Lecture 2 of strategic management

8/10/2019 Lecture 2 of strategic management

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External Environmental

AnalysisStrategic Management


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Diagnosing a companys situation has two facets

Assessing the companys external o rm acro-environ m ent (Societal or GeneralEnvi ronment )

General environment conditions

Forces acting to reshape this environment

Assessing the companys in ternal orm icro-envi ronm ent (Spec i f ic or taskEnvi ronment )

Market position and competitiveness

Competencies, capabilities, resource strengthsand weaknesses and com etitiveness

Understanding the Factors thatDetermine a Companys Situation


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From Thinking Strategically about theCompanys Situation to Choosing a Strategy


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The Components of a CompanysMacro-environment


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Thinking Strategically about aCompanys Macro -environment

A companys macro -environment includes all re levant fac tors andinf luences outside its domain

Diagnosing a companys external situation involves assessings t ra tegical ly imp ortant fac tors that have a bearing on thedecisions a companys makes about its Direction Objectives Strategy Business model

Requires that company managers scanthe external enviro nm ent to Identify potentially important external developments Assess their impact and influence Adapt a companys direction and strategy as needed


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Environmental Scanning

General Environment/ Societal environment1. Economic forces that regulate exchange ofmaterials, money, energy, and information

2. Technological forces that generate problem solving

3. Political legal forces that allocate power andprovide constraining and protecting laws andregulations

4. Socio-cultural forces that regulate the values, mores,

and customs of society


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Prentice Hall, 2000 Chapter 3 7

Some Important Variables in theSocietal Environment

Economic

GDP trendsInterest rates

Money supply

Inflation rates

Unemploymentlevels

Wage/price controls

Devaluation/revaluation

Energy availabilityand cost

Disposable anddiscretionary income

Technological Total government

spending for R&D

Total industryspending for R&D

Focus of

technologicalefforts

Patent protection

New products

New developments

in technologytransfer from lab to marketplace

Productivityimprovementsthrough automation

Political-LegalAntitrust

regulations

Environmentalprotection laws

Tax laws

Special incentives

Foreign traderegulations

Attitudes towardforeign companies

Laws on hiring andpromotion

Stability ofgovernment

Socio-culturalLifestyle changes

Career expectations

Consumer activism

Rate of family

formationGrowth rate of

population

Age distribution ofpopulation

Regional shifts inpopulation

Life expectancies

Birth rates


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Important variables in InternationalSocietal Environment

Economic Technological Political-legal Socio-cultural

EconomicDevelopmentPer capita incomeGDP tendsMonetary andFiscal policiesEmployment level

CurrencyconvertibilityNature ofcompetition

Regulation intechnology transferEnergy availabilityNatural resourceavailabilitySkill level ofworkforce

Patent-trademarkprotectionInternet availabilityTelecommunicationinfrastructure

Form ofgovernmentPolitical ideology

Tax lawsStability ofgovernmentRegulation offoreign

ownershipTrade regulationsForeign policiesTerrorist activityLegal system

Customs, norms,valuesLanguageDemographicsLife-stylesReligious beliefs

Attitude towards

foreignersLiteracy levelHuman rightsEnvironmentalism


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Key Questions Regarding theIndustry and Competitive

EnvironmentWhat are theindustrysdominant traits?

How strong arecompetitiveforces?

What forcesare drivingchange in theindustry?

What marketpositions dorivals occupy?What moves will

they make next?

What are thekey factors forcompetitivesuccess?

How attractiveis the industryfrom a profitperspective?


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Market size and growth rate Number of rivals Scope of competitive rivalry

Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions

Pace of technological change Vertical integration Economies of scale Learning and experience curve effects

Question 1: What are the Industrys Dominant Economic Traits ?


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What to Consider in Identifying an Industrys Dominant Features

FeaturesQuestions to answer

Market size andgrowth rate

How big is the industry and how fast it is growing?What does the industrys position in the businesslife cycle (early development, rapid growth, earlymaturity, maturity, stagnation, decline) reveal aboutthe industrys growth position?

Scope ofcompetitive

rivalry

Is the geographic area over which most companies

compete local, regional, national, multinational, orglobal? Is having a presence in foreign markets becoming more important to a companys long -term competitive success?


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Number of Rivals Is the industry fragmented into many smallcompanies or dominated by a few large firms?Is the industry going through a period ofconsolidation to a smaller number of competitors?

Buyer needs andrequirements

What 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 sowhat is driving such changes?

ProductionCapacity

Is a surplus capacity pushing prices and profitsdown?Is the industry overcrowded with too manycompetitors?


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ProductionCapacity

Is a surplus capacity pushing the prices and profitmargins down?Is the industry over crowded with too manycompetitors?

Pace ofTechnological

Change

What role does technology play in this industry?Are ongoing upgrades of facilities/ equipmentessential because of rapidly advancing production

process technologies?Do most industry members have a need for strongtechnological capabilities? Why?

Degree ofProduct

Differentiation

Are the products of rivals becoming differentiated orless differentiated?Are increasing look alike products of rivals causingheightened price competition?


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ProductInnovation

Is the industry characterized by rapid product innovation andshort product life cycle? How important is R&D and productinnovation? Are there opportunities to overtake key rivals by

being first-to-market with next generation products?

VerticalIntegration

Are some competitors in the industry partially or fullyintegrated? Are there any important cost differences among fullyversus partially versus non-integrated firms? Is there any

competitive advantage or disadvantage associated with beingfully or partially integrated?

Economies of

Scale

Is industry characterized by economies of scale in purchasing,

manufacturing, and other activities? Do companies with highscale operations have an important cost advantage over smallscale firms

Learning andexperiencecurve effects

Do some companies have a significant cost advantage because of their experience in performing particular

activities?


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Question 2: What Kind of CompetitiveForces are Industry Members Facing?

Objectives are to identify:

Main sources of competitive forces

Strength of these forces

Key analytical tool

Five Forc es Mod elof Com pet it ion


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Fig. 3.3: The Five Forces Model of Competition


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Analyzing the Five CompetitiveForces: How to Do It

Step 1 : Identify the specific compet i t ivepressures associated with each ofthe five forces

Step 2 : Evaluate the s t reng th of each co m peti t ive fo rce -- fierce, strong,moderate to normal, or weak?

Step 3 : Determine whether the col lect ives t reng th of the five competitive forces

is conducive to earning attractive profits


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Factors Affecting Threat of Entry


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Threat of New Entrants/ Entry BarriersFactors HUF MUF Neutral MF HF comment

Economies

of scaleCapitalrequired

Access todistributionchannelsExpectedretaliationDifferentiationBrand

LoyaltyExperienceCurveGovt. Action

Low

Low

Ample

LowLow

Low

InsignificantLow

High

High

Restricted

HighHigh

High

Significanthigh


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x arr ers Exit BarriersFactors HUF MUF Neutral MF HF Comments

Specialized AssetsFixed Cost ofExit

StrategicinterrelationshipGovernmentBarriers

Hi

Hi

Hi

Hi

Low

Low

Low

Low

t g t


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eapons or ompet ng an actors Affecting Strength of Rivalry


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t t g g g


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actors ect ng arga n ng ower oBuyers

P Of B


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Power Of Buyer

Factors HUF MUF N MF HFA Comment

Number of

ImportantbuyersThreat ofBackwardintegrationProductsuppliedSwitchingcost% ofbuyers

costProfitearned bybuyerImportance tofinal quality ofbuyersProduct.

Few

High

Commodity

High

High

Low

Low

Many

Low

Specialty

Low

Low

High

High


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How Seller Buyer PartnershipCan Create Competitive Pressures

Sellers that provide items to business have found it is in their mutualinterest to collaborate closely on matters such as:- just in time inventories- order processing- electronic invoice payments- data sharing

Dell has partnered with its largest PC customers to create an on linesystem 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 otherefficiency 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 andsoftware

Fi 3 7 F Aff i B i i


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Fig. 3.7: Factors Affecting BargainingPower of Suppliers

P f S li


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Power of Supplier

Factors HUF MUF N MF HF CommentNo, of importantSuppliersSwitching cost

Availability ofsubstitutesThreat of forward

integrationImportance ofBuyer industry tosuppliers

Importance of

suppliers productto the buyersbusiness

Few

High

DifficultHigh

BuyssmallProportionHighImportance

Many

Low

ManyLow

BuyslargeproportionLowImportance


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How Seller-Buyer Partnership CanCreate Competitive Pressures

1. Reduce inventory and logistic costs2. Speed the availability of next generation

components3. Enhance the quality of parts and

components being supplied and reducedefect rates

4. Squeeze the cost savings for boththemselves and suppliers


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Factors Affecting Competition FromSubstitute Products


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Threat Of Substitute Product

FactorsHUF MUF N MF HF

CommentThreat ofObsolescenceof Industrysproduct

Aggressivenessof substituteproducts inpromotionSwitching Cost

Perceivedprice/ value

Hi

Hi

Low

Hi

Low

Low

High

Low


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Overall Industry Attractiveness

Factors Unfavorable Neutral FavorableEntry BarriersExit BarriersRivalry amongexisting firmsPower of buyersPower ofSuppliersThreat ofsubstitutes

Is the Collective Strength of the


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Is the Collective Strength of theFive Competitive Forces Conducive

to Good Profitability? As a rule, stronger the collective impact of the five

forces, the lower the combined profitability of industryparticipants

Fierce to strong competitive pressures come from all fiveforces driving industry profitability to unacceptably lowlevels

An industry can be competitively unattractive even whennot all five forces are strong

Intense competitive pressure from just two or threeforces may suffice to destroy the conditions for goodprofitability and prompt some companies to exit thebusiness


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Matching Company Strategy toCompetitive Conditions

Effectively matching a companys strategy toprevailing competitive conditions have twoaspects:

1. Pursuing avenues that shield the firm from asmany of the different competitive pressures aspossible

2. Initiating actions calculated to producesustainable competitive advantage, thereby

shifting competition in companys favor, puttingadded competitive pressure on rivals, andperhaps even defining a business model forthe industry

Q ti 3 Wh t F t D i i g


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Question 3: What Factors are DrivingIndustry Change and what Impact will

they have ? Industries change because forces

are dr iv ing industry par t ic ipantsto al ter th ei r act io ns

Driv ing forces are them ajor un der ly ing c auses of changing industry andcompetitive conditions

Where do dr iv ing fo rces or ig ina te? Outer ring of macroenvironment

Inner ring of microenvironment ( Most frequent)


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Driving Forces of ChangeThe internet and new e-commerce opportunities and

threats in the industryIncreasing Globalization:

1. Where scale economies are so large that rival firmsneed to market their products in many countries to

gain enough volume to drive unit cost down2. Where low cost production is a critical consideration

(making it imperative to locate manufacturing facilitiesin countries where lowest cost could be achieved)

3. Where one or more globally ambitious companies arepushing hard to gain significant competitive position inmany attractive markets

4. Where local governments are privatizing government-

owned monopolies


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Driving ForcesChanges in long-term industry growth rate

1. Upsurge in long-term demand triggers a race for growthamong existing firms and attract new-comers

2. A shrinking market heightens competitive pressures formarket share inducing mergers and acquisitions that result

in industry consolidationChanges in who buys the product and how they use itProduct innovationTechnological change

Marketing innovationEntry or exit of a major firm


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Drivers of Change

Diffusion of technical know how across morecompanies and countriesChanges in cost and efficiencyGrowing preference for differentiated productsinstead of commodity or vice versaRegulatory influences and government policychangesChanging societal concerns, attitudes and life styles


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Assessing the Impact of theDriving Forces

Are the driving forces causing demandfor the industrys product to increase ordecrease?

Are the driving forces acting to makecompetition more or less intense?

Will the driving forces lead to higher or

lower industry profitability?

Categorizing International


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Categorizing InternationalIndustries

Multi-domestic Industries: Are specific to each country or group of countriesCollection of essentially domestic industriesEach subsidiary is essentially independent of theactivities of the MNCs subsidiaries in othercountries

Global Industries:Operate world wide, with MNC making only smalladjustment for country specific circumstances

MNCs produce products or services in variouslocations throughout the world and sell them makingonly small adjustments for country requirements


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Continuum of InternationalIndustries

3.9 Continuum of International Industries (Fig. 3.4)

Multi-domestic Industry in which companies tailortheir products to the specificneeds of consumers in aparticular country. E.g.:

Telecommunication Insurance

Banking

Global Industry in which companiesmanufacture and sell the sameproducts, with only minoradjustments made for individualcountries around the world. E.g.:

Automobiles

Wrist watches

Electrical appliances

Factors that Determine whether


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Factors that Determine whetherIndustry would be Global or Multi-

domestic1. Pressure for coordination within

multinational corporations operating inthat country

2. Pressure for local responsiveness on thepart of individual country markets


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Strategic Groups A strategic group is a set of business units or firms

that pursue similar strategies with similar resources A firms competitive domain can be identified with

the concept of strategic group The strategic group map consists of two sets of

dimensionsI. Business Scope Commitment:

(1) The target market segment (2) types of productsoffered (3) geographical reachII. Resource Allocation Commitment: Allocation of

resources to functional areas considered central inachieving competitive advantage

3 10 M i S i G i h U S R Ch i I d (Fi 3 5)


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Mapping Strategic Groups in the U.S.Restaurant Chain Industry

3.10 Mapping Strategic Groups in the U.S. Restaurant Chain Industry (Fig. 3.5)

Product-Line Breadth

High

LowLimited Menu Full Menu

Arby's Wendy'sDomino's Dairy Queen

Hardee's Taco BellBurger King McDonald's

Shoney'sDenny's

Country Kitchen

Kentucky Fried ChickenPizza Hut

Long John Silver's

PonderosaBonanza

PerkinsInternational House

of Pancakes

Red LobsterOlive Garden

ChiChi's

P r

i c e

I li i f S i


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Implications of StrategicGroups

The strategic group a firm should considerentering

The number, type and level of entry barriersthe firm will face

The strategic dimensions that will make thefirm similar to its strategic group membersand different from members of differentstrategic groups

The combined effect of five forces ofcompetition on its relative profitability


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Key Success Factors

Key success factors affect the ability ofindustry members to prosper in market place

On what basis do customers chose betweenthe competing brands of sellers?

What must a seller do to be competitivelysuccessful- what resources and competitivecapabilities does it need?

What does it take for sellers to achieve asustainable competitive advantage?

Common Types of Industry Key Success Factors (KSF)


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Common Types of Industry Key Success Factors (KSF)

TechnologyRelated

Expertise in particular technology or in scientific research ( important in pharmaceuticals, internet applications, mobile communications, andmany high tech. industry

Proven ability to improve production processes (important in industrieswhere advancing technology opens the way for higher manufacturingefficiency and lower production costs)

ManufacturingRelated KSFs

Ability to achieve scale economies and/or capture learning curveeffects (important to achieving low production costs)

Quality control know-how ( important in those industries wherecustomers 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 laborcontent)Low cost product design and engineering ( reducesmanufacturing costs)Ability to manufacture or assemble products that are customizedto buyer specification

A k f h l l di ib /d l


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Distributionrelated KSFs

A strong network of wholesale distributors/dealersStrong direct sales capabilities via the internet and or havingcompany owned retail outletsAbility to secure favorable display space on retailer shelves

MarketingRelatedKSFs

A talented workforce

Distribution capabilitiesProduct innovation capabilitiesShort delivery time capabilitySupply chain management capabilitiesStrong e-commerce capabilities

Breadth of product line and product selectionA well known and respected brand nameCourteous, personalized customer serviceCustomer guarantees and warrantiesClever advertising

HR

Related KSFs

External Factor Analysis Summary( EFAS) /


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External Factor Analysis Summary( EFAS) /External Factor Evaluation Matrix ( EFE)

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 higherthe weight the more important is this factor to the current andfuture success of the company. All weights must sum to 1.0regardless 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 currentresponse to a particular factor

Column 4 ( weighted score) Multiply the weight in column 2 foreach factor in column 3 to obtain each factors weighted score.

Column 5 ( comments), note why a particular factor wasselected and how its weight and rating were estimated

Add the individual weighted score for all external factors incolumn 4 to determine the total weighted score for thatparticular company. The weighted score of 3 = average, 4 =

above average, less than 2.5 as below average

3 16 External Factor Analysis Summary (EFAS): Blank


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Prentice Hall 2000 Chapter 3 50

External Factors Analysis Summary(EFAS)

3.16 External Factor Analysis Summary (EFAS): Blank

ExternalStrategic Factors Weight Rating

WeightedScore Comments

1 2 3 4 5

1.00

Opportunities

Threats

Total Weighted Score

Notes: 1. List opportunities and threats (5 10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2based 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 factorsweighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weightedscore 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.

Lecture 2 of strategic management

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