MBA Part Time
Managing in the Competitive Environment
Strategy process and the external environment
A.
INTRODUCTION TO SESSION
For many companies in the UK and the United States the period 1950 to 1970 seems in
retrospect to have been one of almost uninterrupted straight-line growth in a relatively stable
environment. In such a situation managers look effective and perhaps they are effective if
they “do the same thing over and over again and appoint successors in their own image”.
Then in the 1970s a big change took place. “Doing the same thing” became almost a recipe
for corporate disaster. The reason for this was simple. Instead of being routine and fairly
predictable, the business environment had become increasingly volatile; according to many
managers the pace of change had accelerated (or so they thought). This process has
continued into the 1990s, and at the same time many managers would claim that the
complexity of the environment they face has also increased.
This Session discusses the nature of the external environment and examines some of tools
and frameworks used to assess the impact of external conditions upon the strategies of
organisations.
Your Objectives
By the end of this session you should be able to:

Appreciate the nature of the external environment and its implications.

Understand the process of environmental analysis as a critical element of strategic
management.

Apply some of the key tools and frameworks available to help evaluate the strategic
implications of conditions and changes in the external environment.
B.
THE NATURE AND IMPLICATIONS OF THE
EXTERNAL ENVIRONMENT
What do we mean by the external environment? Broadly, the external environment
comprises those factors and trends outside the organisation that might have an influence
upon an organisation and its future.
Many external factors can have an effect upon an organisation - from changes in
government legislation (e.g. the ending of Duty Free sales to travellers within Europe), to the
entry of new competition into a market (e.g. the opening of a new supermarket near to an
existing shopping centre). Some environmental changes might affect all or many
organisations, whilst others may be limited to only one or two.
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The complexity of the external environment faced by different organisations is likely to vary
greatly. A global corporation will face many influences, some changing from country to
country, such as consumer legislation, whilst others like technological changes are
intrinsically more international. In contrast, the influences faced by a village shop are likely
to more limited in range and variety, such as the number of local customers and their buying
habits, though perhaps no less critical to the future of the business.
Arguably, it is a cliché to say that in today’s world even the pace of change is changing, but
for most organisations the dynamic nature of their external environment is not invalidated by
this statement, however hackneyed. For example, the emergence of the Internet is affecting
organisations from large to small, and in the public sector as well as those in industry and
commerce, with new developments quickly diffusing across the globe leading to changes in
market structures and business practices.
 The Need to Monitor the External Environment
Monitoring and evaluating the external environment is an important issue for organisations
because changes in the external environment imply the need to ensure that strategies can
meet new circumstances. This may seem a statement of the obvious, yet it is frequently the
case that:

Otherwise ably managed organisations are frequently taken by surprise by events what
may seem to the observer to have been quite predictable.

Managers are prone to describe their failures as due to bad luck and their successes as
due to good management.
These points illustrate both the importance of trying to undertake environmental analysis, but
also suggest that such analysis is not entirely objective. If the process is viewed as a
scientific experiment, then the analyst is also part of the experiment. Consequently, the
results of the analysis are as much the product of expectations, prejudices, assumptions and
typology as they are of “objective” circumstances.
Despite these problems, the answer to the question “does an organisation need to undertake
environmental analysis?” remains in the affirmative. However, given the nature of the
environment and the organisational dynamics outlined above, three further questions are
also worth a moment of reflection:

Which areas of the environment should be analysed? This will depend upon the nature
of the organisation and the context in which it operates: the global company and village
store, mentioned above, are likely to need to focus upon different issues and at different
levels.

How much information is needed and from where can it be sought? Again, the global
corporation is likely to require much more information, from many sources and of a more
detailed nature, than the village store. The dangers of “information paralysis”, always
seeking more data before taking action, are also a significant consideration here.

What techniques can be used to analyse important factors, trends and events? There
are many tools and models available, some more complex and detailed than others, so
their appropriateness and depth of application needs to be considered: the global firm
applying more tools and with greater sophistication, in contrast to a more intuitive and
informal approach taken by the village store.
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Above all, the overall need for external analysis needs to be kept in mind – what is the
strategic significance of the changes and trends that are apparent for the particular
organisation?
 An Overall Approach to Analysing the External Environment
Despite the limits to objectivity a systematic approach to external environmental analysis
can minimise problems and provide an important contribution to the process of strategy
formulation. The implicit assumption of all environmental analysis is that in understanding
changes in the external environment, the implications for the strategy of an organisation can
be identified and addressed.
The external environment can be considered at three levels:

The general environment affecting all organisations.

The competitive environment affecting all organisations in particular industries or
sectors.

The competitive position of individual organisations within a particular industry or
sector.
At each of these levels a range of tools and frameworks can help to organise the analysis
and point to underlying factors affecting the dynamics and complexity of the situation. These
tools and frameworks are outlined below, but in applying them you must remember:

Take a holistic view – be aware of the interactions between individual factors.

Adapt what you read to the particular circumstances of the organisation or industry under
analysis.

The most difficult aspect of environment analysis is often that of deciding exactly which
factors are the most important.

New factors and new priorities will arise as the circumstances change.
C.
ASSESSING THE GENERAL ENVIRONMENT
The wide range of potential influences on an organisation and the ways in which they
interact, make the job of assessing the general environment particularly difficult. In addition,
each organisation will be affected in different ways by changes in the environment. The
factors that will have a significant impact upon one organisation will have little effect on
another. For example, the recent changes in the funding of students in the UK is of
particular concern to universities like Durham, but will have only a marginal impact on a
retailer like Marks & Spencer.
PEST Analysis
PEST analysis (a mnemonic for Political, Economic, Social and Technological factors) is the
most frequently used tool to consider the impact of the general environment. It provides a
broad framework for considering a wide range of potential factors in order to:
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
Summarise the most important influences of the general environment upon a particular
organisation.

Evaluate the potential impact of these influences, both individually and jointly, upon the
organisation, whether positive or negative – the opportunities and threats to be faced.
Each of the four headings can be broken down further to suggest more detailed
consideration of particular factors and changes that might influence the organisation both
currently and in the future. Whilst varying dependent upon the particular context, the list of
factors and changes may include:

Political factors and changes – the introduction of specific legislation and regulation
such as competition policy, trading standards, financial regulation, planning policies.
Changes in the general political climate both domestically and internationally such as
whether the UK will become part of the Euro zone of countries.

Economic factors and changes – patterns and trends in overall economic activity and
world trade; movements in exchange rates, interest rates and taxation both within
particular countries and internationally; fluctuations in capital markets; broad changes in
market demand; industrial trends like increasing industry concentration and increased
mergers and acquisitions activity.

Social factors and changes – changes in demographic patterns like the increasing age
profile of populations in developed countries; changing social attitudes and tastes such
as the way in which people spend their leisure time; patterns of spending on education
and health; public concern on issues like the environment, smoking and food safety.

Technological factors and changes – this includes changes to products, processes and
supply chains. The importance of information and communications technology with the
growth of the Internet is the obvious example, but other trends and changes also need to
be evaluated. Trends in the physical environment such as climate change may have
significant and unexpected consequences and lead to legislative responses affecting a
wide range of industries and activities.
The influences identified will often cross between the headings, their position is less
important than fact that they appear somewhere in the analysis. It is also important that
consideration of particular issues goes beyond the superficial to try and identify the
underlying causes of the changes. For example, the growth of out-of-town supermarket
shopping in the UK during the 1980s reflected an increase in two-earner households with
less time to devote to shopping, increased car ownership, more people moving to the
suburbs and changes in planning laws to allow the stores to be built. Changes in some of
these factors during the late 1990s have seen the supermarkets now consider opening
smaller stores in town and city centres.
The following illustration highlights some of the main environmental factors and trends
influencing companies within the European Brewing Industry during the late 1990s.
Illustration
THE EUROPEAN BREWING INDUSTRY
The brewing industry across Europe had developed from a long tradition of brewing across
most of Europe. Indeed, in aggregate, Europeans produced 50% more beer than the USA,
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the largest beer-producing country in the world. However, there were significant differences
between individual countries within Europe, both in terms of the nature of each market and
the structure of the industry that served them. That said, greater European integration of the
industry was emerging as a significant trend as a result of a number of factors.
Industry concentration across Europe as a whole was relatively low, with the top 10 brewers
accounting for only 54.7% market share in 1994. However, the position was significantly
different from country to country as the table below (for 1994) indicates:
Country
Industry Situation
Denmark
Holland
Italy
Belgium
France
Britain
Spain
Germany
Monopoly
Monopoly
Monopoly
Monopoly
Monopoly
Concentrated
Concentrated
Fragmented
No. of Competitors
1
1
2
2
2
5
5
5
Degree of
Concentration
71%
74%
61%
86%
71%
84%
87%
26%
As the 1990s progressed this situation was beginning to change as a number of crossborder mergers and acquisitions took place. For example, the French food, beer and
packaging group, Danone, group made acquisitions in Italy, Spain and Greece, before
selling their brewing interests, in the form of Brasseries Kronenbourg to Scottish &
Newcastle in 1999. Belgian Interbrew attempted to buy British brewers Whitbread and Bass
during 2000, though the UK Government blocked the latter purchase on competition
grounds. Many of the larger brewers, like Heineken and Carlsberg, also entered into
licensing agreements for local production of their brands in other countries, or set up joint
ventures like Carlsberg-Tetley in the UK.
Governments had frequently had an influence upon developments within the industry within
their countries. Reinheitsgebot, the German beer purity laws dating back to 1516, historically
restricted the ability to transport beer over long distances, so that even in the 1990s there
were around 1,200 breweries, often serving local markets. These laws also meant it was
difficult for foreign brewers to enter the German market, even after EC intervention in 1987.
Similarly, Denmark’s ban on cans in favour of environmentally-friendly recyclable bottles was
investigated by the EU in 1996, because it created a restriction on trade. As well as
preventing a number of brewing mergers, the UK competition authorities had introduced
restrictions on brewers owning public houses and outlawed tied-house arrangements (were
pubs bought their beer from one supplier in return for long-term loans), following a report by
the Monopolies & Mergers Commission in the early 1989. In contrast, the EU had made little
progress in harmonising the different duty rates paid on beer within different member
countries.
In part, the moves towards greater industry concentration reflected increasing economies of
scale in both brewing and distribution as a result of new technology. However, low growth or
declining consumption of beer in many markets was also important as companies attempted
to restructure in order to reduce excess capacity. Stagnant demand could be traced to a
number of factors. Changing demographics, with fewer 20-29 year olds in most countries,
had reduced the size of the main group of beer drinkers. People were also choosing to
spend their leisure time in pursuits unrelated to drinking, like going to the cinema.
Tradition had been an important influence for beer drinkers as well as the brewers. In
markets like Germany there is still great loyalty to locally produced beers. However, a
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number of trends were beginning to change this picture. Growing concerns about health
issues and drink-driving had changed the nature of customer requirements, favouring low
alcohol and soft drinks. Different groups of drinkers were emerging as brewers increasingly
segmented markets, providing greater product ranges to meet these differing needs. This
had increased the acceptance of the heavily promoted pan-European, even global, brands of
the big brewers, amongst some consumers.
Distribution channels played an important part within the industry. In Germany and Britain
the public houses and bars owned by the brewers had traditionally played an important role
as retailers. However, as mentioned above, the picture in the UK was changing as a result
of competition legislation. Specialist pub retail companies like J D Wetherspoon had
emerged alongside those companies, like Bass, who turned towards “leisure management”,
running pubs, restaurants and hotels but selling on their brewing businesses. Across all
European markets, the supermarket chains had become a large and growing channel of
distribution, often selling their own-label brands alongside the brewers’ brands.
Sources: Based on T Jacobs & M Steele, “The European Brewing Industry” in G Johnson & K Scholes, Exploring
Corporate Strategy, Prentice Hall, 1999 and various newspaper reports.
SAA 1
Using the PEST analysis framework, identify and assess the main factors that have
influenced companies in the European Brewing Industry, as outlined in the illustration above.
D.
ANALYSING THE COMPETITIVE ENVIRONMENT
Whilst the general environment is important, the more immediate environment that
surrounds most organisations is the competitive environment. In order to understand how
the competitive environment might have an impact upon an organisation it is useful to first
examine the dynamics of the competitive system.
Competition is at the very root of a market economy. If you read the works of writers as
diverse as Keynes, Hayek, Marx, Adam Smith, Lenin, Ricardo, John Stuart Mill, Weber,
Veblen, Schumpeter or Milton Friedman, you will find that they see competition as a critical
aspect of a capitalist system.
Today, most politicians invoke the market economy as a superior system, focusing on the
incentives and the dynamism provided by competition. Despite problems such as periodic
stock market crashes and the financial crises of many countries in South East Asia in 19971998, the market economy is still seen as the dominant paradigm of political economy.
During the 1990s, many public services such as health, welfare and education saw the
introduction of market-type structures and competition in an attempt to reduce costs and
increase efficiency. Similarly, many fashionable trends in business have sought to improve
efficiency through increased competition, such as multiple sourcing of supplies, recently reencouraged by the use of e-commerce; internal competition between business units; the
creation of profit and cost centres; and “shadow prices” for internal transactions.
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How Does Competition Work?
The foundations of competition go back to Adam Smith in the eighteenth century and
Vilfredo Pareto in the nineteenth. According to these writers, competition potentially offers
an optimal state in which resources are efficiently (if not necessarily fairly) allocated. Smith
was so struck by the effectiveness of competition that he spoke of its working as an “invisible
hand” which under certain conditions would guide the selfish actions of individuals to the
best outcome for society as a whole.
Essentially firms compete in 2 ways:

They try to undersell one another and capture markets, customers and profits, through
manipulating prices and lowering costs. This is termed “price competition”.

They compete through “non-price competition” by differentiating their products,
marketing, advertising, promoting, branding and otherwise attempting to retain their own
customers and attract their rivals.
The very process of competition provides a dynamic for the economic system. Entrants
competing on price or non-price factors are at the same time a threat to existing competitors,
a stimulus to develop new markets and products, and a pressure for lower cost processes.
If businesses in a particular industry earn above the normal rate of return this is likely to
attract in new competitors and imitators, so reducing prices and profits.
As well as providing an incentive or dynamic to the economy, competition provides
information about opportunities for gain through the messages of prices and profits. Figure
2:1 provides a picture of the competitive process and its role as both an incentive and
information system.
Figure 2:1 – The Dynamic Competitive Process
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An Approach to Competitive Analysis
Based on an understanding of the competitive process outlined above, Michael Porter of
Harvard University has built a framework to allow for the analysis of competition within a
particular industry. Much of his approach builds on the work of Edward H Chamberlain, also
of Harvard University, and Joan Robinson, of Cambridge University, who were pioneer
analysts of non-price competition in the 1930s.
At the heart of Porter’s work is what economist’s refer to as the Structure-ConductPerformance Paradigm. To understand the competitive pressures of an industry you need
to focus upon its structure - its underlying economics.
Structure
The underlying
economic factors
in an
industry
Conduct
Strategies of
competitors
in an industry
Performance
Profitability of
competitors across
industry as a
whole
Figure 2:2 – The Structure – Conduct – Performance Paradigm
The underlying economics include such factors as the numbers of competitors and how easy
it is for firms to enter or leave the industry. For example, if there are lots of competitors, who
can enter or leave the industry easily, who sell similar products and who are fully informed of
each others strategies (the economists call this perfect competition), then it is unlikely in
the long term that any firm will make massive profits. The competitive process described
above will ensure that prices and profits are reduced. In contrast, if there is only one firm in
the industry and entry into the industry is difficult (the economists call this perfect
monopoly) the profits are likely to remain high, unless customers find alternatives to the
product. Whilst these two examples may be unrealistic extremes, the principle still applies to
most industries that lie somewhere between the poles.
Porter goes on to argue that firms who come up with a better strategies than their
competitors, by understanding and exploiting the conditions of the industry better than
others, might be able to achieve a more profitable position in the long term - he calls this
sustainable competitive advantage.
The Five Forces Framework
According to Porter, whether an industry produces a commodity or a service, or whether it is
global or domestic in scope, the level of competition in an industry depends upon the
strength of the competitive forces to which it is exposed. These forces, act individually and
together to determine the ultimate profit potential of the industry and are a result of the
structure (the underlying economics) of the industry. Many of the broad influences identified
through PEST analysis have an impact upon organisations through the way in which they
affect the underlying competitive structure of the industry.
An understanding of the competitive dynamics of an industry requires analysis of the
structural factors influencing each of these five forces of competition:

The threat of new entrants coming into the industry. The ability of new competitors to
enter the industry will depend upon the existence of barriers to entry – the higher they
are, the less likely it is that new competitors will pose a threat. These barriers to entry
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could come from factors such as large economies of scale, difficulty of access to
distribution channels, high capital investment requirements, strong existing brand names,
and scarce skills or resources.

The threat of substitute products or services to those produced by the industry. This
threat will be high when customer needs can be met by alternative products or services
to those produced within the industry. The relative price-performance of substitutes, the
extent of switching costs and the propensity of buyers to use substitutes, will all affect
the intensity of this threat.

The bargaining power of suppliers affects the costs incurred by the industry. If it is
hard to switch suppliers because there are few of them or it is expensive to change, or
the product supplied is a relatively minor market for suppliers, then suppliers’ bargaining
strength will be high and costs will be passed on to the industry.

The bargaining power of customers or buyers is the mirror image of that exerted by
suppliers to an industry. If there are relatively few buyers or they can switch easily
between suppliers, then the bargaining position of the industry will be weakened, with
pressures to reduce prices or increase the quality of products provided.

The intensity of rivalry between existing competitors within the industry is determined
by the number and size of competitors, the rate of growth of the industry, the risks of
creating over-capacity, the similarity of products and services, and the ease with which
competitors can leave the industry.
All of these forces of competition are illustrated in Figure 2:3.
Figure 3.6 Five forces analysis
Potential
entrants
Threat of
entrants
Suppliers
COMPETITIVE
RIVALRY
Buyers
Bargaining
power
Bargaining
power
Threat of
substitutes
Substitutes
Source: Adapted from M. E. Porter, Competitive Strategy, Free Press, 1980, p. 4. Copyright by The
Free Press, a division of Macmillan Publishing Co., Inc. Reproduced with permission.
From: G Johnson and K Scholes, Exploring Corporate Strategy, 4th edition
Figure 2:3 – The Five Forces Framework
The analysis of the underlying factors that potentially influence the strength of each force
creates a better picture of the source of the competitive pressures within an industry –
usually two or three of the forces are particularly important, the others less so. A summary
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of the ways in which these underlying factors could influence the forces of competition, so
affecting the profitability of an industry, is outlined in Figure 2:4.
Will Lower Profitability
Will Raise Profitability
Easy to enter
 Low scale threshold
 Little brand franchise
 Common technology
 Access to distribution
channels
Difficult to exit
 Specialised assets
 High exit costs
 Interrelated businesses
Difficult to enter
 High scale threshold
 Brand switching difficult
 Proprietary know-how
 Restricted distribution
channels
Easy to exit
 Saleable assets
 Independent businesses
Power of suppliers
Suppliers powerful
 Credible forward
integration threat by
suppliers
 Suppliers concentrated
 Significant cost to switch
suppliers
Power of customers
Customers powerful
 Buyer concentrated
 Buyers purchase a
significant proportion of
output
 Buyers possess credible
backward integration
threat
Substitution easy
 Low user switching costs
 Substitute producers
profitable and aggressive
Many competitors
 Competitors equal in size
 Slow demand growth
 High fixed cost
 Excess capacity
 Commodity products
 Diversity of approach and
historical background
Suppliers weak
 Many competitive
suppliers
 Purchase commodity
products
 Credible backward
integration threat by
purchasers
 Concentrated purchasers
Customers weak
 Producers threaten
forward integration
 Significant buyer
switching costs
 Buyers fragmented
 Producers supply critical
proportion of buyers input
Substitution difficult
 High user switching costs
 Substitute producers
unprofitable and passive
Few competitors
 Diversity of competitor
size
 Industry leader
 Fast demand growth
 Low fixed cost
 Differentiated products
 Commonality of
approach and historical
background
Ease of entry
Ease of exit
Availability of substitutes
Industry Rivalry
Figure 2:4 – Critical Factors Affecting Competitive Forces in an Industry
Porter argues that an organisation can attempt to create competitive advantage within an
industry by changing its strategy so as to build upon or avoid these pressures (we will
explore this in more detail later in the course).
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SAA 2
Using information drawn from the illustration The European Brewing Industry undertake a
Five Forces Framework analysis to identify the factors influencing competitive pressures
within the industry by considering:

Threat of New Entrants

Threat of Substitutes

Bargaining Power of Suppliers

Bargaining Power of Customers

Intensity of Rivalry between Existing Competitors
Which are the most significant competitive forces within the industry?
Whilst the Five Forces Framework can be very helpful in understanding the competitive
dynamics of an industry, some caution is needed in its application.
The analysis of the European brewing industry highlights one key point – the analysis
depends upon a clear definition of the boundaries of the industry. There are still significant
structural differences between the brewing industries of different European countries –
taking just one factor like the level of industry concentration, the fragmented German
industry stands in contrast to the concentration of brewing companies in the UK, or the near
monopoly position of Heineken in Holland. That said, as barriers to entry are reduced, more
factors become pan-European in nature. Consequently, it might be worth conducting the
analysis both at the level of individual countries and at a pan-European level in order to
highlight the complexity of change within the industry.
Finally, the actions of the competitors themselves can also change the analysis – the
companies within an industry are an active part of the system not mere spectators, in
changing their strategies the underlying economics of the forces themselves are changed.
For example, a company may undertake the acquisition of other competitors in order to
reduce competition.
E.
IDENTIFYING COMPETITIVE POSITION
Whilst the Five Forces Framework can give a good insight into the overall competitive
dynamics of an industry, such an analysis does not fully explain how differing organisations
choose to compete against each other within the industry. There is a need to understand
how these organisations position themselves relative to the other competitors within the
industry. Two techniques offer insight into this issue – strategic group analysis and
market segmentation analysis.
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Strategic Group Analysis
Even within the same industry, not all competitors will be following similar strategies or
competing directly against each other. Strategic group analysis can be used to identify the
differing ways in which particular groups of companies compete within an industry.
The key to this approach is to identify two or three sets of characteristics that seem to
establish key differences between the companies or groups of companies within an industry.
Such characteristics might include different approaches to product diversity, geographic
coverage, extent of vertical integration, distribution channels, branding, use of technology
and research and development spending.
Once the key characteristics have been identified, a strategic group map can plot the
differing approaches taken by organisations within an industry. This will then highlight the
similarities of approach taken by firms within a particular strategic group and the differences
of approach between strategic groups. The illustration below shows some of the major
strategic groups within the European brewing industry around the mid-1990s.
Illustration
STRATEGIC GROUPS WITHIN THE EUROPEAN BREWING INDUSTRY
Global
C
Pan European
D
Geographic
coverage
National
B
Regional
A
Local
Limited
Strategic Groups:
AB-
CD-
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Extent of Brand Family
Broad
Local microbreweries in UK
National breweries with medium-sized range of brands
e.g. Bass, Scottish & Newcastle, Carlsberg-Tetley and
Whitbread in UK
International niche brewers with limited brand range
e.g. Grolsh
Pan-European/global brewers with broad brand families
e.g. Heineken, Carlsberg, BSN
Such an analysis can help identify the immediate competitors for a particular
organisation: the major UK brewer, Scottish & Newcastle is unlikely to be too concerned
about the actions of a micro brewery like The Wallsend Brewery, even though their plants
are within 10 miles of each other.
The analysis can also be taken to assess the barriers between the groups and any
strategic problems that might ensue from structural changes within the groups, by applying
the Five Forces Framework at the level of the strategic group. Such analysis can help
explain the changes in strategy of the competitors outlined in the illustration below.
Illustration
THE CHANGING NATURE OF COMPETITION WITHIN UK BREWING
Since 1997, the UK-based strategic group of brewers, including Bass, Scottish & Newcastle,
Whitbread and Carlsberg-Tetley, has seen significant change as barriers to entry have been
reduced, partly as an unintended consequence of UK competition policy.
Bass, whose attempt to buy Carlsberg-Tetley in 1997 was rejected by the competition
authorities, sold its brewing interests to the Belgian brewer Interbrew in late 2000. Interbrew
hoped to combine this purchase with the breweries previously acquired from Whitbread
earlier in the year. However, in early 2001 this deal was rejected by the UK Government
who were concerned about the impact upon competition in the beer market and ordered that
the £2.3 million take-over to be dismantled.
During 1999 and 2000, Scottish & Newcastle bought the French brewer Brasseries
Kronenbourg. At the same time they sold on their interests in the Pontin’s and Center Parcs
holiday camp chains. In 2001, Scottish & Newcastle also announced plans to sell off 920 of
its pubs and restaurants.
The effects of all these changes were to a great extent to see the UK-based brewers
strategic group disappear. By buying Brasseries Kronenbourg, Scottish & Newcastle has
joined the pan-European brewers strategic group, concentrating on developing its now
enlarged portfolio of international beer brands. In contrast, competitors like Bass, who owns
the Inter-Continental, Crowne Plaza and Holiday Inn hotel chains alongside its Harvester
and Innkeeper’s Fayre pubs, are helping to define a new strategic group of diversified
“hospitality” providers, no longer involved in the brewing of beer.
Market Segmentation Analysis
As well as competing in different ways, companies are also unlikely to seek to serve the
same customers. People’s tastes and needs differ, so not all products and services are
likely to meet their requirements. By identifying these different requirements through market
segmentation analysis, companies can change their strategies to more closely appeal to
the needs of particular groups of customers, so defining a position within the market that is
more favourable relative to the forces of competition.
Markets can be segmented in many different ways using characteristics of particular
customers (like age, gender, income, location and family size) or the nature of the
customers’ purchase needs or product use. After so many examples from the brewing
industry I think I deserve a drink. Walking across Durham, I could call at “It’s a Scream”, part
of a pub chain targeted at students; the “Dunelm Castle”, this time targeted at families with
children, the “Dun Cow”, still untouched by the brewery marketing people, or I could buy a
pack of cans from the Sainsbury’s supermarket. Apart from being a considerable “pub
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crawl”, this example illustrates well the differing types of market segmentation within the
local beer retailing market.
F.
SUMMARY
The analysis of the external environment is a key task within the process of creating
strategy.
An understanding of the nature of the environment is important in order to identify the
strategic opportunities and threats that face organisations. In discussing the nature of the
external environment we saw it is possible to argue that environmental influences are
becoming more complex and dynamic. This increases the importance for systematic
analysis in order to identify and understand the potential influences upon organisations.
Such an analysis is possible by distinguishing between the general environment affecting
all organisations, the more immediate competitive environment that affects organisations
in particular industries, and the competitive position of individual organisations with respect
to others within the industry.
One of the main tools used for assessing the general environment is PEST Analysis, which
lists the potential influences under a series of headings.
The most used framework for analysing the competitive environment is the Five Forces
Framework, which attempts to identify the main competitive pressures in an industry based
upon its underlying economic structure.
Tools like Strategic Group Analysis and Market Segmentation Analysis allow for a more
detailed assessment of the approach taken by an organisation within a particular industry or
market sector.
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