External Environmental

Analysis
Strategic Management
Diagnosing a companys situation has two facets
Assessing the companys external or
macro-environment (Societal or General
Environment)
General environment conditions
Forces acting to reshape this environment
Assessing the companys internal or
micro-environment (Specific or task
Environment)
Market position and competitiveness
Competencies, capabilities, resource strengths
and weaknesses, and competitiveness
Understanding the Factors that
Determine a Companys Situation
From Thinking Strategically about the
Companys Situation to Choosing a Strategy
The Components of a Companys
Macro-environment
Thinking Strategically about a
Companys Macro-environment
A companys macro-environment includes all relevant factors and
influences outside its domain
Diagnosing a companys external situation involves assessing
strategically important factors that have a bearing on the
decisions a companys makes about its
Direction
Objectives
Strategy
Business model
Requires that company managers scan
the external environment to
Identify potentially important external developments
Assess their impact and influence
Adapt a companys direction and strategy as needed
Environmental Scanning
General Environment/ Societal environment
1. Economic forces that regulate exchange of
materials, money, energy, and information
2. Technological forces that generate problem solving
3. Political legal forces that allocate power and
provide constraining and protecting laws and
regulations
4. Socio-cultural forces that regulate the values, mores,
and customs of society
Prentice Hall, 2000 Chapter 3 7
Some Important Variables in the
Societal Environment
Economic
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment
levels
Wage/price controls
Devaluation/revalu
ation
Energy availability
and cost
Disposable and
discretionary income
Technological
Total government
spending for R&D
Total industry
spending for R&D
Focus of
technological
efforts
Patent protection
New products
New developments
in technology
transfer from lab to
marketplace
Productivity
improvements
through automation
Political-Legal
Antitrust
regulations
Environmental
protection laws
Tax laws
Special incentives
Foreign trade
regulations
Attitudes toward
foreign companies
Laws on hiring and
promotion
Stability of
government
Socio-cultural
Lifestyle changes
Career expectations
Consumer activism
Rate of family
formation
Growth rate of
population
Age distribution of
population
Regional shifts in
population
Life expectancies
Birth rates
Important variables in International
Societal Environment

Economic Technological Political-legal Socio-cultural
Economic
Development
Per capita income
GDP tends
Monetary and
Fiscal policies
Employment level
Currency
convertibility
Nature of
competition

Regulation in
technology transfer
Energy availability
Natural resource
availability
Skill level of
workforce
Patent-trademark
protection
Internet availability
Telecommunication
infrastructure
Form of
government
Political ideology
Tax laws
Stability of
government
Regulation of
foreign
ownership
Trade regulations
Foreign policies
Terrorist activity
Legal system
Customs, norms,
values
Language
Demographics
Life-styles
Religious beliefs
Attitude towards
foreigners
Literacy level
Human rights
Environmentalism
Key Questions Regarding the
Industry and Competitive
Environment
What are the
industrys
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 Industrys
Dominant 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 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
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?
What to Consider in Identifying an Industrys Dominant Features
Features
Questions to answer
Market size and
growth rate
How 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
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 companys long-
term competitive success?
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?
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?
Production
Capacity
Is a surplus capacity pushing prices and profits
down?
Is the industry overcrowded with too many
competitors?
Production
Capacity
Is a surplus capacity pushing the prices and profit
margins down?
Is the industry over crowded with too many
competitors?
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?
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?
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?
Question 2: What Kind of Competitive
Forces are Industry Members Facing?
Objectives are to identify:
Main sources of competitive forces
Strength of these forces
Key analytical tool
Five Forces Model
of Competition
Fig. 3.3: The Five Forces Model of Competition
Analyzing the Five Competitive
Forces: How to Do It
Step 1: Identify the specific competitive
pressures associated with each of
the five forces
Step 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

Factors HUF MUF Neutral MF HF comment
Economies
of scale
Capital
required
Access to
distribution
channels
Expected
retaliation
Differentiati
on
Brand
Loyalty
Experience
Curve
Govt. Action

Low

Low

Ample


Low
Low

Low

Insignifi
cant
Low
High

High

Restri
cted

High
High

High

Signifi
cant
high
Exit Barriers
Exit Barriers
Factors HUF MUF
Neutral
MF HF Comments
Specialized
Assets
Fixed Cost of
Exit
Strategic
interrelations
hip
Government
Barriers
Hi

Hi

Hi


Hi
Low

Low

Low


Low
Weapons for Competing and Factors
Affecting Strength of Rivalry
Competitive Rivalry

Factors
HUF MUF
Neutral
MF HF Comment
Composition of
Competitors
Mkt. Growth rate
Scope of
competition
Fixed storage
Cost
Capacity Increase

Degree of
differentiation

Strategic Stake
Equal
Size
Slow
Global

High

Large

Commodity


High
Unequal
Size
High
Domestic

Low

Small

High


Low


Factors Affecting Bargaining Power of
Buyers
Power Of Buyer

Factors HUF MUF N MF HFA Comment
Number of
Important
buyers
Threat of
Backward
integration
Product
supplied
Switching
cost
% of
buyers
cost
Profit
earned by
buyer
Importance to
final quality of
buyers
Product.

Few


High


Commodity

High

High

Low



Low
Many


Low

Specialty

Low

Low

High



High
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 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

Factors HUF MUF N MF HF
Comment
No, of important
Suppliers
Switching cost

Availability of
substitutes
Threat of forward
integration
Importance of
Buyer industry to
suppliers

Importance of
suppliers product
to the buyers
business
Few

High

Difficult
High

Buys
small
Proporti
on
High
Importa
nce
Many

Low

Many
Low

Buys
large
proport
ion
Low
Import
ance
How Seller-Buyer Partnership Can
Create Competitive Pressures
1. Reduce inventory and logistic costs
2. Speed the availability of next generation
components
3. Enhance the quality of parts and
components being supplied and reduce
defect rates
4. 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 Industrys
product
Aggressiveness
of substitute
products in
promotion
Switching Cost
Perceived
price/ value
Hi



Hi


Low

Hi
Low



Low


High

Low
Overall Industry Attractiveness
Factors
Unfavorable
Neutral Favorable
Entry Barriers
Exit Barriers
Rivalry among
existing firms
Power of buyers
Power of
Suppliers
Threat 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 companys strategy to
prevailing competitive conditions have two
aspects:
1. Pursuing avenues that shield the firm from as
many of the different competitive pressures as
possible
2. Initiating 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 actions
Driving forces are the
major underlying causes
of changing industry and
competitive conditions
Where 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 down
2. 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 markets
4. Where local governments are privatizing government-
owned monopolies
Driving Forces
Changes in long-term industry growth rate
1. Upsurge in long-term demand triggers a race for growth
among existing firms and attract new-comers
2. 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 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
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 MNCs subsidiaries in other
countries
Global Industries:
Operate world wide, with MNC making only small
adjustment for country specific circumstances
MNCs produce products or services in various
locations throughout the world and sell them making
only small adjustments for country requirements
Prentice Hall, 2000 Chapter 3 41
Continuum of International
Industries
3.9 Continuum of International Industries (Fig. 3.4)
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 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
Factors that Determine whether
Industry would be Global or Multi-
domestic
1. Pressure for coordination within
multinational corporations operating in
that country
2. 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 resources
A firms competitive domain can be identified with
the concept of strategic group
The 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
Prentice Hall, 2000 Chapter 3 44
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
Low
Limited Menu Full Menu
Arby's Wendy's
Domino's Dairy Queen
Hardee's Taco Bell
Burger King McDonald's
Shoney's
Denny's
Country Kitchen
Kentucky Fried Chicken
Pizza Hut
Long John Silver's
Ponderosa
Bonanza
Perkins
International House
of Pancakes
Red Lobster
Olive Garden
ChiChi's
P
r
i
c
e

Implications of Strategic
Groups
The strategic group a firm should consider
entering
The number, type and level of entry barriers
the firm will face
The strategic dimensions that will make the
firm similar to its strategic group members
and different from members of different
strategic groups
The 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 KSFs
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 KSFs
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
KSFs
A talented workforce
Distribution 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 company
Column 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 factors
Column 3 (Rating) ,assign a rating to each factor from 5.0 (
outstanding) to 1.0 (poor) based on managements current
response to a particular factor
Column 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 estimated
Add 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, 2000 Chapter 3 50
External Factors Analysis Summary
(EFAS)
3.16 External Factor Analysis Summary (EFAS): Blank
External
Strategic Factors Weight

Rating
Weighted
Score Comments
1 2 3 4 5
1.00
Opportunities




Threats




Total Weighted Score
Notes: 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.