1. The General Environment
Firms can’t generally control the GENERAL ENVIRONMENT they face SO
Gather all the information you can
Understand each segment
And the implications on selection and implementation of strategies
WHY ?
Try to identify the opportunities & threats that exist in the environment

2. Segments of the General Environment
Economics
- change in GDP
- interest rates
- exchange rates
- capital market trends
- consumer confidence
- unemployment rates
- personal savings rates
- business savings rates
- governmental deficits
- trade deficits/surpluses
- inflation rates

3. Segments of the General Environment
Demographics
- population size
- income distribution
- ethnic mix
- geographic distribution
- age structure
- immigration

4. Segments of the General Environment
Socio-Cultural
- % of women in the workforce
- workforce diversity
- attitudes about quality of work life
- concerns about the physical environment
- shifts in work/career preferences
- shifts in preferences regarding product/service characteristics
Globalization
- important political events
- critical government movements
- newly industrialized countries
- different cultures & institutional attributes

5. Segments of the General Environment
Technological
- product innovation
- process innovation
- knowledge applications
- new communication technologies
- focus of private & government-supported R&D expenditures
Political/Legal
- political stability
- is government friend or foe of business ?
- anti-trust laws
- taxation
- labour training incentives & educational policies
- de-regulation/regulatory philosophies & policies
- philosophies regarding government economic involvement/ownership

6. Industry Analysis Can we make a lot of money ?
Estimate the potential size of the market
Number of customers and their relative sizes
Where is most of the competition coming from ?
Number of competitors and their relative sizes
Where is the industry in its life cycle ?
What are the most popular strategies being used ?
- is differentiation important ?
- how about technology ?
- is production capacity crucial ?
- what are the capital requirements ?
Some of the most recent trends in the industry
Can we make a lot of money ?

7. How Attractive is the Industry ?
Porter’s FIVE Forces + 1
This is an attempt to determine if you can make a lot of money in this particular industry or not
Threat of New Entrants
If everybody can easily get into this industry, there will be too much competition and it will be very difficult to make huge profits
WHAT MAKES IT DIFFICULT TO GET INTO AN INDUSTRY ?
- the need to get in, in a big way (economies of scale required)
- patent protection or proprietary technology
- a sharp learning curve that puts new entrants at a huge disadvantage
- strong existing brands that customers are loyal to
- excessive capital requirements
- access to the best suppliers/distributors is not possible
- government/legal regulations or international trade restrictions

8. How Attractive is the Industry ? Cont’d.
Porter’s FIVE Forces + 1 cont’d.
Threat of Substitute Products/Services
Substitutes are not competitors’ offerings; they are products/services in totally different industries that can be used by customers instead of yours. The more alternates there are, the easier it is for customers to switch if your industry tries to make too much money
e.g. encrypted document electronic forwarding is a substitute to courier services
Bargaining Power of Suppliers
If you cannot switch suppliers easily, you are at their mercy and they will reduce your chances of making large profits
WHAT GIVES SUPPLIERS POWER ?
- a few large companies dominate the industry and behave similarly
- no real substitutes to what you need
- a specific supplier’s product is critical to your operation

9. How Attractive is the Industry ? Cont’d.
Porter’s FIVE Forces + 1 cont’d.
Bargaining Power of Buyers
If a buyer is so important to your operation that you can’t afford to lose that customer, the customer can get so many concessions that you start to get squeezed and thus make less profits
A BUYER GROUP IS POWERFUL WHEN ....
- it purchases a large portion of a manufacturer’s output
- the buyer could easily switch to another supplier
- products are un-differentiated
Rivalry Among Competitors
In some industries, the participants tend to get along; in other industries, the participants will do anything to steal market share from other players. The more vicious the competition, the more downward pressure on profits
IN A VICIOUS INDUSTRY, COMPETITORS ....
- lower prices to the point where no one can make a decent profit
- OR increase offerings and thus costs for which they don’t charge extra

10. How Attractive is the Industry ? Cont’d.
Porter’s FIVE Forces + 1 cont’d.
Conclusion
THE PERFECT SCENARIO
You can make the most profits when ....
- it is really difficult for new players to enter the industry
- there are no industries that offer close substitutes to your industry’s products or services
- suppliers are at your mercy and not the other way around
- there are many buyers who can’t switch easily
- and you are in an industry where competitors tend to not compete aggressively
The “Plus 1”
Even if (and probably more accurately because) the industry is really attractive, where you are in the LIFE CYCLE can determine how long this attractiveness will continue

11. How Attractive is the Industry ? Cont’d.
Porter’s FIVE Forces + 1 cont’d.
The “Plus 1” cont’d.
THE INDUSTRY LIFE CYCLE
Check each market in which the company operates or wishes to operate
Compare the growth trend of the industry with the country’s annual change in GDP

12. Key Success Factors – A better name would be ....
Minimum Factors Necessary to Avoid Failure
Apply to the entire industry, NOT just a specific company
They are NOT factors that give one company a competitive advantage over another –Shit just lets you survive
If a company does not incorporate ALL of these factors into its operations it will not be a success
Are typically determined by the economic and technological characteristics of a particular industry
They are NOT the obvious characteristics of an industry e.g. one of the KSFs of the commercial airlines industry is NOT having airplanes
There are usually between 1 and 4 KSFs in an industry
How to Determine KSFs
Compare firms that have been successful with firms that are struggling or have failed
What do firms that are successful have in common ?
What don’t struggling or failed firms do that successful firms do ?

13. Key Success Factors cont’d
Examples:
TECHNOLOGY RELATED
DISTRIBUTION RELATED
Scientific research expertise
Innovative processes
Innovative products
Technological expertise
Great network of distributors
Access to key shelf space
Having company-owned retailer
Low distribution costs
Fast deliveries
MANUFACTURING RELATED
Production efficiency
Quality
High utilization of fixed assets
Low cost plant locations
Access to skilled labour
High productivity
Low cost product design
Manufacturing flexibility
MARKETING RELATED
Great sales force
Dependable service staff
Accurate order filling
Breadth of product line
Merchandising skills
Packaging
Guarantees/Warranties

14. Key Success Factors cont’d
Examples cont’d. :
SKILLS RELATED
OTHER
Superior talent
Quality control know-how
Design expertise
Technical expertise
Ability to get from prototype to finished product quickly
Great image/reputation/brand
Overall low cost
Convenient locations
Pleasant, courteous employees
Access to capital
Patent protection
ORGANIZATIONAL RELATED
Superior MIS
Effective decision-making style
Experienced management and know-how

15. Competitors’ Analysis
Focuses on each company against whom a firm DIRECTLY competes
Each competitor should be very interested in fully understanding the others’...
- Objectives or goals
Assumptions about the environment and industry
Strengths and weaknesses
Strategies
In gathering competitor intelligence, firms must be ethical
Obtain only publicly-available information e.g. court records, annual reports, etc.
Attend trade fairs and shows to see products and ask questions
Listen to or read speeches of top executives
Read brokers’ reports on the firms

16. Goals of Competitors’ Analysis
You want to be able to predict how major competitors will react to changes in the environment
You want to be able to figure out how vulnerable competitors are to our alternative strategies
Also what will they likely do to counter our strategic moves and how will that impact us ?
Equally we want to determine how vulnerable we would be to strategic moves that we think competitors are capable of
We want to understand how our products/services are positioned relative to the competition
We want to try to figure out if our competitors are in the midst of changing their strategic behavior or direction

17. About-Faces Are Rare (But Can Happen)
To understand where competitors may go next, you have to look at where they have been and their normal way to conduct business
Categorize their objectives and strategies
STRATEGIC SCOPE OF OPERATIONS
Local
Regional
National
Multi-country
Global
STRATEGIC INTENT
Be dominant player
Overtake current leader
Be in the top five/ten
Overtake a specific rival
Maintain relative market share
Just survive

18. About-Faces Are Rare (But Can Happen) cont’d.
MARKET SHARE OBJECTIVES
Aggressive expansion through internal growth or acquiring market share
Grow at industry rate (hold your relative position)
Give up share to gain short-term profits
COMPETITIVE POSITION
Has been getting stronger recently
Strong – no issues with maintaining current position
Stuck – “going nowhere”
Overtake a specific rival
Changing directions (going after a new market)
Losing ground
Retrenching to where it can defend its position
STRATEGIC POSTURE
Mostly offensive
Mostly defensive
Analytical
Aggressive risk-taker
Conservative follower

19. Predicting What Rivals will do Next
It is almost as important to build competitive profiles as it is to analyze your own strategic position
Analyze:
Where they are in the industry
Their basic competitive approach
What their objectives are
What needs to be done:
Study the current situation
Understand their strategic intent
Monitor how well rival is doing in the marketplace
Determine how much financial pressure rival is under

20. A Tool for Understanding the Playing Field
STRATEGIC GROUP MAPPING
Attempts to understand the characteristics that define various groups of competitors
- price/quality range
- geographic coverage of operations
- degree of vertical integration used
- diversity of product line
- dependence on distribution channels
- level of service offered
- etc.
By selecting two characteristics at a time (those that make sense to combine) we can create a visual representation of our competitors by plotting these on a map
Add additional information on the map that may be useful like visually representing the relative size of competitors or groups of competitors with similar strategic characteristics
A number of combinations of the variables may be necessary to get a complete picture

21. Strategic Group Map
Competitors in the Montreal Furniture Retail Market
SMALL SPECIALTY
Atwood’s Ethan Allen Gallery
Germain Larivierre
Denis Riel
Morette’s
Lida
HIGH
Price/Quality
LARGE CHAINS
Sears
The Bay
Leons
The Brick
Brault & Martineau
Mobilia
MEDIUM
KNOCK-DOWNS
IKEA
Idomo
DISCOUNTERS
Wal-Mart
Homesense
Meubles en Gros
Jason
LOW
Merchandise Mix
Specialty
Full Line
Mass Merchandisers

22. Summarize Your Findings
At the very least, summarize your analytical findings of the general environment and the industry
To increase the use of your analysis, rank the opportunities from most important to least and the threats from the most threatening to the least
To get the most out of your external analysis, relate each opportunity and threat to your current strategy

23. External Factor Evaluation (EFE) Matrix
An EFE Matrix is simply a strategic report card; it attempts to rate a business’s current strategy (established to match SWOT at some time in the past) with the current external factors faced by the business
First, understand and clearly state the current business strategy
Then, divide the factors that you identified as you analyzed the current external environment faced by the business into two groups – opportunities that the business can take advantage of and threats to the success or even survival of the business
Third, rank each group from most important to least
Now, we are ready to produce a report card

24. EFE Matrix Example
Assume we are in the boutique hotel business and our strategy is to aggressively grow by opening 2 – 3 new hotels (converting existing buildings in major cities into luxury hotels) each year in major U.S. cities. Target market are affluent individuals or couples travelling either alone or as couples for business first and leisure.
At this point in our analysis we are matching our strategy to the external environment we face regardless of what we feel the company is capable of doing. We have not yet reviewed the company’s strengths or weaknesses that will limit what this particular company is capable of doing within the current environmental setting.
Let’s next start building the EFE Matrix report card by listing the results of our external analysis

25. EXTERNAL ANALYSIS RESULTS
EFE Matrix Example
EXTERNAL ANALYSIS RESULTS
OPPORTUNITIES
Population group that travels the most is the 30 – 45 slice
30 – 45 year olds prefer smaller hotels to larger ones
High immigrant population prefers to travel out of country
Aging population want luxury hotel-like retirement homes
Democrats, in power, tend to support small business
THREATS
2008 financial melt-down dried up sources of capital
Increased competition for older buildings from condo developers
Industry consolidation due to being in later stages of growth
Increased use of communication technology is reducing travel

26. EFE Matrix Example
Assuming we have done a great job of analyzing the environment, our list of opportunities and threats should describe FULLY the environment that ALL companies in this industry face at this time
If that is true, then the total of all these external factors should equal “1”. Anything that we have not listed should be so miniscule, that it does not change the results.
In our example, we have identified 9 external factors that impact this industry at this time. If we felt that they all had equal impact on companies, each would have a weight of 0.11 (1/9).
But we should be able to say that they do not all have the same impact on the industry.
An attempt should be made to put relative weights on each factor such that the total come to 1. Opportunities and threats do not have opposite values as they all describe the total environment

27. EXTERNAL ANALYSIS RESULTS
EFE Matrix Example
EXTERNAL ANALYSIS RESULTS
WEIGHT
OPPORTUNITIES
Population group that travels the most is the 30 – 45 slice
.20
30 – 45 year olds prefer smaller hotels to larger ones
.10
High immigrant population prefers to travel out of country
.08
Aging population want luxury hotel-like retirement homes
.05
Democrats, in power, tend to support small business
.03
THREATS
2008 financial melt-down dried up sources of capital
.25
Increased competition for older buildings from condo developers
.17
Industry consolidation due to being in later stages of growth
.09
Increased use of communication technology is reducing travel
.03

28. EFE Matrix Example
Now we want to rate our current strategy to our latest list of external analysis factors
Remember our current strategy is to aggressively grow by opening 2 – 3 new hotels (converting existing buildings in major cities into luxury hotels) each year in major U.S. cities. Target market are affluent individuals or couples travelling either alone or as couples for business first and leisure.
How effective is this strategy in taking advantage of each opportunity and in reducing the negative impact of current threats ?
On a scale of 0 to 4, if the strategy is outstanding in dealing with the factor, we should allocate a score of A+ or 4; if it is totally ineffective, we should give it a score of F or 0. We allocate scores based on an outstanding range (4’s); above average scores (3’s); average scores (2’s); below average scores (1’s) and unacceptable scores ( 0 – 0.9)

29. EXTERNAL ANALYSIS RESULTS
EFE Matrix Example
EXTERNAL ANALYSIS RESULTS
WEIGHT
GRADE
OPPORTUNITIES
Population group that travels the most is the 30 – 45 slice
.20
3.8
30 – 45 year olds prefer smaller hotels to larger ones
.10
3.8
High immigrant population prefers to travel out of country
.08
0.0
Aging population want luxury hotel-like retirement homes
.05
0.0
Democrats, in power, tend to support small business
.03
2.5
THREATS
2008 financial melt-down dried up sources of capital
.25
1.5
Increased competition for older buildings from condo developers
.17
2.5
Industry consolidation due to being in later stages of growth
.09
3.0
Increased use of communication technology is reducing travel
.03
1.5

30. EFE Matrix Example
We multiply the relative importance of each factor of our external evaluation by the effectiveness of our current strategy in dealing with each factor.
Remember, effectiveness is always a positive number - if the strategy is outstanding at taking advantage of an opportunity it receives a score of 4; similarly if the strategy is outstandingly effective in reducing a threat, it also should receive a score of 4
We add up the weighted scores and come to an overall GPA and interpret that score using the same 0 to 4 scale (2.5 being average)
If the score is average or below, it means that our current strategy is not ideal in the current external circumstances and should be changed. If it is outstanding or above average, it may not need to be changed in terms of its relationship with the external environment
BUT, this is only half the review we need to do. We next have to look internally to see if there are weaknesses or strengths that improve or reduce the effectiveness of our strategy

31. EXTERNAL ANALYSIS RESULTS
EFE Matrix Example
EXTERNAL ANALYSIS RESULTS
WEIGHT
GRADE
SCORE
TOTAL
OPPORTUNITIES
Population group that travels the most is the 30 – 45 slice
.20
3.8
.76
2.35
30 – 45 year olds prefer smaller hotels to larger ones
.10
3.8
.38
Below
Average
New
Strategy
Needed
High immigrant population prefers to travel out of country
.08
.00
0.0
Aging population want luxury hotel-like retirement homes
.05
0.0
.00
Democrats, in power, tend to support small business
.03
2.5
.08
THREATS
2008 financial melt-down dried up sources of capital
.25
1.5
.38
Increased competition for older buildings from condo developers
.17
2.5
.43
Industry consolidation due to being in later stages of growth
.09
3.0
.27
Increased use of communication technology is reducing travel
.03
1.5
.05