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Lecture 2

Lecture 2

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External Environmental Analysis

Chapter 3

Understanding the Factors that Determine a Company’s Situation
• Diagnosing a company’s situation has two facets – Assessing the company’s external or macro-environment (Societal or General Environment) • Industry and competitive conditions • Forces acting to reshape this environment – Assessing the company’s internal or micro-environment (Specific or task Environment) • Market position and competitiveness • Competencies, capabilities, resource strengths and weaknesses, and competitiveness

From Thinking Strategically about the Company’s Situation to Choosing a Strategy

The Components of a Company’s Macro-environment

Thinking Strategically about a Company’s Macro-environment
• A company’s macro-environment includes all relevant factors and influences outside its boundaries • Diagnosing a company’s external situation involves assessing strategically important factors that have a bearing on the decisions a company’s makes about its – Direction – Objectives – Strategy – Business model • Requires that company managers scan the external environment to – Identify potentially important external developments – Assess their impact and influence – Adapt a company’s direction and strategy as needed

Environmental Scanning
• 1. 2. 3. General Environment/ Societal environment Economic forces that regulate exchange of materials, money, energy, and information Technological forces that generate problem solving Political –legal forces that allocate power and provide constraining and protecting laws and regulations Socio-cultural forces that regulate the values, mores, and customs of society


Some Important Variables in the Societal Environment
Economic GDP trends
Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/reval uation Energy availability and

Technologic al



Total government spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products

Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies

Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates

Disposable and Prentice Hall, discretionary 2000 income

Laws on hiring New and promotion developments in technology Stability of transfer from lab government to marketplace Chapter 3

Important variables in international Societal Environment
Economic Economic Development Per capita income GDP tends Monetary and Fiscal policies Employment level Currency convertibility Nature of competition Technological Regulation in technology transfer Energy availability Natural resource availability Skill level of workforce Patent-trademark protection Internet availability Telecommunication infrastructure Political-legal
Form of government Political ideology Tax laws


Customs, norms, values Language Demographics Stability of Life-style government Religious beliefs Regulation of foreign ownership Attitude towards Trade regulations foreigners Literacy level Foreign policies Human rights Terrorist activity Environmentism Legal system

Key Questions Regarding the Industry and Competitive Environment
What are the industry’s dominant traits?

How strong are competitive forces?
What market positions do rivals occupy? What moves will they make next?

What forces are driving change in the industry? What are the key factors for competitive success? How attractive is the industry from a profit perspective?

Question 1: What are the Industry’s Dominant Economic Traits?
• Analyzing a company’s industry and competitive environment begins with identifying an industry’s dominant economic features and forming a picture of what the industry landscape is like • It not only sets the stage for the analysis to come but also promotes understanding of the kind of strategic moves that industry members are likely to employ

Question 1: What are the Industry’s Dominant Economic Traits?
• • • • • • • • • • • Market size and growth rate Number of rivals Scope of competitive rivalry Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions Pace of technological change Vertical integration Economies of scale Learning and experience curve effects

What to Consider in Identifying an Industry’s Dominant Features

Market size and growth rate

Questions to answer
How big is the industry and how fast it is growing? What does the industry’s position in the business life cycle (early development, rapid growth, early maturity, maturity, stagnation, decline) reveal about the industry’s growth position? Is the geographic area over which the most companies compete local, regional, national, multinational, or global? Is having a presence in foreign markets becoming more important to a company’s long-term competitive success?

Scope of competitive rivalry

Number of Rivals

Is the industry fragmented into many small companies or dominated by a few large firms? Is the industry going through a period of consolidation to a smaller number of competitors? What are the final buyers( as well middlemen) looking for – what attributes prompt to choose one brand over another? Are buyers needs or requirements changing? If so what is driving such changes? Is a surplus capacity pushing prices and profits down? Is the industry overcrowded with to many competitors?

Buyer needs and requirements

Production Capacity

Production Capacity

Is a surplus capacity pushing the prices and profit margins down? Is the industry over crowded with too many competitors? What role does the advancing technology play in this industry? Are ongoing upgrades of facilities/ equipment essential because of rapidly advancing production process technologies? Do most industry members have a need or need strong technological capabilities? Why? Are the products of rivals becoming differentiated or less differentiated? Are increasing look alike products of rivals causing heightened price competition?

Pace of Technological Change

Degree of Product Differentiation

Product Innovation

Is the industry characterized by rapid product innovation and short product life cycle? How important is R&D and product innovation? Are there opportunities to overtake key rivals by being first-to-market with next generation products? Are some competitors in the industry partially or or fully integrated? Are there any important cost differences among fully versus partially versus non integrated firms? Is there any competitive advantages or disadvantages associated with being fully or partially integrated firms?

Vertical Integration

Economies of Scale Learning and experience curve effects

Is industry characterized by economies of scale in purchasing, manufacturing, and other activities? Do companies with high scale operations have an important cost advantage over small scale firm

Do any companies have significant cost advantage because of their experience in performing particular activities?

Question 2: What Kinds of Competitive Forces Are Industry Members Facing?
• Objectives are to identify
– Main sources of competitive forces – Strength of these forces

• Key analytical tool
– Five Forces Model of Competition

Fig. 3.3:

The Five Forces Model of Competition

Analyzing the Five Competitive Forces: How to Do It
Step 1: Identify the specific competitive
pressures associated with each of the five forces Step 2: Evaluate the strength of each competitive force -- fierce, strong, moderate to normal, or weak? Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits

Factors Affecting Threat of Entry

Threat of New Entrants/ Entry Barriers
Factors Economies of Low scale Capital Low require red Access to Ample distribution channels Expected Low retaliation Differentiation Low Brand Loyalty Experience Low Curve Govt. Action Insignific ant Low HUFA MUFA Neutral MFA HFA High High Restrict ed High High High Signific ant high comment

Exit Barriers

• Exit Barriers
Hi Hi Hi

HUA MUA Neutral MA

LOW Low Low


Specialized Assets Fixed Cost of Exit Strategic interrelationshi p Government Barriers



Barriers and profitability

low Entry Barriers

Low, stable returns

Low, risky returns


High, stable returns low

High, risky returns high

Exit Barriers

Weapons for Competing and Factors Affecting Strength of Rivalry

Competitive Rivalry
Composition of Competitors Mkt. Growth rate Scope of competition Fixed storage Cost Capacity Increase Degree of differentiation Strategic Stake High Equal Size Slow Global High Small Large High Commo dity Low

Unequal Size High Domestic Low


Factors Affecting Bargaining Power of Buyers

Power Of Buyer
Factors Number of Few Important buyers Threat of High Backward integration Commodity Product supplied High Switching cost % of buyer’s High cost Profit earned Low by buyer Importance to final quality of buyers Pr. High HUFA MUFA N MFA HFA Many Comment

Low Specialty Low Low High


How Seller – Buyer Partnership Can Create Competitive Pressures
• Sellers that provide items to business have found it is in their mutual interest to collaborate closely on matters such as: - just in time inventories - order processing - electronic invoice payments - data sharing Dell has partnered with its largest PC customers to create on line system for over 50,000 corporate customers, providing their employees - information on approved product configurations - paperless purchase orders - real time order racking, invoicing, purchasing history and other efficiency ools - loads a customer’s software at the factory - installs asset tags so that customer setup time is minimal - helps customers upgrade their PC systems to next generation hardware and software

Fig. 3.7: Factors Affecting Bargaining Power of Suppliers

Power of Supplier
# of important Suppliers Switching cost

Few High

Many Low Many Low Buys large proportio n Highly importan t


Availability of Difficult substitutes Threat of forward High integration Importance of Buyer industry to suppliers Buys

small Proportion Suppliers product an important input to the Less buyer’s business important

How Seller-Buyer Partnership Can Create Competitive Pressures
1. Reduce inventory and logistic costs 2. Speed the availability of next generation components 3. Enhance the quality of parts and components being supplied and reduce defect rates 4. Squeeze the cost savings for both themselves and suppliers

Factors Affecting Competition From Substitute Products

Threat Of Substitute Product
Threat of Hi Obsolescence of Industry’s product Aggressiveness Hi of substitute products in promotion Switching Cost Low Perceived price/ value Hi HUFA MUFA N MFA HFA Low



High Low

Overall Industry attractiveness Factors
Entry Barriers Exit Barriers Rivalry among existing firms Power of buyers Power of Suppliers Threat of substitutes

Unfavorabl Neutral Favorable e

Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability
• As a rule, the stronger collective impact of the five forces, the lower the combined profitability of industry participants • Fierce to strong competitive pressures come from all five forces driving industry profitability to unacceptably low levels • An industry can be competitively unattractive even when not all five forces are strong • Intense competitive pressure from just two or three forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business

Matching Company Strategy to Competitive conditions
• Effectively matching a company’s strategy to prevailing competitive conditions have two aspects 1. Pursing avenues that shield the firm from as many of the different competitive pressures 2. Initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in the company’s favor, putting added competitive pressure on rivals, and perhaps even defining a business model for the industry

Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have?
• Industries change because forces are driving industry participants to alter their actions • Driving forces are the major underlying causes of changing industry and competitive conditions • Where do driving forces originate? – Outer ring of macro-environment – Inner ring of microenvironment ( Most frequent)

Driving Forces of Change
 The internet and new e-commerce opportunities and threats in the industry  Increasing Globalization: 1. Where scale economies are so large that rival firms need to market their products in many country markets to gain enough volume to drive unit cost down 2. Where low cost production is critical consideration ( making it imperative to locate manufacturing facilities in countries where lowest cost could be achieved 3. Where one or more globally ambitious companies are pushing hard to gain significant competitive position in many attractive markets 4. Where local governments are privatizing government – owned monopolies

Driving Forces
 Changes in long-term industry growth rate 1. Upsurge in long-term demand triggers a race for growth among existing firms and attract new comers 2. A shrinking market heightens competitive pressures for market share inducing mergers and acquisition that result in industry consolidation  Changes in who buys the product and they use it  Product innovation  Technological change  Marketing innovation  Entry or exit of a major firm

Drivers of Change
 Diffusion of technical know how across more companies and countries  Changes in cost and efficiency  Growing preference for differentiated products instead of commodity or vice versa  Regulatory influences and government policy changes  Changing societal concerns, attitudes and life styles

• Are the driving forces causing demand for the industry’s product to increase or decrease? • Are the driving forces acting to make competition more or less intense? • Will the driving forces lead to higher or lower industry profitability?

Assessing the impact of the driving Forces

•   

Multi-domestic Industries: Are specific to each country or group of countries Collection of essentially domestic industries Each subsidiary is essentially independent of the activities of the MNC’s subsidiaries in other countries • Global Industries:  Operate world wide, with MNC making only small adjustment for country specific circumstances  MNCs produce products or services in various locations through out the world and sell them making only small adjustments for country requirements

Categorizing International Industries

3.9 Continuum of International Industries (Fig. 3.4)

Continuum of International Industries
Mltid ms u o e tic G bl lo a

Industry in which companies tailor their products to the specific needs of consumers in a particular country. • Retailing • Insurance • Banking
Prentice Hall, 2000

Industry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles • Tires • Television sets
Chapter 3 42

1. Pressure for coordination within multinational corporations operating in that country 2. Pressure for local responsiveness on the part of individual country markets

Factors that determine whether industry would be global or multidomestic

Strategic Groups
• A strategic group is a set of business units or firms that pursue similar strategies with similar resources • A firms competitive domain can be identified with the concept of strategic group • The strategic group map consists of two sets of dimensions I. Business Scope commitment: (2) The target market segment, (2) types of products services offered, (3) geographical reach II. Resource Allocation Commitment: allocation of resources to functional areas considered central in achieving competitive advantage

3.10 Mapping Strategic Groups in the U.S. Restaurant Chain Industry (Fig. 3.5)

Mapping Strategic Groups in the U.S. Restaurant Chain Industry
High Red Lobster Olive Garden ChiChi's

Perkins International House of Pancakes


Ponderosa Bonanza

Shoney's Denny's Country Kitchen

Kentucky Fried Chicken Pizza Hut Long John Silver's

Arby's Wendy's Domino's Dairy Queen Hardee's Taco Bell Burger King McDonald's Low Limited Menu Full Menu

Prentice Hall, 2000

Product-Line Breadth Chapter 3


• • • •

Implications of Strategic groups consider The strategic group a firm should
entering The type and level of entry barriers the firm will face The number and type of entry barriers the firm will face The strategic dimensions that will make the firm similar to its strategic group members and different from members of different strategic groups The relative effect of five forces of competition on its relative profitability

Key Success Factors
• Key success factors are those things that most affect the ability of industry members to prosper in market place • On what basis do customers chose between the competing brands of sellers • What must seller do to be competitively successful- what resources and competitive capabilities does it need • What does it take for sellers to achieve a sustainable competitive advantage

Common Types of Industry Key Success Factors (KSF)
Technology Related
Expertise in particular technology or in scientific research ( important in pharmaceuticals, internet applications, mobile communications, and many high tech. industry Proven ability to improve production processes ( important in industries where advancing technology opens the way for higher manufacturing efficiency and lower production costs)

Manufacturing Related KSF

Ability to achieve scale economies and/or capture learning curve effects (important to achieving low production costs) Quality control know-how ( important in those industries where customers insists on product reliability) High utilization of fixed assets (important in capital intensive/ high fixed cost industries) Access to attractive supplies of killed labor High labor productivity ( important for items with high labor content) Low cost product design and engineering ( reduces manufacturing costs) Ability to manufacture or assemble products that are customized to buyer specification

Distribution A strong network of wholesale distributors/dealers Strong direct sales capabilities via the internet and or having related KSF company owned retail outlets
Ability to secure favorable display space on retailer shelves

Marketing Related KSF

Breadth of product line and product selection A well known and respected brand name Courteous, personalized customer service Customer guarantees and warranties Clever advertising A talented workforce Distribution capabilities Product innovation capabilities Short delivery time capability Supply chain management capabilities Strong e-commerce capabilities

Industry Matrix/ Competitive Profile Matrix ( CPM)
Strategic Factors 1 Weight 2 Company A Rating 3 Company A Weighted Score 4 Company B Rating 5 Company B Weighted Score 6



Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix.” Copyright © 1997 by Wheelen and Hunger Associates. Reprinted by permission.

Prentice Hall, 2000

Chapter 3


External Factor Analysis Summary( EFAS) / External Factor Evaluation Matrix ( EFE)
• • Column 1( External Factors) list 8-10 most important opportunities and threats facing the company Column 2 ( Weights) assign a weight to each factor. The higher the weight the more important is this factor to the current and future success of the company. All weights must sum to 1.0 regardless of the number of factors Column 3 (Rating) ,assign a rating to each factor from 5.0 ( outstanding) to 1.0 (poor) based on management’s current response to a particular factor Column 4 ( weighted score) Multiply the weight in column 2 for each factor in column 3 to obtain each factor’s weighted score. Column 5 ( comments), note why a particular factor was selected and how its weight and rating were estimated Add the individual weighted score for all external factors in column 4 to determine the total weighted score for that particular company. The weighted score of 3 = average, 4 = above average, less than 2.5 as below average

• • •


External Factor Analysis Summary (EFAS): Blank

External Factor Analysis Summary (EFAS)
External Strategic Factors Opportunities 1 Weight 2 Rating 3 Weighted Score 4 Comments 5


Total Weighted Score


Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Prentice Hall, 2000 Chapter 3 52 Hunger Associates. Reprinted by permission.

Discussion Questions

• `

Discuss how a development in a corporation's societal environment can affect the corporation through its task environment ? Developments or trends in a corporation's societal environment typically do not affect the corporation directly but indirectly through their impact on one or more stakeholder groups in the corporation's task environment. As mentioned in the text, the trend toward dualcareer couples is a recent development in the societal environment of any company Sociocultural forces regarding the changing role of women plus the trend toward single family households combined with the economic forces of high interest rates and inflation in the 1970s to send both men and women searching for full-time jobs in addition to their being parents. This development in the societal environment continues to affect companies through its impact on employee/union groups (who ask for parental leave and/or company-sponsored day care centers), customers (employed parents who increasingly shop for convenience goods because of time constraints), and special interest groups and even governments (who ask business firms to help support local schools and deal with community social problems

Why is environmental uncertainty an important concept in strategic management? It can be argued that without environmental uncertainty, there would be no need for strategic management. The Arab oil embargo of 1973 is said to be the single most influential event causing the formation of planning departments in most U.S. corporations. The embargo showed managers just how vulnerable their companies were to environmental change. A key part of strategic management, environmental scanning is a tool used to help avoid strategic surprise and cope with an uncertain environment. If the environment was certain and predictable, environmental scanning would be a rather easy chore. Simple extrapolation would be the only type of forecasting needed. In a complex and changing world, however, those corporations which engage in environmental scanning and strategic planning tend to deal better with environmental uncertainty and to be more successful than their non-planning brethren.

• •

What can a corporation do to ensure that information about strategic environmental factors gets to the attention of strategy makers? This is a very real problem in most large corporations given the usual obstacles to good communication. The very people who are in the best positions to gather this data are often the ones who either fail to pass it on because it's too much of a chore or they fail to notice it because no one told them how important certain developments are to top management Since proper information dissemination is an important part of environmental scanning, corporations attempt to schedule a series of analytical reports for top management's information. Some of these reports are depicted in Figure 3.1 in the text. The purchasing department, for example, might be tasked with the job of compiling a quarterly analysis of the availability and reliability of present and future suppliers. The market research department might prepare analyses of present and future customers for certain products and services with special attention to demographic shifts. Each report would need to conclude with a list of strategic factors to monitor in the coming months or years.

• •

If most long-term forecasts are usually incorrect, why bother doing them? This question is based upon the questionable assumption that most long-term forecasts are usually incorrect. One must keep in mind that some things are easier to forecast than others. For example, a forecasted drop in the demand for tricycles in three years will very likely occur if it is based upon a strong drop in the present birth rate. Nevertheless, most people would probably agree that forecasts going out five to ten years have a low probability of becoming reality in today's dynamic world. The text takes the position that even if predictions prove to be wrong, the very act of scanning and forecasting the environment helps managers take a broader perspective. It also forces managers to take an active rather than a passive orientation toward its external environment. It encourages calculated risks over WAHS (wild a -- hunches) and is more likely to result in strategic management instead of reactive management

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