The External Environmental

1
The External Environmental

• Think in terms of Opportunities and Threats - the
  O and T of TOWS
• Relate Strategic Objectives to O and T
• increased sales and/or market share (Cereal)
• new product offerings (Toys)
• processing technology innovation (Semiconductors)
• decreased environmental impact (Chemicals)
• Continually scan to identify Os and Ts

2
The External Environmental

• The Company should achieve Strategic Fit
• What is needed to respond to changes in the
  external environment and what does the company
  possess to respond to these changes?
• What does the company need and what does the
  external environment possess to provide to the
  company?

3
The External Environmental

• The General Environment
• Demographic age, ethnicity, household size,
  occupation
• Economic income distribution, inflation,
  interest rates, exchange rates, urbanization
• Political/Legal consumer and environmental
  protection, unions

4
The External Environmental

• The General Environment
• Social and Cultural conservatism/ liberalism,
  nesting, materialism
• Technological e-tailing, intranets, diffusion
  rates
• Global nationalism, transnational corporations,
  cultural differences

5
The External Environmental

• Age of Functionality (Osborn, 2002)
• Strategic Perspective What risk do you take?
• Hondas Element
• Chryslers PT Cruiser
• Pontiac Vibe
• Toyota Matrix
• - To what degree does a company try to meet the
  needs of a increasingly fragmented market?

6
The External Environmental

• What changes are going on in the General
  Environment that you think businesses need to pay
  attention to?
• Are these changes only short term? Are they
  cyclical? Are they more long term and lasting?

7
The External Environmental

• The Industry Environment
• The following factors in an Industry
• Bargaining Power of Buyers
• Bargaining Power of Suppliers
• Threat of New Entrants
• Threat of Substitute Products
• ...Determine Intensity of Competitive Rivalry

8
The External Environmental
The Industry Environment
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Competitive Rivalry
Threat of Substitute Products
9
The External Environmental

• Threats of New Entrants decreases if barriers to
  entry are high...
• Economies of Scale are high
• Product Differentiation is high
• Capital Requirements are high
• Switching Costs are high
• Access to Distribution Channels is limited
• Cost Disadvantages Independent of Scale are high
• Government Policy is restrictive
• Expected Retaliation is high

Threat of New Entrants
10
The External Environmental

• Suppliers are likely to be powerful if
• Supplier industry dominated by a few firms
• Suppliers products have few substitutes
• Buyer is not important customer
• Suppliers product is an important input
• Suppliers products are differentiated
• Suppliers products have high switching costs
• Supplier poses credible threat to forward
  integration

Bargaining Power of Suppliers
11
The External Environmental

• Buyers are likely to be powerful if
• They are concentrated or purchases are large
  relative to sellers sales
• Purchase accounts for a significant fraction of
  suppliers sales
• Product unimportant to quality
• Products are undifferentiated
• Buyers face few switching costs
• Buyers industry earns low profits
• Buyer has full information
• Buyer presents a credible threat to backward
  integration

Bargaining Power of Buyers
12
The External Environmental

• The keys to evaluating Substitute Products are
• Products with improving price/performance
  tradeoffs relative to present industry products
• For example
• Electronic security systems in place of security
  guards
• Email and fax machines in place of overnight mail
  delivery

Threat of Substitute Products
13
The External Environmental

• Fresh Co. (Yugoslavian fruit juice company)
• Supply of packaging only one supplier in
  country with limited styles.
• Supply of raw material (fruits) large number of
  small suppliers located throughout the country
  for most fruits, imports tropical
• Limited, but increasing domestic incomes
• Brand conscious younger generation
• Health conscious parents

14
The External Environmental

• Forecasting perhaps the most challenging issue
  for business success directly impacts financial
  planning and internal resource allocation
• Based on a mix of hard data and luck/intuition
• Use brainstorming, statistical modeling, and
  scenario planning.

15
The External Environmental

• Forecasting
• For the simulation, consider
• What is existing industry demand in each segment?
• What market share of each segment does your
  company possess?
• How much will the segment grow?
• What will be the change ( or -) in your market
  share of each segment?
• Lets take a look under Tutorials for an
  excellent description of doing Sales Forecasts in
  the Simulation!

16
The External Environmental
Understanding Competitors

• Assumptions Can competitor(s) adapt to changing
  environment?
• Capabilities relative strengths and weaknesses?

• Future objectives goals and risks, ability to
  achieve
• Current strategy competitive advantages
• Retaliation How will competitor(s) respond to
  your actions?

17
The External Environmental

• capacity added in large increments
• diverse competitors
• high strategic stakes
• high exit barriers

Cutthroat Competition

• numerous and/or equally balanced competitors
• slow growth industry
• high fixed costs
• high storage costs
• lack of differentiation

18
The External Environmental

• High Exit Barriers
• Economic, strategic, and emotional factors that
  cause companies to remain in an industry even
  when future profitability is questionable.
• Include specialized assets, fixed cost to exit
  (labor agreements), strategic relationships
  networks, emotional links /or history,
  government social restrictions.

19
External Factor Analysis Summary
20
External Factor Analysis Summary

• External Factors List the 8 to 10 most important
  opportunities and threats (developments in the
  General and Industry environments) facing the
  company.
• Weight Assign a weight to each External Factor
  from 1.0 (most important) to 0.0 (not important)
  based on the factors probable impact on the
  companys current strategic position. All
  weights must sum to 1.00.
• Rating Assign a rating to each factor from 5.0
  (Outstanding) to 1.00 (Poor) based on the
  companys current response to that particular
  factor.

21
External Factor Analysis Summary

• Weighted Score Multiply the weight times the
  rating to get the weighted score for each factor.
• Comments Describe (1) why you selected each
  External Factor and (2) how you estimated the
  weight and rating.
• Total Weighted Score Add the Weighted Scores for
  the External Factors to get the Total Weighted
  Score. The Total Weighted Score is useful as a
  comparison to other companies in the industry
  group.
• See pages 73 and 74 in the text for more
  information.