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Strategic Management Process

(abstracted)
Mission  
External analysis Internal analysis
What MIGHT we do? What CAN we do?
 
Opportunities and Strengths and
threats weaknesses
 Strategy 
 
Social responsibility Managerial values
What SHOULD we do? What do we WANT
to do?

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Role of Managerial Values
• Set internal value standards

• Work toward shared value system
(regarding products, conduct of business
activities, and interactions both inside and
outside the organization)

• Develop a strong organizational culture,
which can be an extremely powerful
competitive asset linked to distinctive
competence
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Role of Social Responsibility
• To anticipate and meet social expectations.

• To look out for the long-term interests of
society, ABOVE AND BEYOND legal
requirements

• To conduct business in a manner consistent
with good corporate citizenship

• To balance the needs and expectations of a
variety of stakeholders
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Role of External Role of Internal
Analysis? Analysis?

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Chapter 2: The External Environment
• external environment analysis - why? how?
• general environment analysis
• industry environment analysis
- basic industry facts
- Porter’s five-forces analysis
• strategic groups
• competitor analysis/competitive intelligence
• opportunities and threats
• industry survival factors
• overall industry attractiveness
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“Analysis is the critical starting point for
strategic thinking.” Kenichi Ohmae,
prominent business consultant and author

“Things are always different – the art is
figuring out which differences matter.”
Laszio Birinyi, Investments manager.

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The
External
Environmen
t

Figure 2.1
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Analysis of the External Environment:
A “nested” view of important
components
• General environment

• Industry environment

• Competitor environment

Overall, looking for opportunities and
threats, and a strategically useful
understanding of the external environment.
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External Environmental Analysis
• A continuous process which includes
Scanning for early signals of potential
changes and trends in the environment
Monitoring changes to see if a trend emerges
from among those spotted by scanning
Forecasting projections of outcomes based on
monitored changes and trends
Assessing the timing and significance of
changes and trends on the strategic
management of the firm
WHY? SO WHAT? WHO CARES?
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General Environment
• Dimensions in the broader society that
influence and industry and the firms within it
 Economic
 Sociocultural
 Global
 Technological
 Political/legal
 Demographic

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General Environment
• The Demographic
Segment -

 Population size
 Age structure
 Geographic
distribution
 Ethnic mix
 Income distribution

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General Environment (cont’d)
• The Sociocultural
Segment –

 Workforce diversity
 Attitudes about worklife
 Environmental concerns
 Shifts in product and
service preferences
 Shifts in leisure pursuits
 Shifts in daily habits
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General Environment (cont’d)
• The Economic Segment –

 Inflation rates
 Interest rates
 Unemployment rate
 Trade balance
 National budget
deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic
product
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General Environment (cont’d)
• The Technological
Segment –

 Product innovations
 Focus of private and
government-supported
R&D expenditures
 New communication
technologies
 Process innovations
 Revolutionary
technologies

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General environment (con’t)
• The Political/Legal
Segment –

 Antitrust laws
 Taxation laws
 Labor laws
 Environmental laws
 Regulation issues
 Education policies
 Relevant federal, state,
local issues

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General Environment (cont’d)

• The Global Segment –

 Important political
events
 Critical global markets
 Newly industrialized
countries
 Different cultural and
institutional attributes

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General Environment Analysis
Identify trends in the various general
environment categories that are potentially
relevant to your industry.

Look for specific opportunities and threats.

Prepare to adapt -- these trends are typically
beyond the control of an organization.

Anticipate! Prepare to place your bets!
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Industry Analysis

Industry IS NOT THE SAME as company!

Industry = external environment
Company = internal environment

These are different “levels of analysis”!

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Examples: Industries/Companies
Industries Companies

1. 1. Wal-Mart

2. 2. NW Airlines

3. Software 3.

4. Restaurant 4.

5. 5.
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Useful “basic facts” about an industry:
• market size; primary market segments
• total industry volume; industry growth rate
• stage of industry life cycle
• average industry profit margins
• primary competitive arena
(local? regional? national? global?)
• relative consolidation vs. fragmentation;
4-firm concentration ratio; market share
data

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Good sources of industry information
=

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The Five Forces of
Competition Model

Figure 2.2
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Porter’s Five-Forces of Competition
• A set of factors that directly influences a
company and its competitive actions and
responses.
• Interaction among these factors determine
an industry’s profit potential and location of
“profit pools”.
• Need to understand which competitive
factors have power, why they have power,
and what you might be able to do about it to
improve your own position.
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1. Threat of New Entrants -
Analyze “Barriers to Entry”, such as . .
.•
Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
• Government policy
• Expected retaliation
• Low average industry profits
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Analysis of barriers to entry
High entry barriers create
(more?) (less?) competition?

Existing firms in an industry prefer
(high?)(low?) entry barriers?

What should existing firms do about entry
barriers in their industry?

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2. Bargaining Power of Suppliers
Suppliers are the organizations providing
inputs to the type of firm being analyzed.

Examples =

What should firms do about
potential power of suppliers?

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Bargaining Power of Suppliers
• Supplier power increases when:
 Suppliers are few and/or large
 Suitable substitutes are
not available
 Individual buyers are not large
customers of suppliers and are plentiful
 Suppliers’ goods are critical for buyers’
marketplace success
 Suppliers’ products create high switching costs.
 Suppliers pose a threat to integrate forward into
buyers’ industry
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3. Bargaining Power of Buyers
• Buyer power increases when:
 Buyers are large and few in number
 Certain buyers purchase a large
portion of industry’s total output
 A buyer’s purchases are a significant
portion of a firm’s annual revenues
 Buyers can switch to another product without
incurring high switching costs
 Buyers are price sensitive
 Buyers are well informed
 Buyers pose threat to integrate backward into the
sellers’ industry
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How can businesses reduce buyer
power?

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4. Threat of “Substitutes”
“Substitutes” offer an alternative way to
satisfy a consumer need, often satisfied by
firms in a different industry.

“Substitutes” ARE NOT THE SAME as rivals!

Burger King IS NOT considered a
“substitute” for McDonald’s.

A “substitute” for McDonald’s = . . . .
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Threat of Substitute Products
• The threat of substitute products
increases when:
 Buyers face few switching costs
 The substitute’s price is lower

 Substitute’s quality and
performance are equal to or greater than the
existing product
• Firms need to consider the price/performance tradeoffs
offered by substitute products
• Substitutes can put a lid on prices, and even make
an©existing
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5. Intensity of Rivalry Among
Competitors
• Industry rivalry increases when:
 There are numerous or equally
balanced or aggressive competitors
 Industry growth slows or
declines (overcapacity exists)
 There are high fixed costs or high
storage costs
 There is a lack of differentiation opportunities or
low switching costs
 Price cutting strategies are employed
 The strategic stakes are high
High
Copyright “exit barriers” exist
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Five-Forces Analysis -- SO WHAT?
• Consider how opportunities and threats may result
from the five competitive forces.

• Understand the strength of each competitive force,
and underlying reasons for strength.

• Select niches where forces are weaker, and profit
pools are higher.

• Build strategies that defend yourself against strong
competitive forces.

•Copyright
Build strategies that influence the forces in your
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favor.
Strategic Groups Defined
• A set of firms emphasizing similar strategic
dimensions and using similar strategies;

• A set of firms occupying the same strategic
position in the marketplace

 Internal competition between strategic group
firms is greater than between firms outside that
strategic group

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Strategic Group Maps
A graphical depiction of rival firms,
using two dimensions that
reflect important aspects of their strategy and
array the firms into groups.

Work best in fragmented industries.

Help show close (within group) rivals,
crowded and open strategic positions;
assist opportunity and threat interpretation
(not all groups are affected equally).
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Steps to Create a Strategic Group Map
1. Identify two important dimensions that help
distinguish the competing firms from each
other.
2. Draw a two-dimensional “map” that places
each firm in the appropriate position given
the two dimensions you are using.
3. Draw circles around firms that cluster
together in a similar position.
4. Include arrows to indicate any movement of
firms from one position to another.
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Strategic Groups
• Strategic Dimensions (examples)
 Extent of technological leadership
 Product quality
 Pricing policies
 Distribution channels
 Customer service
 Target markets
 Product breadth
 Geographical coverage
 Extent of diversification or vertical integration . . .
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Pitfalls in Creating Strategic Group
Maps
DO NOT . . .
• use unimportant/minor dimensions to create
your map
• use correlated dimensions (you will
basically get a diagonal array of groups)
• split one firm apart and map it in numerous
positions
• limit your thinking to only quantitative
dimensions (because some categorical or
qualitative dimensions might be useful!)
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“Nested” review of important
components to consider in the
external environment
• Broadest component = -

• Industry-wide considerations =

• Competitive components =

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Direct Competitors

• Usually rivals within your strategic group

• Usually your constant concern

• Deserve intensive investigation

• You want to understand these serious rivals
as deeply as possible – to predict their next
moves, and outsmart them with your moves!
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Competitor Analysis
Components

Figure 2.3
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“Competitive Intelligence”

The ethical gathering of insightful
information about your competitors.

How?

When?

What to do with it?
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Industry Survival Factors
(also called “key success factors”)

• specific “pre-requisites” for success in a
particular industry

• necessary specific skills or attributes that
ALL firms in the playing field must have to
be considered serious competitors

• Examples?

• SO WHAT?
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Overall Evaluation of Industry
Attractiveness
Attractive industry Unattractive industry

• favorable general • unfavorable general
environment trends environment trends
• favorable “industry • unfavorable “industry
facts”; industry growth facts”; overcapacity
and generous industry and low industry profits
profits • many strong threats in
• few strong threats from the 5 competitive forces
the 5 competitive forces • many powerful direct
• no powerful direct rivals
rivals
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