Presentation on theme: "Chapter 3 Strategic Planning Process:"— Presentation transcript:
1 Chapter 3 Strategic Planning Process: The External Environmental Analysis
2 Learning Objectives After reading this chapter, you should be able to: Explain the key external environmental forces.Describe the nature of the industry environment.Discuss the five forces that make up the industry environment.Discuss the importance of monitoring the external and industry trends and events.Explain how to analyse the external environment using the positive and negative method and the weighted score method.
3 External EnvironmentThe external environment represents factors which are beyond the control of an organization.It is divided into two categories:1. General environment2. Industry environment
4 The General and Industry Environments The general environment, also known as the macro environment, includes the environmental factors that have an impact on all organizations and firms within the company.Easily remembered by the simple acronym PESTP : Political factorsE : Economic factorsS : Socio-cultural factorsT : Technological factors
6 The General and Industry Environments (cont.) The industry environment or the micro environment refers to factors that directly affect the firm and its competitive responses.Threats of new entrantsThe bargaining power of the supplierThe bargaining power of the buyers (customer)Threats of substitute products and servicesRivalry among the existing firms.These factors have the ability to affect the firm’s profitability and shape the competition in an industry.
7 The General and Industry Environments (cont.) When formulating a business strategy, one of the most important aspect is to consider the firm’s competitor.Conduct a competitor analysis.Involves analyzing the competitor’s strengths, weaknesses, strategies and capabilities.Competitor analysis is an important element when analyzing the external environment.Helps company to identify opportunities which can then be matched with the firm’s core competencies to create competitive advantage.
8 External Environmental Analysis This analysis provides information to managers regarding the key trends and changes in the external environment, such as the following:Population shiftsChanging demographics (e.g. aging population)Information technologyAdvancement in technology creates new opportunities but also destroy the existing one.New government regulations
9 External Environmental Analysis (cont.) External environmental analysis reveals:– Opportunities: External environment factors which can help the organization improve its performance and achieve its strategic objectives. (e.g. The rising petrol price is an opportunity for bicycle shops which have reported an increase in sales.)– Threats: External environment factors which can hinder an organization’s performance and prevent the organization from achieving its strategic objectives
10 External Environmental Analysis (cont.) Based on the external environmental analysis, managers formulate strategies that:Take advantage of opportunitiesAvoid/reduce impact of threatsSources of information for external environmental analysis include customer surveys, market surveys, periodicals, journals, reports, books, newspapers, conferences and the Internet.
11 Factors in the General Environment Political and Legal FactorsLooks at how the government can influence organizationsComes from government and powerful group and institutions.Examples:employment lawsenvironmental regulationscompetitive regulationsgovernment leadershiptax policiesquotas on goods producedconsumer protection laws
12 Factors in the General Environment (cont.) Economic FactorsUnemployment ratesInflation ratesConsumer and investor confidenceTaxation levelInventory levelsCurrency exchange ratesGross Domestic Product (GDP)Read text chapter 3- pg 36 – pg 38
13 Factors in the General Environment (cont.) Socio-cultural FactorsConcerned with changes insociety’s attitudes,cultural valuesdemographic (age, gender, race, family size, etc),lifestyle,population shifts,education levels of population,immigration/emigrationHealthLiving standard etc..
14 Factors in the General Environment (cont.) Socio-cultural FactorsInclude factors such as:Demographic factors (e.g. population size and distribution, age distribution, education levels)Attitudes towards materialism, capitalism, free enterprise
15 Factors in the General Environment (cont.) Technological FactorsInclude factors such as:Rate of technology transferEnergy use and costNew products and services of competitorsChanges in InternetChanges in mobile technologyTechnological breakthroughs can create new industries or create new products and services which might render existing products and services redundant.
16 Factors in the Industry Environment A set of factors that directly affects a firmAlso known as micro environmentThese factors are analysed to assess how the forces of the organization’s immediate environment affect the attractiveness or profitability potential of the firm.Michael Porter’s Five Forces Model (1980) is one of the most widely used and best known conceptual frameworks to assess the industry environment.
17 Industry Environment Analysis/Competitive Analysis: Michael Porter’s Five-Forces Model Potential developmentof substitute productsRivalry amongcompeting firmsBargaining powerof suppliersBargaining powerof consumersPotential entry of new competitors
18 Factors in the Industry Environment (cont.) Threat of New EntrantsNew entrants to an industry can raise the level of competitionThe threat of new entrants depend on the barriers to entryBarriers of entry can be affected by economies of scale, product differentiation, capital requirements, switching costs and government regulations.
19 Factors in the Industry Environment (cont.) Bargaining Power of SuppliersA supplier group is powerful whenthe suppliers’ goods are critical to the buyers’ marketplace success.the inputs required by the buyers are unique, making it costly to switch suppliers.the buyers’ inputs do not represent a significant portion of the supplier’s business.
20 Factors in the Industry Environment (cont.) the buyers’ inputs are only available from a small group of suppliers.the suppliers can sell directly to the firm’s customers, bypassing the need for the firm.
21 Factors in the Industry Environment (cont.) Bargaining Power of BuyersCustomers (or buyer groups) have the most power whenthey are large and purchase most of the industry’s output.the industry has many small suppliers supplying the product and the buyers are large.the products represent a relatively large expense for customers and sales of the product being purchased account for a significant portion of the seller’s annual revenues.
22 Factors in the Industry Environment (cont.) they have access to sufficient information and are able to evaluate the competitive offerings.the customers could switch to another product without incurring significant switching cost because the suppliers’ products are not unique or undifferentiated.the customers could possibly make the product themselves.
23 Factors in the Industry Environment (cont.) Substitute ProductsSubstitute products can be a threat whenthe product is undifferentiated and customers can easily switch away from one supplier to another supplier with little or insignificant switching costs.the customers or buyer groups are price sensitive and customers have little brand loyalty.there is no real benefit offered by the products in the industry and consumers can do without the product offered by the industry.
24 Factors in the Industry Environment (cont.) Rivalry Among CompetitorsRivalry among competitors is the strongest of the five competitive forces and can vary widely among industries.If rivalry among the competitors is intense, companies in the industry may need to enhance their product offerings to keep customers and firms may earn less profit.
25 Factors in the Industry Environment (cont.) Rivalry among competitors can be most intense whenthe industry has two or three dominant firms which are battling to be the dominant firms in the industry.there are numerous competitors in the industry.the competitors are relatively equal in size and power.the firms are competing in a slow or shrinking industry.
26 Factors in the Industry Environment (cont.) there are high fixed costs of production.the products are undifferentiated and are viewed by customers as commodities.there are high costs for exiting the business.
27 ReferenceZainal Abidin Mohamed, Jo Ann Ho, Foong Yee Wong (2010) “Strategic Management” ,Oxford University Press, ISBN ,