Strategic Management External Environmental Analysis Notes

External Environmental Analysis Strategic Management

Understanding the Factors that Determine a Company’s Situation

Diagnosing a company’s situation has two facetso Assessing the company’s external or macro-environment (Societal or General Environment)o General environment conditionso Forces acting to reshape this environment

Assessing the company’s internal or micro-environment (Specific or task Environment)o Market position and competitiveness o Competencies, capabilities, resource strengths

and weaknesses, and competitiveness

From Thinking Strategically about the Company’s Situation to Choosing a Strategy

Thinking Strategically about a Company’s Macro-environment

A company’s macro-environment includes all relevant factors and influences outside its domain Diagnosing a company’s external situation involves assessing strategically important factors that have a

bearing on the decisions a company’s makes about itso Directiono Objectiveso Strategyo Business model

Requires that company managers scan the external environment too Identify potentially important external developmentso Assess their impact and influence

o Adapt a company’s direction and strategy as needed

Environmental Scanning

General Environment/ Societal environment

1. Economic forces that regulate exchange of materials, money, energy, and information2. Technological forces that generate problem solving3. Political –legal forces that allocate power and provide constraining and protecting laws and regulations4. Socio-cultural forces that regulate the values, mores, and customs of society

Some Important Variables in the Societal Environment

Economic GDP trendsInterest ratesMoney supplyInflation ratesUnemployment levelsWage/price controlsDevaluation/revaluationEnergy availability and costDisposable and discretionary income

Technological Total 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 automation

Political-LegalAntitrust regulationsEnvironmental protection lawsTax lawsSpecial incentivesForeign trade regulationsAttitudes toward foreign companiesLaws on hiring and promotionStability of government

Socio-culturalLifestyle changesCareer expectationsConsumer activismRate of family formationGrowth rate of population Age distribution of populationRegional shifts in populationLife expectanciesBirth rates

Important variables in International Societal Environment

Economic Economic DevelopmentPer capita incomeGDP tendsMonetary and Fiscal policiesEmployment levelCurrency convertibilityNature of competition

Technological Regulation in technology transferEnergy availabilityNatural resource availabilitySkill level of workforcePatent-trademark protectionInternet availabilityTelecommunicationInfrastructure

Political-LegalForm of governmentPolitical ideologyTax lawsStability of governmentRegulation of foreign ownership Trade regulationsForeign policiesTerrorist activityLegal system

Socio-culturalCustoms, norms, valuesLanguageDemographicsLife-stylesReligious beliefsAttitude towards foreigners Literacy levelHuman rightsEnvironmentalism

Key Questions Regarding the Industry and Competitive EnvironmentWhat are the industry’s dominant traits? How strong are competitive forces?What forces are driving change in the industry?What market positions do rivals occupy? What moves will they make next?

What are the key factors for competitive success?How attractive is the industry from a profit perspective?Question 1: What are the Industry’s Dominant Economic Traits?

Analyzing a company’s industry and competitive environment begins with identifying an industry’s dominant economic features and forming a picture of what the industry landscape is like

It 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

What to Consider in Identifying an Industry’s Dominant FeaturesFeature Questions to AnswerMarket size and growth rate

How big is the industry and how fast it is growing? What does the industry’s position in the business life cycle (early development, rapid growth, early maturity, maturity, stagnation, decline) reveal about the industry’s growth position?

Number of rivals Is 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?

Scope of competitive rivalry

Is 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 company’s long-term competitive success?

Buyer needs and requirements

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 so what is driving such changes?

Degree of product differentiation

Are the products of rivals becoming differentiated or less differentiated? Are increasing look alike products of rivals causing heightened price competition?

Product innovation Is 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?

Pace of technological change

What 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?

Vertical integration Are 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 scale Is 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 firms

Learning and experience curve effects

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

Production Capacity Is a surplus capacity pushing the prices and profit margins down? Is the industry over crowded with too many competitors?

Question 2: What Kind of Competitive Forces are Industry Members Facing? Objectives are to identify:

o Main sources of competitive forces

o Strength of these forceso Key analytical tool >> Five Forces Model of Competition

Fig. 3.3: The Five Forces Model of CompetitionAnalyzing 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 A

Threat of New Entrants/ Entry BarriersExit Barriers

Factors HUF MUF Neutral MF HF Comments

Specialized AssetsFixed Cost of ExitStrategic interrelationship

HiHiHiHi

LowLowLowLow

Factors HUF MUF Neutral MF HF comment

Economies of scaleCapital requiredAccess to distribution channelsExpected retaliationDifferentiationBrand LoyaltyExperience CurveGovt. Action

LowLowAmpleLowLow Low InsignificantLow

HighHighRestrictedHigh HighHighSignificanthigh

Government Barriers

Weapons for Competing and Factors Affecting Strength of Rivalry

Competitive Rivalry

Factors HUF MUF Neutral MF HF Comment

Composition of CompetitorsMkt. Growth rateScope of competitionFixed storage CostCapacity IncreaseDegree of differentiationStrategic Stake

Equal Size SlowGlobalHighLargeCommodityHigh

Unequal SizeHighDomesticLowSmallHighLow

Factors Affecting Bargaining Power of Buyers

Power of Supplier

Factors HUF MUF N MF HF Comment

No, of important SuppliersSwitching costAvailability of substitutesThreat of forward integrationImportance of Buyer industry to suppliersImportance of supplier’s product to the buyer’s business

FewHigh Difficult High Buys small ProportionHigh Importance

ManyLowMany Low Buys large proportionLow Importance

How Seller – Buyer Partnership Can Create Competitive Pressures

Sellers 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 sharing

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 customer’s software at the factory- installing asset tags so that customer setup time is minimal- helping customers upgrade their PC’s to next generation hardware and software

Fig. 3.7: Factors Affecting Bargaining Power of Suppliers

Power of Supplier

Factors HUF MUF N MF HF Comment

No, of important SuppliersSwitching costAvailability of substitutesThreat of forward integrationImportance of Buyer industry to suppliersImportance of supplier’s

FewHigh Difficult High Buys small ProportionHigh

ManyLowMany Low Buys large proportionLow

product to the buyer’s business Importance Importance

How Seller-Buyer Partnership Can Create 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 reduce defect rates4. Squeeze the cost savings for both themselves and suppliers

Factors Affecting Competition From Substitute Products

Threat Of Substitute Product

Factors HUF MUF N MF HF Comment

Threat of Obsolescence of Industry’s productAggressiveness of substitute products in promotionSwitching CostPerceived price/ value

HiHiLow Hi

LowLowHighLow

Overall Industry Attractiveness

Factors Unfavorable Neutral Favorable

Entry 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 participants

Fierce to strong competitive pressures come from all five forces driving industry profitability to unacceptably low levels

An industry can be competitively unattractive even when not all five forces are strong Intense 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 Conditions

Effectively matching a company’s strategy to prevailing competitive conditions have two aspects:1. Pursuing avenues that shield the firm from as many of the different competitive pressures as possible2. Initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition

in company’s 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 macroenvironment Inner ring of microenvironment ( Most frequent)

Driving Forces of Change The internet and new e-commerce opportunities and threats in the industry Increasing Globalization:1. 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 down2. Where low cost production is a critical consideration (making it imperative to locate manufacturing

facilities in countries where lowest cost could be achieved)3. Where one or more globally ambitious companies are pushing hard to gain significant competitive

position in many attractive markets4. Where local governments are privatizing government-owned monopolies

Driving Forces

Changes in long-term industry growth rate1. Upsurge in long-term demand triggers a race for growth among existing firms and attract new-comers2. A shrinking market heightens competitive pressures for market share inducing mergers and acquisitions

that result in industry consolidation Changes in who buys the product and how they use it Product innovation Technological change Marketing innovation Entry or exit of a major firm

Drivers of Change Diffusion of technical know how across more companies and countries Changes in cost and efficiency Growing preference for differentiated products instead of commodity or vice versa Regulatory influences and government policy changes Changing societal concerns, attitudes and life styles

Assessing the Impact of the Driving Forces

Are the driving forces causing demand for the industry’s 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 Industries

Multi-domestic Industries:

Are specific to each country or group of countries Collection of essentially domestic industries Each subsidiary is essentially independent of the activities of the MNC’s subsidiaries in other countries

Global Industries:

Operate world wide, with MNC making only small adjustment for country specific circumstances MNC’s produce products or services in various locations throughout the world and sell them making

only small adjustments for country requirements

Continuum of International Industries

Multi-domestic Industry in which companies tailor their products to the specific needs of consumers in a particular country. E.g.:

• Telecommunication• Insurance• Banking

Global Industry in which companiesmanufacture and sell the same products, with only minor adjustments made for individual countries around the world. E.g.:

Automobiles• Wrist watches• Electrical appliances

Factors that Determine whether Industry would be Global or Multi-domestic

1. Pressure for coordination within multinational corporations operating in that country2. Pressure for local responsiveness on the part of individual country markets

Strategic Groups

A strategic group is a set of business units or firms that pursue similar strategies with similar resourcesA firm’s competitive domain can be identified with the concept of strategic groupThe strategic group map consists of two sets of dimensions

I. Business Scope Commitment:(1) The target market segment (2) types of products offered (3) geographical reach

II. Resource Allocation Commitment: Allocation of resources to functional areas considered central in achieving competitive advantage

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 Factors Key success factors affect the ability of industry members to prosper in market place On 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 Related

Expertise 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 KSF’s

Ability 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 KSF’s

A 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 KSF’s

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 KSF’s

A talented workforceDistribution capabilities Product innovation capabilities Short delivery time capability Supply chain management capabilities Strong e-commerce capabilities

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 management’s current response to a particular factorColumn 4 ( weighted score) Multiply the weight in column 2 for each factor in column 3 to obtain each factor’s 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

ExternalStrategic Factors Weight Rating

Weighted Score 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 2 based on that factor’s probable impact on the company’s 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 company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s 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.