University of Zululand
Faculty of Commerce, Administration and Law
Department of Business Management

Assignment topic: Chapter Two summary
Name: Mr T Mdletshe
Student number: 200903233
Module code: CBM 503
Module Description: Advanced Aspects of Management

THE ENVIRONMENT
The environment is what gives their means of survival. It creates opportunities and its present threats. This chapter therefore provides frameworks for analysing changing and complex environments. These frameworks are organised in a series of ‘layers’. Within the environment there is Macro-environment, this is the highest-level layer that consist of broad environmental factors that impact to a greater or lesser extent on almost all organisations. Industry or Sector forms the next layer within this broad general environment; this is made up of organisations producing the same products and services. Competitors and markets are the most immediate layer surrounding organisations; here the concept of strategic groups can help to identify the different kinds of competitors. This chapter works through this three layers in turn. 1. THE MACRO-ENVIRONMENT
The three concepts in this section are PESTEL, key drivers and scenarios these are interrelated tools for analysing the broad macro environment of an organisation 2.1. PESTEL framework
The PESTEL framework categorise the environmental influences into six main types, namely: Political, Economic, Social, Technological, Environmental and Legal.
Politics highlight the role of government, Economics refers to macro-economic factors such as exchange rates, business cycle and different economic growth rates around the world, social influences include changing cultures and demographics, Technological influences refer to innovation such as the internet etc., Environmental stand specifically for ‘green’ issues and Legal embraces legislative constraints or changes Key drivers for change: are the environmental factors likely to have a high impact on the success or failure of strategy. Typical key drivers will vary by industry of sector. 2.2. Building scenarios
When the business environment has high levels of uncertainty arising from either complexity or rapid change (or both), it is impossible to develop a single view of how environmental influences might affect an organisation’s strategies – indeed it will be dangerous to do so. Scenario analyses are carried out to allow for different possibilities and help prevent managers from closing their minds about the alternatives.
Scenario analyses can be carried out as follows: * Identifying the scope is an important first step. Scope refers to the subject of the scenario analyses and the time span. * Identifying key drivers for a change comes next. Here PESTEL analysis can be used to uncover issues likely to have a major impact upon the future of the industry, region or market. * Selecting opposing key drivers is crucial in order to generate a range of different but plausible scenarios * Developing scenario ‘stories’: as in films, scenarios are basically stories. Having selected opposing key drivers for change, it is necessary to knit together plausible ‘stories’ that incorporate both key drivers and other factors into a coherent whole. * Identifying impacts of alternative scenarios on organisations is the final of scenario building.

2. INDUSTRIES AND SECTORS
An important aspect of this for most be competition within the industry, sector or market. An industry is a group of firms producing products and services that are essentially the same. A market is a group of customers for specific products or services that are essentially the same (for example, a particular geographical market)
This section concentrates on industry analysis, starting with Michael Porter’s five forces framework and introducing techniques for analysing the dynamics of industries. 3.3. Competitive forces – five forces framework
Porters’ five forces framework helps to identify the attractiveness of an industry in terms of five competitive forces: the threat of entry, the treat of substitutes, the power of buyers, the power of suppliers and extent of rivalry between competitors. 3.4.1. The threat of entry
Barriers to entry are the factors that need to be overcome by new entrants if they are to compete in an industry. Typical barriers are as follows: * Scale and experience in some industries, economies of scale are extremely important * Access to supply or distribution channels in many industries manufacturers have had control over supply or distribution channels. Sometimes this has been through direct ownership (vertical integration) * Expected retaliation if an organisation considering entering an industry believes that the retaliation of an existing firm will be so great as to prevent entry or mean that entry would be so costly. * Legislation or government action legal restraints on new entry vary from patent protection, to regulation of markets and through government actions. * Differentiation providing a product or service with higher perceived value than the competition

3.4.2. The threat of substitutes
Substitutes are products or services that offer a similar benefit to an industry’s products or services but different process. There are two important points to bear in mind about substitutes: * The price/performance ratio is critical to substitution threats. A substitutes is still an effective threat even if more expensive, so long as it offers performance advantage that customers value * Extra-industry effects are core of the substitution concepts. Substitutes come from outside the incumbents industry and should not be confused with competitor’s threat from within the industry.

3.4.3. The power of buyers
Buyers are the organisation’s immediate customers, not necessary the ultimate customers. Buyer’s power is likely to be high when some of the following conditions prevail: * Concentrated buyers where a few large customers account for the majority of sales, buyer power is increased * Low switching costs where buyers can easily switch between supplier and another, they have strong negotiating position and can squeeze suppliers who are desperate for their business * Buyers competition threat if the buyer has the capability to supply itself or if has the possibility of acquiring such capability, it tends to be powerful

3.4.4. The power of suppliers
Suppliers are those who supply the organisation with what it needs to produce the product or service. Thus supplier power is likely to be high where there are: * Concentrated suppliers where just a few producers dominate supply, suppliers have more power of buyers * High switching costs if it is expensive to move from one supplier to another, then the buyer becomes relatively dependent and correspondingly weak * Suppliers competition threat suppliers have increased power where they are able to cut out buyers who are acting as middlemen

3.4.5. Competitive rivalry
Competitive rivals are organisations with similar products and services aimed at the same customer group (i.e. not substitutes), there are number of additional factors directly affecting the degree of competitive rivalry in an industry or sector.

* Competitor balance where competitors are roughly equal size there is the danger of intensely rivalries behaviour as one competitor attempts to gain dominance over others, through aggressive price cuts. * Industry growth rate in situations of strong growth, an organisation can grow with the market, but in situations of low growth or decline, any growth is likely to be at the expense of a rival and meet with fierce resistance. * High fixed costs industries with high fixed costs, perhaps because requiring high investments in capital equipment or initial research tend to be highly rivalries. * High exit barriers the existence of high barriers to exit – in other words, closure or disinvestment – tends to increase rivalry, especially in declining industries. * Low differentiation in a commodity market, where products or services are poorly differentiated, rivalry is increased because there is little to stop customers switching between competitors and the only way to compete is on price.

3.4.6. Types of industries
Four main types of industry structures, these four types are: * Monopolistic industries a monopoly is formally an industry with just one firm and no competitive rivalry, because of lack of choice between rivals. * Oligopolistic industries an oligopoly is where just a few firms dominate an industry, with the potential for limited rivalry and great power over buyers and suppliers. * Hypercompetitive industries hyper-competition occurs where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change. * Perfectly competitive industries perfect competition exists where barriers to entry are low, there are many equal rivals each with very similar products, and information about competitors is freely available.

3.4.7. Implications of five forces analysis
The five forces framework provides useful insights into the forces at work in the industry or market environment of an organisation. the analysis should next prompt investigation of the implications of these forces, for example: * Which industries to enter (or leave)? * What influence can be exerted? * How are competitors differently affected?

3.4.8. Key issues in using five forces framework
The five forces framework has to be used carefully and is not necessarily complete, even at the industry level. When using this framework, it is important to bear the following three issues in mind: * Defining the right industry most industries can be analysed at different levels, for example different markets and different segments within them. * Converging industries industry definition is often difficult too because industry boundaries are continuously changing. * Complementary organisations some analysts argue that industry analyses need to include a sixth force, the existence of organisations that are complementary rather than simple competitors. 3.4. The dynamic of industry structure
Industry structure analysis can easily become too static: after all, structure implies stability. The key drivers for change are likely to alter industry structures and scenario analyses can be used to understand possible impacts 3.5.9. The industry life cycle
The power of the five forces typically varies with the stages of the industry life cycle. The industry life cycle concept purposes that industries start small in their development stage, and then go through period of rapid growth, culminating in a period of ‘shake-out’ 3.5.10. Comparative industry structure analyses
The Industry life cycle underlines the need to make the industry structure analysis dynamic. One effective means of doing this is to compare the five forces over time in a simple ‘radar plot’ 3.5.11. Competitive cycles
In most industries, competitors constantly interact in terms of competitive moves: price cuts are matched and innovations imitated. These sequences of move and counter-move are called cycles of competition. 3. COMPETITORS AND MARKETS
An industry or sector may be too high a level to provide for detailed understanding of competition. The five forces can impact differently on different kinds of players. Many industries contain a range of companies, each of which have different capabilities and compete on different bases. These competitor differences are captured by the concept of strategic groups. Customer too can differ significantly and these can be captured b distinguishing between different market segments. 4.5. 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
This strategic group concept is useful in at least three ways: * Understanding competition, managers can focus on their direct competitors within their particular strategic group, rather than the whole industry * Analysis of strategic opportunities, strategic group maps can identify the most attractive ‘strategic spaces’ within an industry * Analysis of mobility barriers, of course to move across the map to take advantage of opportunities is not costless

4.6. Market segments
The concept of strategic groups discussed above help with understanding the similarities and differences in terms of competitor characteristics. The concept of market segment looks at the other side, differences in customer needs. A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market
Three issues are particularly important in market segment analysis, therefore: * Variation in customer needs. Focusing on customer needs that are highly distinctive from those typical in the market in one means of building a secure segment strategy * Specialisation within a market segment can also be an important basis for a successful segmentation strategy * Strategic customers, it is crucial to understand whose needs matter

4.7. Blue ocean thinking
Blue oceans are the market spaces where competition is minimised. Blue oceans contrast with ‘red oceans’, where industries are already well defined and rivalry is intense. Strategy canvas compares competitors according to their performance on key success factors in order to develop strategies based on creating new market spaces 4. OPPORTUNITIES AND THREATS
Opportunities and threats form one half of the SWOT analyses that shape many companies strategy formulation. In responding strategically to the environment, the goal is to reduce identified threats and take advantage of the best opportunities. The techniques and concepts in this chapter should help in identifying environmental threats and opportunities, for instance: * A PESTEL analysis of the macro-environment might revel threats and opportunities presented by technological change or shifts in market demographics and similar * Identification of the key drivers for change can help generate different scenarios for managerial discussion, some more threatening, other more favourable * A porter five forces analysis might for example identify a rise or fall in barriers to entry, or opportunities to reduce industry rivalry, perhaps by acquisition of competitors * Blue ocean thinking might reveal where companies can create new market spaces, alternatively it could help identify success factors which new entrants might attack in order to turn ‘blue oceans’ into ‘red oceans’