TM-1

Topic 3 Topic 3 The External EnvironmentThe External Environment

is part of is part of Strategic Management Strategic Management

ModelModel• 04/19/2304/19/23• SCANNING AND MONITORING THE EXTERNAL SCANNING AND MONITORING THE EXTERNAL

ENVIRONMENTENVIRONMENT• FORMULATING STRATEGIESFORMULATING STRATEGIES• IMPLEMENTING STRATEGIESIMPLEMENTING STRATEGIES• EVALUATING AND CONTROLLING STRATEGIESEVALUATING AND CONTROLLING STRATEGIES

TM-2

The External AuditThe External AuditCan be described as:Can be described as:1. collecting and evaluating social-1. collecting and evaluating social-cultural, demographic, political/legal, cultural, demographic, political/legal, economic , technological (economic , technological (general general societal informationsocietal information) and collecting ) and collecting and evaluating and evaluating 2. Industry/competitive/task 2. Industry/competitive/task information.information.• ScanningScanning: Is looking for anything that might be : Is looking for anything that might be

importantimportant

• MonitoringMonitoring: Is looking at environment on a : Is looking at environment on a continuous basiscontinuous basis

TM-3

External Environmental Variables External Environmental Variables can be described as (O)Opportunities can be described as (O)Opportunities or (T)Threatsor (T)Threats

Internal Environmental variables can be described Internal Environmental variables can be described as (S)Strengths or (W)weaknessesas (S)Strengths or (W)weaknesses

Together looking at external environment and Together looking at external environment and internal environment is called SWOT analysisinternal environment is called SWOT analysis

TM-4

External SocietalExternal Societal

• Should not be company specificShould not be company specific• This information will be general information that is effecting This information will be general information that is effecting

most organizations in this or other industries.most organizations in this or other industries.

• Should not be industry specificShould not be industry specific• This information will not include what is happening in the This information will not include what is happening in the

industry among competitors in the industry, nor will it be industry among competitors in the industry, nor will it be information about specific technology the industry uses, information about specific technology the industry uses, nor government regulation of this industry in particular. It nor government regulation of this industry in particular. It does not include the specific customers for the products of does not include the specific customers for the products of this industry.this industry.

TM-5

When looking at Opportunities and When looking at Opportunities and Threats in the Societal and Industry Threats in the Societal and Industry external environments Information external environments Information should be assessed as to whether it is should be assessed as to whether it is a Strategic Issue ora Strategic Issue orStrategic FactorStrategic FactorStrategic IssuesStrategic Issues• External Variables that External Variables that maymay affect the future environment affect the future environment

of our organizationof our organization

Strategic Factors (are issues that we believe Strategic Factors (are issues that we believe will will have have meaningful effect on our organization- we now meaningful effect on our organization- we now call them call them strategic factorsstrategic factors

• Those strategic issues with high probability of occurrence Those strategic issues with high probability of occurrence and high probable impact on corporation are factorsand high probable impact on corporation are factors

• Strategic Group: Group pursuing similar markets with Strategic Group: Group pursuing similar markets with similar products.similar products.

TM-6

Issues Priority Matrix is used to Issues Priority Matrix is used to determine which issues are strategic determine which issues are strategic

factorsfactors

High Priority

HighPriority

High Priority

Medium Priority

Medium Priority

Medium Priority

Probable Impact on Corporation

Low Priority

Low Priority

Low Priority

LowMediumHigh

Med

ium

Hig

hL

ow

Pro

bab

ilit

y o

f O

ccu

rren

ce

TM-7

Scanning the External Scanning the External Societal and Competitive Societal and Competitive

EnvironmentsEnvironments Analysis of Societal Environment

Economic, Sociocultural, Technological, Political-Legal Factors

Selection of Strategic Factors

• Opportunities • Threats

Market Analysis

Competitor Analysis

Supplier Analysis

Governmental Analysis

Interest Group Analysis

Community Analysis

TM-8

Some Important Variables Some Important Variables in the Societal Environmentin 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

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

Sociocultural

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

TM-9

Each team needs to gather Each team needs to gather information on their assigned industry information on their assigned industry and present an integrated summary of and present an integrated summary of their findings in their Case write-up their findings in their Case write-up

and presentationand presentation..• See Handout - Ten(10) Outside Bibliographical See Handout - Ten(10) Outside Bibliographical

Sources required. Pick sources that speak Sources required. Pick sources that speak comprehensively about the industry. Sources comprehensively about the industry. Sources should be several pages long if possible. Put should be several pages long if possible. Put number of pages at end of citation. number of pages at end of citation.

• Review the several pages in the book that Review the several pages in the book that discuss indexes, and internet cites, and discuss indexes, and internet cites, and strategic planning programs. (in chapter 3)strategic planning programs. (in chapter 3)

TM-10

External Industry/Task External Industry/Task EnvironmentEnvironment

• Success Success hinges on competitionhinges on competition in industry. In industries in industry. In industries that have a small amount of competition, and high profit that have a small amount of competition, and high profit margins-- success is relatively easy.margins-- success is relatively easy.

• The following, according to Porter, is what drives industry The following, according to Porter, is what drives industry competition. In our case industry analysis we will use the competition. In our case industry analysis we will use the categories, demand, supply, competitive structure, categories, demand, supply, competitive structure, government groups, and interest groups to analyze and government groups, and interest groups to analyze and industry.industry.

TM-11

Forces Driving Industry Forces Driving Industry CompetitionCompetition

3

Threat of New Entrants

Bargaining Power

of Suppliers

Bargaining Power

of Buyers

Relative Power

of Unions, Governments,

etc.

Potential Entrants

Threat of Substitute Products or Services

Industry Competitors

Rivalry Among Existing Firms

Other Stakeholders

Buyers

Substitutes

Suppliers

by Michael E. Porter.

TM-12

Intense rivalry among firms Intense rivalry among firms reduces profits and reduces profits and

increases competitive increases competitive pressures. pressures.

• Factors effecting Factors effecting demand demand includeinclude::• Rate of growth in consumer needsRate of growth in consumer needs• Alternative replacement products for consumersAlternative replacement products for consumers• Product or service characteristicsProduct or service characteristics• Elasticity of demand (how consumers are effected by a Elasticity of demand (how consumers are effected by a

change in price (elastic or inelastic products)change in price (elastic or inelastic products)• Bargaining power of buyersBargaining power of buyers• Rate of Industry GrowthRate of Industry Growth

TM-13

Factors effecting Supply include:Factors effecting Supply include:

• Capacity of the industryCapacity of the industry• Availability and control of raw materials..partsAvailability and control of raw materials..parts• Number of competitorsNumber of competitors• Price levels of productPrice levels of product• Economies of scaleEconomies of scale• Access to distribution channelsAccess to distribution channels

TM-14

Factors Making Competitive Factors Making Competitive Structure include:Structure include:

• What type of competition you are in (monopoly, What type of competition you are in (monopoly, oligopoly, monopolistic competition)oligopoly, monopolistic competition)

• Stage in Product Life Cycle and Industry Stage in Product Life Cycle and Industry evolutionevolution

• Threat of Threat of SubstitutesSubstitutes• Threat of Threat of Entrant Entrant • Height of Entrance Barriers and Exit Barriers Height of Entrance Barriers and Exit Barriers

including those developed by governmentsincluding those developed by governments • Diversity of RivalsDiversity of Rivals• Switching CostsSwitching Costs

TM-15

Government Groups Government Groups affecting an industry affecting an industry

include:include:• State, county, city, and other governmental unit State, county, city, and other governmental unit

regulators.regulators.• Specific agencies set up to oversee and Specific agencies set up to oversee and

industry’s environmental practices, pricing industry’s environmental practices, pricing policies, work rules, accounting requirements, policies, work rules, accounting requirements, safety,safety,

• Courts and legal practices (liability insurance)Courts and legal practices (liability insurance)• Groups that set wages, employee taxes, Groups that set wages, employee taxes,

disability insurance, work person’s disability insurance, work person’s compensation. Etc., compensation. Etc.,

TM-16

Interest Groups studied Interest Groups studied when you study an industry when you study an industry

include:include:• Customer representativesCustomer representatives• Local community, city, state groups in which Local community, city, state groups in which

companies are locatedcompanies are located• Those effected by environmental pollutionThose effected by environmental pollution• Social action groups (e. g. MADD)Social action groups (e. g. MADD)• Groups effected by tax abatements of industry Groups effected by tax abatements of industry

or direct governmental grantsor direct governmental grants

TM-17

Sometimes competitors in an industry see Sometimes competitors in an industry see themselves in a competitive group.themselves in a competitive group.Mapping Strategic Groups in the U.S. Restaurant Mapping Strategic Groups in the U.S. Restaurant Chain Industry below is similar to perceptual maps Chain Industry below is similar to perceptual maps in simulationin simulation

Product-Line Breadth

High

LowLimited 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

Pri

ce

TM-18

In Analyzing your competitors and In Analyzing your competitors and your company, it should help to your company, it should help to

determine which determine which Strategic TypesStrategic Types you you are dealing withare dealing with

• Defenders - improve existing efficienciesDefenders - improve existing efficiencies• Prospectors - broad lines innovatorsProspectors - broad lines innovators• Analyzers - (Defender & prospector depending Analyzers - (Defender & prospector depending

on line)on line)• Reactors - lack of consistent strategyReactors - lack of consistent strategy

TM-19

We can scan and monitor all we We can scan and monitor all we want but in the end we don’t want but in the end we don’t

know what future is so we must know what future is so we must Forecast Forecast

EnvironmentalScanning

EnvironmentalScanning

PresentTrends andFashions

PresentTrends andFashions

ForecastingFuture Trendsand Fashions

Assumptionsfor StrategicPlanning and

Decision Making

Assumptionsfor StrategicPlanning and

Decision Making

TM-20

Popular Forecasting Popular Forecasting TechniquesTechniques

• ExtrapolationExtrapolation• Brain stormingBrain storming• Expert opinionExpert opinion• Statistical modelingStatistical modeling• Scenario writingScenario writing• POM (Moving weighted averages)POM (Moving weighted averages)• Regression analysisRegression analysis

TM-21

Industry ScenariosIndustry Scenarios1.1. Examine possible shifts in societal variable globally.Examine possible shifts in societal variable globally.

2.2. Identify uncertainties in each of the six forces of the task Identify uncertainties in each of the six forces of the task environment.environment.

3.3. Make a range of plausible assumptions about future trends.Make a range of plausible assumptions about future trends.

4.4. Combine assumptions into internally consistent scenarios.Combine assumptions into internally consistent scenarios.

5.5. Analyze the industry situation under each scenario.Analyze the industry situation under each scenario.

6.6. Determine sources of competitive advantage under each Determine sources of competitive advantage under each scenario.scenario.

7.7. Predict competitors’ behavior under each scenario.Predict competitors’ behavior under each scenario.

8.8. Select most likely scenario to use in strategy formulation.Select most likely scenario to use in strategy formulation.

TM-22

External Factor Analysis Summary External Factor Analysis Summary (EFE)(EFE)

ExternalStrategic Factors Weight Rating

Weighted Score Comments

1 2 3 4 5

1.00

Opportunities

Threats

Total Weighted Score

1st determine your variables, 2nd determine weights, 3rd give a rating from 1-5 for the Variable’s influence on your strategy, 4th figure weighted scores 5th added weighted

score which is your EFE rating

TM-23

External Factor Analysis Summary External Factor Analysis Summary (EFE): Maytag as Example(EFE): Maytag as Example

ExternalStrategic Factors Weight Rating

Weighted Score Comments

1.00

Opportunities• Economic integration of

European Community

• Demographics favor quality appliances

• Economic development of Asia

• Opening of Eastern Europe

• Trend to “Super Stores”

Threats• Increasing government regulations

• Strong U.S. competition

• Whirlpool and Electrolux strong globally

• New product advances

• Japanese appliance companies

Total Scores

.20

.10

.05

.05

.10

.10

.10

.15

.05

.10

4

5

1

2

2

4

4

3

1

2

.80

.50

.05

.10

.20

.40

.40

.45

.05

.20

Acquisition of Hoover

Maytag quality

Low Maytag presence

Will take time

Maytag weak in this channel

Well positioned

Well positioned

Hoover weak globally

Questionable

Only Asian presence is Australia

3.15

1 2 3 4 5