EXTERNAL EXTERNAL

ENVIRONMENTENVIRONMENT

Strategic Management Strategic Management ProcessProcess

Develop Develop VisionVision

MissionMission#1#1

Develop Develop VisionVision

MissionMission#1#1

Perform Perform ExternalExternal

AuditAudit#2#2

Perform Perform ExternalExternal

AuditAudit#2#2

PerformPerformInternal Internal

AuditAudit#3#3

PerformPerformInternal Internal

AuditAudit#3#3

Implement Implement Strategies-Strategies-Marketing,Marketing,Finance,Finance,

Accounting,Accounting,CIS Issues

ImplementImplementStrategies –Strategies –ManagementManagement

IssuesIssues#6#6

Generate,Generate,EvaluateEvaluate

SelectSelectStrategiesStrategies

#5#5

EstablishEstablishLong-TermLong-Term

GoalsGoals#4#4

EstablishEstablishLong-TermLong-Term

GoalsGoals#4#4

Measure andMeasure andEvaluateEvaluate

PerformancePerformance#7#7

StrategyStrategyFormulationFormulation

StrategyStrategyImplementationImplementation

StrategyStrategyEvaluationEvaluation

Feedback

Identifies & evaluates events beyond control of firm, Identifies & evaluates events beyond control of firm, likelike::

External External AssessmentAssessment

Increased foreign Increased foreign competitioncompetition Population shiftsPopulation shifts DemographicsDemographics TechnologyTechnology

Examine immediate environment; Examine immediate environment; IndustryIndustry

External AssessmentExternal Assessment

Examine ‘stakeholder’ Examine ‘stakeholder’

Groups --- how firmGroups --- how firm

relatesrelates

Then broader, Then broader, General (macro)General (macro)

External AuditExternal AuditReveals:Reveals:

• Key Key OpportunitiesOpportunities• Key Key ThreatsThreats

Managers formulate Managers formulate strategies:strategies:• Take advantage of Take advantage of

opportunitiesopportunities• Avoid/reduce threatsAvoid/reduce threats

Categories to Categories to ConsiderConsider

Price competitivenessPrice competitiveness TechnologyTechnology

World economiesWorld economies Proprietary & key Proprietary & key

account advantagesaccount advantages

General, Industry & General, Industry & Competitive Competitive

environmentsenvironmentsFirms must understand present to Firms must understand present to predict the future. Company’s predict the future. Company’s

external environment is divided external environment is divided into 3 main areas:into 3 main areas: General (Macro)General (Macro)

IndustryIndustry Competitive (Micro)Competitive (Micro)

Let’s review each….Let’s review each….

PESTELPESTEL Framework Framework PPoliticalolitical

EEconomicconomic

TTechnological echnological

EEnvironmentalnvironmental

LLegalegal

SSocialocial

PPoliticalolitical• TariffsTariffs• SubsidiesSubsidies• Import/export lawsImport/export laws

• QuotasQuotas• Political variables impact:Political variables impact:

““Formulation” of strategiesFormulation” of strategies““Implementation” of strategiesImplementation” of strategies

EEconomicconomicCredit AvailabilityCredit AvailabilityDisposable incomeDisposable income Interest ratesInterest rates Inflation rates, Money market ratesInflation rates, Money market ratesFederal government budget deficitsFederal government budget deficitsGDP trends, Consumption patternsGDP trends, Consumption patterns

EEconomic cont’dconomic cont’d Unemployment trendsUnemployment trends Worker productivity Worker productivity Value of $$ Value of $$ Stock market trendsStock market trends

Foreign countries’ economic conditionsForeign countries’ economic conditions Demand shifts for goods / servicesDemand shifts for goods / services Income differences by region/customerIncome differences by region/customer

SSocialocial• Social, cultural, Social, cultural,

demographic, demographic, environmental changesenvironmental changes

Impacts:Impacts: ProductsProducts ServicesServices MarketsMarkets CustomersCustomers

SSocial Key Factorsocial Key Factors Marriages, divorces, Marriages, divorces,

births, deathsbirths, deaths Immigration & Immigration &

emigration ratesemigration rates Life expectancy rateLife expectancy rate

Per capita incomePer capita income Attitudes toward businessAttitudes toward business Average disposable incomeAverage disposable income

Key Factors, Key Factors, cont’dcont’d Buying behaviorBuying behavior Ethical concernsEthical concerns Attitude toward savingAttitude toward saving Education level Education level Govt regulationsGovt regulations Attitude toward Attitude toward

customer service, customer service, product qualityproduct quality

TTechnological echnological – Gov’t spending on Gov’t spending on

R&DR&D

– Information & Information &

communicationcommunication

– InfrastructuresInfrastructures

– New technologies & productsNew technologies & products

– Availability of technologyAvailability of technology

TTechnological echnological

260B

300B

90B

InternetInternetOpportunities & threatsOpportunities & threats

Information toolInformation toolTransactions onlineTransactions onlineAccelerates communicationAccelerates communication

Alters product life cyclesAlters product life cyclesSpeeds distributionSpeeds distributionCreates new products / Creates new products /

servicesservicesEliminates geographical Eliminates geographical

boundariesboundaries

EEnvironmentalnvironmental• Environmental Environmental

protectionprotection

• Pollution lawsPollution laws

• Waste disposalWaste disposal

• EnergyEnergy

LLegalegal– Corporate / Contract law / TaxCorporate / Contract law / Tax– Employment / trade unions lawEmployment / trade unions law– Health & Safety lawsHealth & Safety laws– Monopoly & restrictive Monopoly & restrictive practices legislationpractices legislation– Consumer protectionConsumer protection– Anti-corruption lawAnti-corruption law– Intl laws affecting Intl laws affecting

businessbusiness

Steps:Steps: List external factors List external factors Assign weight fromAssign weight from 0.00.0 ‘not ‘not important’ to important’ to 1.01.0 ‘very important’. ‘very important’. Assign Assign 1- 41- 4 rating to each rating to each indicating ‘current response’indicating ‘current response’ MultiplyMultiply weight by rating weight by rating TotalTotal scores scores

External Factor External Factor Evaluation (EFE) Matrix – Evaluation (EFE) Matrix – Stage 1Stage 1

Google to learn moreGoogle to learn more

Highest score Highest score 4.04.0, lowest , lowest 1.01.0 Average score is Average score is 2.52.5 4.04.0 firm is effective handling firm is effective handling

threats / opportunitiesthreats / opportunities

EFE MatrixEFE Matrix

EFE MATRIXEFE MATRIX KEY EXTERNAL FACTORS Wt Rating ScoreKEY EXTERNAL FACTORS Wt Rating Score

OpportunitiesOpportunities         

1. China market favors smoking1. China market favors smoking .15.15 11 .15.15

2. Increasing demand caused by habit2. Increasing demand caused by habit .05.05 33 .15.15

3. Internet advertising accelerating growth3. Internet advertising accelerating growth .05.05 11 .05.05

4. Company is leader in tobacco industry4. Company is leader in tobacco industry .15.15 44 .60.60

5. China fastest growing population5. China fastest growing population .10.10 33 .30.30

           

ThreatsThreats         1. Legislation against industry or foreign companies1. Legislation against industry or foreign companies .10.10 22 .20.202. Production limits --- increases competition2. Production limits --- increases competition .05.05 33 .15.153. Market concentrated only in China3. Market concentrated only in China .10.10 22 .20.204. Bad media exposure from US Govt, NGOs4. Bad media exposure from US Govt, NGOs .20.20 11 .20.20

TOTALTOTAL 1.001.00    2.102.10

(US (US Tobacco Tobacco

enter enter China)China)

QUESTIONS??QUESTIONS??

Industry Industry EnvironmentEnvironment Factors influencing competitive Factors influencing competitive

actionsactions Interactions determine profit Interactions determine profit

potential.potential.Goal: Goal: influence or defend against influence or defend against forcesforces

Influence = above average Influence = above average returns:returns:

Threat of new entrantsThreat of new entrants Power of suppliersPower of suppliers Power of buyersPower of buyers Product substitutesProduct substitutes Intensity of rivalry Intensity of rivalry

5 Forces 5 Forces ModelModel

Barg

ainin

g

Barg

ainin

g

Po

wer o

f

Po

wer o

f

Su

pp

liersS

up

pliers B

arg

ain

ing

P

ow

er o

f B

uye

rs

Threat of New

Entrants

Threat ofSubstitute Products

Rivalry A

mong

Competing Firm

s

Five ForcesFive Forces

Product DifferentiationProduct Differentiation** Capital RequirementsCapital Requirements**

Switching CostsSwitching Costs**Access to Distribution ChannelsAccess to Distribution Channels**

Government PolicyGovernment Policy**Expected RetaliationExpected Retaliation**

Economies of ScaleEconomies of Scale**

Barriers Barriers to Entryto Entry

Threat of New Threat of New EntrantsEntrants

Bargaining Power Bargaining Power SuppliersSuppliers

BargaininBargaining Power g Power

of of SuppliersSuppliers

*

Barg

ainin

g

Barg

ainin

g

Po

wer o

f

Po

wer o

f

Su

pp

liersS

up

pliers B

arg

ain

ing

P

ow

er o

f B

uye

rs

Threat of

New Entrants

Threat ofSubstitute Products

Rivalry A

mong

Competing

Firms

Five Five ForcesForces

Threat of New

Entrants

Supplier Power

depends on a number of factors…

**Dominated by few suppliers.Dominated by few suppliers.

**Buyer not important Buyer not important

** Suppliers’ important to Suppliers’ important to buyers’.buyers’.

**Products are differentiatedProducts are differentiated.

**High switching costs.High switching costs.

Suppliers Suppliers exert power exert power

by:by:** Threatening to raise Threatening to raise prices or to reduce prices or to reduce

qualityquality

Supplier Powerful if…Supplier Powerful if…

*

Bargaining Power Bargaining Power Buyers Buyers (B2B: Distributors)(B2B: Distributors)

BargaininBargaining Power g Power

of Buyersof Buyers

Bargaining Power of Suppliers

Threat of New

Entrants

Bar

gai

nin

g

Bar

gai

nin

g

Po

wer

of

Po

wer

of

Bu

yers

Bu

yers

Threat of

New Entrants

Threat ofSubstitute Products

Rivalry

Among

Competing

Firms

Five Five ForcesForces

Bargaining Bargaining Power of Power of buyers buyers

depends on a depends on a number of number of factors…factors…

Barg

ainin

g

Po

wer o

f

Su

pp

liers

Playing firms off Playing firms off of each otherof each other

Buyers compete Buyers compete with supplying with supplying

industry by:industry by:

** Bargaining down pricesBargaining down prices

** Forcing higher Forcing higher qualityquality

** Large purchases Large purchases

**Suppliers are similarSuppliers are similar

** Easy switch other suppliersEasy switch other suppliers

**Industry earns low profitsIndustry earns low profits

**Product unimportant to qualityProduct unimportant to quality

Buyers Powerful if…Buyers Powerful if…

Threat of Threat of Substitute Substitute ProductsProducts

*

Bargaining Power of Buyers

Bargaining Power of Suppliers

Threat of New

Entrants

Threat ofThreat ofSubstitute Substitute ProductsProducts

Bar

gain

ing

Bar

gain

ing

Pow

er o

f P

ower

of

Buy

ers

Buy

ers

Threat of

Threat of

New Entrants

New Entrants

Bargaining

Bargaining

Pow

er of P

ower of

Suppliers

Suppliers

Rivalry

Among

Rivalry

Among

Competing

Competing

Firms

Firms

Five Five Forces Forces

Substitutes areSubstitutes are NOT NOT always direct always direct competitorscompetitors

Threat of Threat of SubstitutesSubstitutes

Products Products with similar with similar

FunctionFunction limit prices limit prices

firms firms chargecharge

Example:Example:Electronic security Electronic security

systems systems instead of security instead of security

guardsguardsFax machines or Fax machines or e-mailed e-mailed

attachments in place attachments in place of FEDEXof FEDEX

Threat of SubstitutesThreat of Substitutes

RivalryRivalry

RivalryRivalry

*

Threat of Threat of New New

EntrantsEntrants

Bargaining Bargaining Power of Power of BuyersBuyers

Bargaining Bargaining Power of Power of SuppliersSuppliers

Threat of Threat of Substitute Substitute ProductsProducts

Rivalry

Rivalry

Among

Among

Competing

Competing

Firms

Firms

Bar

gai

nin

g

Po

wer

of

Bu

yers

Threat of

New Entrants

Threat ofSubstitute Products

Barg

ainin

g

Po

wer o

f

Su

pp

liers

Five Five ForcesForces

Reduced rivalry means greater

profitability

Occurs if pressured or sees opportunity

Price competition Price competition leaves entire leaves entire

industry worse industry worse offoff

Price Price competitioncompetition

AdvertisinAdvertising battlesg battles

Increasing Increasing consumer consumer

warranties or warranties or serviceservice

Making new Making new product product

introductionsintroductions

Advertising battles Advertising battles increase demand, increase demand,

but costly to but costly to smaller competitorssmaller competitors

RivalryRivalryStrategic Strategic

positioningpositioning

Intense rivalry is:Intense rivalry is:

Slow growth Slow growth industryindustry

High fixed High fixed costscosts

CompaniesCompaniessimilarsimilar

High High storage storage costscosts

High High strategic strategic stakesstakes

Diverse Diverse competitorcompetitor

ss

Rivalry - Existing Rivalry - Existing CompetitorsCompetitors

Equally balanced Equally balanced competitorscompetitors

Intense competitionIntense competition is is more more

likely to occur whenlikely to occur when

High exit High exit barriersbarriers

Low entry Low entry barriersbarriers

Interpreting Interpreting industry analysesindustry analyses

UnattractiveUnattractiveindustryindustry

Suppliers-buyers Suppliers-buyers strong positionsstrong positions

Threats from Threats from substitutessubstitutes

Intense rivalryIntense rivalry Low profit Low profit potentialpotential

AttractiveAttractiveindustryindustry

High profit High profit potentialpotential

High entry High entry barriersbarriers

Suppliers-buyers Suppliers-buyers weak positionsweak positions

Few Few substitutessubstitutes

Low to Moderate Low to Moderate RivalryRivalry

Interpreting Interpreting industry analysesindustry analyses

QUESTIONS??QUESTIONS??

Competitor Competitor EnvironmentEnvironmentAll companies All companies

compete against:compete against:

CompetitorCompetitors s

EnvironmenEnvironmentt

Identifying RivalsIdentifying RivalsStrengthsStrengthsWeaknessesWeaknessesCapabilitiesCapabilitiesOpportunitiesOpportunitiesThreatsThreatsObjectivesObjectivesStrategiesStrategies

Competitor Competitor EnvironmentEnvironment

Competitor AnalysisCompetitor AnalysisFuture Objectives:Future Objectives:

• Compare goals to Compare goals to competitors’competitors’

• What emphasis?What emphasis?

• Attitude toward risk?Attitude toward risk?

Future objectivesFuture objectives

Competitor AnalysisCompetitor Analysis

Current StrategyCurrent Strategy

Current Strategy:Current Strategy:Future objectives

• How are we How are we currently currently

competing?competing?

• Does strategy adapt Does strategy adapt to market changes ?to market changes ?

Competitor AnalysisCompetitor Analysis

AssumptionsAssumptions

Current strategy

Assumptions:Assumptions:

• Future turbulentFuture turbulent

• Are we adapting?Are we adapting?

• Assumptions Assumptions competitors have competitors have about industry --- about industry ---

themselves?themselves?

Future objectives

Competitor AnalysisCompetitor Analysis

CapabilitiesCapabilities

Capabilities:Capabilities:

• Our strengths / Our strengths / weaknesses?weaknesses?

• Compared to Compared to competitorscompetitors?

Current strategy

Future objectives

Assumptions

Competitor AnalysisCompetitor Analysis

ResponseResponse

• What are competitors What are competitors future strategies? future strategies?

• What advantages What advantages do we have? do we have?

• How will this How will this strengthen our strengthen our competitiveness?competitiveness?

Future ObjectivesFuture Objectives

Current StrategyCurrent Strategy

AssumptionsAssumptions

CapabilitiesCapabilities

Compares Competitors to YouCompares Competitors to You Strengths / WeaknessesStrengths / Weaknesses

Weights: Weights: 0 – 1 0 – 1 level of importancelevel of importance

Rating:Rating: 44=major strength =major strength 33=minor strength,=minor strength, 22=minor=minor weakness weakness 11=major weakness.=major weakness.

Competitive Profile Competitive Profile Matrix (CPM)Matrix (CPM)

AdvertisingAdvertising 0.20 1 0.20 4 0.80 3 0.60

Product QualityProduct Quality 0.10 4 0.40 4 0.40 3 0.30

Price Price CompetitivenessCompetitiveness

0.10 3 0.30 3 0.30 4 0.40

ManagementManagement 0.10 4 0.40 3 0.30 3 0.30

Financial PositionFinancial Position 0.15 4 0.60 3 0.45 3 0.45

Customer LoyaltyCustomer Loyalty 0.10 4 0.40 4 0.40 2 0.20

Global ExpansionGlobal Expansion 0.20 4 0.80 2 0.40 2 0.40

Market ShareMarket Share 0.05 1 0.05 4 0.20 3 0.15

TOTALTOTAL 1.00   3.15   3.25   2.8

Wt Rating Score Rating Score Rating Score Wt Rating Score Rating Score Rating Score

IPhoneIPhone NokiaNokia Sony-EricssonSony-Ericsson

Competitive Profile Competitive Profile MatrixMatrixCritical Success Critical Success

Factors (CSF)Factors (CSF)

More Strategy More Strategy Tools…Tools…

www.mba-www.mba-tutorials.cotutorials.co

mm

QUESTIONS??QUESTIONS??