Example Solution Manual Essay
Example Solution Manual
PESTEL analysis is a useful starting point for environmental analysis, encouraging students to think wide. Exhibit 2.2 provides an initial PESTEL analysis of the airline industry, giving students the general idea. The first question asks for additional elements in the analysis. For example, under Political, you might add subsidies for local airports; under Economic, you might add the rise of Asian economies; and under Legal, you could add the trend towards airline privatisation. A key danger to highlight is of long lists of forces or influences that are too unwieldy for practical action. So the second question challenges students to assess which of the forces are likely to be of most significance in driving industry change. Here students should justify their views in terms of the evidence from the past and the likely impact in the future of any particular influence. The end-chapter case example on the European brewing industry also asks students to do a PESTEL analysis. Illustration 2.2
Scenarios help students think long term and very broadly: here the World Economic Forum and its members are looking a decade ahead, and thinking about geo-economics in general as well as just the market in a narrow sense. The question asks about whether companies have more influence over government policy or geo-economics. It then goes on to ask about how companies might influence government. This also obviously touches on issues of corporate social responsibility, pursued in Chapter 4. Companies probably do have more influence on policy coordination, but the issue is which governments they should be talking to (the United States, China?) and whether it is only governments that matter (United Nations, International Monetary Fund, World Trade Organisation?).
They should also consider how they can best influence governments, individually or collectively through, for example, the World Economic Forum or the Business Roundtable, the group of CEOs of leading American corporations. To some extent, the power is likely to be exercised negatively: through lobbying against and criticism of proposals for financial re-regulation. It is worthwhile also asking about the influence these corporations can have themselves on geo-economic shifts: some Western company headquarters are shifting away from their home-countries, for example, the global headquarters of American civil engineering conglomerate Halliburton moved to Dubai and Swiss/Swedish engineering company ABB moved its global robotics business headquarters to Shanghai. Illustration 2.3
The Steel Industry
The steel industry provides a fairly easy-to-understand case of rapid structural change, and one led by industry actors. Understanding how the leading companies are making an impact helps to counter a risk of ‘determinism’ in Porterian analyses; in other words, a sense that structures are given rather than changeable. The first question particularly invites a comparative analysis using the radar-plot introduced in Exhibit 2.5. The radar-plot might look roughly like the following, with the continuous lines indicating rough positions in around 2000 (10 years earlier than the illustration) and the dotted lines indicating positions in 2010.
The comparative positions highlight the increasing power of suppliers such as the iron ore producers (negative); the high power of sophisticated buyers, somewhat mitigated by the declining power of the Big Three (mildly positive perhaps); and the beginning of decreased rivalry (positive) as the larger steel companies such as Mittal try to consolidate the industry. It might be said that the new entry threat has stabilised and even reduced, though continued investment by Chinese players may increase rivalry especially if they turn to overseas markets. Overall, comparing the size of the two radar plots over time suggests only a marginal change in favour of the steel producers. With regard to the second question, the acquisition strategies seem driven by the desire to reduce rivalry by reducing the number of players and even capacity.
You might ask students what is necessary to make this work: here you might highlight the importance for reduced rivalry of both simultaneous cuts in capacity investments by, for example, the Chinese and strong barriers to new entry. With regard to the third question, success in raising barriers to entry (e.g. through technological change) and in reducing rivalry (through continued consolidation) would make the industry more attractive. Vertical integration strategies into sources of supply (e.g. iron ore) would help too. A potential negative is significant progress with substitute materials. This depends on technological progress, hence providing a useful link between the Porter 5 Forces and PESTEL. Illustration 2.4
Chugging in the Charity Sector
The aim of this Illustration of course is to show that industry structure analysis is relevant to not-for-profits as well. Indeed, charities appear ruthlessly competitive – hence the High Street chuggings. The first question points to at least three of the Porterian forces as causing problems: (i) There are low barriers to entry, with ‘constant refreshment’ of the industry by new charities; (ii) there is strong buying power on the part of local authorities commissioning services; (iii) there is intense rivalry because of the number of competitors and tendency towards overlap and duplication of charitable services. In addition, they face substitutes in the form of local authorities and other agencies performing services in-house, but at this point the trend in that respect was in their favour. The suppliers of funds – donors – have many alternative charities to give to. The mergers and increasing concentration levels (the largest are growing fastest) imply growing industry consolidation. At the moment, the industry structure might be described as highly competitive, but there may be widespread advantages to it moving towards a more oligopolistic situation. Illustration 2.5
Cycles of Competition
The ‘wisdom’ in strategy theory has been that competitiveness is about building up a long-term competitive advantage and then defending it against competitors. The idea of cycles of competition takes a more dynamic view as to how competition in an industry will work its way out over time. It also highlights the potentially destructive nature of competition (at least from the point of view of industry players) and the value of trying to avoid it. Indeed, a key point is that these competitive cycles are not inevitable. Signaling to competitors, and interpreting the signals of others’ competitive moves, can help avoid head-on competition. Retaliation (Section 2.3 under barriers to entry) is a key principle here, as are the basics of game theory (Chapter 3).
With regard to question 1, Francotop might have slowed down or rebuffed entirely Deutschespitze’s invasion of the French market by retaliating hard against its initial move: even though the youth niche was not so important to Francotop, a determined response there would have signalled the likelihood that attacking the core French market would be so fiercely opposed that it might not be worth Deutschespitze’s while even to try. With regard to question 2, Francotop would have been hard-pressed to avoid escalating competition in the business market. However, one possibility might have been for Francotop to focus on a particular neglected niche (say the small firms segment). By signaling clearly through advertising or similar that this niche was the extent of their ambitions, Francotop might have encouraged Deutschespitze to concentrate on its best opportunities, leaving the French get on with their specialism in peace. Illustration 2.6
Key Debate: How Much Does Industry Matter?
This debate addresses an enduring source of controversy in strategy research, and allows students to review the importance of the contents of Chapter 2 (particularly the ‘five forces’), at the same time as introducing the more internally focused issues of Chapter 3 that follows. For Porter, industry matters a lot. The sceptic might argue ‘he would say that, wouldn’t he’? After all, this is exactly what his training in industrial economics and the standard products of his consulting firm would favour. However, the important thing here is to recognise the extent of the research he (and collaborators such as Anita McGahan) draw upon to make their case. It is worth pointing out to students that strategy theories are more than ‘just theories’: there is solid empirical research involved too. When meeting a new theory, students should get used to asking: where is the research evidence? What the research seems to suggest is that an industry is not the be-all and end-all, but that choosing an attractive industry is a very good starting point in strategy: industry accounts for about two-fifths of the explained variance in the Porter and McGahan study (leaving aside control variables etc.).
Turning to the precise question, the kinds of industries that influence members’ profitabilities more than others seem generally to be service industries (explaining the greater industry effects in the Porter and McGahan study than in Rumelt’s). But to go on from here, industry influences are most likely to be strongest in highly competitive and mature industries. In such industries, sources of firm-specific differentiation are likely to be few, easily imitated and easily competed away, so making it hard to earn above-normal profits. At the same time, standard recipes for competing would have been established, so only the incompetent would perform substantially below the norm (and competition should have eliminated most such incompetents by the industry maturity stage). These conditions would probably prevail in service industries such as hotels, restaurants and retail. Newer industries are likely to offer more scope for innovation and differentiation, and have fewer commodity competitors and suppliers, so allowing persistent variability in profitability. Video Questions
Hiscox is a specialist insurer in the Lloyds of London insurance market. The company specialises in niche areas such as property and casualty insurance for high net worth individuals and companies, as well as cover against such risks as hacking, kidnapping and satellite damage. The video case is quite complicated, so best viewed after a thorough working through of the chapter material. 1.The industry is facing more buyer power, with the rise of online price comparison sites. On the other hand, there is a process of consolidation with the rise of ‘consolidators’ (companies such as Resolution), who are acquiring weaker companies in order to build position.
This is likely in the long term to reduce rivalry. Major failures such as that of the American giant AIG (American Investment Group) are likely to reduce rivalry too. It is clear that general recessionary pressures are also influencing the market at the time of the video, reducing demand and likely to make it more price-sensitive. 2.Hiscox has a specialist position, aside from companies like AIG or the general insurers that Resolution is trying to buy, and its power in its niche is reinforced by its brand (well known in the United Kingdom). It also has the advantage of having both an underwriting (issue of insurance policies) and investment business, which mean that Hiscox is protected from short-term cycles or crises in one part of the business, probably helping to buffer it from price competition in the short term too. Assignment 2.1
PESTEL analysis is a useful starting point for environmental analysis. Illustration 2.1 provides a model. A ‘blank’ of the basic template of illustration 2.1 can be provided to students who can then be asked to complete it for the forces at work in a particular industry. The danger is that long lists of forces or influences can be generated by this device. So the second question challenges students to assess which of the forces are likely to be of most significance in driving industry change. Here students should justify their views in terms of the evidence from the past and the likely impact in the future of any particular influence. See the discussion of the PESTEL for the end-chapter case on the European brewing industry for an example. Assignment 2.2
Assignment 2.2 requires students to focus on change in industry characteristics and competitive forces through the construction of scenarios. Guidelines for the construction of scenarios are given in Section 2.2.2 it is recommended that students follow these, building either two or four scenarios for a given industry. The work done in Assignment 2.1 should provide the bases of identifying the key industry forces or influences which will enable them to do this. Some of the problems of scenario building should be emphasised to students: Students may try to build in too many factors and, therefore, not be able to limit the number of scenarios. They may find difficulty in generating scenarios with a coherent and compatible set of factors. Some may be wary of having to exercise judgement; and others will confuse judgement with hunch. Try to encourage a realistic debate that tests out assumptions and projections against known facts and trends. A particularly useful exercise is to ask students to build scenarios for an industry for which there is a company case (or for their own industry/company if possible) and then to assess the company’s strategic position in the light of the different scenarios (e.g. see the notes above on the brewing industry).
One of the issues that might surface is the ease or difficulty with which scenarios can be constructed. It usually emerges that scenarios are much easier to construct where the number of key forces at work in an industry is relatively few. They are less easy to construct if the number of important forces is high because the number of variables the student is trying to handle becomes too great. This, in turn, raises another issue. Scenarios are of particular use in uncertain environments as a means of helping managers to think through possible futures. However, uncertainty may arise for a number of reasons. If uncertainty arises because of the unpredictability of a few forces, then arguably scenarios may be very helpful, but what if uncertainty arises primarily because there are a large number of forces at work: to what extent are scenarios of use in such circumstances? There are a limited number of very important forces at work in the brewing industry: but what of fast-moving hi-tech industries where there are many different forces at work? Assignment 2.3
Five Competitive Forces
Five forces analysis is an absolutely fundamental technique in strategy. Section 2.3 should give students the ability to carry out a basic five forces analysis of any industry. They should be encouraged to consider all of the elements of each of the five forces: so for example, under barriers to entry, scale and experience effects, channels, retaliation and so on. The radar-plot technique of Exhibit 2.5 should only be used as a summary once the full analysis is complete; the danger is of it being used to short-circuit the analysis. Students should be expected to do more than simply list elements; they should clearly identify the implications (positive or negative) of each. The second question about conclusions for industry attractiveness should underline the importance of drawing out implications, rather than just listing. Assignment 2.4
Comparisons between Industries and Over Time
This assignment allows students to build on Assignment 2.3 in order to consider the investment implications of differences between industries and change over time. The assignment is a substantial one if relying on students’ own research. However, time can be saved if two case studies are used (e.g. brewing, pharmaceuticals or hi-fi, perhaps looking backwards at change over the past three to five years, rather than change in the future). Similarly, students may save time by using the radar-plot technique (Exhibit 2.5), as in the discussion of Illustration 2.3. It is important to note the two follow-up questions. Explicitly asking for justification helps students avoid the superficial analysis which is easy to do with five forces. Asking the question about investment helps students think about concrete implications, again something that five forces analyses often neglect.
By looking over time, students will learn to be cautious about investing in industries with declining attractiveness. By comparing industries, students can also consider industry attractiveness in their diversification decisions, an issue picked up in Chapter 7. At the same time, it is worth countering the implications of five forces analysis with two thoughts: Industries that are highly attractive are likely to have high barriers to entry, so the costs of entry may outweigh the benefits of entering. An industry that is becoming relatively unattractive may be neglected by competitors, and, if you enjoy a strong competitive advantage in that industry, it may still be a source of profit to you. Assignment 2.5
This assignment builds on the notion of strategic groups and strategic space outlined in Section 2.4.1 in the text. Figure 2.8 provides an example of how the exercise could be carried out. This could, for example, be applied to the European brewing industry: Key strategic dimensions might come under either of the scope or resource commitment characteristics in Section 2.4.1 – for example, product range or extent of vertical integration. Possible key strategic dimensions in the European brewing industry might include geographical coverage, strength of brands, diversification, size of firm, type of distribution, and so on. Students are encouraged to draw more than one strategic group map if they believe that more than two dimensions are important.
It is useful to ask them to consider the extent to which different bases of such maps give rise to similar or different configurations. They might find, for example, that however the maps are drawn up, some companies always tend to end up in the same groups. In other words, some companies may have a very similar set of strategic characteristics along many dimensions. Students are asked to examine the strategic group maps to see if there are any under-populated ‘white spaces’ in the industry. For example, in brewing, is there an opportunity for a giant specialist in making ‘own brand’ beer for the large retailers? However, students should assess carefully why there are few competitors in any such white spaces. White spaces can often turn out to be dangerous ‘black holes’ rather than attractive opportunities. Assignment 2.6
Critical Success Factors and the Strategy Canvas
It is very likely that students will concentrate on success factors that are salient to them as consumers – for example, the product ranges of a clothing retailer. Less visible elements, such as ownership by a diversified parent company, may be neglected. However, for a short assignment, this need not matter too much: the essence is comparison in order to identify areas of (potential) competitive advantage. The key insight of a strategy canvas is to encourage competitors to compete where it is relatively easy to secure a significant advantage (Blue Ocean), and not necessarily to compete fiercely over the top-rated success factors if advantage can only be obtained at very considerable cost (Red Ocean). You can introduce less visible, but strategically significant elements after they have done their basic analysis. Integrative Assignment
Full Analysis of an Industry or a Sector
This assignment would be a demanding research project over a significant part of the course. It is however a very good test of students’ ability to apply tools to real data appropriately, as well as developing their research skills. Students will see it as practical and, if allowed a choice of sectors, relevant to their own interests. Good research resources are essential. As well as free web-based resources such as company reports, trade association statistics and some government or supra-governmental (EU, UN) reports and statistics, students would likely need limited-access resources such as the business press and journals available through BusinessSource Premier, Factiva or Proquest, and reports from organisations such as Euromonitor, Key Notes and Mintel. Your institution’s librarian will advise you on what is available to students and how proficient they are likely to be in using such sources. You would also want to guide students on which industries or sectors to choose. Very broad industries – for example, the world airline industry – are likely to overwhelm students with data. It might be helpful to encourage focus – for example, the airline industry in India, or similar. Industry focus also reduces the risk of plagiarism.
There are many student assignments of a similar nature available for a fee on the web, and it would definitely be wise to avoid allowing students to research the same industries in successive years. Requiring a specific focus on particular themes (e.g. internationalisation) or some less common concepts (e.g. the strategy canvas, cycles of competition etc.) can also reduce plagiarism. Insisting on precisely citing sources for key data and points (through an end-note system or similar) makes simple plagiarism harder too, as well as being good practice. If allowed, students will find very helpful a couple of example assignments from previous years to guide them roughly on what they are supposed to do. A report length limit of around 2000–2500 words would encourage students to focus on what is really important. Requiring an ‘executive summary’ would also force students to consider what is really important and what are the key implications. Over a two semester course, this assignment could be stage one of a two-part assessment regime; the second semester could have as an assignment asking students to consider implications of the first part for the strategy of a particular company in the original industry or sector. Case Example
The European Brewing Industry
This case focuses on the key techniques of PESTEL and five forces analysis that are central to this chapter. Full cases such as the pharmaceutical industry can be used develop students’ skills in seeing trends in industry data and drawing conclusions as to the likely impact of those trends on particular companies in an industry. PESTEL
Here it would be helpful to ask the students to draw on wider knowledge or research (you may have beer drinkers from many countries in your class). Depending on how extensive students’ additional research and thinking are, a wide-range of issues may be raised. To highlight some for the purposes of illustration: Political: government campaigns against drink driving
Economic: the rise of the Asian economies
Social: rise of beer consumption in southern Europe
Technological: few clear in the case, but innovations around products such as ice-cold lager might be raised Environmental: few clear in the case, but packaging issues are likely to be important Legal: few clear in the case, but changes in licensing laws and permitted alcohol limits for driving are relevant. PESTELs can often seem somewhat inconclusive, so it is important to pull out key issues and conclusions. The increasing hostility to drinking (under P and L) and the rise of Asian economies and southern Europe (under E & S) seem particularly important trends. One way of drawing some simple conclusions is to assess the overall balance (positive or negative) under each of the PESTEL headings: in the case of the European brewing industry, most of the headings are likely to be negative. The Five Forces
There has traditionally been a wide variation of industry structures across Europe. The United Kingdom is fairly competitive. Denmark, Holland, Italy, Belgium and France, on the other hand, have been in near monopoly situations. However, with increasing exports and imports and cross-border acquisitions, national markets are becoming less protected. An interesting issue, then, is at what level to conduct industry structure analysis. If at a European level, the broad issues to consider under each of the five forces are as follows: Buyers: With more than one fifth of beer sold through supermarkets, and increasing resort to ‘own-label’, these buyers are increasingly powerful (underline that buyers are not the ultimate consumers). Suppliers: The high concentration of the packagers suggests that these are becoming increasingly powerful. Substitutes: Wine is clearly a dangerous substitute.
New entrants: Internationalisation through M&A and increased trade is introducing new entrants into previously protected markets: most countries see increasing imports (Table 2). Anheuser-Busch and SABMiller are two obvious new entrants into Europe. Students might be alerted to the potential threat of TsingTao and the other Chinese brewers. Although not prominent in the case, there is still the potential of small new brewers entering using micro-breweries or contract brewers (e.g. Cobra). Rivalry: falling demand, international entrants and over-capacity obviously increase the scope for rivalry. However, note that sales values are rising, that innovation and branding can mitigate price-competition, that there has been a history of price-fixing cartels, and that leading players are attempting consolidation through M&A. It might be useful to ask the students to compare industry concentration ratios in 2000 and 2009: that is, the share accounted for the top three or five players (Table 3). As ever, it is important to draw conclusions. On balance, the European brewing industry does not seem attractive, and unlikely to become more so until the current round of consolidation is completed and brewers achieve greater leverage against their buyers and suppliers. Impact on Particular Brewing Companies
The three companies are chosen to represent different types of ‘player’. A–B InBev is the largest player, after a succession of spectacular mergers. It is remarkable how the company is withdrawing from fast-growing China and Eastern Europe, however. Greene King is tiny in comparison to A–B InBev, with just one key domestic market, the United Kingdom. However, domestic focus and its own pubs may be giving it a strongly defended local position. You might ask whether there are competitors who might be tempted to buy such a company. Tsing Tao is the wild-card here. It is strong in its booming home market, but it is also interested in moving overseas. But would it make Europe a priority region for expansion, or choose another market?