ACCA P3 Business Analysis - 2010 - Study text

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Chapter 3: Competitive forces

to make a strategic initiative, and attempt to fill the space that no other rivals

occupy.

Example

One way of identifying strategic groups within an entire market is to classify market

position in terms of price and quality. Some firms will offer lower-priced products,

but their equality is probably not as good. Other firms might offer higher-quality

products for a higher price.

The strategic groups in a market might be mapped according to price and quality as

follows:

This map indicates that there are four strategic groups, each in a different market

position in relation to price and quality. The largest group, Group 2, sells products

with a middle-range price and middle-range quality.

This method of analysis can help an entity to identify possible gaps in the market –

strategic space. When there is a perceived gap in the market, an entity might decide

on a strategy of filling the empty space by offering a product with the characteristics

that are needed to fill the gap.

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If the positioning of entities in a market is analysed by price and quality, as above,

possible strategic spaces might be identified as follows:

In this example, an entity might decide to target a position in the market where it

sells a high-quality product for a low price, because there are no firms yet in this

part of the market. Alternatively, there might be a market for even higher-quality

products at an even higher price.

4.3 Product differentiation

A market can be identified as a group of customers or potential customers for a

particular product or range of related products.

In a very small number of markets, all suppliers provide an identical product that is

the same in every respect to the product supplied by its competitors. An example is

foreign exchange. Banks selling US dollars in exchange for euros are all trading

exactly the same product.

In most markets, products are differentiated in various ways. They are similar, but

there are also noticeable differences. Differences in products include differences in:

 product design

 pricing

 branding.

Products might also be differentiated by the way in which they are delivered to

customers. For example, banking services might be delivered through a branch

network or as an internet service. Similarly, consumers can buy products in shops or

through the internet; or they can buy a hot meal by going to a cafeteria or

restaurant, or by ordering a home-delivery meal.

Chapter 3: Competitive forces

Business entities often use differentiation to make their products attractive to

customers in the market – so that customers will buy their products rather than

those of competitors.

4.4 Market segmentation

A business entity might try to sell its products to all customers in the market. For

example, manufacturers of sugar might try to sell their product or products to all

customers in the market who buy sugar. Similarly, distributors of petrol (car fuel)

might try to sell their products to all car drivers/buyers of petrol.

However, a business entity might choose instead to target its products at a

particular section or segment of the market. A market segment is a section of the

total market in which the potential customers have certain unique and identifiable

characteristics and needs.

Instead of trying to sell to all customers in the entire market, an entity might

develop products or services that are designed to appeal to customers in a specific

market segment.

Market segmentation is the process of dividing the market into separate segments,

for the purpose of developing differing products for each segment.

Example

The market for motor cars might be segmented according to the design of the car,

for example:

 four-door or two-door family saloon car (with or without hatchback) – and with

differing engine sizes

 two-seater sports cars

 estate cars

 people carriers

 4 × 4 vehicles

 electric-powered cars

 cars that can be powered by ethanol (bio-fuel).

For car dealers, the market for cars can also be segmented into the new cars market

and the used cars market.

Each type of car design is intended to appeal to the needs of a different segment of

car buyers.

When an entity is selecting a product market strategy, Porter has suggested that it

should select from three generic strategies:

 Cost leadership. This means being the lowest-cost producer in the market. The

least-cost producer can compete on price, and can expect to achieve market

leadership.

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 Differentiation. This means offering products or services that are different in

some way from those of competitors. By making its products different, an entity

might be able to add value for customers, and so justify a higher price (= higher

than the lowest price in the market).

 Focus. This means selecting a specific market segment for selling a product or

service. Having targeted a market segment, an entity must also choose between

a strategy of cost leadership or a strategy of differentiation within that market

segment.

4.5 Methods of segmenting the market

Market segmentation is important for strategic management for two main reasons:

 It provides a basis for analysing competition in a market or industry.

 It provides a basis or framework for making strategic choices.

There are various ways of segmenting the market, and identifying different groups

of customers. Methods of segmenting the market include segmentation by:

 geographical area

 quality and performance

 function (for example, within the market for footwear, there are market

segments for running shoes, football boots, hiking boots, riding boots, snow

boots, and so on)

 type of customer: for example, consumers and commercial customers

 social status or social group

 age: adults, teenagers and younger children might all buy different types of

similar products, such as computer games or music downloaded from the

internet

 life style.

Example

An entity might decide to segment a market according to the life style of customers.

Possible life style segments include single people under 30 years of age, newly-

married couples with no children, married couples with young children, married

couples with teenage children, married couples whose children are grown up and

have left home, retired couples, and retired single people.

This form of market segmentation can be useful for certain product so services such

as:

 holidays

 motor cars

 some food and drink products

 entertainment products.

Chapter 3: Competitive forces

4.6 Market segmentation and strategic space

A similar analysis of strategic groups can be made to identify possible target market

segments. In the example below, the strategic groups are analysed by life style of

customers.

This analysis suggests that there are possibly gaps in the market for a product, and

that a product is not currently being made and sold that might appeal specifically to

individuals whose children have left home or to individuals who have retired from

working.

Having analysed the market and identified these strategic spaces, management can

go on to assess whether a strategy based on developing an amended product

specifically for these gaps in the market might be strategically desirable and

financially worthwhile.

Identifying gaps in a market can be a particularly useful method of competition

analysis for companies that are considering whether or not to enter into a market for

the first time.

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Opportunities and threats

 SWOT analysis (TOWS analysis)

 Identifying opportunities and threats

5 Opportunities and threats

5.1 SWOT analysis (TOWS analysis)

SWOT analysis is a technique (or ‘model’) for identifying key factors that might

affect business strategy. It is a simple but useful technique for analysing strategic

position.

SWOT analysis is an analysis of strengths, weaknesses, opportunities and threats.

 S - Strengths. Strengths are internal strengths that come from the resources of

the entity.

 W - Weaknesses. Weaknesses are internal weaknesses in the resources of the

entity.

 O – Opportunities. Opportunities are factors in the external environment that

might be exploited, to the entity’s strategic advantage.

 T – Threats. Threats are factors in the external environment that create an

adverse risk for the entity’s future prospects.

Strengths and weaknesses are concerned with the internal capabilities and core

competencies of an entity. Threats and opportunities are concerned with factors and

developments in the environment.

SWOT analysis is sometimes called TOWS analysis (an analysis of Threats,

opportunities, Weaknesses and Strengths).

Analysing strengths and weaknesses will be considered in a later chapter. In this

chapter, the focus is on using SWOT analysis as a technique for identifying strategic

opportunities and threats in the business environment and competitive

environment.

5.2 Identifying opportunities and threats

If you are asked to apply SWOT analysis to a case study or scenario in an

examination question, part of your analysis will be the identification of

opportunities and threats.

The following approach is recommended. Opportunities and threats might exist

because of changes, or possible changes, in the business environment. They might

also exist because of the nature of competition in the market or the existence of a

strategic space.

Chapter 3: Competitive forces

To identify opportunities and threats in the business environment, you should

consider each aspect of the business environment. PESTEL analysis provides a

useful framework. However, whereas PESTEL analysis is used to identify

significant factors in the environment, SWOT analysis is used to assess these factors

and consider how they might create an opportunity or a threat for the entity.

You should then consider the competitive environment.

 What is the strength of the competition? You should consider the Five Forces

model. Are any of the Five Forces likely to change in the future, and if so, how

might they change? What effect could this have on the nature of competition

(and profitability in the market)?

 Does the life cycle model offer a useful insight into the market and competition?

Is the market in its introductory phase, its growth phase, its maturity phase or its

decline phase? Is it likely to move from one phase to the other? If so what might

be the consequences for the business?

 Is the market segmented? What are the existing market segments? Are there

gaps in the market, and opportunities for developing new segments? If the

market is not segmented now, might it become segmented in the future, and if

so what might those market segments be? Is there an opportunity to create a

new market segment?

Opportunities should be seen in terms of circumstances (or changes in the

environment or in competition) that can be used to increase competitive advantage.

Threats should be seen as circumstances (or changes in the environment or in

competition) that will weaken or remove a competitive advantage, or that could

give competitors a competitive advantage over you.

It is also worth remembering that some changes in the environment can be both a

threat and an opportunity. For example, it can be a threat if competitors of a

company take advantage of a change in the environment, but it can be an

opportunity if the company takes the initiative itself.

Example

There is intense public concern about ‘global warming’ and the effect on the world’s

climate of carbon emissions into the atmosphere. This concern is growing. It is

recognised that the consumption of oil products could be having a major impact on

the world climate.

The known reserves of oil and natural gas in the world are falling. Consumption is

exceeding discoveries of new reserves. Many of the known reserves are in politically

unstable countries.

New technology is being developed for the production of fuel out of corn. Corn can

be converted into ethanol (a ‘bio-fuel’) and cars are now being manufactured that

Paper P3: Business analysis

will run on ethanol. However, the technology is in a very early stage of

development.

The US government has set a formal target for the production of bio-fuels. The

European Union also announced that a minimum of 10% of transport fuel

consumed in the EU by 2020 should come from bio-fuels.

You work for a company that specialises in commodity trading. It buys and sells a

range of agricultural products such as corn. At the moment, its purchases of corn

are resold mainly to food manufacturers. Most of its suppliers are in North America.

Required

Identify opportunities and threats that appear to exist for your company, over the

next five years or so.

Answer

There is no ‘correct’ answer. Strategic managers need to identify threats and

opportunities in the environment and the competitive market, but opinions can

vary.

PESTEL analysis

There is growing public concern for the environment. Attitudes are changing, and

over time it is probable that attitudes towards the consumption of oil products will

become more hostile. At the same time, public support for the use of bio-fuels might

grow significantly.

Changes to the ecology and social attitudes have already had an impact on political

thinking in the US and EU. Formal targets have been set for the production of bio-

fuels. Over time, these formal targets might become laws or regulations.

The current situation indicates that over the next ten years, there will be a significant

shift towards the consumption of bio-fuels. World demand for the raw materials –

corn – will therefore increase, and this means that the total amount of land used for

the production of corn will also increase. It is very likely that the increase in demand

for corn will exceed the increase in supply, and prices will rise. Opportunities for

making profits in agriculture and related industries should increase.

These changes offer opportunities to the commodity trading company. There will be

more customers wanting to buy corn. More agricultural producers will make corn.

There is an opportunity to develop the company’s business by finding the new

customers and new suppliers. There is also a threat, because competitors will want

to do the same thing.

There might also be an opportunity for the company to become involved in trading

in ethanol and other bio-fuels.

There is a problem with technology. It is not yet clear how successful the technology

for producing ethanol will be. Improvements will be needed, and it is possible that

Chapter 3: Competitive forces

other methods of producing bio-fuels, using other natural products, might become

more successful.

Competitor analysis

If the above analysis is correct, the market for ethanol is at an introductory phase of

the product life cycle. Demand for ethanol – and corn – will increase substantially.

Trading in these products will also increase.

If profits from trading increase, new competitors are likely to enter the market.

Five Forces analysis might suggest that competition in the market for trading corn

will intensify. This is partly because of the threat from new entrants, and (probably)

an increase in competitive rivalry amongst firms that are in the market already. As

the demand for corn increases, demand will exceed supply (for some years at least)

and the bargaining power of suppliers will increase. The probability of increasing

competition might be seen as a threat.

There might be a segmentation of the market for corn and other grain products in

the future, with the market dividing between users of corn for fuel production and

users of corn for food manufacture. There might be an opportunity for the company

to specialise in selling corn to one type of customer, offering specialist knowledge of

their particular requirements as a feature of its service (to give the company a

competitive advantage over its non-specialist rivals).

Summary

You might agree or disagree with this analysis. The main point to understand,

however, is how to use PESTEL analysis and competition analysis to identify

opportunities or threats that an entity will be faced with in the future.

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ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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