Business Strategy 2 Business Plan Part 3 Competition, Industry and Markets

1. Business Strategy 2 Business Plan Part 3 Introduction: Welcome to business strategy to Business Plan, Part three. My name is John Colley. I'm a very experienced investment banker on entre partner, and I absolutely love creating online courses to help share my knowledge and experience with you. Now, if you are looking to get a much better understanding, a more in depth understanding officer strategy and at the same time you want to know how to write a business plan, then this course is absolutely real, because at the end of it, not only will you have ALS that detailed business strategy knowledge, but if you follow the assignments as we go through the Siris, of course, is that I prepared for you. Then you will also write a very comprehensive, detailed business plan at the same time. Now, this course is developed, divided into 11 separate parts, simply because it's such a long course. So I had to break it up into parts to make it digestible. But every part off the course takes you step by step closer to that business plan that you want to write in this part. Three. We're looking at competition, industry and markets, so we're going to go and do a deeper dive into those topics Now the whole point about competition is you really need to know who you're up against On this section off the course is all about understanding the competition firm faces in the marketplace, and it shares with you some classic business models to help you evaluate this. We're also going to have a very detailed look at external strategic analysis, looking industry markets, as well as how the competition dovetails into all that. Because it's the immediate threat off competitors is one thing, but you need to understand the context in which they're operating. I eat the whole of the external marketplace, and this brings this into context, so we deal with competition first on, then we put the competition into the context of industry markets. In this course, you are going to be able to create your own business plan step by step. I'm sharing with you templates on a whole load of dropping those and guiding you through the entire process, including lectures in every section which explain what you have to do in this project. I'm asking you to drop the first draft off your business plan competition section and again if you look at the project area, you'll see exactly what you need to do their on this other resources there to help you. Now, I'm really excited about this. Course I know you're gonna absolutely love it. It took me weeks and weeks to make it, but I loved making it. And I really hope you're gonna enjoy it, too. And I look forward to seeing you in the course very shortly. So business strategy to business plan. This is part three. It's it's competition. It's industry. It's markets. It's everything you want to know about those three. And I think you're gonna absolutely no, this 2. COMPETITION - KNOW YOUR ENEMY: competition. Know your enemy section Learning Objective This section is dedicated to understanding the competition, are firm faces in the marketplace and uses some classic models to assess this section. Introduction. If you know the enemy and know yourself, you need not fear the result of 100 battles. If you know yourself but not the enemy. For every victory gained, you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle. Some sue. Understanding your competition is one of the key steps to creating an effective strategy for your business. We therefore have focused this section on mastering this aspect off not only your business strategy but your business plan to look out for the tie in lecture at the end of the section, we introduced the Boston Consulting Group Matrix here, a key to as relevant today as ever. We bring in Michael Porter's Five Forces model, an absolutely essential tool for understanding competition in an industry. We discussed different aspects of competition intensity on the business lifecycle, The Business plan assignment, which concludes the section will enable you to address the competition section off the business plan armed with the models and information contained in this section at the end of this section. At the end of this section, you will have the ability to complete a strategic analysis of the competition in and around your own business. This will enable you to describe it in your strategic planning and draw insights about the steps you need to take. You will also have the context for your business. Plan contents on the headings under which to evaluate your competition in your business plan. 3. Competitor Analysis: one off. The most important sections in the business plan is the competitors analysis section, where your setting out your understanding of your competition and believe you, me every firm has got competition, so we're going to look in this section and go through a number of steps to understand how we can actually conduct competitors for analysis. So understanding your competition is a crucial step in your strategic planning and in your business plan. Know your enemy. As I'm sure, son Sue would have said at one point, albeit in Chinese. You need to evaluate their strengths to determine their strengths and weaknesses relative to your products or services in the military. We used to do a a process of evaluating your situation, which started off with situation enemy forces. And the first thing you would do is evaluate the forces arrayed against you before you could then start to devise a strategy to defeat them on. This has to be a critical first step. So questions to ask is, Who are your competitors? What products or services do they sell? What is their market share? What did their past strategies water their current strategies? What type of media to they used appetites. There are lots of things you can talk about. And, of course, the market share question ties right into the Boston consulting Group Matrix, which is all about the strength of the market. Share inventively, different areas off business where you've got you've got the businesses, Richard doing really well, which you got the stars and the cash cows. And then you've got the the dogs and the question marks on that's all against a raid and the size of the the company's market share is shown by the size off the circle in the In the Matrix. So that's right in the middle of all this analysis. So how many hours a week they purchase to advertise media? That's another question. What each is their strengths and weaknesses. What potential threats do they pose to you, and what potential opportunities do they make available to you? So we're also looking at SWAT analysis here clearly. So one thing you can do is to create a competitive grid. Now, how you set this out, of course, is entirely up to you, and you can put your competitors along the top or you can put them down the left hand side or their main products and services down the left hand side on, then, which ever access you do the other way. You need to have that main features and characteristics of each product or service. Now here is a selection off thoughts. I'm not going to read them all out to you, a selection of thoughts and ideas of the sorts of things you might be trying to measure. One quite good way to do this exercise is to rank each one from 1 to 10 so you get an idea for how they compare against you, one being very poorly against you and 10 being very well, all the other way around, entirely up to you. But you do need to do some sort of systematic analysis to understand where each competitors sits in relation to your main products and services. Now, where can you find this information? Well, frankly, there's a lot of it about you can do customer discovery interviews. What else are they looking at? What else are they considering? You can look at the advertising that your competitors are doing. Look at that. Get their set, their sails, brushes. That's easy enough to download newspapers. Websites. There's huge amounts of information on websites, online rating sites and marketplaces. Often set out the features and benefits off off your competitors, products and services. And, of course, talk to your own business at work. I'm sure they'll have lots of hopefully helpful insights about what your competitors are up to. So you need to out of this identify your own competitive advantages. This is why you're doing it. How do you compare against the competition? It's not enough just to know that there, there, you need to then work out how you're going to beat them. Remember, was situating the enemy situation so that we can defeat them on a really important little fact. Remember is features tell benefits cell. So when you're working out your competitive advantages, you're coming up with the benefits that your products and services offer your customers on the things that you're going to basically out compete them with just to give you a very simple diagram to finish off on the left hand side. We have the competition, so we analyze our competition to find out who they are, what they're up to, what their products and services air doing. If you then put that into the competitive forces analysis to understand the various competitive forces around you in the market, you can then at the end of it, come through and come up with your list off your own competitive advantages. And that's really what you're looking for. What are the things that make you stand out in the market? What are the things that enable you to differentiate yourself and out, compete your competition? But you have to start it with some form of formal and stratified competitor analysis. That's why this section is important. And that's why I've gone to some effort to try to help you, to go through the various steps off analyzing your competition so ultimately you can out compete them. 4. Boston Consulting Group (BCG) Matrix: won't take a look now at the Boston consulting group BCG Matrix. This was a strategic tool, which was developed by the consulting group Boston Consulting Group in the early 19 seventies on What is doing is it's helping you to balance correctly, balance to strategically manage the business product portfolio on it, gives you the ability to look at it strategically and then to allocate resources. According Me on it was originally developed by the one of the founders of the Boston Consulting Group, Bruce Henderson. So were you use the BCG matrix to manage a firm's product portfolio, its R and D investments and its business in a strategic way on it. The key thing, particularly back in the 19 seventies, it gave you the rationale for redistributing surplus cash from businesses which were throwing off the cash cash cows into question marks and percent extent into stars. So you had a logic about where you made your investments and how you could select the businesses to invest in. To quote, it says, allow firms to maximize competitiveness, value and sustainability off their businesses by allowing them to strike the right balance between exploitation of mature businesses and investment in new businesses to secure future growth. I think that sums it up really well. So what does it look like? Well, here you can see the BCG matrix on the screen on the horizontal access you have market share, which is a proxy for the competitiveness off the business. On on the vertical access, you have growth rate, which is a proxy for the market attractiveness that the businesses operating in. So if you look in each quadrant one by one, starting with stars, they are high growth and high market share. So it's a really attractive place to be in your in a very interesting market, and you've got a very strong position in it. Then you have low high growth but low market share. And these are the question marks. These are the businesses which are potentially going to become stars, and if they don't work, they're gonna drop down at the bottom quadrant, which is dogs. So you've got to decide what you do with them. In the next quadrant. You have the low growth high market share, which are the cash cows, and here you've basically got a very attractive business. But in a mature market, so it doesn't need so much investment. It's cash positive in that regard, and you can decide where to reinvest that surplus cash and then at the bottom right hand corner. You've got low growth, low market share, and these are dogs or pets. And basically these are businesses which, you know have limited future appeal on. They're not in a great market, so you have to decide what you're going to do with them. So if you think about that the Apple product range, where would you put them? You know, you've got a lot of very attractive products. You've got products with significant market share. You got a lot of products in growing markets, and you need to think about how you position those in those quadrants. But let's move on. So the model assumes that basically an increase in market share is a good thing because it increases cash flow. You get economies of scale and you get cost advantages over rival firm, so you become more competitive. So that's what's of underlying assumption of the model. Looking at stars a bit more death, I remind you, high growth high market share said these are market leading products, which require substantial investment to maintain their position. But they're also throwing off a lot of cash because there's they're selling a lot, so they consume cash and they generate cash. But as the market matures, they lead need less investment to sustain their position, and they'll eventually move down to become cash cows. Question marks high growth, low market share, thes consume cash. They require management time and resources to actually develop them. So we actually don't know what what's gonna happen to them if they do really well, they'll become stars because they're in a high growth market, but they've got low market share at the moment, but if they increase that market share, they become stars. But if they fail to do that and then the markets mature, then they'll become dogs. Ideally, you want democracy to transition to stars, but they do require investment on the money comes from cash cows on. They do require a lot of management time cash, cows, low growth, high market share market leaders in their markets. But they require a little further investment because the markets are mature, so they are throwing off cash, and this is where the model it we had its strength because it gave senior management the rationale to take surplus cash out of business units, which was normally then in those days back in the early seventies, and particularly in conglomerates held in those businesses and cash scepters were built up rather than being redeployed to other parts off the business. So it gives you the logic to then take that cash out and finance your stars to keep them in their market leading positions and to put money into question marks to try to turn them into stars. And finally, dogs low growth, low market share their self sustaining, but they're never gonna become stars on the markets are mature. The strategic response to that is normally to phase them out unless they contribute in some way to either the competitive strategy of the business or somehow, is a long term strategy going forward. Maybe there's a compliment parity with other products, but there has to be a very good reason within the firm why you keep them. Otherwise you would phase them out. So that's the Boston Consulting group. BCG Matrix is an absolute key toe. The Harvard Business Review and named it as one of the the world changing models business models off the 20th century. And it's true to say that it's still very valid today. Albeit things have changed somewhat since the 19 seventies, but it's still a very valid strategic tool, and it's definitely one you need to understand. 5. Competition and Competitive Forces: We've already taken a look at Porter's Five Forces model, but I want to go back and just reiterate and focus back on some off the competitive aspect off that model because we're looking at this competition section, and it's very important that we don't miss any of these nuances. And these details. Porter's Five Forces model looks at the competitive rivalry, the competitiveness off an industry taken as a whole on I want to focus on the intensity of competitive rivalry, the threat of potential new entrance and the threat of substitute products. We're not in this video going to look at the power off supplies or the power off customers . Let's take a look first at competitive rivalry on what we're looking at here. Is that the circumstances, the background market conditions to see when circumstances make a competitive rivalry and competition higher or lower? So the first thing is concentration. If there lots of firms in the market, so it's a relatively highly fragmented market, there's going to be more competition. If there are a few players and there's probably one or two market leaders, then they have a lot more market power and they can actually compete and out compete the others, but without having to give up too much of their own profits because they can use their clout to really dominate the market. So highly fragmented market MAWR rivalry creates more competition when products off a similar product homogeneous homogeneity on Majid virginity Difficult to say when they are homogeneous than they're All very similar products are likely to be more competing with one another. So, for instance, if you have five bicycle manufacturers and they were producing a bicycle and they were pretty similar bicycles, which one do you pick? But you probably end up going for a combination of quality and price. But there's not really anything there that is differentiating them on making you pick one over the other. We keep on coming back to this differentiation point consumer switching costs when it costs a customer or consumer a lot of money to switch. Then there's less competition. So if I have to sell my car to buy another one, I'm not going to do that very frequently of a new model of car comes out, so if you've got high switching costs, then you have less competition. If there's excess production capacity in the market. Then you're going to get higher competition. If you think about it. People it, let's say I'm manufacturing tins of baked beans on. I can produce 100,000 of these a day, but there's only a market demand for about 80,000 of my tends well, I'm gonna push harder discounting and doing other promotional campaigns to try to sell Mawr off my tins. If I had a capacity if I had demand for only 60,000 and I had capacity for, let's say, 40,000 then I wouldn't be too worried because I could sell all that the tins of baked beans that I could possibly manufacturer so I wouldn't be looking to discount. I wouldn't be making the competitive environment tougher for my rivals, so excess production capacity leads to higher competition. Brand loyalty is an important factor when there's low brand loyalty this high competition again, people are prepared to look at other other switching alternatives. So if I'm looking for a, I don't know if I'm looking for well, let's go the other way. If I'm looking for an iPhone or Anapa phone and I'm particularly keen on Apple, then I'm not really gonna look at the competition, you know. But if I'm looking for some sheets of paper or I'm looking for a portable hard drive on, I don't have a particularly strong brand affinity to the hard drive manufacturer or to the paper manufacturer. Then I'll go for the product that suits me best in terms of price features, benefits, etcetera. But I won't be picking the one I buy on the basis off the brand. So the markets more competitive network effects, I think, is an interesting one, because what we're talking about here is if you have a product and the more people who use it, the more valuable it becomes. If you control that product, then you have a very high barrier to entry. The obvious example. There is a fax machine. When they came out, if you just had one fax machine, it was actually useless because you couldn't fax to anybody else because nobody else had a fax machine. The minute there were a 1,000,000 fax machines out there, then actually became a very important piece of office equipment. And then as it took over, it became almost ubiquitous. Now, if I was the only manufacturer or fax machines. I would be laughing all the way to the bank, but because that the technology is there on, anybody could produce fax machines. But they were seen as being more, more, more interesting, more more valuable. More people wanted to buy them. And that created more competition because more people wanted to enter a market that was growing faster, and people could see that it had lots of potential in the future. Let's take a look at the the threat of potential new entrance, and this sort of crosses over with barriers to entry. So I think about barriers to entry at the same time, back to brand loyalty. If you have low brand loyalty, you have the chance of Mawr New Entrance. You know what? I want to go and start up a fresh and compete with Apple? No, probably not. What I want to go and start our profession, compete with a generic manufacturer. Baked beans. If I was taking on manufacturing baked beans, I wouldn't be too worried. The cost advantage is or economies of scale, Um, when you can gain economies of scale and therefore make more profits, it is more attractive. And it's in an industry that people would want to come and into if there was no ability to make more profit from scaling up. Then the industry becomes less attractive and the barriers are effectively higher because people are less attracted to the industry. When switching costs are low, the threat is high. So again, we're talking about if I'm using this machine and I want to muse across and use a different machine. If the switching costs for me are gonna be low, I think about doing it Likewise. If they're high, then I think twice before I do it. If government regulation is high than that's a high barrier to entry, it means you've got to work a lot harder to meet all the regulations. If you're a new entrant to the market, so you think twice about it. Another factor, interestingly, is barriers toe exit, because when they're high new entrance or less as well. What this basically means if I come into an instrument doesn't work and it's going to cost me a lot of money to get out. I'll think twice about going in in the first place. Investment in special equipment equipment. If I've got to tool up something in a very specialized way and it's a high cost, then the that lowers the threats of new entrance on high fixed costs, which is sort of aligned with that. If I've got toe quit a brand new factory before I can sell one widget, then I'm going to think twice about it before I come in on the same with specialized skills . If I need a whole team of specialized computer software engineers, then I'm gonna have to think twice about making the investment in them before I see anything out in the way of code or software product. So the next one is to look at the threat of substitute products, which is basically saying, If you've got a high threat and high possibility off substitutes coming in. So if there's a product which is similar to mine, which can do much of what Mencken do, then I'm going to be under threat from them competing in my market, and that will ultimately reduce the profitability of my business. So this works and is true when switching costs are low for consequence customers. So there's a substitute product on bacon switch across to that cheaply, then it's a threat to me if they have superior pricing relative to current products so that their products are cheaper than mine and it's a substitute people might move across. And if they have better attributes of performance characteristics, then again they might switch. Now for an example, I can think of none better than the Japanese entering the UK motorcycle industry in the 19 sixties, up to 1960 everybody drove British bikes. In the UK there were a few American bikes, but for the most part there were relatively few imports. Most of them were British made bikes. The Japanese came in with bikes which were more powerful, cheaper. They were more reliable, reliable and they had better styling and pretty well overnight, I e. In about 5 to 10 years, they killed the UK motorcycle industry on that is exactly where the switching substitute products came in and they were. They would. They were different, but they were the same in the sense. But they had a superior pricing. They had superior attributes and performance characteristics on the switching. Costs were very low because when I decided to change my bike it wasn't a difficult decision to get by a Japanese one. So that's a re visit to competitive forces in Michael Porter's model, specifically looking at the competition aspect because in this section it's so important that we do consider competition properly on. I wanted to go back and revisit those to make sure you didn't miss any of the detailed points that come up in the five Forces model. 6. Competitive Intensity: the more I researched the competitive side off Michael Porter's Five Forces, the more I wanted to go into this competitive intensity factor on. That's what I've done in this lecture. I'm doing a deeper dive now down into this competitive rivalry to look at competitive intensity and see how that impacts the competitive nature often industry on. There are two factors to look at in this area. There's intensity, but there's also dimension, and it's important that you understand the difference between the two and can recognize them when you see them. And if you're designing a competitive strategy, then you've got two different dimensions that you need to address. Intensity is when there are several companies competing for the same market segment, basically on the same grounds on they end up effectively using prices to compete and incentives to encourage switching. So if you think about the mobile phone industry, they're all pretty well offering the same thing, and they keep on offering you incentives to jump from one our firm to another. But it's a very intense market dimension of competition looks at specific areas in which firms are competing. So we've talked about pricing that is one dimension, but people firms can can compete on quality. They can compete in terms of customer support and service on dawn product features. And if they start competing on different dimensions, then they can actually differentiate themselves and they can move themselves away from direct competition. So if I'm a car manufacturer and I'm basically I'm making ah mass market car, then my car is competing with a lot of other cars in the mass market area. But if I decide to produce a high end grand tourer, that instead of selling for $35,000 sells for $70,000 when I'm now competing on a different dimension, it's a different quality of car. It's a different price point, but it's also a different customer segment on. Therefore, I've moved myself away from direct competition with the mass market cars, and I've got a part of my product. Profit is now competing and completely different dimensions than it was before, and that's why it works. So if companies only compete on one factor or in the same dimensions, basically a zero sum game one makes ahead. You know, Win and the other make gets, ah, a lot so it's a win lose game. If they compete in different dimensions quality, for instance, than they appeal to different segments of the customer base on, they move themselves away from direct competition with their competitors. So what determines levels of competition? Let's have a look. The first of these is costs so high Fixed costs increase rivalry As firms try to win market share by lowering prices, they're already in the market. They've already made the investment. Now they've got to recoup that investment. If there's lots of competition, the anything they can really do is try to sell more. They sell more with lots of competition. They have to reduce prices on a low Switching costs encourage competition between rival firms because it's very easy for the customer to move from one firm to another on. Therefore, like the phone industry, the firms will offer lots of incentives to try to move customers into their business. Market concentration is really about the number of firms competing in the industry. If there are lots of firms, it's a highly fragmented industry offering similar products. You get higher competition, but if you have a monopoly situation or an oligopoly, I either one firm completely controlling the market or a few large firms controlling the market. Well, there's a lot less competition, and they sort of rub along together, and they've all got plenty to do. But they're not actually struggling in a food fight. Food frenzy fight with lots of other small rivals. The rate of market growth impacts because high growth leads to less competition. Very straightforward. If the markets growing very quickly, there's plenty for everybody to get around lots of customers, more customers coming in and therefore you're trying Your problem is one of trying to keep up with the growth rather than try to nick customers off other competitors. Slower growth as the market matures and slows down, then it approaches saturation. And then you have to start fighting harder for the customers that are there. And so in the competition increases differentiation that the extent to which you are differentiating your products from those of your competitors highly differentiated products , as you can expect, will have less competition because they stand out more on their easier to see clearly from others. And they can sell them Selves on whatever they're differentiating. Points are we've talked erratic quite a lot. In this course. In more generic industries, competition is hires a little scope to differentiate. So iPhones highly differentiated in the food industry. If you're producing a loaf of bread, you're producing a loaf of bread. And so any other bakery can produce a loaf of bread every bit as good as yours. So the only thing you can really compete on is well, you can compete on quality and argue its quality. But basically it's a very undifferentiated product, and therefore the price is low and the competition is high switching costs. This is the the amount it costs. And it's not just money. But it's also time, knowledge, experience, this sort of thing. The difficulty. High switching costs lead to lower competition because if if, for instance, I'm using them, the latest Microsoft operating system on I've learned all that, I'm really good at it. Then I put a lot of time and effort as well as money into buying the computer and buying the different software programs and learning how to use all this stuff. So for me to move across the apple requires a major on expensive cost to me in terms of not just buying a new computer and buying in the operating system, but the time and efforts going to take me to learn how to use it. So consumers who invested time and money mastering one product may be reluctant to go through the learning curve against switching to another, so high switching costs equals lower competition. The benefits of competition, however, are broadly positive. It's not all bad news. Competition is good for industries, firms and customers, and even actually for the broader economy. It encourages innovation. Competition helps or encourages firms to go and seek on develop new products and services. Because they are under competitive pressure with their existing products and services, they have to keep moving forward. It benefits customers because they get better products. And it also encourages firms to seek to differentiate and therefore make their products better and more interesting in order to move themselves away from their competitors. It leads to lower prices, or it keeps prices fairer because, you know, there's a lot of people competing for the same market, so you've got you can't you can't charge whatever you like, which is good for customers. But again it gives firms and economic incentive to try to find new products or services or new market segments so they can increase their sales and sell more. And it has positive attributes for economic growth because because it encourages innovation and growth, it bolsters the economy. If you think about smartphones, the invention of the smartphone on the whole revolution in smart phones over the last 15 or 20 years has had a huge positive impact on the global economy because it's made everything much more connected, much more easy to speak and keep in touch of people on. The economic benefits of that have bean almost immeasurable. So competitive intensity is an important factor is worth drilling down so that you need. You can understand what's happening in your industry, and you can understand what's happening with your competitors around you. And you can think about how you're competing with them, how they're competing with you, what the environment is like. And then you can start thinking about how you can move away from them on, differentiate yourself and actually adopt strategies in your business strategy in your business plan that will help you to be more competitive 7. Industry Life Cycle: It's interesting to look at the dimension off time when looking at competitive competitive rivalries and competition. So I'm gonna walk you through the industry life cycle and talk about its impact on competition. We're talking about the different stages off the life cycle of an industry on, depending on the stage at it can have a high impact on the competitive environment in that industry. This also mirrors the life cycle of a business. But we're really talking about the macro economic environment here rather than the individual conditions for the individual business. There are not surprisingly five stages start up growth shakeout, maturity on decline, and we're gonna take a look at each one of these. In turn, at the start up stage, there is relatively limited custom demand. There's an undeveloped distribution channel, lack of complementary products, lower revenues, low profits, negative cash flow and competition, frankly, is low or non existent. Companies are just getting started there, just producing their first new products. They're just reaching out to their first customers. There isn't really a market or an industry segment to compete in, so for the moment they have a bit of a free ride. But bear in mind. The scale of their operations is very limited and, of course, with negative cash flow, they ability to grow very quickly is also hampered. As the industry moves up, the Kurban moves into growth, profitability and positive cash flow start to rise, so products become more developed on that means they have more use, more utility to customers. Complementary products appear, which make the custom the products even more attractive. Because you can, you know they become more effective because they're more complementary products around them . Prices start to come down. If you think about When the first smartphone mobile phone came out, it was the size of a brick, and it costs the price of a house. Today they're the size of a pack of cards, and there's still quite expensive. But there are a lot lot cheaper, relatively speaking, so the price has come down because the products are becoming more developed and more broadly available on. This, of course, encourages further customer demand, so there's MAWR demand. But competition is still limited because there's a growing market and there's plenty for everybody to go after, so it's a great market to be in as this begins to plateau, you get into the shakeout stage where basically, there's a lot of competition, but people are juggling around. It's a very fragmented market. Companies are trying to consolidate, to try and take market leadership on. That does help to reduce competition to a limited extent. But as market leaders emerged, they may have more market power than the smaller companies. But competition is still high. The market growth is slowing down. But there plenty of players in the market and plenty of demand. Cash flow and profitability are strong. Now We hit maturity, and of course, what is happening here is you're getting a slower market, still plenty of demand. But it's not growing. Lots of court competitors operating in the market so they're chasing fewer and fewer opportunities on this, therefore increases competitive intensity. Companies are adapting new strategies to try to limit new entrance and also to try to differentiate themselves from their competitors. Profits and cash flow hit a peak in this phase. As we go into decline, the intensity of competition really depends on the speed of decline, the height of barriers, toe exit and the level off fixed costs. But competition is high on profits and cash flow are declining. So basically in this market you either have to try to consolidate the market to take out some of the competition. Or you need to think about exiting the market altogether because you there's not much point in sitting still and doing nothing in a declining market. So that's a little look into the industry life cycle and how it impacts on competition. It is important to think about where your business is in terms of the life cycle, where your industry is in terms of the life cycle, and then try to understand what that means for the competitive, a rivalry and the competitive conditions that your firm is operating in. 8. Competition Business Plan Tie In: So how does your competition tie into your business plan? A critical step towards understanding how you can differentiate your business in the market is to understand who your competition is. If you understand who your competition is, you can identify your main competitive advantages against theirs on this, then gives you a critical part of your business plan as used. Take people through the logical sequence off the topics in the plan. So who are your competitors? That's what you need to know, and you then need to know what their distinctive features and benefits are in their products and services. So it's as well to know who they are. But you will need to know what they're offering in the market, how they're offering it, how they're competing against you so that you can work out how you compete against them. It's also important to know what the barriers to entry are in the market because you need to anticipate the risk off new entrance and new competitors coming in against you. When you've identified this, the critical thing to do is ask. So what? Because it's all well and good to know who they are, what they're doing, but you need to understand what you can do about it, and that's the So what question. So how can you out compete them? What sources of competitive advantage do you have? And that's what we keep on coming back to. So the strategic planning, understanding all your competitive advantages ties into the business plan. Because actually, in the business plan, you have a specific section where you explain to the readers of your business plan that you really do know and understand who your competition is. And that's a critical step. So it's important that you include a strategic analysis off your competitors on. Then you can transpose that information into the business plan, and I've put the business plan references in an appendix to this document, which you can download from the resources section. 9. EXTERNAL STRATEGIC ANALYSIS - Industry, Markets and Competition: external strategic analysis, Industry Markets and competition section. Learning Objective. This section moves beyond the immediate threat of competitors to review competitive conditions in the whole of the external marketplace and brings in context from the industry as well. Section introduction. You need to have an objective perspective beyond the walls of your office. This means understanding your industry, your marketing, your regulatory environment and, yes, even mawr about your competition. We develop these themes in this section. Firstly, we introduce more frameworks to help you understand how to tackle this problem. We explain why you need to analyze your industry and then dive into a series of models to help you. To do this pest analysis business and funding life cycles value chains the total addressable market market segmentation. We take the bargaining power of suppliers and customers out of Michael Porter's model and look at them in greater detail. Of course, the section ends with a tie in lecture, which provides you with the relevant sections off the business plan. Temp aid we are working with the Business plan assignment will enable you to complete the business plan, industry markets and competition section and enable you to draw on the models and frameworks you have just been introduced to at the end of this section. At the end of this section, you will be armed to the teeth with external analysis tools to enable you to look at this aspect of business strategy from a number of different angles. Remember that each one of these provides insights on their collective value, exceeds that of any one model used on its own, so used the mall. 10. What do we mean by External Strategic Analysis: What do we mean by external strategic analysis? This is an important section off the course because we're now going to take a look at the whole off the external environment around the firm on this is critical to us getting an objective and rigorous understanding of what's going on so that we can make sure that we are strategically positioning the firm in the best possible place so external on Isis. What are we looking at? Well, it's the industry environment off the company said We have. The company is in the middle on. We have everything that is the industry around it. So we're looking at things like competitive structure, competitive positioning, competitive dynamics and indeed the history of the company. How did the company start off and how did they get there? We need to take a macro perspective, so we need to look at the big picture. So we're talking about global trends and issues and challenges the political environment in the country and possibly in the whole continental region. The socio demographic issues Andi, you know, that could be interviewing from immigration to, you know, the the upcoming large baby boom. Whatever it happens to be so if you just take a couple of examples The whole issue of Brexit in the UK for the last three years going back from to the referendum in 2000 and 16 up to 2019 that had a huge impact on businesses and was causing a huge amount of uncertainty, political and economic. You've now and I'm recording this in March 2020. We've now got the whole issue of the Corona virus, which is going across the world and wreaking economic and political havoc, and I'm sure will continue to do so for quite some time. So if you're a company in the circumstances, you know, these are major factors which are going to affect your your business in the most fundamental way, and you need to be looking at them and understanding them. I hope those air to useful examples. So what we're really looking at is focusing on the opportunities and threats. So we're looking at SWAT analysis that is facing the business on one impact it's gonna have on profitability and growth. Do you see how these models tie in different places and why it's so important to get a grounding in them. So what do we mean by an industry? While an industry is a group off, companies that offer similar products and services, which are essentially close substitutes for one another on a market segment is a distinct group of customers in a particular market. So it's a sub part off an industry important to have those two definitions pinned down. When we're doing external analysis, we're going to have to look at the supply chain, and I want you to think about the two types of supply chains, bricks and mortar and e commerce. And essentially, a supply chain is taking the looking at the whole processes and systems where you take the raw material at the beginning. You bring it into the business, you convert it, manufacture it, turn it into your product or service on. Then you take it out of the company on deliver it to through the distribution channels to your customers. So is the whole of that on. It can be quite a complex process, and he gets broken into other segments at such as sales marked in which we will be looking at separately. But we will look at the supply chain if you think about that's that's really a bricks and mortar supply chance. If you think about e commerce supply chain, I think about Amazon FB a fulfilled by Amazon, for instance. So here, if I was a an e retailer, then I'm sourcing my products from a manufacturer or raw materials. But I'm basically finding a product and getting it manufactured on, then bringing it into the Amazon warehouse where I'm working with Amazon and Amazon is finding customers who then come online and find my product, and by it, which Amazon then ships out. And I have to think about my SCF to think about my online marketing and all this sort thing . So it's a different business model, but nonetheless, I'm still thinking about a supply chain, and I'm still thinking about the external factors that will be affecting my e commerce business. But the two of a different. So how can we identify strategic groups within an instrument? Yes, we can, on they can be differentiated by a number of factors. Distribution channels, market segments, product quality, technology, leadership, vertical integration, pricing. So if you look at all these in in different ways and you could you can start to group in firms which have the same channels to market, which address the same segments of customers which go for high quality or low quality which have technology leadership, which follow which are vertically integrated, which you're not on which follow Ah high pricing strategy or low pricing strategy. And some of this is competitive dances stuff as well. So you can see that even when you have an industry, it's not homogeneous. It's not a uniform across the way. There's lots of little groupings within it, and you need to understand those and understand where you're going to position yourself amongst them. So we can also look at competitive analysis, which we have done in the original models. Essentially, we're identifying the characteristics, the competitive characteristics off the industry. We're looking at the level off rivalry, the concentration off competition, the intensity of rivalry between different firms, which tells you an awful lot about the the conditions between them and how difficult or easy it is to exist and stay alive in that industry. The barriers to entry, Whether there's a threat off potential new entrance coming in on making even mawr competitive, the bargaining pyre power off buyers where you basically have a weak position visit be your customers or the bargaining sir Power of suppliers where the supplies have got control of a key raw material and they can charge you more for it on the the threat of substitute other similar products coming in on replacing your own where you have low switching costs. So it doesn't cost the customer very much to go from one to the other on the power off complementary goods and service providers, which is where you get a product which complements and adds value to your product and therefore makes it more attractive and helps to sustain its competitive advantage. We'll need to look at the industry life cycle become and I want to quickly talking through what I mean by this. Essentially, it's think about us of birth, growth, maturity, death that's it's the normal cycle of life. But you then apply it to an industry onda business. So you have this start up phase, which is typically characterized by low competition. You have the growth phase where there's a rapid growth in demand and people are striving to scale up to meet that demand. Then you have this shake out where the demand and supply get more imbalance. So the competition goes up and there's more price pressure. And then in maturity, where there's a slower grain market, you've got MAWR established products of people under threat. There's less and less attractive. As we found out for the Boston Consulting Group. It's less attractive for new entrance because it's a mature, slow growing market. However, you're still got people with significant market share, and you still have companies which are trying to compete within that industry and product segmentation where they start to try to differentiate their products. More becomes a characteristic off that stage off the market and then in decline, where you have competitors established competitors fighting over a smaller and smaller market, which makes it the competitive rivalry very intense because they're all basically trying to survive and put the other guy out of business. Well, look at the pest model, the broad factors model, which is political, economic, social, demographic and technology or technological. I won't go into in detail now. I will go into it in a separate lecture. So then it's important to look at these strategic factors. I'm going to go through these and more detail in this part of the course to help give you a broad balanced approach to external strategic announces. But I'm also gonna bring in some additional factors to keep you thinking and keep the ideas coming, because it's really important that you think very carefully about the industry that your firm is in. So that's what we mean by external ST Jean in strategic analysis, and that is why it is so important. 11. How does Industry Analysis Help?: I want you to think now about how industry analysis can help you as a business strategist, as we've already discussed, were going through internal and external analysis off our business. And one of the key parts off external analysis is conducting an industry analysis. It's an essential guide, an essential part of understanding market conditions. Now the principal models that we use for this are the five forces model from Porter, which looks at the competitive forces within an industry. There's the pest analysis, which is the broad factors analysis which looks at the political, the economic, social, technological and the core, says the SWAT analysis, strengths, weaknesses, opportunities and threats. The detail of these I've covered or I'm going to cover elsewhere in this course, but those the principal models. But let's focus on how they help us. So we really want to look at the benefits of industry analysis and when we conduct in the industry analysis, these are the sorts of things we're trying to get out of it. These are the the results that we're looking to generate from our analysis. The first of these is being able to forecast demand and supply, so we're looking at industry conditions. Andi, trying to then adjust our own business to match those conditions. Doing that and making your business more profitable means you reduce waste. You don't have an oversupply on over investment in in stock. Andi. As a result, you can become more profitable. You can increase and improve your financial returns. It also allows you to assess the competition around you in the competitive, repetitive nature off the market on the industry that you are in. And that's a critical factor because you don't want to be caught out by your competition who come in and do something either new or you have a new entrant to the market, who then disrupts the market and you get left flat footed. And as a consequence, your business fail. So it's critical to understand the competitive forces around you. And, of course, you need to understand this whole issue of market entry and market entry costs. Are there barriers to entry? Can you create barriers to entry because if you can't, the risk of somebody coming in and competing against you are that much higher? Obviously another thing to look at is the stage, and industry is in. This is where we talk about industry life cycles, and you go through this curve of growth and then maturity, and then it tells often death eventually, eventually. But understanding where your industry is or you're part of the industry is in terms of the life cycle helps you to make forward looking investment decisions about, you know, is your business a a dog because that you got low market share in a low growth market? Or is it a star? Because you've got a high market share in the high growth market? We're going back to the BCG again. But you do need to understand this industry life cycle. Kurban on where your business is in relation to its life cycle. Is your business still existing in an industry where this opportunity is the industry still growing, you know, or is it saturated? And therefore, is it a time for you to evaluate maybe moving or pivoting or doing something different in order to continue growing and continue making money? Industry analysis is also an opportunity to identifying new opportunities. You confined gaps in the market. If you study in and you know your industry well enough, then one of these as you might wake up and realize that, actually, Hey, if I've got a some has got a Walkman. Maybe reckon electron. If I it, I can turn it into an iPod and you spot the opportunity. And your name is Steve Jobs. History is a wonderful thing. Dig, look at. But you said, I mean, you could If you really understand your industry, then you are much more inclined to be a an effective strategic thinker where you can see these opportunities now. Bear in mind, of course, that a lot of this industry analysis is very subjective. We know that we've got models and frameworks to help us, but it's how we interpret those models how we use those frameworks, how we gather and understand and interpret. The data that we have is what will affect out making our decisions. Andi. It's important to realize a lot of it's subjective and you can make bad decisions so beyond the guard for that and you. One of the reasons we have these different models and frameworks is that we can double check up perspective from different angles, and that's another important reason to think like a Fox. As I pointed out in my video before this. So I hope you found that helpful. Why we do industry analysis what? It can help us to achieve the goals you can set yourself from it. But at the end of the day, do be aware that it is subjective and there is a risk element in its interpretation, and you mustn't fall into that pitfall. 12. Conducting PEST or Broad Factors External Analysis: I want to take a look now at conducting pest or broad factors. External analysis. We have touched on what pest or broad factors analysis is. But it's a very important part off the external environment review of the business, and it focus essentially on the four macro economic factors just to refresh. These are the political, the economic, the social democratic and the technological on. What I want to do in this video is to explore these in a little bit more depth and give you some examples and challenge you to think about them in greater depth as part of your external review for your business. So if we start with the political, let's take a look at three or four factors which may impact your business from a political point of view with some specific examples. The first of these are barriers to international trade. Now, one of the consequences off President Trump spat with President G in China has bean this trade war, where the U. S and China have been putting up barriers to tariffs Teoh each other's imports and exports . So in the case study for Apple, one of the issues has bean, the fact that they manufacture in China, but they then re importers manufacturers to the U. S. So this has led to terrorists being put on their their products on that is increased their cost of production. So it's just an example of something that 23 years ago, but he wasn't on the agenda but has now come in. Tax policy can be critical for a business. One of the things that being under discussion recently with the UK budget was the possible scrapping on, in fact, lead to the reduction off tax relief for entrepreneurs. So before this, entrepreneurs relief, you could get tax relief on £10 million of capital gains, and now it's only £1 million. But that effects the business that affects the thinking on the planning of the management and particularly the owners and the investors in the business. Employment laws can have a big impact if you're employing a lot of people in on zero hours contracts like people like uber or there's a dispute about whether uber employees our employees or whether they're just contractors. Then employment laws and legislation will have an impact on your business, and then you have things like country specific political risk. In the last three years in the UK, we've had this awful debate about Brexit. Now putting aside whether you're for Brexit or against Brexit, it caused an enormous amount off political uncertainty in the UK on it also had ramifications and political uncertainty in Europe on If we're looking here in March 2020 and looking forward, then we could argue that the presidential elections in the U. S. Will Mr Trump get reelected or not? Putting aside your views on Mr Trump, the issue off the change of president and what that meat might mean for government policy going forward is a challenging issue, and it's something that you should be thinking about if you're a business owner. If we turn our attention to the economic, let's take the first factor, which is interest rates. So in the UK, Weakened were concerned about interest rate policy because that affects the cost of borrowing on. The same applies for the Fed in the US You know, what is the Fed's interest rate strategy and how are they going to affect their interest rates and and change the interest rates over time with the Corona virus. Both the Bank of England and the Fed have actually dropped their interest rates to near record low levels. I think in the UK it's 0.1% now, so that has an impact on your business. The next factor is foreign exchange rates. If you're operating on selling out off the U, then you are operating within the euro zone. But what if you want to sell into the UK How is that going to be? How is your business going to be impacted by Brexit on the changes of interest rates between the UK and the euro? Inflation can make a major problem now. Fortunately, in the developed economy for the last decade or two, inflation has bean more or less under control. But imagine if you have a business in Zimbabwe where inflation has completely ruined the economy of the country. You know that something which is gonna have disastrous impact on your business, or would it affect your view on whether you want to invest in that country or not? I think you probably would. GDP growth rates are another factor again. We've got this Corona virus pandemic on everybody's now expecting the world to go into a global recession in the eurozone to go into recession and probably the UK will go into recession. On that has bean effective that GDP growth rates have been negatively affected by the slowdown immediately attributable to the pandemic. So you need to start thinking about the impact, that economic impact on your business off this slowdown in GDP growth rate. Turning to the socio democratic demographic of people saying Democratic because demographic eso the first factor that I'd like to think about his population growth over the last 20 years. There's bean near running uncontrolled immigration to the UK, so the population has grown much faster than the natural rate of increase well, this has put the squeeze on health resources. It's put the squeeze on education resources. There's a broadly a shortage of housing across the country, and that's had an economic impact. Now, if you were in the house building industry, that's a good thing. But if you are somebody who is trying to employ people in an area where your staff can't get affordable housing, it has a negative consequence. Education levels really important. It's the availability of skilled and trade trained employees, so you know, you want to go to places where you're gonna have lots of skill people and you'd think twice and maybe a bit more critical about countries where the labor force is less skilled. I don't want to pick out any negative examples, but I'm sure you take my point. Public health. What? We're back to Kobe in 19 and the Corona virus as well. I mean, the the impact on public health of the pandemic has a huge knock on effect for businesses across the country. And think about the airline business where people are counseling holidays and flights and flights of being grounded because countries are not letting people across international boundaries. You know, President Trump has basically locked out the eurozone on the UK from flying to the states starting this week. As a consequence of that, if you're in the airline industry, it has a huge negative impact, and you have to think about this nature and the environment is really critical and again not standing up beating the drum for this particular cause. Non, the less you have to be Mawr and Mawr sensitive to recycling waste management, the issues of maybe you go build on a brownfield site. What are the environmental risks associated with that? And this all has an impact back to the socio and demographic. If you don't have a proper waste management or recycling policy for your business, you can get some very bad PR and that'll impact in the press, and that will impact people's perception of your business and damage your brand. And then age cohort changes. What really saying here is what does the aging of the population due to business And again , it depends what injury industry. And if you're in the health care industry and you're in Italy, which has one of the oldest populations in Europe, then that's probably a tick. But if you're trying to do something which is very hip on very millennial focused, then if you want your market is shrinking because the population is aging, then you maybe have Teoh think about how you're going to deal with the impact of that. And maybe that means you make investment decisions about moving to countries on markets where they have a younger population. Finally, we look at the technological Andi. Let's start with R and D investments, issues like do you get tax breaks for your R and D. Would you go and set your business up in some sort of special zone? That the government's form? Because they want you to go and set up in a less well developed part of the country and they'll give you a tax break for doing that and therefore you get get it probably on your I R and D investment or something else. The other side of that, and we'll look at it as well. At the bottom is this whole issue of intellectual property, and it's protection because if you're going to invest in R and D, you want to make sure your intellectual property is protected, and if it's not, then that can have a major negative consequence for your business. Scientific advances, air Important Do you have access to university research? I happen now to live just outside of Boxer. It's got one of the best universities in the world on my doorstep. There's a huge amount of thinking in a new ideas coming out of both Oxford, Cambridge and other universities globally on giving and getting access to that that can have a positive impact on your business emergent emerging technologies. You know, the whole start up scene is really important. Thes could be a threat because they could be disruptors coming into industry. But on the other hand, there could be opportunities because there may be some technology you can acquire. So do you know what's happening in Silicon Valley? Do you know what's happening in Silicon Roundabout in London? These are issues you have to think about. And then there's the diffusion of technologies, which is goes back to the intellectual property protection or piracy. Is your I P protected or you in situation where your I P is going to be stolen and then used by people who haven't done all the hard work to to create it in the first place. So these are factors which you need to sit down and discuss with your border. In this model, the pest model or the broad factors model gives you that framework that allows you toe have that discussion, and once the topic is open, then all ideas are welcome and you could be put on the table. So if you're conducting your pest or broad factors analysis, a zits called Use this as a checklist off ideas on thinking, but it's only a start. You need to explore this and brainstorm it and see what conclusions you come to and by using the model. Then you'll start to come up with ideas and you'll start to, I think, and slink strategically about what you should be doing for your business. 13. What are the Business and Funding Lifecycles?: Let's take a look now at the business and funding life cycles now before we get started. There's two reasons I want to put these two together. Firstly is because the business and funding life cycles are very intertwined. But I want to start talking about the funding site about the financial side because it's the latter part of the strategic analysis. But of course, as we've already found everything ties in together, so I thought would be useful to bring in some thoughts about profits and sales and cash flow into this part of the analysis. But we're obviously going to look at the financial statements and some of the financial aspects off strategy later in this course. So going back to the lecture when we're looking at the external strategic environment, we have to pay attention to the critical dimension off time. It's all well and good looking at it, statically as we see the market today, but we also have to look at it both historically and in the future. So what we would look at in this lecture is the life cycle off the business on on the industry over time, and then we'll leave that into the funding life cycle of the business. So there are five stages in the business lifecycle, which a start up growth, shakeout, maturity and decline. And the critical thing when you're looking at a business lifecycle is to understand the impact off these particular stages on sales, profits and cash flow. So if we start with a start up, we have a new product or service. Now this could be a business unit. This could be an entire business. All we can look at the industry as a whole, so a new product or service comes to the market. And obviously the first thing you have to do is their business is to go out and get a customer on. Then you have to get a second customer, so the sales are relatively slow to start on. The focus is very much on the target Customer group, on part of the preparation of the launch of this product has to be finding the right segment within the industry. To go and target the product to this obviously requires considerable investment, not only in the product in the capital expenditure to produce the product and get a game, but also in marketing it and in scaling the business. So at this point, not surprisingly, the businesses lost, making it has few sales it's lost making and its cash negative. When you look at that financial profile, you can see that profits are behind sales, and this is a characteristic of the business life cycle. And it also is one of the reasons we need to understand the funding lifestyle cycle. Because there is a timing lag between sales and profits on cash flow. They don't all happen at the same time. And that can have very serious consequences for the management of your business, particularly if you grow very fast because you can then over trade and actually run out of cash. Growing too fast is as bad is not growing a tall in some some technical respects. So cash flow Lang's profits even more than profits lag sales into the growth phase. Onda. We see rapid sales growth, which is great, but it then presents the challenge off scaling the business, and this is often where start ups fail, so you have to scale up the business, which requires more investment. But eventually you get to a point of break even, and then you start to get profit. So sales ramp up. Profits start to catch up, but it takes a while to get to the point where the business is cash positive. Because you're continuing to invest in the scaling of the business and in the marketing off the products at the shakeout stage, you're getting near the top of the curve here. The sales continue to increase, but the rate of growth in the sales starts to slow, so this curve starts to come over the top. This is characterized by market saturation and often new entrance at this point come into the market because it's being recognized as the high grey market. You've done the hard work to create the market, and other people will come in and try to take some of your lunch. So as the sales rate of sales growth against decline so profits start to decrease and costs increase because you're having to put more money in to try to sustain the rate of growth. Cash flow, however, increases well because the amount of capital investment reduces considerably. Even there, you're still spending on marketing. So your cash flow at this point is now beginning to catch up your sales and your profits. In the mature stage, sales are now in decline and profits are in decline and cash flow is still positive. But it's stagnating, so basically, you've got a steady state of cash coming out of the business. Little cap cap. Ex little capital expenditures acquired At this point, the firm has an opportunity to reinvent itself, re launch a new product and start a new growths growth cycle. This is characterized by the state that Apple was in when Steve Jobs came back to the firm and they re launched the new Apple computer and off they went again so it can be done. But this is the stage where you've got to use the surplus cash flow and reinvest it into the new products in order to get the new growth cycle going. And if that sounds like the portfolio theory we're talking about on the Boston Consulting Matrix, where you have the cash cows providing investment for the question marks and the stars, then it's no surprise that these things all tie in together in the final stage. Off decline, sales, profit and cash are all in decline. The company has lost its competitive advantage and is going south rapidly. It has the choice now to either leave this particular market and reinvest in other products or to go out of business. In the classic example of this would be Kodak. If you look at the film business of Kodak over the last 30 years of the 20th century, with the rise of digital photography, they saw their film products, which they had completely dominated the market for through most of the 20th century, go into steep decline. They never saw the opportunity. You reinvent themselves in digital photography on day eventually went bust. So having talked about that, that's look at the funding cycle. And I've put the funding as graph on this screen because it's a little more complex to understand. And to a degree it's counterintuitive. But we basically have three factors We're looking at here, which is sales, business risk and funding off the business. Andi Justus we had with the business lifecycle. These three factors do not all follow the same curve at the same time, so let's take a look at what it looks like in the start up phase, which is on the left. The business. The red line has got the highest risk, and you'll see the overtime business risk steadily declines. Which is fine, however, because it has very little sales. It's cash negative. It needs a lot of funding, and this funding is required. You can see that the Green Line is in advance of the Blue Line before the sales start coming through. It's unable, probably to get much debt from banks, which means it needs external financing. And this is typically done by either bootstrapping. It's done by angel investors. It's done by venture capitalists and then latterly. It's done by private equity firms. Or it can be the company could be acquired and then funded by apparent, however it is, funding is required. And of course, at this point, sales are low. In the next stage of growth, sales start to grow, which is great. Risk continues to decline. It starts to come down on Andi. As the sales start to grow, the ability to fund with debt starts to increase. So the the the capacity of the business Teoh basically borrow against its future profits that starts to emerge at the shakeout stage sales have peaked. Dept. Funding is at its capacity, but on the business, risk continues to decline. But again, you've got a mismatch, because now your sales are going really, really well. You probably don't need as much debt funding or as much external funding as you did much earlier on. Typically, you know when you don't need it. It's available, and vice versa. At maturity, sales are now coming into decline. The business risk is continuing to decline, which is a steady story in this whole old life cycle. But it has the easiest access to capital because the risk is low. The sales are there. There's a good historic track record. But of course it's cash requirements for cash is we've seen in the business. Lifecycle are very limited in decline. Sales decline accelerates. The business risk remains low. But I mean, fundamentally, it's, you know, that is an established business. It's got its sales. It's got its customer base. It's all pretty hunky dorey, except that it's going south and year on year. Profits and sales are not increasing, but equally because of that decline. Because now the year on your story is negative at the funding ability off the business declines with it. So those are the two life cycles that I thought it would be helpful to you when you're looking externally. The business lifecycle, which helps you to think about the evolution of the different stages off the business or product through the business over time on the funding lifecycle because it's very interconnected with the business lifecycle, but it throws up different challenges and different issues, which you'll find very helpful when we come onto the financial part of this course. 14. Value Chains: Connecting Companies to their External Environment: value chains connecting companies to their external environment. I want to discuss value chains here because they inevitably have both external and internal strategic value. Andi, we're going to go onto the internal part of the strategic analysis next. But I don't want you to ignore value chain analysis for the external because clearly, in any value chain, you have a connection at one end with suppliers, which is where you get the raw materials and the inbound logistics on the other end, where you get the outbound logistics and the customers. So both ends of a value chain are connected to the external environment. And this is just another example off how business strategy and business strategic analysis is such an integrated topic. It's very difficult to silo everything because an organization is inevitably very complex and very integrated. So I'm gonna present it to you here now and get you thinking about by new chain analysis. But I don't want you to ignore it clearly when we come to the external. The internal analysis that we're going to do in the next section the Value Chain analysis was created was originated by Michael Porter. Who else? The great Harvard business strategist back in the 19 eighties. I remember studying it when I was at CASS Business School in the early 19 nineties. Michael Porter was absolutely all the range, all the rage there. Essentially, what he showed us how to do was to review all the activities and processes within a company that add value to his products and services and helped us to think about them strategically on. I'm going to show you how that happens now. The basic premise is that competitive advantage is a result off increasing value added to the products whilst reducing costs on value. Chain analysis enables you to do this. The first step is the focus on the primary activities off the business, and we're going to go through these now. So as the the start of the whole process, you have inbound logistics, which is completely interconnected with the relationship with suppliers, and it's the receiving, storage and distribution of the raw material. So this is where the whole process starts. But the key connected pretty that is with the suppliers. And if you think about his five forces model, you've got the supplies. At one end, you have the customers at the other end, and now he's helping to understand how all the bits in the middle join up through the value chain analysis. Then you have the core of the business, which is the operations. This is the transformation off raw materials into products on innovation. In this process or in this complex, Siri's off processes can create enormous value for customers. And this is the heart, if you like off the value added part off the value chain analysis, although everything else that goes around it, which can be very complex, still leave plenty of scope for cost savings, efficiencies and innovation. Outbound logistics is the delivery and distribution off the products to the customers. So very straightforward inbound logistics. So the process off the business and then the outbound logistics. You got those 33 steps operations the business in the middle. Then you have marketing and sales, which is the creation of the awareness of the on decree ation. The demand for the product and service off the firm so critical step clearly on, then finally have service, which is the post sale, maintenance and support off the product or service for the customer. So again marketing and sales and then service the secondary activities and these are normally listed below the Value chain are the firm's infrastructure. So it's the buildings and the tea and all restaurant like this. You've got the human resource management, which is clearly the people, the employees in the organisation, the technological development. So that's all the that technology, both mechanical and electronic, behind the creation off the products on procurement, which is the relationship again, we're going back to the relationship with suppliers to procure raw materials. So implementation off the Value chain model happens in three steps on. The first step is to identify the secondary activities for each crime reactivity, okay and direct activities. This this breaks down into three into three sections you have in the primary activities. You have direct activities. You have indirect activities. You have quality assurance. So for direct activities which are happening in the the whole operation's part, you then are looking for the second reactivity is connected to those You have indirect activities, which is things like how, um hr and, um, accounting help The primary activities to function bed is that's an indirect relationship, and then quality assurance both for direct and indirect activities and how quality assurance helps to ensure that the standards that is set for the products are actually delivered. The second step is to identify the secondary activities for each support activity. I e. How does accounting add value to inbound logistics, for instance? So it may be something to do with the the management and the bookkeeping of all the stock that's on hand on then you working out if you've got obsolescence, stock or you're moving to a just in time process where you reduce your stock levels and therefore you free up cash all these sorts of things and you're looking for these connections and how they can improve the activities off the organization. Thirdly, you are looking for connections between the activities. So, for instance, you've got human capital deployed, so you have people deployed on the shop floor. Two main maintain machinery on is their relationship. Then, between the number of people you have deployed on, the reliability off the machinery, it may be that you don't have enough people on. Therefore, your machinery is not as reliable as you need to be, so you need to change the number of people or tentatively, you may have too many people, so you may be able to redeploy that human capital elsewhere in the organization to greater effect and still maintain the same level off reliability on the machinery. So you see how these connections can work and how you have to look at the more on. Try to identify the areas where there's opportunity to make improvements. So value chain and houses helps you to systematically break down every step within the organization that produces a good or a service. It helps you to understand that cost savings on the differentiation off that product, and it helps you to optimize your operations, eliminating waste and improving profit profitability. So that's value chains. I brought it in here because I want you to understand how a business connects and either rent to its external environment. But also I want you to keep it in mind because obviously it has a very large element off internal strategic analysis, which we will I'll be using in the next section when we look at internal strategic analysis 15. Addressing the Total Addressable Market: I want to talk to you now about assessing the total addressable market when you're putting your business plan together, this is going to be a very important concept that you're gonna have to address because one of the things you're gonna have to explaining your business plan is how bigger market there is for your products and services and how you can address it and understanding the size. That market is critical to that analysis. So we're talking about the evaluation off the external market for a firm. We're looking the overall revenue opportunities for a product or service or for business, and it's important. Therefore, if you understand the size of various different markets, which products you then decide to prioritize which customer segments you designed to sell to on which business opportunities you invest in on which you don't. This is also a very important concept for investors, and stakeholders on is often used as part off financial modelling exercise by a, B, C or P s when they're looking to make an investment. So what we're looking to do is to evaluate the total market size, often industry, the total investment required to address that market the competition in that market on the expected market growth, and this gives us then an idea of the available market to the firm for their particular product. So to summarize, we're talking about the actual size off the available market and the prevailing competition for a product or for a firm. Now there are three different ways to assess this top down bottom up, off the value theory. So top down. We basically start with a very large population comprising the target market, and we get that information and data from research, my industry, research and industry reports. And then we narrow it down to a smaller segment off that population through. And it looks like an inverted permit, as you can see on the screen to focus just on the part of that population that our product or service can address. Now, if we do it, bottom up, we did it the other way around. We start with primary market research and surveys on. We start with a particular product and current pricing and its usage, its value added to a customer on, then try to work upwards to assess how many people will actually find this product or service useful, and this really makes us focus very closely on the market. Segments that we want to address now in value theory were basically taking an estimate off the value provided to customers and how much can be reflected in the pricing. And then you multiply that up by the number of units that you expect to sell, and that gives you an idea off the revenues and the profits. Now, in the markets that we're talking about, there are three subsets you need to be aware of. And these are standard acronyms, which he used quite frequently, which is why I'm highlighting them to you. Now. We've talked about the total addressable market, which is the Tam, then, as a subset of that you have the SAM, which is the serviceable available market, which is the market, which is served by a company's product or service, is actually the part of the market that the company can address. And then you have the some, which is a serviceable obtainable market, which is the percentage off the Sam that can be realistically achieved, because although you may have a total Sam, you're only going to be able to get a certain amount off the market share. As I said already, this is an essential messed metric to the estimate off the scale of the market to come at total sales and revenues. So it's a really critical part of your business plan. You'll need to present this and explain exactly how big the market is for your products and services. This is the methodology you use a lot part of your strategic analysis. Obviously, it's very useful for startups, but is also used for useful for existing companies, particularly considering launching a new product or service into a market. And, of course, it's used extensively by investors to evaluate the quality and the opportunity off a particular investment in a company or its product. You'll find it a swell in financial modeling, so that's the concept off the total addressable market. It's important you get your mind around, and it's important that you understand enough about it to start being able to calculate it in your own strategic analysis for your own business or which have you know, investment opportunity. You're you happen to be considering at this particular time, 16. Market Segmentation: Choosing Customers: We need to talk now about market segmentation, which is essentially choosing your customers. Having identified the total addressable market, the next logical step is to work out how we're going to segment that total addressable market in order to identify the customers we want to sell to. There are three steps to this which are segmentation, targeting and positioning, otherwise known as S T P segmentation. Targeting is all about key customer acquisition, finding that group of customers who are going to be perfect to for your product or service , wherever it has to be. Now there's all sorts of things that this is based upon, but it's things like location, lifestyle, Democratics who, what and why. I'll explain that in a minute influences the This whole approach influences business strategy for pricing, communication and custom management, and we're gonna explore that as well a bit further down. So STP. Let's just go through these three steps segmentation, basically your segmenting customers into groups off people who have similar needs and then determining the characteristics off those customers so that you find them easy to identify . Then you want to select the group that you want to fix on seeing you do, you're targeting and you need to do that by looking at the relative attractiveness off the different segments that you've created. And then the third step, you need to create a value proposition for the chosen segment, which will communicate the value, your offering to them. And that's done through the design of the packaging, the distribution of the product on the promotion off the product or service to the customers. So how do firms segment? Well, let's go into this in a bit more detail. Things like geography, demographics, behavior on the benefits that customers seek from the product. Psycho graphics is the study off customers lifestyle, interest, opinions and personalities and that's used to create segments within a particular market. Behavior, loyalty, purchase opportunity, the usage rate off the buyer. So those are all factors which are worth studying, and also the benefits sort the values the customers looking for. Price convenience in status. So taken example, I have a BMW, and what am I looking for? Well, I want a reasonably not too expensive cars. I'm not gonna buy a Porsche. I want it to be to give me all the facilities I want space of it is to carry things good in the wet, comfortable inside air. Cornel Lewis it. But I also like the brand of driving a BMW, so that gives me degree of status and comfort so I'd be happier in a BMW, then say in a C at, for example, there's nothing wrong with sounds they made by Volkswagen. The very nice. I'm just making a contrast. I'm not putting them down. So you also want to look at the Why Watan Who and why is there past? Why did they buy what, that what's their past purchase data trying to understand their his historic purchasing decisions? The what is the recency frequency and monetary value off their purchase behaviour? And then the who is basically who they are their names, addresses, phones, email so that you can actually be able to contact them and reach out to them. So let's talk a bit about tech targeting. How do you target? Well, you need to consider the product on the service that the firm is offering, that you're offering what segments e want to focus in on the relative attractiveness of each segment and then choosing the right marketing stretchy, so you can see it's a segue, step by step. Logical sequence to working out. Exactly. You know who you're going to target with Watch product, and you know which method you're going to use your marketing in your segment evaluation. You need to think Look at things like the rate of growth in the profitability off each segment. You need to look at the firm's competences to address this segment, and you need to look at the competition, current and future in the segment toe workout. It's relative attractiveness compared to other segments, and the result is that you have a product you have a price on. Then you have a communication and customer management strategy, and that's what comes out off this whole exercise. So product strategy is all about extracting the most value from a customer. So how you gonna price your product, you're gonna have different pricing levels or you're going to start off by releasing it at the very highest pro price on, then bringing the price down. So if you think about a film, the films, when they're launched their only available in cinemas, you want people to go along on pay for them in cinemas. On that could be 10 or £20 of seat. But then, later on, they come out on DVD, so you coning own a copy off the film toe watch multiple times, and that's probably only £10 a pop on. Then, later on, it turns up on a streaming service, and you can buy or rent it for two or £3 so you can see the pricing comes down. In terms of your pricing strategy, you're either appealing to people who are price sensitive, in which case you have to come up with competitive pricing or to price insensitive segments like the luxury segment where, actually, people can charge pretty well what they want on. Their customers will pay it in terms of your communication strategy. You're looking at the placing the most appropriate advertisements or promotions in the right media to write, you reach the right segment. So if you're trying to reach a much older segment bit like me, then you're probably gonna put in may be open in a newspaper, out or something in a magazine, or maybe even on the television. If you're trying to read your much younger segment, then maybe, Or do it through YouTube ads or Facebook ads, just depending on who you're trying to reach on their characteristics. Customer management is all about using the customers past purchases Street to design the best approach to promote your products and how frequently to promote them. So you're trying to work out what they've done on where they've done it, so that you can then reach them. So it's again a bit like Facebook hands. You're tryingto to get a particular ad in front of a particular segment based on their past behavior. And that's what Facebook is very clever at helping you do, because the segmentation is phenomenally forensic, very, very detailed, and it's all based on past behavior. So that's market segment. Choosing segmentation, choosing customers. It's all about you. We've looked at the big the big scale off the market, and now we're trying to narrow down to isolated segments groups of customers within that market that we can specifically target at for our product or service 17. The Bargaining Power of Suppliers: bargaining power off suppliers is one of Michael Porter's five forces on When You're Conducting your external analysis. It's one of the key determinants in the evaluating the attractiveness off an industry. So it's worth going into this in a little bit. More detail, as I mentioned, is one of Porter's five forces. And essentially, what we're talking about is the pressure that can be exerted by suppliers. So these are people who are supplying the firm with goods, raw materials, whatever it may be for the firms to create products from. And if they have the ability to raise prices, lower quality or reduce availability, they can negatively impact that firms profitability. And that's what we're talking about. It's the tussle between who's got the most negotiating power when it comes to actually the provision of raw materials and essential goods into the firm. Is it the supplier of those goods, or is it the fun? It can make a big difference to the profitability off the buying company, and we're going to talk about the buying company as the buyer on it will reduce the attractiveness off the industry overall, just quickly touching on the different types of suppliers. I'm not gonna go into this in a great deal of if you will be detailed. But obviously manufacturers and vendors, people who were doing distribution and wholesaling even independent suppliers in the importers or exporters or drop shippers aled these types of people who will be supplying a company. Now the factors affecting the power off supplies are the number of suppliers relative to the number of buyers. So number surprise with the number of firms you're buying from them, the dependence of a firm on a particular supplier. So if I'm a firm and I'm getting 90% of my raw materials from one supply and that's critical, then that supplier has a certain amount of leverage over me, which is something I don't really want. Teoh allow to happen switching costs off suppliers so if this it will talk about the behind those in a minute. But basically switching costs means the cost off, switching from one supplier to another. If you look at it from the supplies point of view, the switching cost off them, changing their customer and finding another buyer for their products and services. The availability of supplies for immediate purchase so If there's very few around and suddenly a spurt in the industry, then there'll be a lot of demand on then you know, where do you get them from on, then the possible forward integration by supplies, which means basically, the suppliers buying the buyer on becoming a an integrated raw materials and your manufacturing unit. So when is the bargaining power strong on? This is when this is when the suppliers have the power. So when the switching costs of buyers is high, so if it's if it's expensive for me as a firm to switch from one supplier to another, the supplier has more power. The threat of forward integration is high, the supplier buying me the small number of supplies relative to buy. So there's lots of buyers. Lots of firms competing to require the raw materials or whatever the products and services are from the suppliers, a low dependence of a supplier on a particular buyer. So if I cancel the contract is not gonna make that much difference to him, so he's not going to fight me very hard for it. Switching costs of supplies is low, so it's easy for suppliers to switch from one customer to another. Substitutes are unavailable, so I'm the firm and I have a a supplier on. I don't have any other raw materials or products or services I can switch to as a substitute for what I'm getting from that supplier on the by relies heavily on sales from the supply. So if I'm dependent on the supply, the supplier has me by the short and curlies, as it were. So when you turn this round and say, When is the bargaining power week? Well, it's the exact opposite. Switching costs of the buyers is low. Threat of forward integration is low. A large number of suppliers relative to the buyers, high dependence of a supplier on a particular buyer. Switching costs of suppliers is high. Substitute are available on. The buyer does not rely heavily on cells from a supply, so you can see that's the mirror image off the previous slide. So to summarize, lo supplier power creates a more attractive industry and increases the profit potential for buyers. Hi, supplier power creates a less attractive industry and decreases the profit potential for buyers again. So you can see it's very straightforward when you're doing your external analysis on your business. You need to make this evaluation as to the people who were supplying your business with raw materials and whatever it is you're bringing into your business to create your value, added your products or services. How much leverage Do they have a view, or do you have over them? Where's the balance in the negotiation when you're discussing and negotiating prices? Think about that cause it's really, really important. And that's what this lectures being all about. So the bargaining power of suppliers. It's one of Michael Porter's critical five forces, and it's absolutely essential that you understand this when you're doing the external analysis off your industry and looking at your firm strategically. 18. The Bargaining Power of Customers/Buyers: want to take a look now at the bargaining power off customers or the bargaining power of buyers, as it's sometimes referred to again. We are looking at Warners, one off Porter's five forces off industry attractiveness. And this is where the customers of the firm can exert pressure on the on the firm to improve quality customer service or reduce prices. If you think about the airline industry, there's an awful of a competition in the airline industry that a lot of people hunting for low price fares. Andi, relatively speaking, the customers have got a lot of power on that makes it the reduces the profitability off the airlines and makes it a less attractive industry to be in. And if you were any doubts about that, then you've only got to look up and see what Warren Buffett has to say about the airline industry. And it's not very polite buyers in this lecture. We're talking about the customers off the firm's. If there's any doubt about that, we're looking at the other side of the equation. Now we have the firm when looking at their buyers, their customers on the right hand side, so the air five factors affecting the power off buyers or the power of customers. A relatively small number of buyers relative to suppliers says competition for the buyers. Customer concentration on this means where one firm is selling a very high proportion of its sales to one customer, which puts them in a really tight spot of that customer decides to move their business elsewhere, the dependence off a customer on a particular supplier. So if there's a customer so if a customer has a high dependence on a particular supply, then there's there's attention there, you know they really need them and therefore the power is going to switch. Probably in that case, in the favor of the firm. If switching costs are high one way or the other, if it's expensive for the firm to get new customers or to move from a customer equally, if it's expensive for the customer to move to another firm and so switching costs of critical on, then the threat off backward integration, which basically means your customer buying you on bringing the goods or services that they buy from you effectively in house. So by a power, this is the customer power is high when there are a few buyers relative to supplies. When switching costs of the buyer is low, they can switch easily from firms from 1 to 1 firm to another. The buyer is able to backward into great the buy it purchase is high in bulk or high volume . And that's really about the customer concentration point, where the large proportion of a firm's output is sold to a 11 buyer. One customer where buyers can get similar products from other suppliers and they can play one off against each other where the buyer purchases the majority of the seller sales. That's also Kokko customer concentration, several substitutes available so if they have lots of different choices of substitutes and they can buy different products and services elsewhere on if the product is not differentiated, which again means that there's lots of other competing products out there that the customers come by. So we turned around the other way. The buyer power is low when there are lots of buyers relative to suppliers. When switching costs of the buyer is high when the buyer is not able to backward into great when the bike cannot get similar products, mother supplies when substitutes are not available and when the product is heavily differentiated. So you can see that's the flipside off that particular coin. Now bargaining power of customers enables companies to When you're looking at this as a concept as one of Porter's five forces in his competitive analysis, it enables you to determine the threats and opportunities. And now we're going back to SWAT analysis. You can evaluate whether or not if this low customer power there may be an opportunity for higher than average profits from that particular industry. You'll get a much better idea off the competition around you. If you understand the relationship, dream you on the customer and it helps you to make more informed. Refugee decisions is another framework for your strategy analysis and for your external environment analysis around your business. You can use this to determine the profit potential off an industry on. Therefore, it's relative attractiveness. So where you have high customer power, you get lower profits in so less attractive industry. But then it has a lower threat of new entrance on. When the customer powers lower, there's higher profits more attractive. Industry higher threat of New Entrance so this can help you to draw a number of conclusions and help with your strategic decision making. So that's the bargaining power of customers. It's the flip side as well off the bower bargaining power off suppliers, one of Porter's five forces. And it's the two that really look at the external environment in which the firm operates on . That's why we've included a more detailed look at it here in this particular section. 19. Business Plan: Industry, Markets and Competition: I now want to tie in the external strategic analysis, the industry, the markets, the competition into the business plan so you can see how the topics into relate. So when you're coming to compile your business plan, you'll have the connections in this section to the strategic analysis we've just been doing . So it's time to tie these two in. We're just going to focus on the external strategic announces. But you'll see, inevitably, there are tie ins to other parts off the business plan as well, on their times toe other parts off the strategic analysis. Well, it's one of these multiple e interconnected topics. So we being focusing on the external perspective in our strategic analysis, the industry of the markets and the competition. We've looked at the macro issues through the pest model, the socio socio demographic, social, regulatory, political, economic and technological. So we've looked at the major industry trends on factors in our business plan. We'll need to expand lane and expand on the market. It's size the total addressable market. What sales that can the company achieve from this total address of addressable market on the whole point about this is to not say it's a market of a $1,000,000,000 I'm gonna get a 1% market share. Therefore, I'm gonna have a market size off $10 million sales of $10 million. You've got to be a lot smarter than that, a lot more sophisticated that. But you do need to actually understand the potential market that you can address and what sells you can get from it. You'll need to understand your go to market strategy will do a lot more about marketing in the marketing section. But in terms of addressing the market clearly, that's the next step on. You know you have the market, you have the total addressable market, you have the sales you can get to that market and then how you going to get them? What it what's your go to market strategy on? Then we talked about competitive vantage, but why will customers by what is so special about your products? What is your USP? How have you differentiated your products? So this is all tied into that and then, of course, you need to understand the market. The industry trends, the regular environment on the market segmentation, how the market is actually divided up Andi. Then we need to look at the competition side of it. The competitive positioning off your business in this market, in the industry and the markets you want to address and the competitors you have around you . So the conclusions from this really are, you know, what business are you in? What business model? What? So go to market strategy. What business model are you going to adapt to achieve the sales on the profits you want to achieve? And of course, we've talked about the timing of all this. What stage off the business lifecycle is your business in? So you think you need to think about how these all time together when you're writing your industry markets and competition section in your business plan on. I have hopefully given you lots off tours and lots of methodologies that you can use to address the issues that you'll need to explain in your business plan. So that's how it ties in together. As you can see, it's never a direct one for one topic. It's a question of understanding through strategic analysis, and you're working out your business strategy and then explaining using a framework in the business plan, which makes it easy to read and easy to follow. 20. Part 3 Competition, Industry and Markets Coming Up Next: Well, before you go, I just thought I would give you a quick wrap up on part three and give you a little bit of a heads up on what's coming up in part for. So congratulations on completing this part off the course and really hope you found it informative. And I hope we've had a lot of fun with your project. Have you done it? And if you haven't done it, I strongly recommend you keep up with the projects as we go through this strategy course, because it is going to build you a fantastic, comprehensive business plan. So we've looked at the competition. Know your enemy. The words off, son Sue on. We focused on the competition that the firm your firm your business is facing in the marketplace, and we looked at some classic models to assess this. But I also took it further. I took the competition section, and I put it into the context of industry and markets, said that you could get in even more in depth understanding off how the whole of the environment around the firm, including competition effects, how your firm and how your business is going to perform So that was the object of this. And obviously, this is what we're focusing on in the project to create the competition section off the business plan. Now in part for coming up next, you will discover internal strategic analysis. We're looking at operations and customer management. We're looking inwards to see all aspect to take a look at all aspects off operations, but particularly, we're keeping a close eye on customer management. On with that view, I've got a specific section on the customer value proposition because this is is at the heart off how your business makes itself unique and stands out in the market. So we're looking specifically at how your business can add value to a customer and is absolutely essential. Core off any business strategy and you have to build it into your business plan. So enjoy the project. Do the competition section for your project, and I look forward to seeing you in part for off the course. So you've been watching Part three of my business strategy to business Plan course. We've been looking at competition, industry and markets, and coming up next is part for where we're going to look at the internal aspects of operations and we're going to look at the customer value proposition