Chapter 3 Strategic Planning Process

8/12/2019 Chapter 3 Strategic Planning Process

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Strategic Management Oxford Fajar Sdn. Bhd. (008974-T) 2010

Chapter 3

Strategic PlanningProcess: The ExternalEnvironmental Analysis


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Learning Objectives

After reading this chapter, you should be able to:

Explain the key external environmental forces.

Describe the nature of the industry environment.

Discuss the five forces that make up the industryenvironment.

Discuss the importance of monitoring the externaland industry trends and events.


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External Environment

The external environment represents factors which

are beyond the control of an organization.

It is divided into two categories:1. General environment

2. Industry environment


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The General and Industry

Environments

The general environment, also known as the macroenvironment, includes the environmental factorsthat have an impact on allorganizations and firmswithin the company.

Easily remembered by the simple acronym PESTEL

P : Political factors

E : Economic factors

S : Socio-cultural factors

T : Technological factors

E : Ecological factors

L : Legal factors


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EXHIBIT 3.1 The Firm Embedded in Its External Environment

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The General and Industry

Environments (cont.)

The industry environment or the microenvironmentrefers to factors that directly affectthe firm and its competitive responses.

These factors have the ability to affect the firmsprofitability and shape the competition in anindustry.


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External Environmental

Analysis

This analysis provides information to managersregarding the key trends and changes in theexternal environment, such as the following:

Population shifts Changing demographics (e.g. aging population)

Information technology

New government regulations


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Analysis (cont.)

External environmental analysis reveals:

Opportunities: External environment factors which

can help the organization improve its performance andachieve its strategic objectives

Threats: External environment factors which canhinder an organizations performance and prevent the

organization from achieving its strategic objectives


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Analysis (cont.)

Based on the external environmental analysis,

managers formulate strategies that:

Take advantage of opportunities

Avoid/reduce impact of threats

Sources of information for external environmental

analysis include customer surveys, market surveys,

periodicals, journals, reports, books, newspapers,

conferences and the Internet.


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Factors in the General

Environment

1. Political and Legal Factors

Looks at how the government can influenceorganizations

Examples: employment laws

environmental regulations

competitive regulations

government leadership tax policies

quotas on goods produced

consumer protection laws


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Environment (cont.)

2. Economic Factors

Unemployment rates

Inflation rates

Consumer and investor confidence

Currency exchange rates


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Environment (cont.)

3. Socio-cultural Factors

Concerned with societys attitudes, cultural values

and demographic changes

Include factors such as: Demographic factors (e.g. population size and

distribution, age distribution, education levels)

Attitudes towards materialism, capitalism, free

enterprise


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Environment (cont.)

4. Technological Factors

Include factors such as:

Rate of technology transfer

Energy use and cost New products and services of competitors

Changes in Internet

Changes in mobile technology

Technological breakthroughs can create newindustries or create new products and serviceswhich might render existing products and servicesredundant.


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Ecological Variables

Global Warming

Sustainable Economic Growth

Fossil Fuel Consumption

Pollution of air & water

Toxins in food and products

Business Sustainability Video3-
https://www.mckinseyquarterly.com/When_sustainabillity_means_more_than_green_2404


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Legal Variables

Minimum wagesPrice control act

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Factors in the Industry

Environment

A set of factors that directly affects a firm

Also known as micro environment

These factors are analysed to assess how the

forces of the organizations immediateenvironment affect the attractiveness or

profitability potential of the firm.

Michael Porters Five Forces Model (1980) is one

of the most widely used and best knownconceptual frameworks to assess the industry

environment.


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Industry Environment Analysis/Competitive Analysis:

Michael Porters Five-Forces Model

Potential developmentof substitute products

Rivalry amongcompeting firms

Bargaining powerof suppliers

Potential entry of newcompetitors

Bargaining powerof consumers


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Environment (cont.)

1. Threat of New Entrants

New entrants to an industry can raise the level of

competition

The threat of new entrants depend on the barriersto entry

Barriers of entry can be affected by economies of

scale, product differentiation, capital requirements,

switching costs and government regulations.


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Environment (cont.)

2. Bargaining Power of Suppliers

A supplier group is powerful when

the suppliers goods are critical to the buyersmarketplace success.

the inputs required by the buyers are unique,making it costly to switch suppliers.

the buyers inputs do not represent a significantportion of the suppliers business.


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Environment (cont.)

the buyers inputs are only available from a smallgroup of suppliers.

the suppliers can sell directly to the firms customers,bypassing the need for the firm.


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Environment (cont.)

3. Bargaining Power of Buyers

Customers (or buyer groups) have the most power

when

they are large and purchase most of the industrysoutput.

the industry has many small suppliers supplying theproduct and the buyers are large.

the products represent a relatively large expensefor customers and sales of the product beingpurchased account for a significant portion of thesellers annual revenues.


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they have access to sufficient information and are

able to evaluate the competitive offerings.

the customers could switch to another product without

incurring significant switching cost because the

suppliers products are not unique or undifferentiated.

the customers could possibly make the product

themselves.


Environment (cont.)


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4. Substitute Products

Substitute products can be a threat when

the product is undifferentiated and customers can

easily switch away from one supplier to anothersupplier with little or insignificant switching costs.

the customers or buyer groups are price sensitiveand customers have little brand loyalty.

there is no real benefit offered by the products in theindustry and consumers can do without the productoffered by the industry.


Environment (cont.)


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Rivalry among competitors can be most intense

when

the industry has two or three dominant firms whichare battling to be the dominant firms in the industry.

there are numerous competitors in the industry.

the competitors are relatively equal in size andpower.

the firms are competing in a slow or shrinkingindustry.


Environment (cont.)


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there are high fixed costs of production.

the products are undifferentiated and are viewed by

customers as commodities.

there are high costs for exiting the business.


Environment (cont.)

Chapter 3 Strategic Planning Process

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