Lecture 3

Lecture 3 : 

1 Lecture 3 The External Assessment and industry analysis 14/08/2007

Learning Outcomes : 

2 Learning Outcomes Describe how to conduct an external strategic management audit Identify and explain key external forces affecting an organisation Evaluate the current external environment of the maritime industry and an organisation operating within the industry

Topics : 

3 Topics The external environment and the assessment process Looking for the right information Understanding the environments Industry Analysis Competitive forces analysis Strategic groups Identify opportunities and threats

External Strategic Management Audit : 

4 External Strategic Management Audit External environmental analysis: Identification and evaluation of trends and events beyond control of single firm Scanning Monitoring Forecasting Assessing

External Strategic Management Audit : 

5 External Strategic Management Audit Purpose of External Audit Identify Opportunities that could be benefited Threats to be avoided

Slide 6: 

6 External Audit – Sources of Information Internet Libraries Suppliers Distributors Customers Competition

Sources of Maritime information : 

7 Sources of Maritime information For examples: Containerisation International Fairplay International Shipping Weekly Lloyd’s List Lloyd’s List Daily Commercial News Lloyd’s List Maritime Asia Lloyd’s Shipping Economy International Journal of Maritime Economics and Logistics Maritime Policy and Management Port Development International Shipping Economist The Drewry MonthlyLloyd’s Maritime information services

Scanning Key external Environment : 

8 Scanning Key external Environment External forces include Economic forces Social-cultural (including demographic ) Environmental forces Political, governmental & legal forces Technological forces Global forces An external environment scanning is also named as PESTLE analysis

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9 Relationships Between Key External Forces and an Organization Key External Forces Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Opportunities & Threats

External forces: Economic Forces : 

External forces: Economic Forces GDP trend, Level of disposable income interest rtes, inflation rates Fed Gov’t deficits Consumption patterns Unemployment trends, Worker productivity levels Stock market trends Foreign economic conditions, Import/Export factors Demand shifts for goods/services Price fluctuations Exportation of labor and capital Monetary policies, Fiscal policies, Tax rates 10

Key Economic forces : 

11 Key Economic forces Ex: economic forces impacting on the shipping market and the port industry The level of economic growth in the world (e.g. India and China’s effects) The development of trade worldwide Global capital markets Consider: How do these factors affect the two industries? Can you illustrate other economic forces impacting any of the two industries?

Global forces : 

12 Global forces e.g. Currency exchange rate Trade agreements among regional blocs (e.g. NAFTA, EU, ASEAN) Emergence of new global markets (effects of globalisation) Creation of WTO Promoting free market (e.g. privatisation, liberalisation, labour reform..) Consider: How do these global forces impact the maritime and logistics industry?

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13 Social, Cultural, Demographic More educated consumers Aging population Minorities more influential Local rather than federal solutions Worldwide trend toward similar consumption patterns Global buyers and sellers 21st Century Trends: e.g.

Environmental Forces : 

Environmental Forces Environment issues: green environment ex: green ships a duty to minimise the impact of ship’s operations on the global environment: http://www.evergreen-line.com/tbn1/jsp/TBN1_GreenShip_Introduction.jsp#6 ..\..\..\..\Desktop\S_Type_Introduction.wmv 14

Political, Government & Legal Forces : 

15 Political, Government & Legal Forces Political forces examples Regional geopolitical instability Terrorism Stable or unstable political environment Intervening politics and other power e.g. DP world acquired P&O in the U.S.A Hutchison Port Holdings(HPH) in India

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16 Political, Government & Legal Forces Antitrust legislation Tax rates Lobbying efforts Patent laws Government Regulation

Legal Forces : 

17 Legal Forces National legislations: e.g. Sarbanes-Oxley Act 2002: legislation on corporate governance reforms in bookkeeping, stock options, etc. The USA Clean Air Act The EU Directive 2005/33/EC on the sulphur contents of marine fuels International regulation: e.g. ISPS Code (International Ship and Port Facility Security), SOLAS Convention (Safety of life at sea), The international Convention for the prevention of pollution from ships (MARPOL 73/78, annex6) The Kyoto protocol Consider: What are the impacts of any of these legal forces on major sectors in the maritime transport industry? (e.g. shipping lines, shippers, terminal operators, port authorities and other transport providers)

Slide 18: 

18 Technological Forces Major Impact – Internet, E-commerce, E-business Communications Semiconductors

Technological Forces : 

19 Technological Forces Internet changes the nature of opportunities and threats -- Alters life cycle of products Increases speed of distribution, saving in distribution and transaction costs from direct sales. Creates new products and services Eases limitations of geographic markets Alters economies of scale Changes entry barriers Changes the relationship between industries and various suppliers, creditors, customers, and competitors.

Technological Forces : 

Technological Forces Technological forces in the maritime and logistics industry? 20

Slide 21: 

21 Know your enemy and know yourself, and in a hundred battles you will never be defeated. When you are ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant both of your enemy and of yourself, you are sure to be defeated in every battle. Sun Tzu’s The Art of War Writing

Slide 22: 

22 Industry analysis (task environment analysis) Competitive Forces Analysis: Market- based view (MBV) MBV is based on the assumption that profitability is determined primarily by the structure of the industry in which the company operates. Collection & evaluation of data on competitors is essential for successful strategy formulation, i.e. positioning itself through three generic strategies. What is competitor intelligence (CI)?

Competitive intelligence : 

23 Competitive intelligence CI helps firm define and understand their industry and identify rival’s strengths and weaknesses. CI is Information A tool A means to deliver reasonable assessments A way of life, a process and everyone’s job Source: Dess, Lumpkin and Eisner (2006), strategic management, p.45.

Porter’s Five-Forces Model of Competition : 

24 Porter’s Five-Forces Model of Competition Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Potential entry of new competitors Bargaining power of consumers

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25 The Five-Forces Model Most powerful of the five forces Focus on competitive advantage of strategies Rivalry Among Competing Firms

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26 The Five-Forces Model Barriers to entry are important Quality, pricing, and marketing can overcome barriers Potential Entry of New Competitors

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27 The Five-Forces Model Pressures increase when consumer’s switching costs decrease Firm’s plans for increased capacity & market penetration Potential Development of Substitute Products

Slide 28: 

28 The Five-Forces Model Large number of suppliers & few substitutes affects intensity of competition Backward integration can gain control or ownership of suppliers Bargaining Power of Suppliers

Slide 29: 

29 The Five-Forces Model Customers concentrated or buy in volume affects intensity of competition Consumer power is higher where products are standard or undifferentiated Bargaining Power of Consumers

Slide 30: 

Illustration Competitive landscape in the ports industry Source: World Bank 2007, ‘The competitive landscape’ extract from ‘Module 2 The evolution of ports in a competitive world’, in Port reform toolkit, World Bank, p.22. 30

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Slide 33: 

33 Example: Indonesia container terminal (Port of Tanjung Priok) competitiveness analysis using five forces model Source: Coltof, H. 2000, port organisation and management in developing countries, international edition.

Slide 34: 

34 Rivalry among existing competitors In domestic (Indonesia), container terminals that already exist are Tg. Perak and Belawan, but in overall capacity, Port of Tanjung Priok is still a leader among them. In South East Asia, port of Singapore is a leader, Port Kelang relatively comparable with Port of Tanjung Priok. Competition among domestic competitors is low, but competition in South East Asia is strong.

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Slide 37: 

37 Bargaining power of suppliers Labour force: Indonesia and Malaysia still have limits in work force Fuel: easy to find. Contractors to build port facilities and to provide equipment: there are a number of contractors Conclusion: as a whole, bargaining power of suppliers is weak. Threat of global substitute?

Strategic groups within industry : 

38 Strategic groups within industry A strategic group is a group of firms in an industry following the same or a similar strategy along the same strategic dimensions.

Strategic group : 

39 Strategic group Characteristics for identifying strategic groups Scope of activities Extent of product or service diversity Extent of geographical coverage Number of market segments served Distribution channels used Resource commitment Extent of branding Marketing effort (ad spread, size of salesforce) Extent of vertical integration Product or service quality Technological leadership Size of organisation

Strategic group : 

40 Strategic group Strategic group is useful because It helps understand who are the most direct competitors of any given organisation. It raises the question of how likely or possible it is for an organisation to move from one strategic group to another. In identifying potential opportunities ad threats to organisations (resulting from changes in general environment) Source: Johson, Scholes, Whittington (2005).

Slide 41: 

41 Source: Dess, Lumpkin and Eisner (2006), strategic management, p.69. Strategic groups illustration

Strategic Group : 

Strategic Group Think about the strategic groups in the container transport industry 42

External environment analysis:identify opportunities and threats : 

External environment analysis:identify opportunities and threats After scanning relevant information on the above external environment forces, evaluate whether they have impacts on the company (i.e. indicate opportunities or threats). E.g EFE matrix Keep monitoring them An organisation should have an External Information System (EIS): an information system that provides managers with needed external information on a regular basis. 43

Slide 44: 

44 Class Activities (group work) Conduct a five-forces industry analysis for the shipping industry (use the table below) Conduct an external environment assessment for Royal Caribbean Cruise.

Slide 45: 

45 Using the shipping industry to analyse and evaluate the strength of each force