EXTERNAL
ENVIRONMENT
ANALYSIS
1
“Analysis is the critical starting
point of strategic thinking.”
Kenichi Ohmae
“Quote”
2
What Is Situation Analysis?
Focuses on two considerations
A company’s INTERNAL
ENVIRONMENT
Its competencies,
capabilities, resource
strengths and weaknesses,
and competitiveness
A company’s EXTERNAL
ENVIRONMENT
Industry and competitive
conditions
3
Strategic Management Model
Environmental Strategy Strategy Evaluation
Scanning Formulation Implementation and Control
Mission
External
Reason for
Societal
existence
Environment Objectives
General Forces
What results
to
Task Strategies
accomplish
Environment
by when Plan to
Industry Analysis
achieve the
Policies
mission &
Internal objectives Broad
guidelines for Programs
Structure decision Process
Chain of Command making Activities to monitor
needed to performance
Culture Budgets and take
accomplish
Beliefs, Expectations, a plan corrective
Cost of the
Values action
programs
Procedures
Resources
Sequence
Assets, Skills
of steps
Competencies,
needed to
Knowledge do the job Performance
Feedback/Learning
4
Environmental Scanning
Definition
Monitoring and interpreting sweep of social,
political, economic, ecological, and technological
events to spot budding trends that could
eventually impact industry
Purpose
Raise consciousness of managers about potential
developments that could
Have important impact on industry conditions
Pose new opportunities and threats
5
Common Types of Driving Forces
Changes in long-term industry growth rate
Changes in who buys the product and how
they use it
Product innovation
Technological change/process innovation
Marketing innovation
Entry or exit of major firms
Diffusion of technical knowledge
6
Common Types of Driving Forces
Increasing globalization of industry
Changes in cost and efficiency
Market shift from standardized to
differentiated products (or vice versa)
New regulatory policies and/or government
legislation
Changing societal concerns, attitudes, and
lifestyles
Changes in degree of uncertainty and risk
7
Analyzing Driving Forces
1. Identify those forces likely to exert
greatest influence over next 1 - 3
years
Usually no more than 3 - 4
factors qualify
2. Assess impact
What difference will the
forces make (favorable?
unfavorable?)
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Scanning the External Environment
Analysis of Societal Environment
Economic, Sociocultural, Technological, Political-Legal Factors
Market
Analysis
Customer Competitor
Analysis Analysis
Supplier
Analysis
Selection of
Interest Group Strategic Factors Governmental
Analysis Analysis
• Opportunities
• Threats
Prentice Hall, 2000 Chapter 3 59
9
Identifying External Strategic Factors
One way to identify and analyze the development in the external environment is
to use the issue priority matrix in this way:
• Identify a number of likely trends emerging in the societal and task
environment
• Assess the probability of these trend actually occurring from low to high
• Attempt to estimate the likely impact from low to high of each of these trends
on the industry of corporation being examined
A corporation external strategic factors are those key environment trends that
are judged to have both a medium to high probability of occurrence and a
medium to high of impact on the organization.
Those environmental trends judged to be a corporation’s strategic factors are
then categorized as opportunities and threats and are included in strategy
formulation.
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Environmental Scanning
Probable Impact on Corporation
High Medium Low
High High Medium
High Priority Priority Priority
Probability
of Occurrence
Medium High Medium Low
Priority Priority Priority
Medium Low Low
Low Priority Priority Priority
Issues Priorities Matrix 11
The Components of a Company’s Macro-
Environment
MACROENVIRONMENT
The Economy
at Large
Le
gi
gy Re sla
o lo gu tio
hn la n a
c Suppliers Substitutes tio n
Te n d
COMPANY
Rival Buyer
Firms s
So New
c Entrants
an ietal tion s
dL V
ife alue p ula phic
sty s IMMEDIATE INDUSTRY Po ogra
les m
AND COMPETITIVE
ENVIRONMENT
De
12
Some Important Variables in
Global and Domestic Remote Environments
Economic Technological Political Sociocultural
Economic development Regulation on technology Form and stability of the Customs, norms, values
per capita income transfer government
GDP trends Energy availability/cost Political ideology Demographics
Interest rate Natural resource availability Tax law Life expectancies
Inflation rates Transportation net work Trade regulations Social institutions
Monetary and fiscal policies Skill level of work force Foreign policies Life-style
Unemployment level Patent-trademark protection Legal system Religious beliefs
Currency convertibility Information flow infrastructure Wage levels Human rights
Nature of competition Total government and industry Government attitude towards Age distribution of
spending for R&D foreign companies population
Membership of regional New product Antitrust regulations Growth rate of the
economic association population
New development in technology Language
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What is Competition Like & How Strong
Are the Competitive Forces?
To identify
Main sources of
competitive forces
Strength of these forces
Key analytical tool
Five Forces Model
of Competition
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Five Forces
Model of Competition
Substitute Products
(of firms in
other industries)
Rivalry
Suppliers
Among
of Key Buyers
Competing
Inputs
Sellers
Potential
New
Entrants
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Analyzing the Five Competitive Forces:
How to Do It
Assess strength of each competitive force
(Strong? Moderate? Weak? )
Rivalry among competitors
Substitute products
Potential entry
Bargaining power of suppliers
Bargaining power of buyers
Explain how each force acts to create competitive
pressure
Decide whether overall competition is brutal,
fierce, strong, normal/moderate, or weak
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Rivalry Among Competing Sellers
Usually the most powerful of the five forces
Check which weapons of competitive rivalry
are most actively used by rivals in jockeying
for position
Price
Quality
Performance features offered
Customer service
Warranties/guarantees
Advertising/promotions
Dealer networks
Product innovation
17
Competitive Force of Potential Entry
Seriousness of threat depends on
Barriers to entry
Reaction of existing firms to entry
Barriers exist when
Newcomers confront obstacles
Economic factors put potential
entrant at a disadvantage relative
to incumbent firms
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Common Barriers to Entry
Economies of scale
Inability to gain access to specialized
technology
Existence of learning/experience curve effects
Strong brand preferences and customer loyalty
Capital requirements and/or other specialized
resource requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies, tariffs, trade restrictions
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Principle of Competitive Markets
Threat of entry is stronger when:
Entry barriers are low
Sizable pool of entry candidates
exists
Incumbents are unwilling or unable to
contest a newcomer’s entry efforts
Newcomer can expect to earn
attractive profits
20
Competitive Force of
Substitute Products
Substitutes matter when customers are attracted
to the products of firms in other industries
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic vs. Glass vs. Metal
Newspapers vs. TV vs. Internet
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How to Tell Whether Substitute
Products Are a Strong Force
Sales of substitutes are growing rapidly
Producers of substitutes are planning
to add new capacity
Their profits are up
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Principle of Competitive Markets
The competitive threat of substitutes
is stronger when they are:
Readily available
Attractively priced
Believedto have comparable or better
performance features
Customer switching costs are low
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Competitive Force of Suppliers
Suppliers are a strong competitive force when:
Item makes up large portion of product costs, is
crucial to production process, and/or significantly
affects product quality
It is costly for buyers to switch suppliers
They have good reputations and growing
demand
They can supply a component cheaper than
industry members can make it themselves
They do not have to contend with substitutes
Buying firms are not important customers
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Principle of Competitive Markets
Suppliers are a stronger force the
more they can exercise power over:
Prices charged
Quality/performance of items
supplied
Amounts and delivery times
25
Competitive Force of Buyers
Buyers are a strong competitive force when:
They are large and purchase a sizable
percentage of industry’s product
They buy in volume quantities
They can integrate backward
Industry’s product is standardized
Their costs in switching to substitutes or other
brands are low
They can purchase from several sellers
Product purchased does not save buyer money
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Principle of Competitive Markets
Buyers are a stronger competitive
force the more they have
leverage to bargain over:
Price
Quality
Service
Other terms and conditions of sale
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Strategic Implications of the
Five Competitive Forces
Competitive environment is
unattractive when:
Rivalry is strong
Entry barriers are low
Competition from
substitutes is strong
Suppliers and customers have
considerable bargaining power
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Strategic Implications of the
Five Competitive Forces
Competitive environment is ideal
when:
Rivalry is moderate
Entry barriers are high
Good substitutes do
not exist
Suppliers and customers are
in a weak bargaining position
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Industry or Competitive Intelligence
Purpose : Gain information and understanding about:
• Overall industry
• Specific other firms, as a basis for our own strategy
analysis
• Market share, Product line, Pricing and advertising policy,
Capacity, Production cost, Experience, Caliber of personnel,
etc..
Open Sources:
• Trade press, shows, websites and company publications
• Annual reports, companies press releases
• Industry conferences
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Industry or Competitive Intelligence
Semi-Open Resources: Specialized industry consultants
• Having comprehensive information on volumes, prices etc.
• Analyzing trends& scenarios
• Cannot disclose all information on specific company
Your Own Resources: In interaction between your company and
other industry firms
• Marketing contracts
• Purchasing contracts
• Technical people at conferences
• Professional association
• Beware of ethical issues; reciprocal informal issues
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The Role of Forecasting
Present Forecasting Assumptions
Environmental for Strategic
Trends and Future Trends
Scanning Planning and
Fashions and Fashions
Decision Making
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The Role of Forecasting
• Extrapolation (more than 70% use this technique)
• Extension of present trends into the future
• Time- series methods are approaches of this type
• Use with caution
• Brainstorming
• Non-quantitative approach
• Emphasis on creativity
• Through out ideas first, evaluate later
• Expert opinion
• Non-quantitative approach
• They should know
33
The Role of Forecasting
• Statistical modeling
• Quantitative approach to find causal association between
quantified variables (Regression analysis, etc..)
• Based on historical data. As the patterns of relationship
change, the accuracy of the forecast
deteriorates.
• Scenario writing
• Widely used after trend extrapolation
• Not really forecast, but alternative possible stories
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Industry Matrix - Key success factors
Those factors that can affect significantly the overall competitive positions of all
companies within any particular industry
Industry Matrix
Key Success Company A Company A Company B Company B
Factors Weight Rating Weighted Score Rating Weighted Score
1 2 3 4 5 6
Total 1.00
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External Factors Analysis Summary EFAS
Synthesis of External Factors
To summarize the external factors into generally accepted categories of opportunities and threats
the so called EFAS table can be established.
External Factors Analysis Summary (EFAS): Maytag Corporation
External Factors Weight Rating Weighted Comments
Score
1 2 3 4 5
Opportunities
Threats
Total Score
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