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External Analysis part 2 - Module SHM

This is part two of the lectures on External Analysis - Strategic Hospitality Management - Stenden Hotel Management School

sandy loup

on 27 February 2013

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Transcript of External Analysis part 2 - Module SHM

External Environment Markets What would customers have answered in the early 1900s when asking them how they could travel faster from A to B? Competitors Industry Macro Environment Some bases of market segmentation Bases of market segmentation (1) A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.

For a holiday resort it may be the travel agents and tour operators that are the strategic customers not the ultimate consumer.

For a pharmaceutical manufacturer it is the health authorities and hospitals not the final patient. Who are the strategic customers? Critical success factors: particularly valued by customers or provide a significant advantage in terms of cost.
Critical success factors: important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them).
Different industries and markets will have different critical success factors
example: for low cost airlines the CSFs will be punctuality and value for money whereas in full service airlines it is all about quality of service Critical success factors (CSFs) Who is your customer? What do customers value? Porter’s five forces framework helps identify the attractiveness of an industry in terms of five competitive forces:
the threat of entry,
the threat of substitutes,
the bargaining power of buyers,
the bargaining power of suppliers and
the extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’. Porter’s five forces framework Identifies the attractiveness of industries – which industries/markets to enter or leave.

Identifies strategies to influence the impact of the forces, for example, building barriers to entry by becoming more vertically integrated.

The forces may have a different impact on different organisations e.g. large firms can deal with barriers to entry more easily than small firms. Implications of five forces analysis Apply at the most appropriate level – not necessarily the whole industry. E.g. the European low cost airline industry rather than airlines globally.

Views the environment as a threat, thus discourages co-operation with suppliers and customers (four link analysis)

Note the importance of complementary products and services (e.g. Coca-Cola complements McDonalds Restaurants) Economic benefits Issues in five forces analysis Layers of the business environment Layers of the business environment Analyse the broad macro-environment of organisations in terms of political, economic, social, technological, environmental (‘green’) and legal factors (PESTEL).

Understand the impact of macro environment on what impacts customer value, thus the choices an organisation needs to make!

Understand the importance of scenario analysis and how to create your own scenarios to support strategic decision making Learning outcomes (1) An External Analysis Markets, Competitors Industries, Macro Environment Determining Opportunities and Threats External Analysis - part 1

Targeting the right customers
Understanding the customers
Analysing and understanding the competition
Strategic Groups
The importance of creating new markets and how this may support organisations to avoid intense competition: Blue Ocean strategies & Red Ocean strategies
Understanding the industry
Porter's five forces: how to determine the attractiveness (profitability) of an industry Last week's lecture Customer Analysis Degree of turbulence Pestel Analysis Industry Life Cycle Key Factors for Success Five Forces Analysis Competitor Analysis Four Link Analysis Customer value from an external perspective

How is customer value impacted by changes within the external environment?
How capable is an organisation in finding (new) markets, dealing with competitors? creating value for customers is resulting in above average returns Emergent approach
Prescriptive approach Changeability: the degree to which the environment is likely to change Predictability: the degree to which such changes can be predicted high low strategy by design? strategy by ideas? The industry life cycle The industry life cycle Strategy will change with each phase Organisational Environment

Information perspective: environment as a source of information

Resource perspective: environment as a source of (scarce) and necessary resources Environment => complex, ever changing: information is essential Environment => how to acquire and control (critical) resources Impact of Environment Customer demand
Market Segmentation
Market Positioning
Pricing, Quality and servicing
Present Strategies Customer Analysis Competitive analysis is important in strategy, but ultimately it is the customers who make the buying decision! Criteria for selecting useful market segments:

Distinguishable: sufficiently distinctive so that they can be isolated in some way
Relevant: to purchasing needs of customer
Sufficient size: to justify special strategies and costs associated (niche markets)
Reachable: so that it is possible to direct the strategy to the segment
Customer needs vary: may be a basis for distinct market segments
Evaluation of viable market opportunities is essential Market segmentation The PESTEL framework categorises environmental influences into six main types:

political, economic, social, technological, environmental, legal

Thus PESTEL provides a comprehensive list of influences on the possible success or failure of particular strategies. The PESTEL framework (1) Political Factors: For example, Government policies, taxation changes, foreign trade regulations, political risk in foreign markets, changes in trade blocks (EU).

Economic Factors: For example, business cycles, interest rates, personal disposable income, exchange rates, unemployment rates, GDP trends.

Socio-cultural Factors: For example, population changes, income distribution, lifestyle changes, consumerism, changes in culture and fashion. The PESTEL framework (2) Technological Factors: For example, new discoveries and technology developments, ICT innovations, rates of obsolescence, increased spending on R&D.

Environmental (‘Green’) Factors: For example, environmental protection regulations, energy consumption, global warming, waste disposal and re-cycling.

Legal Factors: For example, competition laws, health and safety laws, employment laws, licensing laws, IPR laws. The PESTEL framework (3) Key drivers of change:

The environmental factors likely to have a high impact on the success or failure of strategy.

For example, (availability of) oil is a key driver for increase of international tourism, impacting global demand within travel & tourism industry

Typically key drivers vary by industry or sector. Key drivers of change Apply selectively –identify specific factors which impact on the industry, market and organisation in question.

Identify factors which are important currently but also consider which will become more important in the next few years.

Use data to support the points and analyse trends using up to date information

Identify opportunities and threats – the main point of the exercise! Using the PESTEL framework based on outcome of external (macro) analysis Customer Value & Value Chain Threat of entrants dependant on barriers to entry such as:
Economies of scale
Capital requirements of entry
Access to distribution channels
Cost advantages (experience curve)
Expected retaliation
Legislation or government action
Differentiation (e.g. blue or red oceans) Power of buyers likely to be high when:
high concentration of buyers
many small operators in supplying industry
alternative sources of supply
switching costs are low
components a high percentage of costs
threat of backward integration Five Forces Framework - a close look High when:
Concentration of suppliers
Switching costs are high
Supplier brand is powerful
Forward integration is possible
Customers are fragmented and bargaining power low Power of suppliers Threat of substitute Different forms
Product substitution
Substitution of need
Generic substitution
Doing without Sleeping in a hotel Fuel for cruiseships? starting a hotel? Online travel agents? Competitive Rivalry is high when:
entry is likely
substitutes exist
buyers or suppliers have control
competitors are in balance
slow market growth (industry life cycle)
global customers increase competition
high fixed costs
markets are undifferentiated
high exit barriers The industry life cycle The industry life cycle vs Five Forces An industry is a group of firms producing products and services that are essentially the same. For example, automobile industry and airline industry.

A market is a group of customers for specific products or services that are essentially the same (e.g. the market for low-budget hotels in the UK).

A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the educational sector) Industries, markets and sectors 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.
There are many different characteristics that distinguish between strategic groups.

Why deciding on strategic groups? Strategic Groups Examine in depth for few competitors only
Past record of performance
Current Products and services
Present strategies Future Objectives: What drives the competition?

Current Strategy: What is the competitor doing, what can they do?

Assumptions: What does the competitor believe about itself and the industry?

Capabilities: Strengths & Weaknesses, compare capabilities

What will be our response? Industry Orientation Customer Competitor Company compete for customer's choices What value do our competitors offer? Stakeholders of a large organisation
Source: Adapted from R.E. Freeman, Strategic Management: A Stakeholder Approach, Pitman, 1984. Copyright 1984 by R. Edward Freeman. Stakeholders of a large organisation how to (re)position an organisation within a market, industry...? How to obtain competitive advantage? Blue Ocean Strategies The value chain within an organisation
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved Value Chain of an organisation Scanning, Monitoring, Forecasting, Assessing Ultimately, be able to determine opportunities and threats for an organisation

Improve knowledge and understanding of the hospitality industry

Be able to shape new strategies based on threats & opportunities

Not to forget the strengths and weaknesses!!

Lecture in week 2: part I of external analysis Learning outcomes (2) next week (4) lecture: Strategic Synthesis, input for strategic decisions "the way forward" Thank you Key Factors for Success (KFS) Industries or markets have factors that are essential to deliver profits in that market (KSF) - INDUSTRY dependent

Useful to identify KSF: set the agenda for strategy. If a strategy fails to address these issues, it may fail completely

Useful as many possible issues that might be considered by management: KSF helps to select key issues Customer service, Cost Cutting, Distribution Channels, Product Differentiation strategic purpose Impact of external environment on organisation How profitable is an industry? What industry do we compete within? What are major trends? small boutique hotel vs Hilton Trends Will the strategy work this time? Strategy is dealing with insecurity "Well informed people know it is impossible to transmit voice over waves and that were it possible to do so, the thing would be of no practical value" - Editorial, the Boston Post c1865 "I think there is a market for about 5 computers" - Thomas J. Watson, Chairman of IBM, 1943 "640kb ought to be enough for anybody" - Bill Gates, 1981 "Collapse Fortis Bank would be highly unexpected" - Nout Wellink 19 September 2009, Dutch Central Bank Most drivers of change are below the surface, invisible and uncertain at 1st sight drivers structures patterns events/trends science & technology war, terrorism & security power & regulation climate & environment demography & world population marketing & consumerism resources & scarcity capitalism & economic system human web & mobility How will key driver develop? where & how will people meet? Who will control the channels where we meet our customers? What did we NOT think of...? internal position How to be prepared for an insecure future? 1 - Identify high impact factors (key drivers) based on research

2 - Identify high uncertain factors (forecasts? figures? experts?)

3 - Understand how key drivers might affect organisation / industry

4 - Understand what underlying factors "feed" this driver (scenario drivers)

5 - Establish scenario drivers, again take care of your research

6 - Build scenarios with established scenario drivers, be creative

7 - Choose most likely scenario, based on arguments, facts

8 - Assess what strategy is needed to deal with most likely scenario Scenario building in practice... Key driver: increase of people traveling

Underlying drivers (scenario drivers):
=> oil prices, technological developments (e.g. new transportation methods), demand of travelers, environmental awareness,.....

FOUR possible future scenarios:
development of travel & tourism industry Why scenario building? What will the world look like in 2015?

What will be the impact for hospitality organisations? * pro-active instead of reactive only
* uncertain future: environment as information
* open eyes for the unexpected
* choose the most suitable strategy Future is insecure and changing fast...

Future is getting here sooner than expected Why do we care so much more about
the climate now, as compared to
15 years ago? if low impact & certain: business as usual! if low impact & uncertain: monitor closely! if high impact & certain: get ready for action! you think a scenario is highly unlikely? Think again! Two key, uncertain factors orientation: regional / international? market conditions: closed or open? step by step approach prescriptive or emergent? Orientation: regional or international?
Market conditions: closed or open? drivers of change An example To what extent the hospitality industry is being influenced by:

Political factors
Economical factors
Social factors
Technological factors
Environmental factors
Legal factors

and how do these factors influence competitors, customers, the organisation itself? Take some time to think about... building plausible future scenarios
based on key drivers of change 1. "price & privilege" 2. "boom & burst" 3. "carbon clampdown" 4. "divided disquiet" scenario building? In what way is the external environment influencing the business model? What key drivers may cause an organisation to innovate its business model? how will these key drivers develop?
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