The External Environmental Think in terms of Opportunities and Threats - the “O” and “T” of TOWS Relate Strategic Objectives to “O” and “T” n increased.

The External Environmental

Think in terms of Opportunities and Threats - the “O” and “T” of TOWS

Relate Strategic Objectives to “O” and “T” increased sales and/or market share (Cereal) new product offerings (Toys) processing technology innovation (Semiconductors) decreased environmental impact (Chemicals)

Continually scan to identify “O’s” and “T’s”

The External Environmental

The Company should achieve Strategic Fit– What is needed to respond to changes in the

external environment and what does the company possess to respond to these changes?

– What does the company need and what does the external environment possess to provide to the company?

The External Environmental

The General Environment Demographic: age, ethnicity, household

size, occupation Economic: income distribution, inflation,

interest rates, exchange rates, urbanization Political/Legal: consumer and

environmental protection, unions

The External Environmental

The General Environment Social and Cultural: conservatism/

liberalism, nesting, materialism Technological: e-tailing, intranets, diffusion

rates Global: nationalism, transnational

corporations, cultural differences

The External Environmental

“Age of Functionality” (Osborn, 2002)– Strategic Perspective

– “What risk do you take?” Honda’s Element Chrysler’s PT Cruiser Pontiac Vibe Toyota Matrix

– - To what degree does a company try to meet the needs of a increasingly fragmented market?

The External Environmental

What changes are going on in the General Environment that you think businesses need to pay attention to?– Are these changes only short term? Are they

cyclical? Are they more long term and lasting?

The External Environmental

The Industry Environment

The following factors in an Industry… Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products

...Determine Intensity of Competitive Rivalry

The External Environmental

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Competitive Rivalry

The Industry Environment

The External Environmental

Threats of New Entrants decreases if barriers to entry are high...

Economies of Scale are high Product Differentiation is high Capital Requirements are high Switching Costs are high Access to Distribution Channels is limited Cost Disadvantages Independent of Scale are high Government Policy is restrictive

Expected Retaliation is high

Threat

of

New Entrants

The External Environmental

Suppliers are likely to be powerful if: Supplier industry dominated by a few firms Suppliers’ products have few substitutes Buyer is not important customer Suppliers’ product is an important input Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat to forward integration

Bargaining Power of Suppliers

The External Environmental

Buyers are likely to be powerful if: They are concentrated or purchases are large relative to

seller’s sales Purchase accounts for a significant fraction of supplier’s

sales Product unimportant to quality Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Buyer has full information Buyer presents a credible threat to backward integration

Bargaining Power

of

Buyers

The External Environmental

The keys to evaluating Substitute Products are: Products with improving price/performance tradeoffs

relative to present industry products

For example:

Electronic security systems in place of security guards

Email and fax machines in place of overnight mail delivery

Threat of Substitute Products

The External Environmental

Fresh & Co. (Yugoslavian fruit juice company)– Supply of packaging – only one supplier in country

with limited styles.– Supply of raw material (fruits) – large number of small

suppliers located throughout the country for most fruits, imports tropical

– Limited, but increasing domestic incomes– Brand conscious younger generation– Health conscious parents

The External Environmental

Forecasting – perhaps the most challenging issue for business success – directly impacts financial planning and internal resource allocation– Based on a mix of hard data and luck/intuition– Use brainstorming, statistical modeling, and

scenario planning.

The External Environmental

Forecasting – – For the simulation, consider

What is existing industry demand in each segment? What market share of each segment does your company

possess? How much will the segment grow? What will be the change (+ or -) in your market share of each

segment?

– Let’s take a look under Tutorials for an excellent description of doing Sales Forecasts in the Simulation!

The External Environmental

Future objectives: goals and risks, ability to achieve

Current strategy: competitive advantages

Retaliation: How will competitor(s) respond to your actions?

Assumptions: Can competitor(s) adapt to changing environment?

Capabilities: relative strengths and weaknesses?

Understanding Competitors

The External Environmental

numerous and/or equally balanced competitors

slow growth industry high fixed costs high storage costs lack of differentiation

capacity added in large increments

diverse competitors high strategic stakes high exit barriers

Cutthroat Competition:

The External Environmental

High Exit Barriers:Economic, strategic, and emotional factors that cause

companies to remain in an industry even when future profitability is questionable.

Include: specialized assets, fixed cost to exit (labor agreements), strategic relationships & networks, emotional links &/or history, government & social restrictions.

External Factor Analysis Summary

External Factors Weight Rating (from 1 - poor to 5

very good)

Weighted Score

(weight multiplied by rating)

Comments

Opportunities What are the most

important opportunities for your firm?

Threats

What are the most important threats to

your company

What is the relative

importance of each of

the opportunities and threats?

How well is your

company able to respond to the

opportunities and threats?

(Describe how you

derived the weighted score for

each line)

Total 1.00 ????

External Factor Analysis Summary

External Factors: List the 8 to 10 most important opportunities and threats (developments in the General and Industry environments) facing the company.

Weight: Assign a weight to each External Factor from 1.0 (most important) to 0.0 (not important) based on the factor’s probable impact on the company’s current strategic position. All weights must sum to 1.00.

Rating: Assign a rating to each factor from 5.0 (Outstanding) to 1.00 (Poor) based on the company’s current response to that particular factor.

External Factor Analysis Summary

Weighted Score: Multiply the weight times the rating to get the weighted score for each factor.

Comments: Describe (1) why you selected each External Factor and (2) how you estimated the weight and rating.

Total Weighted Score: Add the Weighted Scores for the External Factors to get the Total Weighted Score. The Total Weighted Score is useful as a comparison to other companies in the industry group.

See pages 73 and 74 in the text for more information.