External Environmental Analysis

External Environmental AnalysisStrategic ManagementDiagnosing a companys situation has two facetsAssessing the companys external ormacro-environment General environment conditionsForces acting to reshape this environmentAssessing the companys internal ormicro-environment (task environment)Market position and competitiveness Competencies, capabilities, and resource strengths and weaknessesUnderstanding the Environment From Thinking Strategically about theCompanys Situation to Choosing a Strategy

The Components for a Companys Macro-environment

Prentice Hall, 2000Chapter 35Some Important Variables in the Domestic EnvironmentEconomicGDP trendsInterest ratesMoney supplyInflation ratesUnemployment levelsWage/price controlsDevaluation/revaluationEnergy availability and costDisposable and discretionary incomeTechnologicalTotal government spending for R&DTotal industry spending for R&DFocus of technological effortsPatent protectionNew productsNew developments in technology transfer from lab to marketplaceProductivity improvements through automationPolitical-LegalAntitrust regulationsEnvironmental protection lawsTax lawsSpecial incentivesForeign trade regulationsAttitudes toward foreign companiesLaws on hiring and promotionStability of governmentLevel of good governanceCost of doing businessDoing business indicatorsSocio-culturalLifestyle changesCareer expectationsConsumer activismRate of family formationGrowth rate of population Age distribution of populationRegional shifts in populationLife expectanciesBirth rates5Some Important Variables in the International EnvironmentEconomicTechnologicalPolitical-legalSocio-culturalEconomic DevelopmentPer capita incomeGDP tendsMonetary and Fiscal policiesEmployment levelCurrency convertibilityNature of competition

Regulation in technology transferEnergy availabilityNatural resource availabilitySkill level of workforcePatent-trademark protectionInternet availabilityTelecommunicationinfrastructure Form of governmentPolitical ideologyTax lawsStability of governmentRegulation of foreign ownership Trade regulationsForeign policiesTerrorist activityLegal systemCustoms, norms, valuesLanguageDemographicsLife-stylesReligious beliefsAttitude towards foreigners Literacy levelHuman rightsEnvironmentalismKey Questions Regarding theIndustry and Competitive EnvironmentWhat are the industrys dominant traits? How strong are competitive forces?What forces are driving change in the industry?What market positions do rivals occupy?What could be their next moves?What are the key factors for competitive success?How attractive is the industry from a profit perspective?What to Consider in Identifying an Industrys Dominant FeaturesFeaturesQuestions to answerMarket size and growth rateHow big is the industry and how fast it is growing? What does the industrys position in the business life cycle (early development, rapid growth, early maturity, maturity, stagnation, decline)? Scope of competitive rivalryIs the geographic area over which most companies compete local, regional, national, multinational, or global?Is having a presence in foreign markets becoming more important to a companys long-term competitive success? Is a surplus capacity pushing prices and profits down?Is the industry overcrowded with too many competitors?Number of RivalsIs the industry fragmented into many small companies or dominated by a few large firms?Who are the major market shareholders?Overall profile of the industryTotal market size, consumption, growth, production capacity, demand and supply gap, key players, market shares, input suppliersChanging needs of buyers & consumers, unsatisfied needs, brand loyaltyPace of technology change, degree of product differentiation & product innovation, substitute products, vertical integration, economies of scale, learning and experience curve effects, legislation & policies for industry The Five Forces Model of Competition

Threat of New Entrants / Entry Barriers

FactorsLevelCommentsEconomies of scale

Capital required

Access to distribution channels

Expected retaliation

Brand Loyalty

Experience Curve

Govt. Action/Approval

Low

Low

High/Ample

Low

Low

Low/Insignificant

LowThere is a great threat of new entrants as entry barriers are very low.Exit BarriersFactorsLevelCommentsUn-disposable Specialized Assets

Loss of Outstanding Credits

Fixed Cost of Exit

Strategic interrelationships & Contracts

Government BarriersHigh

High

High

Low

HighThere is a great difficulty in exit as exit barriers are very high.

Factors Affecting Bargaining Power of Buyers

How SellerBuyer Partnership Can Create Competitive EdgesThe seller-buyer strategic relations or even minor partnership can provide mutual benefits to both on matters such as:- defect-less & quality inputs at low price- timely order processing- just-in-time inventories (to reduce inventory and logistic costs) - electronic invoice payments- data sharing - supply of next generation components

Dell has partnered with its largest PC customers to create an on line system for over 50,000 corporate customers, providing their employees- information on approved product configurations- paperless purchase orders- real time order tracking, invoicing, purchasing history and other efficiency tools- loading a customers software at the factory- installing asset tags so that customer setup time is minimal- helping customers upgrade their PCs to next generation hardware and software

Factors Affecting Bargaining Power of SuppliersPower of Buyers or Suppliers

FactorsLevel/RemarksDetailed CommentsNo. of important Buyers / Suppliers

Switching cost (to other products)

Availability of substitutes

Threat of forward integration

Importance of buyers / suppliers

Few

High

Difficult

Low

HighThe company has to play very carefully because of fewer number of buyers and suppliers.Factors Affecting Competition From Substitute Products

Threat Of Substitute Product

FactorsLevelCommentThreat of Obsolescence of Industrys product

Aggressiveness of substitute products in promotion

Switching Cost (for buyers)

Perceived price/value High

High

Low

HighThe company has to play very carefully because of availability of abundant substitute products.

Overall Industry AttractivenessFactorsUnfavorableNeutralFavorableEntry barriersExit barriersRivalry among existing firmsPower of buyersPower of suppliersThreat of substitutesCategorizing International IndustriesMulti-domestic Industries:Independent subsidiaries in all countries Differentiated productsLocal responsiveness & adaptations

Global Industries:Standardized products (with uniform company image with uniform marketing, integrated packaging, & delivery/supply chain system), but may do minor adaptation or customization due to specific conditions Reputation of global brandsTreats the world as a single market (with homogenous needs)Presence in almost all continentsPrentice Hall, 2000Note: More detail will be presented in later chapters.21Continuum of International IndustriesMulti-domesticIndustry in which companies tailor their products to the specific needs of consumers in a particular country. Retailing Insurance BankingGlobalIndustry in which companiesmanufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles Tires Television sets21Factors that Determine whether Industry would be Global or Multi-domesticPressures for cost reduction may lead to turn as a global industry

Pressures for local responsiveness may lead to turn as a multi-domestic industryKey Success Factors (KSFs)Key success factors affect the ability of industry members to prosper in market place

On what basis do customers choose 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-wide Key Success Factors (KSF)Technology RelatedExpertise in particular technology; degree of automation; R&D; rapid innovation in high tech. industries; state-of-the-art production processes; process design; capacity planning; Enterprise Resource Planning (ERP) systems; etc. Manufacturing or Operations Related KSFsAbility to achieve scale economiesCapture learning & experience curve effects (important to achieving low production costs)Quality control applications Access to skilled labor for high labor productivity Low cost product design and engineering Ability to reduce number of components and processesSOPs for work specialization & certifications of excellence Standardized and customized products (made up to buyer s specifications)Accounting & Finance related KSFsAccuracy & expertise in financial planning & forecasting; capital budgeting; annual budgeting; computerized accounting; inventory & expenditure control; overall financial controls Marketing Related KSFs A talented workforceProven management and leadershipTraining and development (T&D)Employee involvement and empowermentDemocratic and participative style of supervisors Unique & innovated product line and product selection A well-known and respected brand name Courteous, personalized customer service Customer guarantees and warranties Clever advertising & effective marketing mixHR Related KSFs Prentice Hall, 2000Chapter 326Industry Matrix/Competitive Profile Matrix (CPM)Strategic FactorsWeightCompany ARatingCompany AWeighted ScoreCompany BRatingCompany BWeighted Score123456Total1.00Source:T. L. Wheelen and J. D. Hunger, Industry Matrix. Copyright 1997 by Wheelen and Hunger Associates. Reprinted by permission.26External Factor Analysis Summary (EFAS) / External Factor Evaluation Matrix (EFEM) 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 managements 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 factors weighted score.

Column 5 (comments): Note that 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.

Prentice Hall, 2000Chapter 328External Factors Analysis Summary (EFAS)ExternalStrategic FactorsWeightRatingWeighted ScoreComments123451.00Opportunities

Threats

Total Weighted ScoreNotes: 1. List opportunities and threats (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factors probable impact on the companys 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 companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factors 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 Hunger Associates. Reprinted by permission.28