Firms and organizations often find themselves in competition with many others as they don’t exist in a vacuum. It is difficult to find that one is a monopoly, and if this happens, it usually doesn’t last for long. Thus a firm has to find a way of accomplishing its goals in that competitive market. This brings about the application of strategic management. According to Michael Porter (1998), ‘strategy is about achieving competitive advantage through being different – delivering a unique value added to the customer & having a clear and enact able view of how to position yourself uniquely in your industry’. Effective strategic management involves looking at the firms resources and seeing how to put them to use in the prevailing environment. It is directing the company to follow a certain path based on the environmental and internal issues its facing (Johnson & Scholes, 1993). It is on this premise that organizations perform strategic analysis of the external environment the industry and firm. This paper discusses the various techniques /models used to facilitate this process.
The analysis of the external environment is made easier by using models. These models basically give framework which help firms in identifying opportunities and threats in the external environment. The external environment comprises of both macro and micro environments. The macro environment consists of the social, economic, legal and technological aspects of society. On the other hand, micro consists of forces from within an industry. It is also referred to as industry environment. Either way both macro and Micro environments influence on organization and analysis into it is indeed necessary. Tools used by firms to come up with good strategies (strategic analysis) include the following. SWOT analysis, BCG matrix the product life cycle, Porter’s five forces model and so on. These help a firm to identify the level competition in an industry as well as threats and opportunities that the firm is facing.
The Fire Forces Model by Michael Parter.
He identifies five competitive forces that shape on industry. Profit potential, these forces include the bargaining power of suppliers, threat of new entrants, threat of product substitutes, bargaining power of buyers and the intensity of rivalry among established organizations within the industry. (Finlay, P. 2000).An analysis into the macro environment by organizations in terms of new trends and the effects of the changes to the organization, forecasting and evaluation is necessary.
The first step is to identify opportunities o the firm as a result of changing trends in political, economic, technological and social spheres. This follows a thorough scan and monitoring of new trend. The second step is identifying potential threats to the firm as in what competitive advantage rival companies have over a firm, threat of strikes by suppliers, closure of premises following a ban by law and so on.
Thirdly is an analysis of the industry environment in regard to the influence of competition, increased number of firm, increased or reduced bargaining power of suppliers or buyers. This has a direct impact on profitability of a firm. Lastly is on evaluation of the organization strategies and the importance of making changes on their strategy. Of course this is in reference to macro and industry environments. This helps the firm to chart course of action to deal with threats or exploit opportunities. This five factors model has however been criticised by many due to its bias focus on external environment rather than internal environment of organization (Kother, J. 1996) We can try and analyze the company British Petrol strategy using Porter’s five forces model.. Most of these points apply to BP as its products have many substitutes. A consumer can fuel at BP or any other station and this will not have any negative effects on their car because increase dependency on its products. This it has achieved by buying out other small companies. This ensures that every corner the customer takes, he finds a BP station thus gets used to the product. BP operates in over 100 counties and thus it is not difficult to find a BP station. This way, customers develop a sense of loyalty and it becomes difficult for them to switch to another firm. To reducing the effects of the bargaining power of customers BP has partnered with various oil companies the world over and has service stations in all areas of the world. In order to gain control of the supply chain BP has ensured that its presence is in the supply chain i.e. from owning oil wells to refineries to selling the products. BP owns various oil wells and also oil refineries and it has franchised its service station outlets to entrepreneurs all over the world. BP has tried to add value to its products by making them environmental friendly. Its products have less negative effects on the environment for example BP was instrumental in creating unleaded petrol. This makes consumers prefer its products over those of competitors. This has made BP also move the purchase decision away from price and more on added value issues.
BP has also bought out supplier companies or partnered with them so as to reduce the effect of them exerting undue pressure on it. Suppliers naturally prefer to sell their goods at the highest possible prices. With a commodity as scarce as oil, BP has ensured it owns some raw material companies so that it is not left at the mercy of suppliers. BP is found in all parts of ht world where oil is present. It is found in Angola, Russia Asia and so on. Threats of new entrants are another force that can reduce the profitability of BP. It has ensured that it prevents this by tying its suppliers and distributors to strict contracts. Those who supply it with oil are only allowed to supply BP and resellers of BP can only sell BP products. BP has also formed alliances with related firms like working with car manufacturers. For example, BP worked with a bus manufacturer to introduce hydrogen fuelled buses. The other competitive force component is the threat of substitutes. So far, BP has managed to acquire other brands into its portfolio like castrol and Aral. This ensures that it spreads the BP brand all over the world even in sensitive markets that would prefer to have a home based brand. These sensitive areas sell the home brand which is part of the BP brand.
This it has done by bringing brands like castrol and trying to influence them from within. Lastly there is the industry rivalry component. BP has tried to prevent this force from affecting its profits by engaging in price competition and differentiating its products. BP always ensures that the prices, of its products are well within the range of those of its competitors. Most BP products worldwide have tried to maintain this trend as is seen in various countries. BP always brands its products and insists that its service stations be franchises so that they all look the same and maintain the same standards. Driving to a BP service station in London is the same as driving to one in Africa. They look the same and offer similar products. Buying out the competition is another way of reducing industry rivalry. BP has merged with shell in some countries so as to get a bigger customer base and thus compete competitively. Some markets are too small and only mergers or buyouts can create a meaningful market size. Focusing on different segments has enabled BP to reduce industrial rivalry. BP focuses on renewable energy products where most of its rivals are yet to venture. BP deals with products like solar power, hydrogen fuel, and low carbon power and wind energy.
SWOT Analysis Model
This is the technique of scanning the business environment both internal and external to analyze the strengths, weakness, opportunities and threats that face a firm. This analysis plays a vital role in formulating effective strategic plans. The strategies of a firm range from goodwill, experience in the industry, patents, strong brand names, resources and assets, distribution network, technology and so on. (Porter, M.1980). This strength gives a firm competitive edge against competitors.
The weaknesses of a firm make it vulnerable to competition and if not checked may lead to losses during intense competition and eventually closure. They include poor brand names, limited resources, lack of goodwill, unskilled work place, poor distribution or lack of distribution channels and so on.
Potential opportunities that occur as a result of changing trends in the industry. These opportunities when exploited could increase firm’s profitability and grow. Potential threats from the external environment due to changes in the trends for instance change in consumer tastes, technology becoming obsolete, new laws, and ban enforcements, trade barriers and so on (Potter, M.1980).
In the recent years firms are compelled to perform this SWOT analysis in order to device strategic plans that allow them to stand in the wave of competition. A case of British Petrol a multinational with subsidiary companies like Amoco, ARCO and Castrol boast of a large portfolio of products. But notice, that other companies have come up which also provide superior products. Strategic analysis is necessary. Subjecting BP to a SWOT Analysis, many contribute to effective strategic management. The strengths BP has is that it has a strong distributive channel, experience, strong brand name, goodwill from customers and adequate oil mines thus sufficient resources. Weaknesses would probably be loss of good will from customers or its inability to adapt to changing trends, fast enough owing to the fact that it’s a large organization. The presence of strong rival competitors such as Total, Mobil poses a threat to BP’s profitability and growth. The changing trends in consumer preferences e.g. nowadays consumers prefer ecofreindly fuels such as unleaded petrol provides a perfect opportunity for BP to produce this before other oil companies can. There is also the opportunity to produce fuel other than oil products say gas.
The SWOT analysis thus gives a framework of developing strategy plans to reduce its weakness, vulnerability to threat, enhance strengths and pursue opportunities.
BCG Matrix (Boston Consulting group Matrix)
This is a portfolio planning model used by firms to help them understand their products lines and business units. This model was developed by Bruce Henderson of the Boston consulting group in the early 1970. Its built on the premise that business are classified into four categories i.e. market growth and market share relative to the largest competitor, hence the name growth share
The market growth indicates industry attractiveness while market share is an indicator of competitive advantage. As all models, this model makes certain assumptions. One, that increased market share yields increase in revenue and that increase in market share implies forward movement in experience curve relative to competitors giving it a competitive edge and the second assumption being that a growth in market requires investment in order to increase its capacity which should result in the consumption of cash. (Proctor, 2000).
According to Henderson the cash required by rapidly growing business units could be obtained from a firms’ units which had reached to a mature stage and were generated sufficient money in order to move a long the experience curve and have competitive advantage. This model divides a firm’s business units into four categories that is star, cow, dog and question mark.
The Dog represents business units that have law market share and low growth rate. They do not generate money neither consume it, rather tie up business capita.
The Question Marks- Business units which have rapid growth rate and consume cash although they do not generate cash, due to their low market share. The question marks have potential of progressing to cash cows or regressing to Dogs. They therefore need to be analyzed to determine how viable they are for investment.
The stars are characterized by their strong market presence and market share. They generate large amounts of cash as well as consume it. Due to their high growth rate, stars generally have potential of becoming cash cows and should therefore be valued. Cash cows is the most cherished entity to a firm it depicts high growth rate and generate large amounts of cash. That is it practically grows faster than market growth rate and generates more cash when it consumes. This cash is used by firms to compensate or fund other costs such as loss made by dogs and question marks, administrative costs, funding R and D, pay dividends and so on (Proctor, 2000) Illustration :The BP company has its cash cow which is car petrol products. This product brings in a lot of profit for the firm without the firm investing in it. It does not need to spend a lot on its advertising as it enjoys customer loyalty. The star, which comes second after the cash cow. A product like lubricants could fall in this category for a company like BP. The question mark would be Gas. It is an alternative energy and could have potential of being a star and a cash cow. It probably generates cash but consumers it more. It therefore needs heavy investment. Then there is the dog. This product has low market share as well as low cash generation. This product is not worth the effort and companies should divest from such a product. By categorizing a firms business units a firm is able to gauge its potential and invest in products that give it a large market share and generate a lot of cash with minimal investment. This gives it a competitive advantage.
Pest Model (Political, Economic Social, Technology factors)
The model is used to analyze external environments. This essentially involves firms looking at the opportunities and threats to the firm found at the external environment. Political factors here include government regulations, legal uses, tax policies, employment laws, trade restrictions, and environmental laws and so on. These factors affect firms indirectly.
Economic factors which encompass purchasing power cost of capital, inflation, exchange rates. Social factors include cultural factors, level of education, people attitude, age and their distribution. Technological factors which range from information technology and automation which influence research and development cost of production globalization, knowledge management and so on. Companies or firms need to analyze their environments which dictate what strategies of company implements to adopting and exploiting these environments to their advantage.
A company like BP has had to develop strategies to deal with these factors. A case in point is the restriction of amount of green house gas that is emitted. BP analyzed this restriction and adapted to producing unleaded fuel. In addition, BP has constantly had to do analyze the economic factors, in order to understand economic climate of where it does business. This has helped it in determining prices, of its products. The social factors are well understood using PEST analysis tool. This has helped BP to strategically locate itself in key markets where consumption of fuel is high and market size is large. It has also helped in determining the level of quality the customer demands. Technological factors analysis has helped BP shape the way BP operates in terms of enhancing R&D, outsourcing, exchange of information following IT advances.
Markets operate within industries firms are usually compelled to analyze their industry because they operate in markets which operate in an industry. The understanding of this industry is important if a firm is to make strategies that are in tandem with changes within the industry. An industry is a collection of organizations with common products and technologies. (Collins Oxford Dictionary). The understanding of industry helps to identify competition. It is important to note that industries undergo series of stages just like products and this brings dynamics in consumers’ needs and competition changes. These changes in the industry have implication on marketing production and distribution strategies employed by a firm.
Analysis of industry involves an in depth look at emerging industries, technological innovations emergence of new customer needs, products economic and sociological changes shifts in cost relations and so on (Porter, 1980). The analysis of the industry gives firms an idea into what laws regulate the industry. What rival firms are doing to stay ahead in the competitive industry. It also provides opportunities for small companies or partner in order to command greater market presense. The industry also sets standards of quality which plays in the industry have to comply with.
Thus, this analysis is very crucial for firms to analyze their industry. Over the recent years the pharmaceutical industry has seen frequent partnering and mergers between. This probably is as a result of analyzing the industry and seeing that it was a trend. For example Glaxo Smithkinle and Beecham Company merged in order to reduce competition in the industry or reduce production costs and have life cycles and different strategies are required with every new stage that on industry enters.
An analysis of the industry enables firms to identify competitors who are reluctant to adopting changes and new strategies thus giving a firm the opportunity to eliminate the competitor from the industry. In addition an analysis of the industry helps a firm to identify barriers put by bigger firms in the industry for discourage new entrants into the industry. This comes in handy in helping new small firms to device strategies to go around these barriers and succeed. Such barriers include tying supplies to tight contracts, bureaucracy, high costs of registration companies and so on.
Analyzing the firm
This involves analyzing the firm’s strengths and weaknesses in terms of decisions made by leadership and their impact on organization profitability and overall organizational performance. Firms’ strengths include high quality managers, leadership style, organizational culture, skilled workforce and so on. The analysis of a firm helps it to develop strategies that facilitate better performance and production of high quality product and quality service delivery. This gives a firm competitive advantage (Mufson, S. 2006)
Analyzing the environment
The analysis of the external environment contributes profoundly to effective strategic management in the sense that it provides firms with information on emerging issues and trends, which helps to develop networks and partnerships among organization and also gives vital information for strategy process (Hill, M 2002)it helps a firm to exploit opportunities and reduce vulnerability to threat.
In conclusion strategic tools are very necessary to a firm as they help the firm realign its objectives and strategic plan. It helps a firm make decisions regarding its future direction or goals. These tools are many and one cannot say that any one of them is better than the other. A firm has to look at the results each gives and decide which tool applies to its situation. PEST analysis helps a firm understand market growth or decline. It looks at issues that are beyond the control of the firm and competitive position of the firm. The SWOT analysis helps a firm discover its strengths and weaknesses as well as opportunities and threats. thus a firm is able to keep revising its goals or objectives in line with the SWOT analysis. The BCG matrix helps a firm evaluate each product and it gives a comprehensive report on each product in relation to market growth and generation of cash. It ranks each product according to performance and advises the firm on which products they should concentrate on and which ones to forget about or ignore.