4 M Eng Strategic & Change Management
Session 2 - Analysing the External Environment: The European Brewing Industry (Case
Study)
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.
As a consequence of these changes, the analysis of the external environment has become a key
task within the process of creating strategy. An understanding of the nature of the
environment is important, as is a familiarity with the tools and frameworks of analysis. The
ability to understand the impact of the external environment upon an organisation will not
guarantee strategic success, but to ignore the external environment is highly likely to make
failure a distinct possibility.
Approaches to Analysing the External Environment
Monitoring and evaluating the external environment is an important issue for managers because
changes in the external environment imply changes in strategy. Johnson and Scholes provide a
framework for analysing the business environment.
Figure 3.1 Steps in environmental analysis
Assess the nature of the
environment
Audit environmental
influences
Identify key
competitive forces
Identify
competitive position
Identify key
opportunities
and threats
Strategic
Strategic
position
position
The framework is a general one so you must remember:
 To take a holistic view;
 To adapt what you read to the circumstances;
 That the most difficult aspect of environment analysis is often that of deciding exactly
which factors are the most important;
 That new factors and new priorities will arise as circumstances change.
There are two further points about environmental analysis that are worth noting:
 Otherwise ably-managed companies are frequently taken by surprise by events what
may seem to the observer to have been quite predictable;
 Businessmen are prone to describe their failures as bad luck and their successes as
good management.
Both points illustrate a key factor in environmental analysis - it isn't entirely objective.
Information is coloured by the perceptions, expectations and prejudices of the manager. If we
view environmental analysis as a scientific experiment, then the analyst (manager) is part of the
experiment. Results in terms of forecasts are as much the product of expectations, prejudices,
assumptions and typology as they are of “objective” circumstances.
What are the principal trends in the European brewing industry?
The wide range of potential influences on an organisation and their interaction, make the job of
assessing the general environment particularly difficult. In addition, each organisation is affected
in different ways by changes in the environment. Factors that 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 (Political; Economic; Social; Technological) analysis provides a systematic technique
for analysing the business environment. It enables the manager to:
 Summarise the most important influences of the business environment;
 Evaluate the potential impact of these influences on the organisation.
Using PEST analysis can help to highlight the biggest influences on the strategy of the
organisation, both currently and in the future. These influences can be both positive and
negative. In addition, influences often cross the divide between the four headings; the important
point is that they appear somewhere in the analysis. The key is to identify and concentrate upon
those factors/trends likely to have the biggest impact upon the future of the organisation.
Johnson and Scholes outline some of the most likely factors.
Figure 3.3 A PEST analysis of environmental influences
1 . W h at en viro n m en tal facto rs are affectin g th e o p p o sitio n ?
2 . W h ich o f th ese are th e m o st im p o rtan t at th e p resen t tim e?
In th e n ext few years?
P o litical/leg al
 M onopolies legislation
 E nvironm ental protection law s
 T axation policy
 F oreign trade regulations
 E m ploym ent law
 G overnm ent stability
E co n o m ic facto rs
 B usiness cycles
 G N P trends
 Interest rates
 M oney supply
 Inflation
 U nem ploym ent
 D isposable incom e
 E nergy availability and cost
S o cio cu ltu ral facto rs
 P opulation dem ographics
 Incom e distribution
 S ocial m obility
 Lifestyle changes
 A ttitudes to w ork and leisure
 C onsum erism
 Levels of education
T ech n o lo g ical
 G overnm ent spending on
research
 G overnm ent and industry focus
of technical effort
 N ew discoveries/ developm ent
 S peed of technology transfer
 R ates of obsolescence
Applying PEST analysis to the European Brewing Industry case study reveals a number of
potentially significant factors/trends.
A PEST ANALYSIS OF THE EUROPEAN BREWING INDUSTRY
POLITICAL
 Harmonisation of duty rates across European Union member states
 Competition legislation - e.g. 1989 Monopolies and Mergers Commission report in the UK
 Local production laws - like Reinheitsgebot in Germany
 Restrictions on containers - like the use of cans in Denmark
ECONOMIC
 Different patterns of industry concentration across countries
 Growing trend towards cross-border mergers and acquisitions
 Low growth in consumption of beers
SOCIAL
 Growing concerns about health issues and drink-driving
 Increasing acceptance of low alcohol drinks
 Importance of supermarkets in distribution and growth of own-label products
 Increasing acceptance of pan European brands
TECHNOLOGICAL
 Economies of scale in brewing and distribution
The Importance of Competition
Whilst the general environment is important, the more immediate environment that surrounds
most organisations is the competitive environment. The concern of most managers is upon the
ways in which the competitive environment might have upon their own organisations.
The foundations of competition as a norm 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”. Under certain conditions (more or less the absence of barriers to entry) it
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 fact that some businesses are earning above the normal rate of return for their industry
attracts in competitors and imitators.
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 to lower cost processes. 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.
Analysing the Competitive Environment
Based on an understanding of this process, 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 Chamberlin, 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
of an industry
- its underlying
economics
---->
Conduct
---->
of the competitors
within the industry
Performance
the profitability of the competitors
& the industry as a whole
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 in the section
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 the (unrealistic?) extremes, the principle still applies to other industries.
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 (of which more next week).
What factors affect competition in an industry?
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.
According to Porter, whether an industry produces a commodity or a service, or whether it is
global or domestic in scope, competition depends on five forces. These forces, which go beyond
the immediate competitors in the industry, are:
 the threat of new entrants;
 the existence of substitute products or services;
 the bargaining power of suppliers;
 the bargaining power of customers or buyers;
 existing rivalry within the industry;
These five forces determine the ultimate profit potential of an industry as a whole. Within an
industry, individual firms who develop particular strengths may be able to gain competitive
advantage whatever the profit position of the industry as a whole is.
The ultimate strength of competition in an industry depends on the collective strength of
these forces: sometimes one will dominate; often it's a collection of two or three.
To understand which of these forces is likely to be most significant means investigating the
underlying structural conditions that underpin them.
We can examine each force in turn, to identify the factors that might be important:
Five Forces Analysis (1)
The threat of entry ...
Dependent on barriers to entry such as:
Economies of scale
Capital requirements of entry
Access to distribution channels
Cost advantages independent of size (eg
(eg the
“experience curve”)
Expected retaliation
Legislation or government action
Differentiation
Five Forces Analysis (2)
Buyer power is likely to be high when:
There is a concentration of buyers
There are many small operators in the supplying
industry
There are alternative sources of supply
Components or materials are a high percentage of
cost to the buyer leading to “shopping around”
Switching costs are low
There is a threat of backward integration
Five Forces Analysis (3)
Supplier power is high when:
There is a concentration of suppliers
Switching costs are high
The supplier brand is powerful
Integration forward by the supplier is possible
Customers are fragmented and bargaining power
low
Five Forces Analysis (4)
Threat of substitutes
Substitutes take different forms:
Product substitution
Substitution of need
Generic substitution
Doing without
Five Forces Analysis (5)
Competitive Rivalry is high when:
Entry is likely
Substitutes threaten
Buyers or suppliers exercise control
Competitors are in balance
There is slow market growth
Global customers increase competition
There are high fixed costs in an industry
Markets are undifferentiated
There are high exit barriers
Assessing each of the competitive forces in turn, by identifying the structural factors which are
significant in each case, will allow an understanding of the dynamics of the industry (its
underlying economics). As well as providing an insight into dynamics of the industry, this
approach also allows individual companies to understand the directions from which they face the
greatest competitive pressures - and tailor their strategies to meet these pressures.
What are the main factors influencing the nature of competition within the European brewing
industry?
A FIVE FORCES ANALYSIS OF THE EUROPEAN BREWING INDUSTRY
Potential Entrants
Competitors from Japan or the USA
Potential Substitutes
Soft drinks e.g. Coca-Cola
Wine
Other leisure activities e.g. going to the cinema
Power of Suppliers
Suppliers (e.g. farmers and packaging companies) have little power
Power of Customers
Customer loyalty to local brews - e.g. Germany
Retailers - supermarkets have growing power as industry concentration increases
Tied Houses - until recently this was one way of reducing Customer Power in the UK
Existing Rivalry
Barriers to entry within EU are reducing leading to cross-border mergers
Industry concentration across Europe is still relatively low
Demand for brewed products is static/declining in most countries
Summary
Industry restructuring between existing competitors and the growing power of the supermarkets
are probably the main competitive forces in the industry at present.
Are the factors the same across all countries?
Whilst some pressures are best understood on a pan-European level, many of the structural
conditions vary between countries - distribution structures and industry concentration being two
major factors. So need to apply the 5 Forces Framework both at a pan-European level and at the
level of individual countries to gain a full understanding.
This example of differences between the pan-European level and individual countries highlights
the necessity of understanding how the framework is to be used.
Five Forces Analysis: Key Questions and
Implications
What
are the key forces at work in the competitive
environment?
Are there underlying forces driving competitive
forces?
Will competitive forces change?
What are the strengths and weaknesses of
competitors in relation to the competitive forces?
Can competitive strategy influence competitive
forces (eg
(eg by building barriers to entry or reducing
competitive rivalry)?
The FFF allows the strategist to both understand the dynamics of their industry and to identify
ways in which to respond to the pressures and forces identified – to change the strategy of the
organisation.
How have the different brewing companies chosen to compete within the industry?
Whilst the Five Force Framework can give a good insight into the competitive dynamics of a
particular industry or sector, most managers also need to understand how their organisation is
positioned relative to the other competitors within the industry.
Strategic Group Analysis
Strategic Group Analysis is useful to:
Identify firms with similar strategic characteristics
Therefore identify the most direct competitors
Identify mobility barriers
Identify strategic opportunities (“strategic spaces”)
Strategic threats and problems
Even within the same industry, not all competitors will be following similar strategies or
competing directly against each other. Michael Porter suggests the use of strategic group
analysis to identify the ways in which particular groups of companies compete within the
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. Johnson and Scholes
highlight a range of possible characteristics:
Figure 3.8 Some characteristics for identifying strategic groups
It is useful to consider the extent to which organisations differ in terms of
characteristics such as:

















Extent of product (or service) diversity
Extent of geographic coverage
Number of market segments served
Distribution channels used
Extent (number) of branding
Marketing effort (e.g. advertising spread, size of salesforce)
Extent of vertical integration
Product or service quality
Technological leadership (a leader or follower)
R&D capability (extent of innovation in product or process)
Cost position (e.g. extent of investment in cost reduction)
Utilisation of capacity
Pricing policy
Level of gearing
Ownership structure (separate company or relationship with parent)
Relationship to influence groups (e.g. government, the City)
Size of organisation
Source: Adapted from M.E. Porter, Competitive Strategy, Free Press, 1980; and J.McGee and H.Thomas,
‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp.141-60.
Companies are also unlikely to compete for 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. Again,
Johnson and Scholes outline a range of criteria for market segmentation:
Figure 3.9 Some criteria for market segmentation
Type of factor
C onsum er m arkets
Industrial/organisational
m arkets
C haracteristics of
people/organisation
s
A ge, sex, race
Incom e
Fam ily size
Life cycle stage
Location
Lifestyle
Industry
Location
S ize
Technology
P rofitability
M anagem ent
P urchase/use
situation
S ize of purchase
B rand loyalty
P urpose of use
P urchasing
behaviour
Im portance of
purchase
C hoice criteria
A pplication
Im portance of purchase
V olum e
Frequency of purchase
P urchasing procedure
C hoice criteria
D istribution channel
U sers’ needs and
preferences for
product
characteristics
P roduct sim ilarity
P rice preference
B rand preferences
D esired features
Q uality
P erform ance requirem ents
A ssistance from suppliers
B rand preferences
D esired features
Q uality
S ervice requirem ents
Using both strategic group and market segmentation analysis, we can gain further insight into the
major trends affecting the European brewing industry.
STRATEGIC GROUPS AND MARKET SEGMENTS IN THE EUROPEAN BREWING
INDUSTRY
Strategic Groups
Two key parameters could be:
 geographic coverage of the company - from local to pan European or global companies;
 extent of brand family - from a single product to broad brand family.
This leads to an identification of a range of strategic groups:





global, broad brand family companies e.g. Carlsberg;
European, broad brand family companies e.g. Brasseries Kronenbourg, who are attempting
to become more international;
international, specialist or narrow brand family, e.g. Grolsch
national broad brand family companies e.g. Bass
local specialists e.g. many German brewers or UK micro breweries
Customer Segments
One of the quickest growing sectors in the UK brewing industry, where brewers have traditional
links to public houses, is in “themed” family pubs, which provide play areas for children, whilst
their parents enjoy a drink. The growth of low alcohol drinks, speciality beers and own-label
brands all appeal to different types of customer.
Conclusion
This session has outlined a number of frameworks and techniques that can be used to assess the
external environment facing a particular organisation or understand the dynamics of competition
within particular industries or markets. Next week’s session will focus more upon how
organisations can outline strategies to meet these challenges of competition.