1. External Environmental Analysis
Session 6
Chapter 4
External Environmental Analysis
Remote/General
Industry/Competitive
Direct /Operating/Task

2. Session Objectives
To stress the importance of the sectors of the firm’s external environment to strategy formulation.
To develop a broader sense of competition and competitive pressures.
To understand the purpose of competitive strategy

3. The Firm’s External Environment
Remote Environment (Global and Domestic)
Industry Environment (Global and Domestic)
Operating Environment (Global and Domestic)
Economic
Social
Political
Technological
Ecological
Entry barriers
Supplier power
Buyer power
Substitute availability
Competitive rivalry
Competitors
Creditors
Customers
Labor
Suppliers
THE FIRM

4. Economic Factors
Concern nature and direction of economy in which a firm operates
Types of factors
General availability of credit
Level of disposable income
Propensity of people to spend
Prime interest rates
Inflation rates
Trends in growth of gross national product

5. Social Factors
Include beliefs, values, opinions, and lifestyles of people
Recent social trends
Entry of large numbers of women into labor market
Accelerating interest of consumers and employees in quality-of-life issues
Shift in age distribution of population

6. Political Factors
Define legal and regulatory parameters within which firms must operate
Types of factors
Fair-trade decisions
Antitrust laws
Tax programs
Minimum wage legislation
Pollution and pricing policies
Administrative jawboning

7. Technological Factors
Focus on technological changes affecting industry
Types of changes
New products
Improvements in existing products
Manufacturing and marketing techniques
Role of technological forecasting
Foresees advancements and estimating their impact
Alerts managers to impending challenges and promising opportunities

8. Ecological Factors
Involve relationships among human beings and other living things and air, soil, and water
Current concerns
Global warming
Loss of habitat and biodiversity
Air, water, and land pollution
Responsibilities of firms
Eliminating toxic by-products of current manufacturing processes
Cleaning up prior environmental damage

9. Firm’s External Environment

10. Industry/Competitive Environment
Michael E. Porter’s Five Forces Model the concept of industry environment as integral to strategic thought and business planning.
The five forces shape competition in an industry.
The framework helps strategic managers link remote factors to their effects on a firm’s operating environment.

11. Competitive Forces Shape Strategy
The essence of strategy formulation is to better cope with competition.
Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry.
The corporate strategists’ goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor.

12. The Goal of Competitive Strategy
To Achieve a Defensible Position Against the Competitive (Five) Forces that Are Constantly Working to Erode Industrywide Profitability

13. Competitive Forces
Any Entity (Group or Class of Firms) that has the Potential to Erode Profitability Among Firms within an Industry

14. Government Influence on the Model
We Consider the Influence of Government as Felt through its Role(s) as one of the Five Forces: Government can be a Potential Entrant, Supplier, Buyer, Substitute, or Rival Firm

15. Industry Analysis & Competitive Analysis
An industry is a collection of firms that offer similar products or services.
Structural attributes are the enduring characteristics that give an industry its distinctive character.
Concentration refers to the extent to which industry sales are dominated by only a few firms.
Barriers to entry are the obstacles that a firm must overcome to enter an industry.

16. Five Forces Driving Industry Competition

17. Let’s Hear from Dr. Porter

18. Breakout Groups by Case
1. Define your Industry
2. Most Significant General Environmental Factor
3. Top Two More Significant of the Five Forces
You have 15 minutes!

19. The Five Forces Threat of Entry Bargaining Power of Suppliers
Bargaining Power of Buyers
Pressure from Substitute Products
Rivalry Among Existing Firms

20. Forces Affecting Entry Decision
Economies of Scale
Product Differentiation
Capital Requirements
Cost Disadvantages Independent of Size
Access to Distribution Channels
Government Policy

21. Powerful Suppliers A supplier group is powerful if:
It is dominated by a few companies and
is more concentrated than the industry
it sells to
Its product is unique or at least
differentiated, or if it has built-up
switching costs
It is not obliged to contend with other
products for sale to the industry
It poses a credible threat of integrating forward into the industry’s business
The industry is not an important customer of the supplier group

22. Powerful Buyers A buyer group is powerful if:
It is concentrated or purchases in
large volumes
The products it purchases from the industry are standard
The products it purchases from the industry form a component of its product and represent a significant fraction of its cost
It earns low profits
The industry’s product is unimportant to the quality of the buyers’ products or services
The industry’s product does not save the buyer money
The buyers pose a credible threat of integrating backward

23. Substitute Products
By placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industry
Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times
Substitute products that deserve the most attention strategically are those that are
subject to trends improving their price-performance trade-off with the industry’s product or
produced by industries earning high profits

24. Jockeying for Position
Intense rivalry occurs when:
Competitors are numerous or are roughly equal
Industry growth is slow, precipitating fights for market share that involve expansion
The product or service lacks differentiation or switching costs
Fixed costs are high or the product is perishable, creating strong temptation to cut prices
Capacity normally is augmented in large increments
Exit barriers are high
Rivals are diverse in strategy, origin, and personality

25. Direct/Operating/Task Environment
Also called task environment
Includes competitor positions relative to the five forces and profiling based on the following factors:
Geographic
Demographic
Psychographic
Buyer Behavior
Also includes suppliers & creditors and HRM

26. HR: Nature of the Labor Market
Access to personnel is affected by 4 factors:
Firm’s reputation as an employer
Local employment rates
Availability of people with the needed skills
Its relationship with labor unions.

27. Emphasis on Environmental Factors
Differing external elements affect different strategies at different times and with varying strengths
Only certainty is that the effect of the remote and operating environments will be uncertain until a strategy is implemented
Many managers, particularly in less powerful firms, minimize long-term planning
Instead, they allow managers to adapt to new pressures from the environment
Absence of strong resources and psychological commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its environment