Strategic Risk Management

The External Environment

The Aims of Today

Develop your knowledge of Strategic Auditing and the process involved in auditing the external environment.

Highlight the distinction between the operating and remote environments.

Develop your knowledge of how to analyse the external environment using a range of models.

Turbulence in the external environment.

A high degree of turbulence exists if: Changeability is high. Predictability is low.

The prescriptive approach is more appropriate if turbulence is low.

The emergent approach is more appropriate if turbulence is high.

Layers of the Business Environment.

Remote Environment

Within Greenley’s Framework, the remote environment is related to as distant to the organisations business journey.The remote environment can be dynamic, uncertain and is constantly changing.

The remote environment is complex with many variables which are categorised as follows:

Political Variables Economic Variables Social Variables Technological Variables

A PEST ANALYSIS SHOULD BE A DETAILED AUDIT NOT A POINT FORM DESCRIPTION

Macroenvironment – PESTEL (1)

Macroenvironment – PESTEL (2)

Political• Government

stability• Taxation policy• Foreign trade

regulations• Social welfare

policies

Economic• Business cycles• GNP trends• Interest rates• Money supply• Inflation• Unemployment• Disposable income

Macroenvironment – PESTEL (3)Sociocultural

• Population demographics

• Income distribution• Social mobility• Lifestyle changes• Attitudes to work

and leisure• Consumerism• Levels of

education

Technological• Government spending

on research• Government and

industry focus on technological effort

• New discoveries /developments

• Speed of technology transfer

• Rates of obsolescence

Macroenvironment – PESTEL (4)

Environmental• Environmental

protection laws• Waste disposal• Energy

consumption

Legal• Competition law• Employment law• Health and safety• Product safety

Key Aspects of PESTEL Analysis

Not just a list of influences Need to understand key drivers of change Drivers of change have differential impact on

industries, markets, and organisations Focus is on future impact of environmental

factors Combined effect of some of the factors

likely to be most important

Mapping PEST outcomes

Political/legal

Economic

Socio-cultural

Technological

Strategic Implications

Strategic Implications

Strategic Implications

Strategic Implications

What are the main drivers of change? How are these affecting the industry? What implications does this have on strategy development?

Analysing Competitive Industry Structures

An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry).

Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.

Spectrum of Industry structures

Perfect competition

Oligopoly Duopoly Monopoly

Concentration

Entry &Exit Barriers

Productdifferentiation

Information

Many firms A few firms Two firms One firm

No barriers Significant barriers High barriers

Homogenous product

Potential for product differentiation

Perfect information

flow

Imperfect availability of information

Porters 5 Forces

Threat of New Entrants

New entrants to an industry can raise the level of competition, thereby reducing its attractiveness.

The threat of new entrants largely depends on the barriers to entry.

High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency).

Key barriers to entry include

Economies of scale

Capital / investment requirements

Brand loyalty and customer switching costs

Access to industry distribution channels

The likelihood of retaliation from existing industry players.

Threat of Substitutes

The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:

Buyers' willingness to substitute The relative price and performance of

substitutes. The cost of switching to substitutes.

Bargaining Power of Suppliers

(Suppliers are the businesses that supply materials & other products into the industry)

The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive.

The bargaining power of suppliers will be high when:

There are many buyers and few dominant suppliers

They offer unique or scarce resources with high switching costs

Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)

The industry is not a key customer group to the suppliers

Bargaining Power of Buyers (Buyers are the people / organisations who

create demand in an industry)

The bargaining power of buyers is greater when:There are few dominant buyers and many sellers in the industry.Products are standardised

Buyers threaten to integrate backward into the industry (buyer sets up in competition to supplier).

The industry is not a key supplying group for buyers

Intensity of Rivalry

The intensity of rivalry between competitors in an industry will depend on:

Structure of competition Competitors of similar size indicates fierce

competition. A clear market leader indicates less competition.

Growth rate of industry Industry growth indicates less competition.

Extent of differentiation Customers can switch easily to other products if

there is little differentiation. High exit barriers indicate increased competition.

The European airline industry – forces driving competition

New entrants Relatively high entry barriers High capital costs for start ups Well established brands Some examples of tacit government support for

flag carriers Shortages of airport landing and take-off slots Corporate jets, low cost carriers and regional

airlines challenging larger more established airlines.

The European airline industry – forces driving competition

Buyers Decreasing customer loyalty Airline frequent flyer programmes Greater choice on some routes Complicated and confusing fare structures Competition from charter carriers on some routes Consolidation amongst travel intermediaries

The European airline industry – forces driving competition

Substitutes Development of high speed trains Extensive motorway network for car usage New telecommunications technologies such

as teleconferencing

The European airline industry – forces driving competition

Suppliers Oligopoly of aircraft and aircraft engine

suppliers Oligopoly of aircraft leasing companies Local monopolies of infrastructure providers

(airports and surface transport) National monopolies and undercapacity of air

traffic control providers

The European airline industry – forces driving competition

Rivalry among competitors Varies on different routes but generally increasing. Increasing price competition Increasing use of internet distribution Sophisticated yield management systems in place

- price discrimination Collaborations Failure of some established airlines

Industry Life Cycles

Highlights trends in Industry Evolution

Classification of Opportunities

10

Capability

0

Probability of Opportunity 1

I Monitor

IIExploit

IVIgnore

IIIInvestigate

For each opportunity assess the highest level (probability)of potential compared with the lowest probable level of potential chosen level being based on a judgement of 0 – 1To analyse the capability of the firm so to exploit each opportunity, linked to the internal audit. 0 – 10 representing total capability.

(Greenley 1989:76)

Classification of Threats

I Competent

IIPrepared

IVMonitor

IIIDefenceless

10

0 1.0

Capability

Probability of Threat

For each threat, asses highest level (probable) of potential compared with the lowest probable level of potential-chosen level being based on value judgement 0 –1The analysis capability of the firm to react to each threat(through the internal audit) 0 – 10 is used representing the total capability.

(Greenley 1989:78)

Summary

The external environment can be turbulent.

The external environment is made up of both an evaluation of the Macro & Micro (Remote and Operating) Environment

The PEST analysis evaluates the Macro (Remote) Environment.

Porters Five Forces assists in analysing scope of our competitive rivalry. (Micro (Operating) Environment)

Industry Life Cycle is important in determining strategy.