External Environmental AnalysisStrategic Management

Diagnosing a companys situation has two facetsAssessing the companys external or macro-environment (Societal or General Environment)General environment conditionsForces acting to reshape this environmentAssessing the companys internal or micro-environment (Specific or task Environment)Market position and competitiveness Competencies, capabilities, resource strengths and weaknesses, and competitivenessUnderstanding the Factors that Determine a Companys Situation

From Thinking Strategically about theCompanys Situation to Choosing a Strategy

The Components of a Companys Macro-environment

Thinking Strategically about aCompanys Macro-environmentA companys macro-environment includes all relevant factors and influences outside its domainDiagnosing a companys external situation involves assessing strategically important factors that have a bearing on the decisions a companys makes about itsDirectionObjectivesStrategyBusiness modelRequires that company managers scan the external environment toIdentify potentially important external developmentsAssess their impact and influenceAdapt a companys direction and strategy as needed

Environmental ScanningGeneral Environment/ Societal environmentEconomic forces that regulate exchange of materials, money, energy, and informationTechnological forces that generate problem solvingPolitical legal forces that allocate power and provide constraining and protecting laws and regulationsSocio-cultural forces that regulate the values, mores, and customs of society

Prentice Hall, 2000Chapter 3*Some Important Variables in the Societal 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 governmentSocio-culturalLifestyle changesCareer expectationsConsumer activismRate of family formationGrowth rate of population Age distribution of populationRegional shifts in populationLife expectanciesBirth rates

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Important variables in International Societal Environment

EconomicTechnologicalPolitical-legalSocio-culturalEconomic DevelopmentPer capita incomeGDP tendsMonetary and Fiscal policiesEmployment levelCurrency convertibilityNature of competitionRegulation 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 rightsEnvironmentalism

Key Questions Regarding theIndustry and Competitive Environment

Question 1: What are the IndustrysDominant Economic Traits?Analyzing a companys industry and competitive environment begins with identifying an industrys dominant economic features and forming a picture of what the industry landscape is likeIt 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

Market size and growth rateNumber of rivalsScope of competitive rivalryBuyer needs and requirementsDegree of product differentiationProduct innovationSupply/demand conditionsPace of technological changeVertical integrationEconomies of scaleLearning and experience curve effectsQuestion 1: What are the IndustrysDominant Economic Traits?

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) reveal about the industrys growth position? 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?

Number of RivalsIs 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?Buyer needs and requirementsWhat 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?Production CapacityIs a surplus capacity pushing prices and profits down? Is the industry overcrowded with too many competitors?

Production CapacityIs a surplus capacity pushing the prices and profit margins down? Is the industry over crowded with too many competitors?Pace of Technological ChangeWhat role does 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 for strong technological capabilities? Why?Degree of Product DifferentiationAre the products of rivals becoming differentiated or less differentiated? Are increasing look alike products of rivals causing heightened price competition?

Product InnovationIs 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? Vertical IntegrationAre some competitors in the industry partially or fully integrated? Are there any important cost differences among fully versus partially versus non-integrated firms? Is there any competitive advantage or disadvantage associated with being fully or partially integrated?Economies of ScaleIs 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 firmsLearning and experience curve effectsDo some companies have a significant cost advantage because of their experience in performing particular activities?

Question 2: What Kind of CompetitiveForces are Industry Members Facing?Objectives are to identify:Main sources of competitive forcesStrength of these forcesKey analytical toolFive Forces Model of Competition

Fig. 3.3: The Five Forces Model of Competition

Analyzing the Five Competitive Forces: How to Do ItStep 1: Identify the specific competitive pressures associated with each of the five forcesStep 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

FactorsHUFMUFNeutralMFHFcommentEconomies of scaleCapital requiredAccess to distribution channelsExpected retaliationDifferentiationBrand LoyaltyExperience CurveGovt. ActionLow

Low

Ample

LowLow

Low

InsignificantLowHigh

High

Restricted

High High

High

Significanthigh

Exit BarriersExit Barriers

FactorsHUFMUFNeutralMFHFCommentsSpecialized AssetsFixed Cost of ExitStrategic interrelationshipGovernment BarriersHi

Hi

Hi

HiLow

Low

Low

Low

Weapons for Competing and Factors Affecting Strength of Rivalry

Competitive Rivalry

FactorsHUFMUFNeutralMFHFCommentComposition of CompetitorsMkt. Growth rateScope of competitionFixed storage CostCapacity Increase

Degree of differentiation

Strategic StakeEqual Size SlowGlobal

High

Large

Commodity

HighUnequal SizeHighDomestic

Low

Small

High

Low

Factors Affecting Bargaining Power of Buyers

Power Of Buyer

FactorsHUFMUFNMFHFACommentNumber of Important buyersThreat of Backward integrationProduct suppliedSwitching cost% of buyers costProfit earned by buyerImportance to final quality of buyers Product.Few

High

Commodity

High

High

Low

LowMany

Low

Specialty

Low

Low

High

High

How Seller Buyer Partnership Can Create Competitive PressuresSellers 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 sharingDell 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

Fig. 3.7: Factors Affecting Bargaining Power of Suppliers

Power of Supplier

FactorsHUFMUFNMFHFCommentNo, of important SuppliersSwitching cost

Availability of substitutesThreat of forward integrationImportance of Buyer industry to suppliers

Importance of suppliers product to the buyers businessFew

High

Difficult High

Buys small ProportionHigh ImportanceMany

Low

Many Low

Buys large proportionLow Importance

How Seller-Buyer Partnership Can Create Competitive PressuresReduce inventory and logistic costsSpeed the availability of next generation componentsEnhance the quality of parts and components being supplied and reduce defect ratesSqueeze the cost savings for both themselves and suppliers

Factors Affecting Competition From Substitute Products

Threat Of Substitute Product

FactorsHUFMUFNMFHFCommentThreat of Obsolescence of Industrys productAggressiveness of substitute products in promotionSwitching CostPerceived price/ value Hi

Hi

Low

HiLow

Low

High

Low

Overall Industry Attractiveness

FactorsUnfavorableNeutralFavorableEntry BarriersExit BarriersRivalry among existing firmsPower of buyersPower of SuppliersThreat of substitutes

Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? As a rule, stronger the collective impact of the five forces, the lower the combined profitability of industry participantsFierce to strong competitive pressures come from all five forces driving industry profitability to unacceptably low levelsAn industry can be competitively unattractive even when not all five forces are strongIntense 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 ConditionsEffectively matching a companys strategy to prevailing competitive conditions have two aspects:Pursuing avenues that shield the firm from as many of the different competitive pressures as possibleInitiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in companys 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 Impact will they have?Industries change because forces are driving industry participants to alter their actionsDriving forces are the major underlying causes of changing industry and competitive conditionsWhere do driving forces originate?Outer ring of macroenvironmentInner ring of microenvironment ( Most frequent)

Driving Forces of ChangeThe internet and new e-commerce opportunities and threats in the industryIncreasing Globalization:Where scale economies are so large that rival firms need to market their products in many countries to gain enough volume to drive unit cost downWhere low cost production is a critical consideration (making it imperative to locate manufacturing facilities in countries where lowest cost could be achieved)Where one or more globally ambitious companies are pushing hard to gain significant competitive position in many attractive marketsWhere local governments are privatizing government-owned monopolies

Driving ForcesChanges in long-term industry growth rateUpsurge in long-term demand triggers a race for growth among existing firms and attract new-comersA shrinking market heightens competitive pressures for market share inducing mergers and acquisitions that result in industry consolidationChanges in who buys the product and how they use itProduct innovationTechnological changeMarketing innovationEntry or exit of a major firm

Drivers of ChangeDiffusion of technical know how across more companies and countriesChanges in cost and efficiency Growing preference for differentiated products instead of commodity or vice versa Regulatory influences and government policy changesChanging societal concerns, attitudes and life styles

Assessing the Impact of the Driving ForcesAre the driving forces causing demand for the industrys 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?

Categorizing International IndustriesMulti-domestic Industries:Are specific to each country or group of countriesCollection of essentially domestic industriesEach subsidiary is essentially independent of the activities of the MNCs subsidiaries in other countriesGlobal Industries:Operate world wide, with MNC making only small adjustment for country specific circumstancesMNCs produce products or services in various locations throughout the world and sell them making only small adjustments for country requirements

Prentice Hall, 2000Chapter 3*Continuum of International IndustriesMulti-domesticIndustry in which companies tailor their products to the specific needs of consumers in a particular country. E.g.: Telecommunication Insurance BankingGlobalIndustry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. E.g.: Automobiles Wrist watches Electrical appliances

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Factors that Determine whether Industry would be Global or Multi-domesticPressure for coordination within multinational corporations operating in that countryPressure for local responsiveness on the part of individual country markets

Strategic GroupsA strategic group is a set of business units or firms that pursue similar strategies with similar resourcesA firms competitive domain can be identified with the concept of strategic groupThe strategic group map consists of two sets of dimensionsBusiness Scope Commitment:The target market segment (2) types of products offered (3) geographical reachII.Resource Allocation Commitment: Allocation of resources to functional areas considered central in achieving competitive advantage

Prentice Hall, 2000Chapter 3*Mapping Strategic Groups in the U.S. Restaurant Chain IndustryPrice

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Implications of Strategic Groups The strategic group a firm should consider enteringThe number, type and level of entry barriers the firm will faceThe strategic dimensions that will make the firm similar to its strategic group members and different from members of different strategic groupsThe combined effect of five forces of competition on its relative profitability

Key Success FactorsKey success factors affect the ability of industry members to prosper in market placeOn what basis do customers chose between the competing brands of sellers?What must a 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 RelatedExpertise 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 KSFsAbility 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 skilled 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 related KSFsA strong network of wholesale distributors/dealers Strong direct sales capabilities via the internet and or having company owned retail outlets Ability to secure favorable display space on retailer shelves Marketing Related KSFs A talented workforceDistribution capabilities Product innovation capabilities Short delivery time capability Supply chain management capabilities Strong e-commerce capabilities Breadth of product line and product selection A well known and respected brand name Courteous, personalized customer service Customer guarantees and warranties Clever advertising HR Related KSFs

External Factor Analysis Summary( EFAS) / External Factor Evaluation Matrix ( EFE)Column 1( External Factors) list 8-10 most important opportunities and threats facing the companyColumn 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 factorsColumn 3 (Rating) ,assign a rating to each factor from 5.0 ( outstanding) to 1.0 (poor) based on managements current response to a particular factorColumn 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 why a particular factor was selected and how its weight and rating were estimatedAdd 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 3*External Factors Analysis Summary (EFAS)External Strategic FactorsWeight

RatingWeighted 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.

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