check-in process at the airline counter. There were often long lines in front of the check-in counters. Today, most airlines offer online check-in in order to process the passengers at the airport faster. Airlines are forced to invest in the technology required to support online check-in procedures, which again influences the strategic plan.
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Ecological factors
This involves ?
an analysis and forecast of ecological developments and trends.
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The airline industry is faced with flight restrictions over certain areas such as larger cities and nuclear power plants.
Therefore, they are forced to re-route planes and engage in major planning efforts to align operations with ecological developments.
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This leads to stronger investments in the planning department and takes resources away from other departments.
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Legal factors
This involves?
an analysis and forecast of legal developments regionally, domestically, or internationally.
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Domestic airlines are often given preference when it comes?
to airport access.
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Smaller airlines are thus forced to resort to?
smaller, more remote airports.
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Cheaper charter airlines, such as Irish company Ryanair, build this factor into?
their strategy and operate from smaller airports.
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The PESTEL analysis is?
comprehensive and extensive.
Its usage is not limited to one organization or one competitive situation;
it can also be applied to a team or a department within the organization.
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A brainstorming session often forms part of a PESTEL analysis with the goal of ?
finding specific features or trends in any of the six areas.
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These can then be evaluated to inform ?
a specific decision or situation.
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The PESTEL analysis is therefore a tool that can be used for location decisions as well as?
for strategic decisions, such as the product portfolio or technological innovations.
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In our case study,
the first three questions concern the macro-environment of Lars Bank.
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The first question: “What business opportunities will the change in the legal framework open up for foreign financial services providers?”
addresses the political and legal aspects of such an investment in Turkey.
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The changes in the legal framework for financing real estate should make it easier for?
European banks to finance real estate in Turkey.
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The second question: “Is the market economically attractive?” looks at the economic aspects of an investment decision. Even if ?
the legal framework supports foreign investments, it might not be economically lucrative for the organization.
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The third question: “Would Turkish customers accept foreign financial service providers?”
looks at the socio-cultural implications of the investment.
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Financial services companies need to ?
establish a relationship of trust with the customer in order to succeed.
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Despite today’s global markets, it might be difficult for a foreign bank to gain the trust of?
Turkish customers.
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This question needs to be explored further before making the decision to enter the Turkish market.
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Where Are We in the Market Place? The Micro-Environment
The direct environment in the market place impacting an organization is called ?
the micro-environment.
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This includes?
the buyers or customers of an organization,
the competitors,
possible substitute products,
and the suppliers.
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The Five Forces Model
Michael Porter’s (1979) Five Forces model takes a look at?
the micro-environment and helps analyze various strategies for the strategic planning process.
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This model is built on the following assumptions.
==The foundation of the model is that the market’s attractiveness is defined by its structure.
== The structure of the market in turn impacts the strategic behavior of an organization operating in this market.
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==Since the market structure is defined by the competition, the competitive strategy of an organization is decisive for its success.
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Porter’s model analyzes the forces in the micro-environment that impact?
a specific market.
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The information gained through this model analysis allows organizations to ?
make decisions regarding activities that influence forces in their micro-environment.
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The attractiveness of a business is identified by the following five forces:
Buyers\/customers: analysis of their buying power
Competitors: analysis of the degree of rivalry among existing competitors
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New market entrants: analysis of threats from new competitors
Substitutes: analysis of threats from substitute products
Suppliers: analysis of their negotiating power
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The stronger these five forces are, the less
-----------------------the business is and the more difficult it is for an organization to build and maintain a ----------------------------------. These forces are now explained in greater depth.
attractive
competitive advantage
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Buyers\/customers
Customers are the direct buyers of the products or services of?
an organization; however, they are not necessarily the consumers.
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When buyers are powerful (i.e. they buy large amounts), they can enforce lower prices for the products. This would lead to?
a decrease in the profits of the organization.
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Consumer
The consumer is the individual using the product or service. In many families, mothers are often the grocery shoppers who buy the chocolate. In this instance, the mother is the direct buyer; however, it is the children who are the consumers of the chocolate.
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Buyers have purchasing power over an organization when:
They buy large quantities.
The producer has high fixed costs and little flexibility in lowering the price for the product or service.
The product is undifferentiated and can easily be replaced by substitute products.
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The switch to an alternative product is simple and inexpensive.
The margins are relatively small.
The customers could produce the product or service themselves.
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The product or service is not of high value to the customer.
The customer knows the production cost of the product.
A backward integration is possible for the customer. Backward integration means that the customer produces the product or service themselves by buying the company or developing it.
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Margin
Margin is the difference between the production costs and the sales price.
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Competition
This force describes the intensity of the competition among the current players in the market.
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High competitive pressure, which is often reflected in?
price competition,
leads to shrinking margins and profits for all the organizations in the business.
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price competition, leads to shrinking margins and profits for all the organizations in the business.
--There are numerous companies of similar size in the market.
--The companies have similar strategies.
--The business sector shows little growth and therefore an increase in sales is only possible if business is taken away from a competitor.
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--The products or services offered in the market are undifferentiated and therefore all companies compete on price.
--The exit barriers for the organization to leave the business and switch to a different business are very high (e.g. highly specialized machines or personnel are required to produce the product or service).
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New market entrants
When the competitive pressure by new market entrants on existing organizations is higher, the easier it is/
for new companies to enter a certain sector.
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Important elements in the market such as ?
market share,
price levels,
customer base, etc.
can be changed when new companies enter the market.
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There is a constant pressure on the existing organizations to react and adjust to this pressure. The threat of new market entrants is defined by?
business specific market entry barriers.
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Market entry barriers are high if there are:
==economies of scale (i.e. organizations need to be a certain size in order to be more efficient)
==high initial costs and high fixed costs
==cost advantages of existing organizations through experience effects or through employment of depreciated but still functioning machines and equipment
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==brand loyal customers
==patents, licenses, etc. which protect the intellectual property of organizations
==scarce resources (e.g. qualified human resources)
==controlled resources by existing organizations
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--controlled distribution channels by existing organizations
--close customer relationships through service or maintenance contracts
--high switching costs for customers who want to change suppliers in the business
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Economies of scale
Economies of scale occur when the production volume depends on the number of production factors deployed. Production costs do not necessarily decrease when the production volume increases.
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Loyal
Loyal customers have a close relationship to a company or brand.
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Switching costs
Switching costs are the costs involved when a customer switches to a different supplier. These costs are monetary and psychological.
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Substitutes
The threat of substitute products is critical if?
the substitute is cheaper or more effective than the current product.
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These may then replace a large portion of the sales volume of the existing product and thus?
reduce sales and profit of existing organizations.
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Similar to the threats of new market entrants, the threat of substitute products depends on various factors such as:
==the degree of customer loyalty
==the intensity of the customer relationship
==how high the switching costs are for the customer
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Intensity
Intensity describes the degree and frequency of the customer contact.
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Suppliers
Suppliers are all the supply sources that are necessary for an organization to be able to produce the product or service.
Suppliers provide the necessary input to make the product.
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Powerful suppliers can increase the prices for their products and therefore reduce?
the profit of the organization to which they supply the product.
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Intensity
Intensity describes the degree and frequency of the customer contact.
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Input
Input includes all efforts such as materials, personnel, etc. that are necessary to produce the product or service.
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Suppliers are powerful if:
The market is dominated by few large suppliers.
The product supplied is highly specialized or rare.
The company that buys from the supplier is small and insignificant to the supplier.
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There are no substitutes for this specific input.
The switching costs to a new supplier are high.
A forward integration is feasible for the supplier, meaning that the supplier could buy the company to whom it supplies.
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The example of the forward integration is ?
evident in the case of charter airlines.
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Many airlines do not sell through travel agents as a distribution channel but rather sell directly to the traveler via?
the internet.
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This example demonstrates how these airlines have?
forward integrated their distribution.
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If a supplier is powerful, the businesses that operate in this market experience?
a high pressure on their profit margins.
It is more difficult to maintain a profitable business.
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The relationship with important suppliers can have a strong impact on?
the strategic plan of an organization.
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Let us return to our case study of the Lars bank, which is?
looking at opportunities for financing real estate in Turkey.
Questions four to ten on the employee’s list concern Porter’s Five Forces model.
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Firstly, the questions: “Which customers should we target, private investors or real estate companies?”
and “How could the customers influence the financing terms of the bank?” look at the customer and how much power he has.
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Small private customers who are buying a home will certainly have less power than?
large real estate companies.
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Real estate companies regularly invest in
large apartment buildings and therefore have a?
great deal more power in negotiating financing terms with the bank. The bank has to decide who their customer is.
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The next questions: “What is the competition like in the Turkish market?” and “What other European competitors might become active in the Turkish market?
To what extent and how?” evaluate both the existing competitive situation in Turkey and potential new competitors.
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Certainly, Lars Bank will not be the only bank to consider entering the Turkish market once ?
the legal changes are finalized.
Therefore, a possible strategy has to look at the competitive landscape.
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The next question: “What alternative financing options are available to Turkish customers?” is concerned with?
possible substitutes or, in this case, other financing options.
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Other financing options may be available in Turkey, such as?
loans supported by the employer.
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The second to last question: “How are real estate projects sold? Who mediates real estate projects in Turkey?” looks at the supply situation. In this case, the bank needs to?
find out where and how to get information on real estate projects.
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Analysis, Strategic Capabilities, and the Five Forces Model
The analysis of Porter’s Five Forces in business can be used for three areas of a strategic plan.
1-Analysis of the market attractiveness (static)
2-Analysis of the development of the market attractiveness (dynamic)
3-Analysis of the strategic possibilities
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Analysis of the market attractiveness (static)
The model helps to define the market attractiveness of a business.
It helps with decisions concerning entering or remaining in a specific market segment.
The model also allows the analysis of the influence of the forces on the individual organization and on its competitors.
This helps to determine the organization’s position in the market.
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Different companies have different resources and competences that permit different strategic decisions. The strategic decisions of the companies in turn influence?
the competitive structure of a business.
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Analysis of the development of the market attractiveness (dynamic)
Together with the PESTEL analysis, the Five Forces model can show developments and changes in a business.
This trend analysis can be used to look at the attractiveness of the business in the future.
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The political,
economic,
social,
technological,
ecological,
and legal developments
can influence one or several of the five forces. This can significantly influence?
the distribution of power of the forces.
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Analysis of the strategic possibilities
The analysis of the intensity of the different forces on the organization provides?
insight into opportunities to influence or use the forces to the organization’s advantage.
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This might lead to a completely new strategic orientation, which could influence?
the position of the organization in the market place, or the differentiation of the products or services, or even the decision to form strategic partnerships.
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In our case study, the Lars Bank is investigating the question: “Would the Turkish market be of interest to Lars bank?” This is the basic strategic question that follow the macro- and micro-analysis of the environment. Thus,?
Porter’s model allows a systematic and structured analysis of the competitive situation and position of an organization.
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As stated earlier, the model can be used to ?
analyze a specific situation, a specific market segment, or a specific region.
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Position
Position is the active communication of a product or brand to the market place.
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Thus, Porter’s model allows a systematic and structured analysis of ؟
the competitive situation and position of an organization.
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As stated earlier, the model can be used to?
analyze a specific situation, a specific market segment, or a specific region.
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What Are The Strategic Options For an Organization?
After thoroughly examining the current and possibly the future development of the five forces, the organization can develop strategies to influence ?
one or several of the forces.
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Possible strategies should not just take the environment into account but should also look at?
the internal resources, capabilities, and goals of the organization.
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The following strategies are available to organizations:
1-Reducing the power of the suppliers
2-Reducing the power of buyers
3-Reducing the threat of new market entrants
4-Reducing the threat from substitutes:
5-Reducing the pressure from existing competitors
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Reducing the power of the suppliers
1-The organization can form partnerships with companies that use the same supplier, enabling them to buy higher quantities at lower prices. Edeka is a buying partnership of several supermarkets in Germany. The partnership started in 1898 and Edeka is now Germany’s largest food retailer.
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2-Systems integration. Organizations can try to integrate (i.e. computer systems, ordering processes, etc.) with their supplier. This will streamline the process and make it cheaper for both companies. At the same time, it will become more difficult and more costly for the supplier to switch customers. Systems integration consolidates the relationship between companies.
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2-An example of successful systems integration is Wal-Mart, a US-based retailer. In June 2003, Wal-Mart announced that its 100 largest suppliers would have to supply all their products with radio frequency identification (RFID) technology by January 2005. RFID allows products to be identified and located automatically. The reordering process is therefore automated as the system recognizes when the shelf is empty and products need to be reordered.
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3-Companies can try to obtain knowledge regarding the production costs and methods of the supplier in order to use this information in negotiations.
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4-Systems integration. Organizations can try to integrate (i.e. computer systems, ordering processes, etc.) with their supplier. This will streamline the process and make it cheaper for both companies. At the same time, it will become more difficult and more costly for the supplier to switch customers. Systems integration consolidates the relationship between companies.
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Reducing the power of buyers
1-Organizations can form partnerships with other suppliers to reduce the buying power of customers. These cooperatives can be seen in many areas.
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For example, olive farmers in Italy deliver the olives together to the oil producer to guarantee the same prices for all farmers.
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2-System integration works in both directions: from buyer to supplier and from supplier to buyer. It leads to optimized processes and lowers the costs for both parties.
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It makes switching more difficult for both supplier and buyer. In the medical equipment market, some manufacturers of medical imaging equipment also supply data management systems to hospitals.
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The imaging systems are then compatible with the patient data management system of the hospital. This creates a close relationship between manufacturer and hospital.
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3-Increasing customer loyalty will also reduce the power of buyers and tie the buyer to the organization. L
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loyal customers who buy repeatedly reduce the purchasing costs of an organization as they are familiar with the process and know how to order.
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This decreases the process costs and increases the profitability of the organizations. Organizations can increase loyalty by consolidating relationships and by offering loyalty benefits to the customer.
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4-The decision to purchase a specific product should not be based on the price. Apple understood that the highly competitive consumer electronics market is price driven.
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However, through excellent marketing, they created a trendy image for their products and evaded price competition with the many other electronic companies in the market.
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5-Organizations can also try to bypass influential distributors and sell directly to the customers. We have already provided the example of charter airlines that no longer sell tickets through travel agencies but directly to the customer.
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Reducing the threat of new market entrants
1-Organizations can weaken the threat of new market entrants by building a brand and creating customer loyalty. Both will make it more difficult for new entrants to establish a customer base.
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2-Patents and licenses protect products and processes for a limited time and make it impossible for new entrants to sell similar products in the respective markets.
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3-Organizations can increase the barriers to entry (see above).
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4-Alliances with complementary products and services can improve customers’ choice of product from a single source. Travel agencies often have alliances with insurance companies to be able to offer travel insurance policies to their customers.
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5-Alliances with suppliers or distributors build closer relationships, making it more difficult for new companies to enter the market.
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6-Increasing efficiency in producing the product or service will give the organization cost and time advantages over new entrants. This can be attained through constant quality and process management.
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Alliance
An alliance is a partnership between two companies with similar interests and goals.
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Reducing the threat from substitutes:
1-In order to reduce the threat from substitutes, organizations can again integrate systems with their customers to make it more difficult for them to switch to substitute products.
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2-Creating industry standards makes it difficult for substitutes to gain a market share. Wal-Mart’s RFID technology has expanded in the retail business in the US and may become an industry standard.
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3-Forming alliances is another strategy to protect the organization from possible substitutes.
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4-Market research and constant analyses of customer preferences can also protect from substitutes.
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5-Organizations may decide to enter the substitute market themselves. Some manufacturers of glass bottles have invested in the production of plastic containers.
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Reducing the pressure from existing competitors
1-Companies should avoid price competition.
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2-Differentiating products from competitive products, as Apple has done with many of their products, avoids direct competition.
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3-Taking over a competitor is another strategy to ease the pressure, as the organization becomes larger.
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4-Focusing on specific market segments (niche marketing) will avoid head-on competition in these smaller market segments.
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5-Communicating with competitors establishes better relationships and avoids fierce competition.
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Critical Issues
Porter’s Five Forces model has received some criticism. Its main weakness is ?
a result of the historic context it was created in.
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At the beginning of the ---------------, the world economy was shaped by strong --------------------------------------------------------patterns. Therefore, organizations’ primary goal was to guarantee their ------------------------------------------------------.
1980s
competition and cyclical growth
existence and profitability
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They had to optimize their strategy in relation to the competition. Today’s market is quite different. It is much more?
dynamic and less stable and predictable in its development.
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Therefore, the Five Forces model has limited applicability in today’s?
market place.
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the Five Forces model
---The model is based on a stable and static market structure. It is difficult to apply it to today’s dynamic markets. The technological advances and aggressive new market entries by companies from different businesses change the markets constantly.
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The internet as a selling tool has put many established brick-and mortar companies that ignored this trend completely out of business.
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---The Five Forces model is best used to analyze simply structured markets. It is difficult to analyze complex businesses with many intertwined structures and networks, products, and distribution structures using this model.
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---Moreover, the model is also based on the classic free market. The stronger a business is regulated, the less effectively the model can be used to design sound strategies.
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More Information
Porter’s answer to such criticism can be found in Porter (2008).
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Each organization exists within an environment which influences its ----------------------. The environment can be divided into the --------------------------------(direct influences) and the ------------------------------------ (factors in the wider environment of the organization). There are various methods of analyzing these factors.
strategy
micro-environment
macro-environment
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The PESTEL analysis:1
helps to examine the macro-environment. It looks at factors in the wider environment, such as trends and developments that influence the company strategy.
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The PESTEL analysis:2
looks at political, economic, social, technological, ecological, and legal aspects that influence strategic decisions.
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The PESTEL analysis:3
is broad and can be used to make decisions on locations, product portfolios, technological concepts, and other projects.
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Michael Porter’s Five Forces model helps to?
analyze the strategy of an organization and make planning decisions.
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The basic assumption of the model is that the business structure influences?
the attractiveness and the strategic behavior of companies operating in the business.
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The attractiveness of the market is influenced by?
five factors: buyers, competitors, new market entrants, substitutes, and suppliers.
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A thorough analysis of the five forces and their scope of influence allows organizations to?
evaluate the attractiveness of the market.
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In combination with the PESTEL analysis, a company can also evaluate trends in the market. Thus, the company can define?
the strategic possibilities and try to influence one or several of the five forces.
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The goal is to weaken suppliers’ and customers’ power over the organization, to minimize the threat from?
new market entrants and substitutes, and to minimize the pressure from existing competitors on the organization.
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Porter’s model has been criticized, as it is based on static and stable market conditions. Therefore, it cannot be applied to?
today’s complex and dynamic markets.
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