Analyzing Company’s External
Environment
Module- 3
Terms and Concepts
Environmental uncertainty:
The degree of complexity plus the degree of change existing in
an organization’s external environment.
Environmental scanning:
The monitoring, evaluating, and disseminating of information
from the external and internal environments to key people
within the corporation to avoid strategic surprise and ensure
the long-term health of the firm.
Industry defined:
A group of firms producing a similar product or service, such
as soft drinks or financial services.
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The External Environment
Societal environment (Macro):
(Macro)
General forces that do not directly touch on
the short-run activities but often influence its
long-run decisions.
Task environment (Industry):
(Industry)
Those elements or groups that directly affect
the corporation and, in turn, are affected by it.
The task environment is the industry within
which that firm operates.
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The External Environment
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Industry Analysis:
Industries differ widely in their economic
features, competitive character, and profit
outlook.
The economic features and competitive
character of the trucking industry bear little
resemblance to those of discount retailing.
The fast-food business has little in common
with the business of developing software for
internet applications.
company’s macro environment includes
all relevant factors and influences
outside the company’s boundaries;
by relevant, we mean important enough
to have bearing on the decisions the
company ultimately makes about its
direction, objectives, strategy, and
business model.
The factors and forces in a
company’s macro environment
having the biggest strategy-shaping
impact almost always pertain to the
company’s immediate industry and
competitive environment.
The External Environment
The General Environment: Segments and Elements
Components of the External Environmental Analysis
Scanning • Identifying early signals of
environmental changes and trends
Monitoring • Detecting meaning through ongoing
observations of environmental changes
and trends
Forecasting • Developing projections of anticipated
outcomes based on monitored changes
and trends
Assessing • Determining the timing and
importance of environmental changes
and trends for firms’ strategies and their
management
Industry analysis
An in-depth examination of key factors within a corporation’s task
environment
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Thinking Strategically About a Company’s Industry
and Competitive Environment
Identifying Strategically Relevant Industry Features
Analyzing the Nature and Strength of Competitive Forces
The Drivers of Change: What Impacts Will They Have?
Diagnosing the Market Positions of Industry Rivals
Predicting the Next Strategic Moves Rivals Are Likely to
Make
Pinpointing the Key Factors for Future Competitive
Success
The Organization and Its Environments
International Technological
dimension dimension
Competitors
Regulators Owners Customers
Employees
Physical environment
Board of directors
Culture
Political-
Economic
legal
Strategic dimension
dimension Suppliers
partners
Sociocultural
Internal environment dimension
Task environment External
General environment environment
The External Environment
The General Environment
Economic dimension is the overall
health and vitality of the economic
system in which the organization
operates.
Technological dimension refers to
the methods available for converting
resources into products or services.
The External Environment (cont’d)
The Task Environment
Specific groups affecting the organization
Competitors seeking the same resources as the organization.
Customers who acquire an organization’s products or resources.
Suppliers that provide resources for the organization.
Regulators (agencies and interest groups) that control, legislate,
or influence the organization’s policies and practices.
Strategic partners (allies) who are in a joint venture or
partnership with the organization.
McDonald’s Task Environment
To gain a deep understanding of a
company's industry and competitive
environment, managers do not need to
gather all the information they can find
and spend lots of time digesting it.
Rather, the task is much more focused.
Societal (Macro) environment forces
Economic forces
Regulate the exchange of materials, money, energy, and
information
Technological forces
Generate problem-solving inventions
Political-legal forces
Allocate power, provide laws and regulations
Sociocultural forces
Regulate values, mores, and customs
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External Strategic Factors
Key environmental trends that are judged
to have both a medium to high
probability of occurrence and a medium
to high probability of impact on the
corporation.
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Industry Analysis:
Industries differ widely in their economic
features, competitive character, and profit
outlook. The economic features and
competitive character of the trucking industry
bear little resemblance to those of discount
retailing. The fast-food business has little in
common with the business of developing
software for internet applications.
Thinking strategically about a company's
competitive environment entails using
some well-defined concepts and analytical
tools to get clear answers to seven
questions:
What are the dominant economic features of
the industry in which the company operates?
What kinds of competitive forces are industry
members facing, and how strong is each
force?
What forces are dividing changes in the
industry, and what impact will these changes
have on competitive intensity and industry
profitability?
What market positions do industry rivals
occupy-who is strongly positioned and who is
not?
What strategic moves are rivals likely to
make next?
What are the key factors for future
competitive success?
Does the outlook for the industry present the
company with sufficiently attractive prospects
for profitability?
Industry's dominant economic features:
Market size and growth rate
Scope of competitive rivalry
Number of rivals
Buyer needs and requirements
Production capacity
Pace of technological change
Vertical integration
Product innovation
Degree of product differentiation
Economies of scale
Learning and experience curve effects
Relevance of Key Economic
Features
Market Size
Small markets don’t tend to attract new
firms;
large markets attract firms looking to
acquire rivals with established positions
in attractive industries
Relevance of Key Economic
Features
Market Growth Rate
Fast growth breeds new entry;
Slow growth spawns increased rivalry &
shake-out of weak rivals
Relevance of Key Economic
Features
Capacity/Surplus Shortages
Surpluses push prices & profit margins
down; shortages pull them up
Relevance of Key Economic
Features
Industry Profitability
High-profit industries attract new
entrants;
Depressed conditions lead to exit
Relevance of Key Economic
Features
Industry Entry/Exit Barriers
High barriers protect positions and profits
of existing firms; low barriers make
existing firms vulnerable to entry
Relevance of Key Economic
Features
Rapid technological change
Raises risk; investments in technology
facilities/equipment may become obsolete
before they wear out
Relevance of Key Economic
Features
Capital requirements
Big requirements make investment
decisions critical; timing becomes
important;
creates a barrier to entry and exit
Relevance of Key Economic
Features
Rapid product innovation
Shortens product life cycle; increases risk
because of opportunities for leapfrogging
Industry Analysis: The Five Force Model
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Porter’s Approach to Industry Analysis
Assess the six forces --
Threat of new entrants
Rivalry among existing firms
Threat of substitute products
Bargaining power of buyers
Bargaining power of suppliers
Relative power of other stakeholders
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Porter’s approach:
Threat of New Entrants --
Barriers to entry:
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Size
Government Policy
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Porter’s approach:
Threat of Substitute Products/Services
Substitute Products:
Those products that appear to be different
but can satisfy the same need as another
product. To the extent that switching costs
are low, substitutes can have a strong effect
on an industry.
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Porter’s approach:
Bargaining Power of Buyers --
Buyer is powerful when:
Buyer purchases large proportion of seller’s products
Buyer has the potential to integrate backward
Alternative suppliers are plentiful
Changing suppliers costs very little
Purchased product represents a high percentage of a buyer’s costs
Buyer earns low profits
Purchased product is unimportant to the final quality or price of a
buyer’s products
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Factors Influencing Bargaining Power of
Buyers:
A buyer group is powerful if:
1) It is concentrated
2) It purchases large volumes relative to the volume of firm’s
sales
3) The products are standard or undifferentiated
4) Buyer face high switching costs
5) Buyer ears low profits
6) buyer poses threat of backward integration
7) Product is unimportant to buyer’s product/service
8) Buyer has full information
Factors Influencing Bargaining Power of
Suppliers:
A supplier group is powerful if:
1) It is dominated by a few companies and is more
concentrated than industry buying group
2) It is not threatened by substitute products
3) The buyer industry is not an important customer
4) The product is an important input for customer
5) Product is differentiated or has built in switching
costs
6) Supplier poses threat of forward integration
Porter’s approach:
Bargaining Power of Suppliers --
Supplier is powerful when:
Supplier industry is dominated by a few companies but
sells to many
Its product is unique and/or has high switching costs
Substitutes are not readily available
Suppliers are able to integrate forward and compete
directly with present customers
Purchasing industry buys only a small portion of the
supplier’s goods.
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Porter’s approach:
Rivalry Among Existing Firms --
Intense rivalry related to:
Number of competitors
Rate of Industry Growth
Produce or Service Characteristics
Amount of Fixed Costs
Capacity
Height of Exit Barriers
Diversity of Rivals
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Industry Evolution (Industry Life-Cycle)
Fragmented Industry –
No firm has large market share and each firm serves
only a small piece of the total market in competition
with others.
Consolidated Industry –
Dominated by a few large firms, each of which
struggles to differentiate its products from the
competition.
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Continuum of International Industries
Multidomestic Global
Industry in which companies tailor Industry in which companies
their products to the specific manufacture and sell the
needs of consumers in a same products, with only
particular country. minor adjustments made for
individual countries around
• Retailing the world.
• Insurance • Automobiles
• Banking • Tires
• Television sets
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International / Global Industries
An industry is primarily multidomestic or
primarily global based on two dimensions:
Pressure for coordination
Within the multinationals in that industry
Pressure for local responsiveness
Individual country markets
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Strategic Groups and Strategic Types
Strategic Groups
A set of business units or firms that pursue
similar strategies with similar resources.
Strategic Types
Category of firms based on a common
strategic orientation and a combination of
structure, culture, and processes consistent
with that strategy.
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Strategic Types
Categorized by one of four general strategic orientations:
Defenders
Companies with a limited product line; focus on
improving efficiency of current operations
Prospectors:
Companies with fairly broad product lines; focus on
product innovation and market opportunities.
Analyzers:
Corporations that operate in at least two different
product-market areas – one stable and one variable.
Reactors:
Corporations that lack a consistent strategy-
structure-culture relationship.
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Forecasting Techniques
Extrapolation
Brainstorming
Expert opinion
Statistical modeling
Scenario writing
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Porters five forces model:
POTENTIAL
ENTRANTS
Threat of new entrants
Bargaining Power of
Suppliers. INDUSTRY
COMPETITORS
SUPPLIERS BUYERS
Rivalry Among
Existing Firms
Bargaining Power of
Buyers
Threat of Substitute
products or services
SUBSTITUTES
Forces Driving Industry Competition
Factors Influencing Intensity of Inter-firm Rivalry
Numerous or equally balance competitors
Slow industry growth
High fixed or storage costs
Lack of Differentiation or switching costs
Capacity augmentation in large increments
Diverse competitors
High strategic stakes
High exit barriers
Factors Influencing Threats to Potential
Entrants:
Economics of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Proprietary product technology
Favored access to raw materials
Favorable location
Government subsidy and government policy
Learning or experience curves
Retaliation practices
Factors Influencing Threats of
Substitutes:
Substitutions are products, services, materials, or
processes
which perform the same function as the those of the
industry, but are not direct industry rivals. Substitutes are
the greatest threats if they constitute,
1) radical innovations which foster displacement or
obsolescence;
2) substitutes which respond to trends and improve their
price performance relative to tradeoffs with the industry
product; and
3) substitutes produced by industries earning high profits.
What are the key factors for future
competitive success?
Common types of key success factors:
Technology related KSF’s
Expertise in particular technology or in scientific
research ( important in pharmaceuticals, internet
applications, mobile communication and most high
tech industries)
Proven ability to improve production processes
(important industries where advancing technology
opens the way for higher manufacturing efficiency
and lower production costs)
Manufacturing related KSF
Ability to achieve scale economies and capture learning curve
effects (important to achieving low production costs)
Quality control know now (important in industries where
customers insist on product reliability)
High utilization of fixed assets important in capital intensive high
fixed cost industries
Access to attractive supplies of skilled labour
High labor productivity important for items with high labor content
Ability to manufacture or assemble products that are customized
to buyer specifications
Distribution related KSF
A strong network of wholesale distributors
dealers
Strong direct sales capabilities via the
internet and having company owned retail
outlets
Ability to secure favourable display space on
retailer shelves
Marketing related KSF
Breadth of product line and product selection
A well known and well respected brand name
Fast accurate technical assistance
Courteous personalised customer service
Accurate filling of buyer order (few back orders or
mistakes)
Customer guarantees and warranties important in
mail order and online retailing, big ticket purchases,
new product introductions)
Clever advertising
Skills and capabilities related KSF
A talented workforce superior talent is important in professional
services like accounting and investment banking
National or global distribution capabilities
Product innovation capabilities important in industries where
rivals are racing to be first to market with new product attributes
or performance features
Design expertise important in fashion and apparel industries
Short delivery time capability
Supply chain management capabilities
Strong e-commerce capabilities a user friendly web site and or
skills in using internet technology applications to streamline
internal operations
Other types KSF
Overall low costs not just in manufacturing so as to be able to
meet low price expectations of customers
Convenient locations important in many retailing business
Ability to provide fast convenient after the sale repairs and
services
A strong balance sheet and access to financial capital important
in newly emerging industries with high degrees of business risk
and in capital intensive industries
Patent protection
