External Environmental Analysis

Strategic Management

Understanding the Factors that Determine a Companys Situation

Diagnosing a companys situation has two facets

o Assessing the companys external or macro-environment (Societal or General Environment)
o General environment conditions
o Forces acting to reshape this environment
Assessing the companys 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 Companys Situation to Choosing a Strategy

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
o Direction
o Objectives
o Strategy
o Business model
Requires that company managers scan the external environment to
o Identify potentially important external developments
o Assess their impact and influence
o Adapt a companys direction and strategy as needed

Environmental Scanning
General Environment/ Societal environment
1.
2.
3.
4.

Economic forces that regulate exchange of materials, money, energy, and information
Technological forces that generate problem solving
Political legal forces that allocate power and provide constraining and protecting laws and regulations
Socio-cultural forces that regulate the values, mores, and customs of society

Some Important Variables in the Societal Environment

Economic
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment levels
Wage/price controls
Devaluation/revaluation
Energy availability and
cost
Disposable and
discretionary income

Technological
Political-Legal
Total government
Antitrust regulations
spending for R&D
Environmental protection
Total industry spending
laws
for R&D
Tax laws
Focus of technological
Special incentives
efforts
Foreign trade regulations
Patent protection
Attitudes toward foreign
New products
companies
New developments in
Laws on hiring and
technology transfer from
promotion
lab to marketplace
Stability of government
Productivity
improvements through
automation
Important variables in International Societal Environment

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

Economic
Economic Development
Per capita income
GDP tends
Monetary and Fiscal
policies
Employment level
Currency convertibility
Nature of competition

Socio-cultural
Customs, norms, values
Language
Demographics
Life-styles
Religious beliefs
Attitude towards
foreigners
Literacy level
Human rights
Environmentalism

Technological
Regulation in technology
transfer
Energy availability
Natural resource
availability
Skill level of workforce
Patent-trademark
protection
Internet availability
Telecommunication
Infrastructure

Political-Legal
Form of government
Political ideology
Tax laws
Stability of government
Regulation of foreign
ownership
Trade regulations
Foreign policies
Terrorist activity
Legal system

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
What to Consider in Identifying an Industrys Dominant Features
Feature
Questions to Answer
Market size and growth
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,
rate
maturity, stagnation, decline) reveal about the industrys growth position?
Is the industry fragmented into many small companies or dominated by a few large
Number of rivals
firms?
Is the industry going through a period of consolidation to a smaller
number of competitors?
Scope of competitive
Is the geographic area over which most companies compete local, regional,
national, multinational, or global? Is having a presence in foreign markets becoming
rivalry
more important to a companys long-term competitive success?
Buyer needs and
What are the final buyers (as well middlemen) looking for what attributes prompt
to choose one brand over another?
Are
requirements
buyers needs or requirements changing? If so what is driving such changes?
Degree of product
Are the products of rivals becoming differentiated or less differentiated?
Are increasing look alike products of rivals causing heightened price competition?
differentiation
Is the industry characterized by rapid product innovation and short product life
Product innovation
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
What role does technology play in this industry?
Are ongoing upgrades of facilities/ equipment essential because of rapidly
change
advancing production process technologies?
Do most
industry members have a need for strong technological capabilities? Why?
Are some competitors in the industry partially or fully integrated? Are there any
Vertical integration
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?
Is industry characterized by economies of scale in purchasing, manufacturing, and
Economies of scale
other activities? Do companies with high scale operations have an important cost
advantage over small scale firms
Learning and experience
Do some companies have a significant cost advantage because of their experience
in performing particular activities?
curve effects
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 forces
o 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 A

Factors

HUF

Economies of scale
Capital required
Access to distribution
channels
Expected retaliation
Differentiation
Brand Loyalty
Experience Curve
Govt. Action

MUF

Neutral

MF

HF

Low
Low
Ample
Low
Low
Low
Insignificant
Low

comment
High
High
Restricted
High
High
High
Significant
high

Threat of New Entrants/ Entry Barriers

Exit Barriers
Factors
Specialized Assets
Fixed Cost of Exit
Strategic
interrelationship
Government Barriers

HUF

MUF

Neutral

MF

Hi
Hi
Hi
Hi

Weapons for Competing and Factors Affecting Strength of Rivalry

HF

Comments
Low
Low
Low
Low

Competitive Rivalry
Factors
Composition of Competitors
Mkt. Growth rate
Scope of competition
Fixed storage Cost
Capacity Increase
Degree of differentiation
Strategic Stake

HUF

MUF

Neutral

MF

Equal Size
Slow
Global
High
Large
Commodity
High

HF

Comment
Unequal Size
High
Domestic
Low
Small
High
Low

Factors Affecting Bargaining Power of Buyers

Power of Supplier
Factors
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

HUF
Few
High
Difficult
High
Buys small
Proportion
High
Importance

MUF

MF

HF

Comment
Many
Low
Many
Low
Buys large
proportion
Low
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 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

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

MUF

Few
High
Difficult
High
Buys small
Proportion
High
Importance

MF

HF

Comment
Many
Low
Many
Low
Buys large
proportion
Low
Importance

How Seller-Buyer Partnership Can Create Competitive Pressures

1.
2.
3.
4.

Reduce inventory and logistic costs

Speed the availability of next generation components
Enhance the quality of parts and components being supplied and reduce defect rates
Squeeze the cost savings for both themselves and suppliers

Factors Affecting Competition From Substitute Products

Threat Of Substitute Product

Factors

HUF

Threat of Obsolescence of
Industrys product
Aggressiveness of
substitute products in
promotion
Switching Cost
Perceived price/ value

MUF

MF

HF

Hi
Hi
Lo
w
Hi

Comment
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

Continuum of International Industries

Multi-domestic

Global

Industry in which companies tailor their products to

the specific needs of consumers in a particular
country. E.g.:

Telecommunication

Insurance

Banking

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
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 Ability to achieve scale economies and/or capture learning curve effects (important to
Related KSFs
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
A strong network of wholesale distributors/dealers
related KSFs
Strong direct sales capabilities via the internet and or having company owned retail outlets
Ability to secure favorable display space on retailer shelves
Marketing
Breadth of product line and product selection
Related KSFs
A well known and respected brand name
Courteous, personalized customer service
Customer guarantees and warranties
Clever advertising
HR
A talented workforce
Related KSFs
Distribution 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 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