Topic 3 The External Environment is part of Strategic Management Model

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Topic 3 The External Environmentis part of
Strategic Management Model

• 7/31/2013
• SCANNING AND MONITORING THE EXTERNAL ENVIRONMENT
• FORMULATING STRATEGIES
• IMPLEMENTING STRATEGIES
• EVALUATING AND CONTROLLING STRATEGIES

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The External AuditCan be described as1.
collecting and evaluating social-cultural,
demographic, political/legal, economic ,
technological (general societal information) and
collecting and evaluating 2. Industry/competitive
/task information.

• Scanning Is looking for anything that might be
  important
• Monitoring Is looking at environment on a
  continuous basis

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External Environmental Variables can be
described as (O)Opportunities or (T)Threats

• Internal Environmental variables can be described
  as (S)Strengths or (W)weaknesses
• Together looking at external environment and
  internal environment is called SWOT analysis

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External Societal

• Should not be company specific
• This information will be general information that
  is effecting most organizations in this or other
  industries.
• Should not be industry specific
• This information will not include what is
  happening in the industry among competitors in
  the industry, nor will it be information about
  specific technology the industry uses, nor
  government regulation of this industry in
  particular. It does not include the specific
  customers for the products of this industry.

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When looking at Opportunities and Threats in the
Societal and Industry external environments
Information should be assessed as to whether it
is a Strategic Issue orStrategic Factor

• Strategic Issues
• External Variables that may affect the future
  environment of our organization
• Strategic Factors (are issues that we believe
  will have meaningful effect on our organization-
  we now call them strategic factors
• Those strategic issues with high probability of
  occurrence and high probable impact on
  corporation are factors
• Strategic Group Group pursuing similar markets
  with similar products.

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Issues Priority Matrix is used to determine which
issues are strategic factors
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Scanning the External Societal and Competitive
Environments

Analysis of Societal Environment

Economic, Sociocultural, Technological,
Political-Legal Factors
Market

Analysis
Competitor

Community

Analysis
Analysis
Supplier

Analysis
Selection of

Strategic Factors

Governmental

Interest Group

Analysis
Analysis
Opportunities

Threats
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Some Important Variables in the Societal
Environment
Economic GDP trends Interest rates Money
supply Inflation rates Unemployment
levels Wage/price controls Devaluation/revaluation
Energy availability and cost Disposable and
discretionary income
Technological Total government spending for
RD Total industry spending for RD Focus of
technological efforts Patent protection New
products New developments in technology transfer
from lab to marketplace Productivity improvements
through automation
Political-Legal Antitrust regulations Environmenta
l protection laws Tax laws Special
incentives Foreign trade regulations Attitudes
toward foreign companies Laws on hiring and
promotion Stability of government
Sociocultural Lifestyle changes Career
expectations Consumer activism Rate of family
formation Growth rate of population Age
distribution of population Regional shifts in
population Life expectancies Birth rates
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Each team needs to gather information on their
assigned industry and present an integrated
summary of their findings in their Case write-up
and presentation.

• See Handout - Ten(10) Outside Bibliographical
  Sources required. Pick sources that speak
  comprehensively about the industry. Sources
  should be several pages long if possible. Put
  number of pages at end of citation.
• Review the several pages in the book that discuss
  indexes, and internet cites, and strategic
  planning programs. (in chapter 3)

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External Industry/Task Environment

• Success hinges on competition in industry. In
  industries that have a small amount of
  competition, and high profit margins-- success is
  relatively easy.
• The following, according to Porter, is what
  drives industry competition. In our case
  industry analysis we will use the categories,
  demand, supply, competitive structure, government
  groups, and interest groups to analyze and
  industry.

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Forces Driving Industry Competition
by Michael E. Porter.
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Intense rivalry among firms reduces profits and
increases competitive pressures.

• Factors effecting demand include
• Rate of growth in consumer needs
• Alternative replacement products for consumers
• Product or service characteristics
• Elasticity of demand (how consumers are effected
  by a change in price (elastic or inelastic
  products)
• Bargaining power of buyers
• Rate of Industry Growth

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Factors effecting Supply include

• Capacity of the industry
• Availability and control of raw materials..parts
• Number of competitors
• Price levels of product
• Economies of scale
• Access to distribution channels

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Factors Making Competitive Structure include

• What type of competition you are in (monopoly,
  oligopoly, monopolistic competition)
• Stage in Product Life Cycle and Industry
  evolution
• Threat of Substitutes
• Threat of Entrant
• Height of Entrance Barriers and Exit Barriers
  including those developed by governments
• Diversity of Rivals
• Switching Costs

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Government Groups affecting an industry include

• State, county, city, and other governmental unit
  regulators.
• Specific agencies set up to oversee and
  industrys environmental practices, pricing
  policies, work rules, accounting requirements,
  safety,
• Courts and legal practices (liability insurance)
• Groups that set wages, employee taxes, disability
  insurance, work persons compensation. Etc.,

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Interest Groups studied when you study an
industry include

• Customer representatives
• Local community, city, state groups in which
  companies are located
• Those effected by environmental pollution
• Social action groups (e. g. MADD)
• Groups effected by tax abatements of industry or
  direct governmental grants

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Sometimes competitors in an industry see
themselves in a competitive group.Mapping
Strategic Groups in the U.S. Restaurant Chain
Industry below is similar to perceptual maps in
simulation
Price
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In Analyzing your competitors and your company,
it should help to determine which Strategic Types
you are dealing with

• Defenders - improve existing efficiencies
• Prospectors - broad lines innovators
• Analyzers - (Defender prospector depending on
  line)
• Reactors - lack of consistent strategy

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We can scan and monitor all we want but in the
end we dont know what future is so we must
Forecast
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Popular Forecasting Techniques

• Extrapolation
• Brain storming
• Expert opinion
• Statistical modeling
• Scenario writing
• POM (Moving weighted averages)
• Regression analysis

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Industry Scenarios

• 1. Examine possible shifts in societal variable
  globally.
• 2. Identify uncertainties in each of the six
  forces of the task environment.
• 3. Make a range of plausible assumptions about
  future trends.
• 4. Combine assumptions into internally consistent
  scenarios.
• 5. Analyze the industry situation under each
  scenario.
• 6. Determine sources of competitive advantage
  under each scenario.
• 7. Predict competitors behavior under each
  scenario.
• 8. Select most likely scenario to use in strategy
  formulation.

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External Factor Analysis Summary (EFE)
ExternalStrategic Factors
Rating
Weighted Score
Weight
Comments
1
2
3
4
5
Opportunities Threats Total Weighted Score
1.00
1st determine your variables, 2nd determine
weights, 3rd give a rating from 1-5 for the
Variables influence on your strategy, 4th
figure weighted scores 5th added weighted score
which is your EFE rating
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External Factor Analysis Summary (EFE) Maytag as
Example
ExternalStrategic Factors
Rating
Weighted Score
Weight
Comments
Opportunities Economic integration of European
Community Demographics favor quality
appliances Economic development of
Asia Opening of Eastern Europe Trend to
Super Stores Threats Increasing government
regulations Strong U.S. competition Whirlpool
and Electrolux strong globally New product
advances Japanese appliance companies Total
Scores
.20 .10 .05 .05 .10 .10 .10 .15 .05 .10
4 5 1 2 2 4 4 3 1 2
.80 .50 .05 .10 .20 .40 .40 .45 .05
.20
Acquisition of Hoover Maytag quality Low
Maytag presence Will take time Maytag weak in
this channel Well positioned Well
positioned Hoover weak globally Questionable Only
Asian presence is Australia
1
2
3
4
5
1.00
3.15