EXTERNAL

ENVIRONMENT
ANALYSIS
Kenichi Ohmae
“Quote”
 Strategic Management Model

Environmental Strategy Strategy Evaluation

Scanning Formulation Implementation and Control
Mission
External
Reason for
Societal
existence
Environment Objectives
General Forces
What results
to
Task Strategies
accomplish
Environment
by when Plan to
Industry Analysis
achieve the Policies
mission &
Internal objectives Broad
guidelines for Programs
Structure decision Process
Chain of Command making Activities to monitor
needed to performance
Budgets
Culture accomplish and take
Beliefs, Expectations, a plan corrective
Cost of the
Values action
programs
Procedures
Resources
Sequence
Assets, Skills
of steps
Competencies,
needed to
Knowledge do the job Performance

Feedback/Learning
 Definition
Monitoring and interpreting sweep of social,
political, economic, ecological, and technological
events to spot budding trends that could
eventually impact industry

Purpose
 Raise consciousness of managers about potential
developments that could
 Have important impact on industry conditions
 Pose new opportunities and threats
 Focuses on two considerations

◦ A company’s INTERNAL ENVIRONMENT

 Its competencies, capabilities,
resource strengths and weaknesses,
and competitiveness

◦ A company’s EXTERNAL ENVIRONMENT

 Industry and competitive conditions
 MACROENVIRONMENT
The Economy
at Large

Suppliers Substitutes

COMPANY
Rival
Buyers
Firms

New
Entrants

IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT
 Changes in long-term industry growth rate

 Changes in who buys the product and how they use it

 Product innovation

 Technological change/ process innovation

 Marketing innovation

 Entry or exit of major firms

 Diffusion of technical knowledge

 Increasing globalization of industry

 Changes in cost and efficiency

 Market shift from standardized to differentiated

products (or vice versa)

 New regulatory policies and/or government legislation

 Changing societal concerns, attitudes, and lifestyles

 Changes in degree of uncertainty and risk

1. Identify those forces likely to exert
greatest influence over next 1 - 3 years
Usually no more than 3 – 4 factors qualify

2. Assess impact
◦ What difference will the
forces make (favorable?
unfavorable?)
 Scanning the External Environment

Analysis of Societal Environment

Economic, Sociocultural, Technological, Political-Legal Factors

Market
Analysis

Customer Competitor
Analysis Analysis

Supplier
Analysis
Selection of
Interest Group Strategic Factors Governmental
Analysis Analysis
• Opportunities
• Threats

Prentice Hall, 2000 Chapter 3 59

 Substitute Products
(of firms in
other industries)

Rivalry
Suppliers
Among
of Key Buyers
Competing
Inputs
Sellers

Potential
New
Entrants
 Assess strength of each competitive force (Strong?
Moderate? Weak? )
◦ Rivalry among competitors
◦ Substitute products
◦ Potential entry
◦ Bargaining power of suppliers
◦ Bargaining power of buyers

 Explain how each force acts to create competitive

pressure

 Decide whether overall competition is brutal, fierce,

strong, normal/moderate, or weak
 Usually the most powerful of the five forces

 Check which weapons of competitive rivalry are most

actively used by rivals in jockeying for position
◦ Price
◦ Quality
◦ Performance features offered
◦ Customer service
◦ Warranties/guarantees
◦ Advertising/promotions
◦ Dealer networks
◦ Product innovation
 Seriousness of threat depends on
◦ Barriers to entry
◦ Reaction of existing firms to entry

 Barriers exist when

◦ Newcomers confront obstacles
◦ Economic factors put potential entrant at a
disadvantage relative to incumbent firms
 Economies of scale
 Inability to gain access to specialized technology
 Existence of learning/experience curve effects
 Strong brand preferences and customer loyalty
 Capital requirements and/or other specialized resource
requirements
 Cost disadvantages independent of size
 Access to distribution channels
 Regulatory policies, tariffs, trade restrictions
Threat of entry is stronger when:
 Entry barriers are low
 Sizable pool of entry candidates exists
 Incumbents are unwilling or unable to contest
a newcomer’s entry efforts
 Newcomer can expect to earn attractive profits
Substitutes matter when customers are attracted
to the products of firms in other industries

 Eyeglasses vs. Contact Lens

 Sugar vs. Artificial Sweeteners
 Plastic vs. Glass vs. Metal
 Newspapers vs. TV vs. Internet
 Sales of substitutes are growing rapidly

 Producers of substitutes are planning to

add new capacity

 Their profits are up

 The competitive threat of substitutes is
stronger when they are:
 Readily available
 Attractively priced
 Believed to have comparable or better
performance features
 Customer switching costs are low
 Suppliers are a strong competitive force when:
◦ Item makes up large portion of product costs
◦ Item is crucial to production process, and/or significantly
affects product quality
◦ It is costly for buyers to switch suppliers
◦ They have good reputations and growing demand
◦ They can supply a component cheaper
◦ They do not have to contend with substitutes
◦ Buying firms are not important customers
Suppliers are a stronger force the more
they can exercise power over:
 Prices charged
 Quality/performance of items supplied
 Amounts and delivery times
 Buyers are a strong competitive force when:
◦ They are large and purchase a sizable percentage of
industry’s product
◦ They buy in volume quantities
◦ They can integrate backward
◦ Industry’s product is standardized
◦ Their costs in switching to substitutes or other brands are
low
◦ They can purchase from several sellers
◦ Product purchased does not save buyer money
Buyers are a stronger competitive force the more
they have leverage to bargain over:
 Price
 Quality
 Service
 Other terms and conditions of sale
 Competitive environment is
unattractive when:
◦ Rivalry is strong
◦ Entry barriers are low
◦ Competition from
substitutes is strong
◦ Suppliers and customers have
considerable bargaining power
 Competitive environment is ideal when:
◦ Rivalry is moderate
◦ Entry barriers are high
◦ Good substitutes do not exist
◦ Suppliers and customers are in a
weak bargaining position
Purpose : Gain information and understanding about:
• Overall industry
• Specific other firms, as a basis for our own strategy analysis
Open Sources:
• Trade press, shows, websites and company publications
• Annual reports, companies press releases
• Industry conferences
Semi-Open Resources: Specialized industry consultants
• Having comprehensive information on volumes, prices etc..
• Analyzing trends& scenarios
• Cannot disclose all information on specific company
Your Own Resources: In interaction between your company and other industry firms
• Marketing contracts
• Purchasing contracts
• Technical people at conferences
• Professional association
• Beware of ethical issues; reciprocal informal issues
 Present Forecasting Assumptions
Environmental for Strategic
Trends and Future Trends
Scanning Planning and
Fashions and Fashions
Decision Making
 Use the issue priority matrix in this way:
• Identify trends emerging in the societal and task environment
• Assess the probability of these trend actually occurring
• Attempt to estimate the likely impact of these trends

 A corporation external strategic factors are: those key

environment trends that are judged to have both a medium to
high probability of occurrence and a medium to high of impact
on the organization.

 High priority factors  categorized as opportunities and threats

and are included in strategy formulation.
 Probable Impact on Corporation

High Medium Low

High High Medium

High Priority Priority Priority
Probability
of Occurrence

Medium High Medium Low

Priority Priority Priority

Medium Low Low

Low Priority Priority Priority

Issues Priorities Matrix

 Those factors that can affect significantly the overall competitive positions of all
companies within any particular industry

Industry Matrix

Key Success Company A Company A Company B Company B

Factors Weight Rating Weighted Score Rating Weighted Score

1 2 3 4 5 6

Total 1.00
Synthesis of External Factors
To summarize the external factors into generally accepted categories of opportunities and threats
the so called EFAS table can be established.
External Factors Analysis Summary (EFAS): Maytag Corporation

External Factors Weight Rating Weighted Comments

Score
1 2 3 4 5
Opportunities

Threats

Total Score