This is Lecture 2 of Strategic Management subject

1. External Environmental
Analysis
Strategic Management

2. • Diagnosing a company’s situation has two facets
– Assessing the company’s external or
macro-environment (Societal or General
Environment)
• General environment conditions
• Forces acting to reshape this environment
– Assessing the company’s internal or
micro-environment (Specific or task
Environment)
• Market position and competitiveness
• Competencies, capabilities, resource strengths
Understanding the Factors that
Determine a Company’s Situation

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

4. The Components of a Company’s
Macro-environment

5. 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 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 company’s direction and strategy as needed

6. 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

7. 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

8. 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

9. Key Questions Regarding the
Industry and Competitive
Environment
What 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?

10. 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

11. • 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 Industry’s
Dominant Economic Traits?

12. What to Consider in Identifying an Industry’s Dominant FeaturesWhat to Consider in Identifying an Industry’s Dominant Features
FeaturesFeatures Questions to answerQuestions to answer
Market size andMarket size and
growth rategrowth rate
How big is the industry and how fast it is growing?How big is the industry and how fast it is growing?
What does the industry’s position in the businessWhat does the industry’s position in the business
life cycle (early development, rapid growth, earlylife cycle (early development, rapid growth, early
maturity, maturity, stagnation, decline) revealmaturity, maturity, stagnation, decline) reveal
about the industry’s growth position?about the industry’s growth position?
Scope ofScope of
competitivecompetitive
rivalryrivalry
Is the geographic area over which most companiesIs the geographic area over which most companies
compete local, regional, national, multinational, orcompete local, regional, national, multinational, or
global? Is having a presence in foreign marketsglobal? Is having a presence in foreign markets
becoming more important to a company’s long-becoming more important to a company’s long-
term competitive success?term competitive success?

13. Number of RivalsNumber of Rivals Is the industry fragmented into many smallIs the industry fragmented into many small
companies or dominated by a few large firms?companies or dominated by a few large firms?
Is the industry going through a period ofIs the industry going through a period of
consolidation to a smaller number of competitors?consolidation to a smaller number of competitors?
Buyer needs andBuyer needs and
requirementsrequirements
What are the final buyers (as well middlemen)What are the final buyers (as well middlemen)
looking for – what attributes prompt to choose onelooking for – what attributes prompt to choose one
brand over another?brand over another?
Are buyers needs or requirementsAre buyers needs or requirements
changing? If so what is driving such changes?changing? If so what is driving such changes?
ProductionProduction
CapacityCapacity
Is a surplus capacity pushing prices and profitsIs a surplus capacity pushing prices and profits
down?down?
Is the industry overcrowded with too manyIs the industry overcrowded with too many
competitors?competitors?

14. ProductionProduction
CapacityCapacity
Is a surplus capacity pushing the prices and profitIs a surplus capacity pushing the prices and profit
margins down?margins down?
Is the industry over crowded with too manyIs the industry over crowded with too many
competitors?competitors?
Pace ofPace of
TechnologicalTechnological
ChangeChange
What role does technology play in this industry?What role does technology play in this industry?
Are ongoingAre ongoing
upgrades of facilities/ equipment essential because ofupgrades of facilities/ equipment essential because of
rapidly advancing production process technologies?rapidly advancing production process technologies?
Do most industryDo most industry
members have a need for strong technologicalmembers have a need for strong technological
capabilities? Why?capabilities? Why?
Degree ofDegree of
ProductProduct
DifferentiationDifferentiation
Are the products of rivals becoming differentiated orAre the products of rivals becoming differentiated or
less differentiated?less differentiated?
Are increasing look alike products of rivals causingAre increasing look alike products of rivals causing
heightened price competition?heightened price competition?

15. ProductProduct
InnovationInnovation
Is the industry characterized by rapid product innovation andIs the industry characterized by rapid product innovation and
short product life cycle? How important is R&D and productshort product life cycle? How important is R&D and product
innovation? Are there opportunities to overtake key rivals byinnovation? Are there opportunities to overtake key rivals by
being first-to-market with next generation products?being first-to-market with next generation products?
VerticalVertical
IntegrationIntegration
Are some competitors in the industry partially or fullyAre some competitors in the industry partially or fully
integrated? Are there any important cost differences among fullyintegrated? Are there any important cost differences among fully
versus partially versus non-integrated firms? Is there anyversus partially versus non-integrated firms? Is there any
competitive advantage or disadvantage associated with beingcompetitive advantage or disadvantage associated with being
fully or partially integrated?fully or partially integrated?
Economies ofEconomies of
ScaleScale
Is industry characterized by economies of scale in purchasing,Is industry characterized by economies of scale in purchasing,
manufacturing, and other activities? Do companies with highmanufacturing, and other activities? Do companies with high
scale operations have an important cost advantage over smallscale operations have an important cost advantage over small
scale firmsscale firms
Learning andLearning and
experienceexperience
curve effectscurve effects
Do some companies have a significant cost advantageDo some companies have a significant cost advantage
because of their experience in performing particularbecause of their experience in performing particular
activities?activities?

16. 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

17. Fig. 3.3: The Five Forces Model of Competition

18. 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

19. Factors Affecting Threat of Entry

20. Threat of New Entrants/ Entry BarriersThreat 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

21. 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

22. Weapons for Competing and Factors
Affecting Strength of Rivalry
Weapons for Competing and Factors
Affecting Strength of Rivalry

23. Competitive RivalryCompetitive 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

24. Factors Affecting Bargaining Power of
Buyers

25. Power Of BuyerPower Of Buyer
Factors HUF MUF N MF HFA Comment
Number of
Important
buyers
Threat of
Backward
integration
Product
supplied
Switching
cost
% of
buyer’s
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

26. 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

27. Fig. 3.7: Factors Affecting Bargaining
Power of Suppliers

28. Power of SupplierPower 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
supplier’s product
to the buyer’s
business
Few
High
Difficult
High
Buys
small
Proporti
on
High
Importa
nce
Many
Low
Many
Low
Buys
large
proport
ion
Low
Import
ance

29. 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

30. Factors Affecting Competition From
Substitute Products

31. Threat Of Substitute ProductThreat Of Substitute Product
Factors HUF MUF N MF HF Comment
Threat of
Obsolescence
of Industry’s
product
Aggressiveness
of substitute
products in
promotion
Switching Cost
Perceived
price/ value
Hi
Hi
Low
Hi
Low
Low
High
Low

32. Overall Industry AttractivenessOverall Industry Attractiveness
Factors Unfavorable Neutral Favorable
Entry Barriers
Exit Barriers
Rivalry among
existing firms
Power of buyers
Power of
Suppliers
Threat of
substitutes

33. 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

34. 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
possible
2. 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

35. 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)

36. 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

37. 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

38. 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

39. 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?

40. 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 through out the world and sell them making
only small adjustments for country requirements

41. 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.
• Retailing
• Insurance
• Banking
Global
Industry in which companies
manufacture and sell the same
products, with only minor
adjustments made for individual
countries around the world.
Automobiles
• Tires
• Television sets

42. 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

43. 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

44. 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
Price

45. Implications of Strategic
Groups
• The strategic group a firm should consider
entering
• The type and level of entry barriers the firm
will face
• The number and type 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 relative effect of five forces of
competition on its relative profitability

46. 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 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?

47. Common Types of Industry Key Success Factors (KSF)Common Types of Industry Key Success Factors (KSF)
TechnologyTechnology
RelatedRelated
Expertise in particular technology or in scientific research ( important inExpertise in particular technology or in scientific research ( important in
pharmaceuticals, internet applications, mobile communications, andpharmaceuticals, internet applications, mobile communications, and
many high tech. industrymany high tech. industry
Proven ability to improve production processes (important in industriesProven ability to improve production processes (important in industries
where advancing technology opens the way for higher manufacturingwhere advancing technology opens the way for higher manufacturing
efficiency and lower production costs)efficiency and lower production costs)
ManufacturingManufacturing
Related KSF’sRelated KSF’s
Ability to achieve scale economies and/or capture learningAbility to achieve scale economies and/or capture learning
curve effects (important to achieving low production costs)curve effects (important to achieving low production costs)
Quality control know-howQuality control know-how
( important in those industries where customers insists on( important in those industries where customers insists on
product reliability)product reliability)
High utilization of fixed assets (important in capital intensive/High utilization of fixed assets (important in capital intensive/
high fixed cost industries)high fixed cost industries)
Access to attractive supplies of killed laborAccess to attractive supplies of killed labor
High labor productivity ( important for items with high laborHigh labor productivity ( important for items with high labor
content)content)
Low cost product design and engineering ( reducesLow cost product design and engineering ( reduces
manufacturing costs)manufacturing costs)
Ability to manufacture or assemble products that areAbility to manufacture or assemble products that are
customized to buyer specificationcustomized to buyer specification

48. DistributionDistribution
relatedrelated
KSF’sKSF’s
A strong network of wholesale distributors/dealersA strong network of wholesale distributors/dealers
Strong direct sales capabilities via the internet and or havingStrong direct sales capabilities via the internet and or having
company owned retail outletscompany owned retail outlets
Ability to secure favorable display space on retailer shelvesAbility to secure favorable display space on retailer shelves
MarketingMarketing
RelatedRelated
KSF’sKSF’s
A talented workforceA talented workforce
Distribution capabilitiesDistribution capabilities
Product innovation capabilitiesProduct innovation capabilities
Short delivery time capabilityShort delivery time capability
Supply chain management capabilitiesSupply chain management capabilities
Strong e-commerce capabilitiesStrong e-commerce capabilities
Breadth of product line and product selectionBreadth of product line and product selection
A well known and respected brand nameA well known and respected brand name
Courteous, personalized customer serviceCourteous, personalized customer service
Customer guarantees and warrantiesCustomer guarantees and warranties
Clever advertisingClever advertising
HRHR
Related KSF’sRelated KSF’s

49. Prentice Hall, 2000 Chapter 3 49
Industry Matrix/ Competitive Profile Matrix
(CPM)
Strategic Factors Weight
Company A
Rating
Company A
Weighted Score
Company B
Rating
Company B
Weighted Score
1 2 3 4 5 6
Total 1.00
Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix.” Copyright © 1997 by Wheelen and Hunger Associates. Reprinted by
permission.

50. 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 management’s 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 factor’s 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

51. Prentice Hall, 2000 Chapter 3 51
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 (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.