Book 3: Analysing external relationships
_(Originally published on_ _OUBS Blog_ _)_
_Here the focus is on the near environment, which needs to be understood for the strategy to be deliverable. Kotler (1980) found four environments of importance: task (e.g. suppliers), competitive, public (e.g. institutions) and macro (e.g. social forces) enviromnents._
_The far environment can be judged by the STEP (also known as PEST and some might know STEEP which adds Ecological) factors but it needs to be understood that these factors all interact. The factors are also context specifica and Fahey and Narayanan (1986) argued that the driving forces behind them need to be understood._
_The near environment is filled with parties of frequent interaction. Here, each organisation will have its own set of interactions, especially if looking beyond the direct rivals into the broader picture. Companies should in the near-term focus on similar companies while companies with different capabilities provide the biggest threat in the long run._
_Industry Structure_
_To develop a competitive strategy, we need to understand both our customers and competitors, hence the market we are competing in. Analysis of this is based on different methods which are explained in the Set Book from page 64 to 102. A major part of this is Porter’s five forces model, which helps to find things like critical success factors, as well as to understand the industry one is competing in._
_Porter’s model gives you inforamtion on the attractiveness of the industry you are targetting, meaning potential profitability for you (see book 2)_
_Looking at all 5 forces, and changes between them, gives us a way of finding potential added value. As industry structures are changing, the models only work for a limited time. Porter’s model describes not predicts. Changes in the industry, changes its boundaries and structure which likely leads to the need for new strategies._
_(Next comes the Electrolux case, which will be referred to at several places within the book. )_
_Industry structure is only a starting point though, especially as all these models only provide a view, not the view of an industry. Rumelt (1991) found that most variation in organisational performance comes from differences between businesses rather than general industry attractiveness. Of course there are industries where the effect is bigger, but they are rare._
_Strategic Groups_
_(Started with a Mini-Case of the European Food-Processing industry)_
_These are clusters of firms within an industry following the same or similar strategy (McGee, 1985)._
_Members of strategic groups are not equally capable though. The grouping comes mostly from a special configuration of resources common to the group. These create so called mobility barriers. They also offer protection of imitation from outside the group. McGee (1985) called them costs of imitation._
_Strategic space and industry dynamics_
_Industry dynamics involve the decaying of mobility barriers due to changes in the significance of different resources (see food-market case)._
_To build a strategic group map, you need to choose two different important factors for a chart (e.g. geographic coverage and marketing costs) and place the different strategic groups of one to n companies within that chart._
_Strategic space was introduced by McGee and Segal-Horn (1990, 1992). They take the strategic groups concept but do not place companies in the chart. They rather create a system of areas of opportunity within that chart for any given industry. These might not be available yet but could be in the future (e.g. non-branch banks). A strategist has to find a space and decide if it presents a viable strategy now or perhaps in the future._
_Industry participants_
_To understand participants strategies, we need to look at their intentions, decisions and capabilities._
* Intentions
_Information can be gained from published remarks, annual reports and official statements of philosophy._
_Kuhn (1962) suggested looking at how companies habitually act. This can be seen in:
\- flexibility and responsiveness to customers
\- aggressive or trustworthy or co-operative in competitive environment
\- notice of strategic threats and speed of reacting to challenges_
* Decisions
_Decisions are made against the background set by industry structure. If we understand the freedom of choices and look at their choices, then we can possibly deduct their future competitive behaviour._
_If your product or service is not cheaper than anyone else’s, or better than anyone else’s or you don’t serve me better or more conveniently than anyone else, why on earth should I prefer you to your competitors? — Porter 1994_
_How can this be achieved?_
_a. Deciding to specialise (e.g. strong branding, specialised sales force, dominating niche markt, …): Customers need to have distinct needs and be willing to pay a premium._
_b. Deciding to seek lowest-cost production: Deliver those value-added elements below a competitors price. This could be quality too. Economies of scale, accumulation of experience, superior operational logistics and a cost cutting culture can be important here._
_c. Deciding to focus: There is high knowledge about what the customers wants needed here._
_d. Decisions and industry structure: There is an interplay between the sources of advantage available and the decisions made._
* Capabilities
_Strategies that the participants are capable of carrying out. This needs concetration of resources and capabilities. You need to:_
_a. Understand the competitor’s market segment as the capabilities need to fit.
b. Understand teh differences between value generating processes
c. Look for patterns of competitive behaviour. It is important to also look at competitors with a different approach to value generation._
_Applying competitor-analysis techniques_
_Here the example of Electrolux is taken, which I will leave out here, as with all case studies._
_Interaction in the industry_
_One form of interaction is competition and this is very dependent on the individual scenario but some generic strategies are:
\- surprise (for short-term advantage)
\- timing
\- maximum use of resources
\- vigour and skill_
_The other form is co-operation, a form that Hamel and Prahalad (1994) argued will be more important in many future opportunities._