Slide 2.

Part I:
The Strategic Position

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.2

The Focus of part 1:

The strategic position
• How to analyse an organisation’s position in the
external environment.
• How to analyse the determinants of strategic
capability – resources, competences and the
linkages between them.
• How to understand an organisation’s purposes,
taking into account corporate governance,
stakeholder expectations and business ethics.
• How to address the role of history and culture in
determining an organisation’s position.

2
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.3

The Strategic Position

2: The Environment

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.4

Learning outcomes (1)

• Analyse the broad macro-environment of

organisations in terms of political, economic,
social, technological, environmental (‘green’) and
legal factors (PESTEL).

• Identify key drivers in this macro-environment

and use these key drivers to construct alternative
scenarios with regard to environmental change.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.5

Learning outcomes (2)

• Use Porter’s five forces analysis in order to

define the attractiveness of industries and sectors
and to identify their potential for change.
• Identify successful strategic groups, valuable
market segments and attractive ‘Blue Oceans’
within industries.
• Use these various concepts and techniques in
order to recognise threats and opportunities in
the marketplace.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.6

Business Environment – Case from Life

In 1993 International Business Machines (IBM) opened its

factory in Zelenograd (Russia). In 1996, after 3 years of
operation, the factory was bankrupt and was forced to close
down, because of competing products. Can you identify the
major competitor company (brand), whose products forced
IBM to close down its factory in Russia?

… IBM (!!!)

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.7

Business Environment – Case from Life

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.8

Business Environment – Case from Life

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.9

Layers of the business environment

Figure 2.1 Layers of the business environment

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.10

The PESTEL framework (1)

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.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.11

The PESTEL framework (2)

● 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.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.12

The PESTEL framework (3)

● Technological Factors: For example, new discoveries
and technology developments, ICT innovations, rates
of obsolescence, increased spending on R&D.

The Internet has changed the very nature of opportunities

and threats by:
●altering the life cycles of products,
●creating new products and services,
●creating new markets,
●increasing the speed of distribution,
●erasing limitations of traditional geographic markets,
●changing the historical trade-off between production
standardization and flexibility.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.13

The PESTEL framework (4)

● 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.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.14

The PESTEL framework (4)

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.15

Key drivers of change

Key drivers for change:

● The environmental factors likely to have a high
impact on the success or failure of strategy.
● For example, the birth rate is a key driver for
those planning nursery education provision in
the public sector.
● Typically key drivers vary by industry or sector.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.16

Using the PESTEL framework

● 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!

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.17

The EXTERNAL Factor Evaluation

(EFE) Matrix
1. List key external factors (influences) as identified in the
PESTEL analysis (see also the next slide)
2. Assign a weight that ranges from 0 (not important) to 1.0
(very-important) to each factor (see also the next slides)
3. Assign a 1 to 4 rating to each key external factor to indicate
how effectively the firm’s current strategies respond to the
factor (see also the next slides)
4. Multiply each factor’s weight by its rating to determine a
weighted score for each variable
5. Sum the weighted scores for each variable to determine the
total weighted score for the organization

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.18

The EXTERNAL Factor Evaluation

(EFE) Matrix

1. List key external factors (influences) as identified in

the PESTEL analysis.
⚫ Use a total of up to 20 external factors, including both
opportunities and threats that affect the firm and its
industry.
⚫ List the opportunities first and then the threats.
⚫ Be as specific as possible, quantify the factors as much
as possible using percentages, ratios and comparative
numbers.
⚫ Include “actionable” factors that can provide insight
regarding strategies to pursue.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.19

The EXTERNAL Factor Evaluation

(EFE) Matrix
2. Assign a weight that ranges from 0* (not important) to 1**
(very-important) to each factor.
⚫ The weight indicates the relative importance of that factor to being
successful in the firm’s industry.
⚫ Warning: Opportunities often receive higher weights than threats, but
threats can receive higher weights if they are especially severe or
threatening.
⚫ * Weight value should not be 0 (in such case the factor should not be
included into the EFE Matrix).
⚫ **Weight value could not be 1 (in such case the other factors could
not be included into the EFE Matrix).
⚫ Weight value > 0.1 indicates a very important factor.
⚫ Weight value < 0.1 indicates less important factor.
⚫ The sum of all weights must equal to 1.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.20

The EXTERNAL Factor Evaluation

(EFE) Matrix

3. Assign a 1 to 4 rating to each key external factor to indicate

how effectively the firm’s current strategies respond to the
factor.
⚫ When the response is poor (rating = 1).
⚫ When the response is average (rating = 2).
⚫ When the response is above average (rating = 3).
⚫ When the response is superior (rating = 4).
⚫ It is important to note that both threats and opportunities can receive
a 1, 2, 3, or 4 ratings.
⚫ Remember, the ratings are company-based (whereas the weights in
step 2 are industry-based).

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.21

The EXTERNAL Factor Evaluation

(EFE) Matrix
5. Sum the weighted scores for each variable to determine the
total weighted score for the organization.
⚫ Regardless of the number of key opportunities and threats included in
an EFE Matrix, the highest possible total weighted score for an
organization is 4.0 and the lowest possible total weighted score is 1.0.
⚫ The average total weighted score is 2.5.
⚫ A total weighted score of 4.0 indicates that an organization’s
strategies effectively take advantage of the existing opportunities and
minimize the potential adverse effects of external threats.
⚫ A total score of 1.0 indicates that the firm’s strategies are not
capitalizing on opportunities or avoiding external threats.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.22

The EXTERNAL Factor Evaluation

(EFE) Matrix
TABLE 3-8 EFE Matrix for a Local 10-Theater Cinema Complex
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬
Key External Factors Weight Rating Weighted
Score
Opportunities__________________________________________________________________________
_
1. Rowan County is growing 8 percent annually in population 0.05 3 0.15
2. TDB University is expanding 6 percent annually 0.08 4 0.32
3. Major competitor across town recently ceased operations 0.08 3 0.24
4. Demand for going to cinema growing 10 percent annually 0.07 2 0.14
5. Two new neighborhoods being developed within 3 miles 0.09 1 0.09
6. Disposable income among citizens grew 5 percent in prior year 0.06 3 0.18
7. Unemployment rate in county declined to 3.1 percent 0.03 2 0.06
Threats_______________________________________________________________________________
_
8. Trend toward healthy eating eroding concession sales 0.12 4 0.48
9. Demand for online movies and DVDs growing 10 percent annually 0.06 2 0.12
10. Commercial property adjacent to cinemas for sale 0.06 3 0.18
11. TDB University installing an on-campus movie theater 0.04 3 0.12
12. County and city property taxes increasing 25 percent this year 0.08 2 0.16
13. Local religious groups object to R-rated movies being shown 0.04 3 0.12
14. Movies rented from local Blockbuster store up 12 percent 0.08 2 0.16
15. Movies rented last quarter from Time Warner up 15 percent 0.06 1 0.06
Total 1.00
Johnson, Whittington and Scholes, Exploring th
2.58
Strategy, 9 Edition, © Pearson Education Limited 2011
Slide 2.23

The EXTERNAL Factor Evaluation

(EFE) Matrix
EFE Matrix for a local 10-theater cinema complex (example).
⚫ The most important factor to being successful in this business is
“Trend toward healthy eating eroding concession sales”, as
indicated by the 0.12 weight.
⚫ Also note that the local cinema is doing excellent in regard to
handling two factors:
⚫ “TDB University is expanding 6 percent annually” - perhaps the
cinema is placing flyers on campus.
⚫ “Trend toward healthy eating eroding concession sales” - perhaps
the cinema is adding yogurt and healthy drinks to its concession
menu.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.24

The EXTERNAL Factor Evaluation

(EFE) Matrix
EFE Matrix for a local 10-theater cinema complex (example).
⚫ Finally, note that the total weighted score of 2.58 is above the
average (midpoint) of 2.5, so this cinema business is doing
pretty well, taking advantage of the external opportunities and
avoiding the threats facing the firm.
⚫ There is definitely room for improvement, because the highest
total weighted score would be 4.0.
⚫ As indicated by ratings of 1.0, this business needs to capitalize
more on the 2 factors:
⚫ “two new neighborhoods nearby” opportunity, and
⚫ “movies rented from Time Warner” threat.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.25

Scenarios

Scenarios are detailed and plausible views of how

the environment of an organisation might develop in
the future based on key drivers of change about
which there is a high level of uncertainty.

● Build on PESTEL analysis .

● Do not offer a single forecast of how the
environment will change.
● An organisation should develop a few alternative
scenarios (2–4) to analyse future strategic options.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.26

Carrying out scenario analysis (1)

● Identify the most relevant scope of the study – the

relevant product/market and time span.
● Identify key drivers of change – PESTEL factors
that have the most impact in the future but have
uncertain outcomes.
● For each key driver select opposing outcomes
where each leads to very different consequences.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.27

Carrying out scenario analysis (2)

● Develop scenario ‘stories’ - That is, coherent

and plausible descriptions of the environment
that result from opposing outcomes
● Identify the impact of each scenario on the
organisation and evaluate future strategies in
the light of the anticipated scenarios.
● Scenario analysis is used in industries with long
planning horizons for example, the oil industry
or airlines.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.28

Industries, markets and sectors

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 luxury cars in Germany).
A sector is a broad industry group (or a group of
markets) especially in the public sector (e.g. the
health sector)

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.29

Porter’s five forces framework

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’.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.30

The five forces framework (1)

Figure 2.2 The five forces framework

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and
Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.31

The five forces framework (2)

The Threat of Entry & Barriers to Entry
● The threat of entry is low when the barriers to entry
are high and vice versa.
● The main barriers to entry are:
Economies of scale/high fixed costs
Experience and learning
Access to supply and distribution channels
Differentiation and market penetration costs
Government restrictions (e.g. licensing)
● Entrants must also consider the expected retaliation
from organisations already in the market

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.32

The five forces framework (2)

The Threat of Entry & Barriers to Entry
Economies (and diseconomies) of scale illustrated

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.33

The five forces framework (2)

The Threat of Entry & Barriers to Entry
Economies (and diseconomies) of scale illustrated

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.34

The five forces framework (2)

The Threat of Entry & Barriers to Entry
Experience (learning) curve illustrated

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.35

The five forces framework (2)

The Threat of Entry & Barriers to Entry

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.36

The five forces framework (3)

Threat of Substitutes
Substitutes are products or services that offer a similar
benefit (think about “parker pen case”) to an industry’s
products or services, but by a different process.
Customers will switch to alternatives (and thus the
threat increases) if:
● The price/performance ratio of the substitute is
superior (e.g. aluminium maybe more expensive than
steel but it is more cost efficient for some car parts)
● The substitute benefits from an innovation that
improves customer satisfaction (e.g. high speed
trains can be quicker than airlines from city centre to
city centre)
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.37

The five forces framework (3)

Threat of Substitutes

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.38

The five forces framework (4)

The bargaining power of buyers
Buyers are the organisation’s immediate customers,
not necessarily the ultimate consumers.
If buyers are powerful, then they can demand cheap
prices or product / service improvements to reduce
profits .
Buyer power is likely to be high when:
Buyers are concentrated
Buyers have low switching costs
Buyers can supply their own inputs (backward vertical
integration)

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.39

The five forces framework (4)

The bargaining power of buyers

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.40

The five forces framework (5)

The bargaining power of suppliers
Suppliers are those who supply what organisations
need to produce the product or service. Powerful
suppliers can eat into an organisation’s profits.
Supplier power is likely to be high when:
The suppliers are concentrated (few of them).
Suppliers provide a specialist or rare input – think about
“Intel Inside”.
Switching costs are high (it is disruptive or expensive to
change suppliers).
Suppliers can integrate forwards (e.g. low cost airlines
have cut out the use of travel agents, as the rise of
online booking has allowed them to create a direct
route to end customers).
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.41

The five forces framework (5)

The bargaining power of suppliers

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.42

The five forces framework (6)

Rivalry between competitors
Competitive rivals are organisations with similar
products and services aimed at the same customer
group and are direct competitors in the same
industry/market (they are distinct from substitutes).
The degree of rivalry is increased when :
Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs
The exit barriers are high
There is a low level of differentiation
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.43

The five forces framework (6)

Rivalry between competitors

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.44

The five forces framework (6)

Rivalry between competitors

How to Increase Sales without changing the

Service/Product?
AA (American Airlines) / SABRE (Semi-Automated Business
Research Environment)

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011