Topic 3

The External Environment

 Topic Outline

• Remote Environment
• International Environment
• Industry Environment
• Industry Analysis and Competitive Analysi
s
• Operating Environment
External Strategic Managemen
t Audit

-- Environmental Scanning

-- Industry Analysis
External Strategic Managemen
t Audit

Identify & Evaluate factors beyond th

e control of a single firm
–Increased foreign competition
–Population shifts
–Information technology
Key External Forces & the Organization

Competitors
Suppliers
Distributors
Creditors
Key Customers Opportunities
External Employees &
Forces
Communities Threats
Managers
Stockholders
Labor Unions
Special Interest Groups
Products
Services
I/O Perspective Firm Performance

Industry Properties

Economies of Scale

Barriers to market entry

Product differentiation

Level of competitiveness

Ch 3 -6
The Firm’s External Environment

• Econom Remote Environment (Glo • Technological

ic bal and Domestic) • Ecological
• Social
• Political Industry Environment (Global and Domestic)
• Entry barriers • Buyer power • Competitive rival
• Supplier power • Substitute availability ry

Operating Environment (Global and Domestic)

• Competitors • Labor
• Creditors • Suppliers
THE FIRM • Customers
 Remote Environment
• Comprises factors that originate beyond, a
nd usually irrespective of, any single firm’s
operating situation; economic, social, politi
cal, technological, legal & ecological factor
s
• Presents firms with opportunities, threats
& constraints, but rarely does a single firm
exert any meaningful reciprocal influence
 Economic Factors

• Concern the nature and direction of economy in

which a firm operates

• Types of factors
General availability of credit
Level of disposable income
Propensity of people to spend
Prime interest rates
Inflation rates
Trends in growth of gross national product
 Social Factors

• Include beliefs, values, opinions, and lifestyles of

people (developed from cultural, demographic. rel
igious, educational & ethnic conditioning)
• Social forces are dynamic, resulting from the effor
ts of individuals to satisfy their desires & needs b
y controlling & adopting to environmental factors
• Recent social trends
Entry of large numbers of women into labor market
Accelerating interest of consumers and employees in
quality-of-life issues
Shift in age distribution of population
 Political and Legal Factors
• Direction & stability factors  major consideration
for managers on formulating company strategy
• Define legal and regulatory parameters within whi
ch firms must operate  affected the supplier & d
emand functions
• Types of factors
–Fair-trade decisions (e.g. AFTA)
–Antitrust laws
–Tax programs
–Minimum wage legislation
–Pollution and pricing policies
 Technological Factors

• Focus on technological changes affecting industry

• Types of changes
New products
Improvements in existing products
Manufacturing and marketing techniques

• Role of technological forecasting

Foresees advancements and estimating their impact o
n organization’s operations
Alerts managers to impending challenges and promisi
ng opportunities
 Ecological Factors
• Involve relationships among human beings a
nd other living things and air, soil, and water
• Current concerns
Global warming
Loss of habitat and biodiversity
Air, water, and land pollution

• Responsibilities of firms
Eliminating toxic by-products of current manufacturi
ng processes
Cleaning up prior environmental damage
 International Environment

• Assessing each non-domestic market on t

he same factors that are used in a domesti
c assessment
• While the importance of factors will differ, t
he same set of considerations can be use
d for each country
• Beware of interplay among international m
arkets during the assessment processes
 Factors Used to Assess
the International Environment
Economic Environment Political System
• Level of economic development • Form of government
• Population
• Political ideology
• GNP
• Per capita income • Stability of government
• Literacy level • Strength of opposition parties
• Social infrastructure • Social unrest
• Natural resources • Political strife and insurgency
• Climate
• Governmental attitude toward fore
• Membership in economic blocs
ign firms
• Monetary and fiscal policies
• Wage and salary levels • Foreign policy
• Nature of competition
• Currency convertibility
• Inflation and interest rates
• Taxation systems
 Factors Used to Assess the
International Environment
Legal Environment Cultural Environment
• Legal tradition • Customs, norms, values,
• Effectiveness of legal syst beliefs
em • Language
• Treaties with foreign natio • Attitudes
ns
• Motivations
• Patent trademark laws
• Social institutions
• Laws affecting business fi
rms • Status symbols
• Religious beliefs
 Industry Environment
• Porter’s concept of industry environment for
developing strategic thought & business pla
nning (the I/O Model of SM)
• Porter’s framework; the nature & degree of c
ompetition in an industry hinge on 5 forces
• Strategic agenda should consider how they
work in its industry & how they affect a comp
any in a particular situation
How Competitive Forces Shape Strategy?
• The essence of strategy formulation is coping wit
h competition
• The collective strength of five forces determines t
he ultimate profit potential of an industry
• Strategy; to find a position in the industry where
a company can best defend itself against five for
ces or can influence them in its favor
• The strongest competitive force (s) determine the
profitability of an industry and so are of greatest i
mportance in strategy formulation
 Forces Driving Industry Competition
Potential
Entrants

Threat of new entrants

Bargaining power
Industry Competitors of buyers

Suppliers Buyers

Bargaining power Rivalry Among

of suppliers Existing Firms
Threat of substitute
products or services

Substitutes
 Competitive Force: Threat of Entry
• Seriousness of threat depends on
Barriers to entry
Reaction of existing firms

• Barriers to entry
Economies of scale (large scale/cost disadvantage)
Product differentiation (spend heavily for cons loyalty)
Capital requirements (expenditures in up-front)
Cost advantages independent of size (e.g. learning curve)
Access to distribution channels (secure distribution)
Government policy (license requirements or limits on acc
ess to raw materials)
 Competitive Force: Suppliers
A supplier group is powerful if:
It is dominated by a few companies and is m
ore concentrated than industry it sells to
Its product is unique, or differentiated, or has
built up switching costs
It is not obliged to contend with other product
s for sale to industry
It poses a threat of integrating forward into in
dustry’s business
Industry is not an important customer of sup
plier group
 Competitive Force: Buyers
A buyer group is powerful if:
It is concentrated or purchases in large volume
Products purchased from industry are standard or u
ndifferentiated
Products purchased from industry form a componen
t of its product, representing a significant fraction of it
s cost
It earns low profits, creating incentives to lower its c
osts
Industry’s product is unimportant to quality of buyer
s’ products or services
Industry’s product does not save buyer money
Buyer poses credible threat of integrating backward
Competitive Force: Substitute Products

• Relevance of substitutes
By placing a ceiling on prices charged, they limit prof
it potential of an industry

• Substitutes deserving the most attention are t

hose
Subject to trends improving their price-performance t
rade-off with the industry’s product
Produced by industries earning high profit
Competitive Force: Jockeying for Position

• Rivalry among existing competitors takes

a familiar form of jockeying for position
• Tactics of competitive rivalry

Price competition
Product introduction
Advertising slugfests
What Causes Rivalry to be Intense?
• Numerous competitors or they are roughly equal i
n size and power
• Slow growth in industry (fights for market share)
• Product lacks differentiation or switching costs
• High fixed costs or perishable product
• Capacity normally augmented in large increments
• High exit barriers (e.g. very specialized assets)
• Rivals are diverse in strategies, origins, and “pers
onalities” (have different idea on how to compete
head-to-head)
Industry and Competitive Analysis

1. What are the boundaries of the indus

try?
Questions
involved
2. What is the structure of the industry?
in
designing
viable
3. Which firms are our competitors?
strategies
4. What are the major determinants of
competition?
 Industry and Competitive Analysis

• Industry; a collection of firms that offer “si

milar products” or services
• Similar products; products that customers
perceived to be substitutable for one anoth
er
• Where do the boundaries of the industry b
egin and end?
 Why a Definition of Industry Bou
ndaries is Important?

• Helps executives determine arena in whic

h their firm competes
• Focuses attention on firm’s competitors
• Helps executives determine key factors for
success
• Gives executives another basis on which t
o evaluate their firm’s goals
 Sources of Difficulty in Defining
Industry Boundaries

Evolution of industries o
ver time creates new opp
ortunities and threats

Industry evolution creates Industries are becoming g

industries within industrie lobal in scope
s
 Issues in Defining an Industry

• What part of the industry corresponds to our firm’s goals?

• What are the key ingredients of success in that part of th
e industry?
• Does our firm have the skills needed to compete in that p
art of the industry?
• Will the skills enable us to seize emerging opportunities
and deal with future threats?
• Is our definition of the industry flexible enough to allow n
ecessary adjustments to our business concept as the ind
ustry grows?
 Characteristics of Industry Structure

• Structural attributes – Enduring characteristics giving a

n industry its distinctive character (different industries ha
ve very different requirements for success)
• Variations among industries involves examining
Concentration – Extent to which industry sales are domi
nated by only a few firms
Economies of Scale – Savings firms within an industry a
chieve due to increased volume
Product Differentiation – Extent to which customers per
ceive products of firms in industry as different
Barriers to Entry – Obstacles a firm must overcome to e
nter an industry
 Innovation-Friendly Regulation

Enable corporations to abide by the ever-inc

reasing regulations while keeping cost do
wn, maintaining competitiveness, and enh
ancing creativity

Need the principles of regulatory design that

will promote innovation, resource productiv
ity, and competitiveness
 Variables in Identifying Competitors

• How do other firms define the scope of their market?

The more similar the definitions of firms, the more likely t
he firms will view each other as competitors
• How similar are the benefits the customers derive fr
om the products and services other firms offer?
The more similar the benefits, the higher the level of subs
titutability between them
• How committed are other firms to the industry?
To size up commitment of potential competitors to industr
y, reliable intelligence data are needed concerning potenti
al resource commitments
 Common Mistakes
in Identifying Competitors

• Overemphasizing current and known competitor

s while ignoring potential entrants
• Overemphasizing large competitors while ignorin
g small ones
• Overlooking potential international competitors
• Assuming competitors will continue to behave in
same way
 Common Mistakes
in Identifying Competitors

• Misreading signals indicating a shift in focus of c

ompetitors
• Overemphasizing competitors’ financial resource
s, market position, and strategies while ignoring t
heir intangible assets
• Assuming all firms in industry are subject to sam
e constraints or are open to same opportunities
• Believing purpose of strategy is to outsmart com
petition, rather than satisfy customer needs
 Industry Analysis
• Using SWOT analysis to identify Critical S
uccess Factors (CSF)
• CSF can vary overtime and by industry
• Both “opportunities” and “threats” can be t
he CSF
Freund identify of CSF should be;
• Important to achieving long-term and annu
al objectives
• Measurable
• Relative few in number
• Applicable to all competing firms
• Hierarchical
• Communicated and distributed widely in th
e organization
 Application of CSF:
Competitive Intelligence Program/CI

• To provide a general understanding of an industr

y and its competitors
• To identify areas in which competitors are vulner
able and to assess the impact strategic actions
would have on competitors
• To identify potential moves that a competitor mig
ht make that would endanger a firm’s position in
the market
 Industry Analysis Matrix

• The External Factor Eval • The Competitive Profile M

uation (EFE) matrix atrix (CPM)
• Lists of opportunities and • Includes both internal and
threats factors external issues
• Allows strategists to sum • Identifies a firm’s major co
marize & evaluate the ext mpetitors & their particular
ernal factors strengths & weaknesses in
relation to a firm’s strategic
position
 CPM versus EFE
• CSF in CPM are broader; may focus on int
ernal issues
• CPM do not grouped into opportunities an
d threats as they are in EFE
• CPM  comparative analysis between fir
ms within industry
• CPM  provides important internal strateg
ic information
 Operating Environment

The operating environment, also called the

competitive or task environment, comprise
s factors in the competitive situation that af
fect a firm’s success in acquiring needed re
sources or in profitably marketing its good
s and services
 Factors in the Operating
Environment

• Firm’s competitive position

• The composition of its customers
• Its reputation among suppliers and
creditors
• Its ability to attract capable employ
ees
 Criteria Used in Constructing
Competitor Profiles
• Market share
• Breadth of product line
• Effectiveness of sales distribut
ion
• Proprietary and key-account a
dvantages
• Price competitiveness
• Advertising and promotion eff
ectiveness
• Location and age of facility
• Capacity and productivity
• Experience
• Raw material costs
• Financial position
• Relative product quality
• R&D advantages position
• Caliber of personnel
• General images
• Customer profile
• Patents and copyrights
• Union relations
• Technological position
• Community reputation
 Customer Profiles

• Improves ability of managers to

Plan strategic operations
Anticipate changes in size of markets
Reallocate resources to support forecasted shifts in d
emand patterns

• Two approaches to market segmentation;

Traditional segmentation approach (example a)
Industrial market segmentation (example b)
 Example a:
Major Segmentation Variables for Consum
er Markets

Geographic Variables; Psychographic Variables;

Region Social class

County size Lifestyle
City or SMSA* siz Personality
e
Density
Climate
* SMSA = Standard Metropolitan Statistical Area
 Example a:
Major Segmentation Variables for
Consumer Markets
Demographic Variables
Behavioral Variables
Age
Sex Occasions
Family size Benefits
Family life cycle User status
Income
Usage rate
Occupation
Loyalty status
Education
Religion Readiness stage
Race Attitude toward product
Nationality
 Example b:
Major Segmentation Variables in
Industrial Markets

Demographic Operating

Industry Technology
Company size User-nonuser status
Location Customer capabilitie
s
 Example b:
Major Segmentation Variables in
Industrial markets

Purchasing Approaches
Purchasing-function organization
Power structure
Nature of existing relationships
General purchase policies
Purchasing criteria
 Example b:
Major Segmentation Variables in
Industrial Markets

Perfect Characteristics
Situational Factors
Buyer-seller similarity
Urgency Attitudes toward risk
Specific applicatio Loyalty
n
Size of order
 Factors Related to Assessing
Relationship With Suppliers
How costly are shipping charges? Ar
e suppliers competitive in terms of pr
oduction standards?

Are suppliers’ prices compet Are suppliers reciprocally depe

itive? Do they offer quantity ndent on the firm?
discounts?

In terms of deficiency rates, are sup

pliers’ abilities, reputations, and ser
vices competitive?
 Factors Related to Assessing
Relationship with Creditors
• Do creditors fairly value and willingly accept firm’s sto
ck as collateral?
• Do creditors perceive firm as having an acceptable re
cord of past payment?
• A strong working capital position? Little or no leverag
e?
• Are creditors’ loan terms compatible with firm’s profita
bility objectives?
• Are creditors able to extend necessary lines of credit?

Answer to these questions  help a firm forecast th

e availability of the resources it will need to implem
ent and sustain its competitive strategies
 Factors Related to Acquiring Needed H
uman Resources

Reputation as an
employer

Local employment A firm’s access to needed Availability of people

rates personnel is affected by with needed skills

“good people attract good people” Tony Fernandez (CEO AirAsia)