Strategic Management

UNIST 2022-1

Module 2
External Environment Analysis
PESTEL Framework
Five Forces of Competition
* News Briefing of the Week
1 Vision, Mission, and Values
Discuss

What is one company that you

admire the most? Why?
Strategic Management Process
 Vision & Mission
Google’s Mission (1998-present)
“To organize the world’s information and
make it universally accessible and useful”

• A key purpose of vision and mission statements is to inform stakeholders

of:
• What the firm is
• What it seeks to accomplish
• Who it seeks to serve
• The vision and mission provide the foundation the firm needs to choose
and implement one or more strategies.
 Vision
• Vision is a picture of what the firm wants to be and, in broad terms,
what it wants to achieve.
• A vision statement:
• Articulates the ideal description of an organization and gives shapes
01 to its intended future
• Tends to be relatively short and concise
Vision • An effective vision:
• Stretches and challenges people
• Is developed by the CEO and other top-level managers, employees,
suppliers, and customers
• Is consistent with the decisions and actions of those involved with
developing it
• Conditions in the firm’s external environment and internal organization
influence the forming of a vision statement.
 Mission
• A mission specifies the businesses in which the firm intends to compete
and the customers it intends to serve.
• A mission:
01 • Is more concrete than a firm’s vision
• Should establish a firm’s individuality
Mission
• Should be inspiring and relevant to all stakeholders
• Deals more directly with product markets and customers
• Should be developed by the CEO, top-level managers, and other
organizational members
• Has a higher probability of being effective when employees have a
strong sense of ethics
 Mission
A mission
1. 1. Informs all stakeholders why the company exists
Why Have a Mission? 2. Helps to resolve disputes about its future direction
3. Inspires employees and managers

A good, well-built mission

2. 1. Emphasizes creation of customer or social value,

above and beyond simply making money
What Makes
2. Focuses on important needs or problems in the
a Good Mission? society or the market, not on simple products or
services
3. Actually lives and is practiced in the company
4. Is short, inspiring, and memorable
 Values
03 • Some companies also lay down values they hold and expect their
employees to adhere to
Values • These are the “code of conduct” for the company and its employees

“Ten Things We Know to be True”

 Values
Larry Page suggested with the intro letter for Alphabet that the following
list contained items they were "excited about" with Alphabet:

• Getting more ambitious things done.

• Taking the long-term view.
• Empowering great entrepreneurs and companies to flourish.
• Investing at the scale of the opportunities and resources we see.
• Improving the transparency and oversight of what we’re doing.
• Making Google even better through greater focus.
• And hopefully... as a result of all this, improving the lives of as many
people as we can.
Values
 Values

*https://www.visualcapitalist.com/vetting-alphabets-4-billion-other-bets/
Values

*https://www.visual
capitalist.com/vettin
g-alphabets-4-
billion-other-bets/
 Value of Leadership
Which company had these core values?

COMMUNICATION RESPECT INTEGRITY EXCELLENCE

We have an obligation to We treat others as we would We work with customers and We are satisfied with
communicate. like to be treated. prospects openly, honestly, nothing less than the
and sincerely. very best in everything
we do.
 Value of Leadership
Which company had these core values?

COMMUNICATION RESPECT INTEGRITY EXCELLENCE

• Energy company based in US

• Went bankrupt in 2000
• Accounting fraud and
excessive risk-taking
• Culture of greed, competition,
and star employees
*Economist (2002)
 What did we learn?

Value of Strategic Leadership

Mission, vision, and values could be important for success, but only if
they are:

1. Designed well
2. Lived and practiced by members
3. Constantly communicated by leaders
4. A true reflection of the ethos of the company
Discuss
Toss: Culture and Values

Unicorn Company

A venture capital-backed
private equity technology
startup valued at a billion
dollar or more prior to its
initial public offerings
Discuss

Why do you think current startups are

investing continuously in building
positive corporate values and culture?
What do you think is most important in
building corporate values, mission, and vision?
2 External Environmental Analysis
To a firm, what is an external environment?
Superior Firm Performance:
Firm Effects vs. Industry Effects?
01 Layers of External Environment
Macro Environment

Industry Environment

Firm
Firm
Firm
02 Why Analyze External Environment?
⚫ An analysis of the macro environment: Focuses on
environmental trends and their implications.
⚫ An analysis of the industry environment: Focuses on the
factors and conditions influencing an industry’s
Macro Environment
profitability potential.
⚫ Macro environment affects all industries and the firms
competing in them. Industry Environment

• For each segment, firms have to determine the

strategic relevance of environmental changes and Firm
Firm
trends.
⚫ In combination, the results of these analyses influence the
firm’s:
• Vision
• Mission
• Choice of strategies
• Competitive actions and responses it will take to
implement those strategies
3 The Macro Environment
Layers of External Environment
Macro Environment

Industry Environment

Firm
Firm
Firm
 Macro Environment

P E S T E L
Political Economic Socio-Cultural Technological Legal
Ecological
Environment Environment Environment Environment Environment
Environment
-Government -Economic -Population -Technology -Discrimination
policy -Weather laws
growth growth incentives
-Political stability -Climate -Antitrust laws
-Exchange rates -Age distribution -Level of
-Corruption innovation -Environmental -Employment
-Interest rates -Career attitudes
policies laws
-Foreign trade -Inflation rates -Safety emphasis -Automation
policy -Climate change -Consumer
-Disposable -Health -R&D activity protection laws
-Tax policy -Pressures from
income consciousness -Technological NGOs -Copyright and
-Labor law -Unemployment -Lifestyle change patent laws
-Trade rates attitudes -Technological -Health and safety
restrictions -Cultural barriers awareness laws
 Macro Environment
⚫ The arena in which organizations and interest groups compete for
attention, resources, and a voice in overseeing the body of laws and
01 regulations guiding interactions among nations as well as between
firms and various local governmental agencies.
Political and • e.g., national, regional, and local laws
Legal ⚫ Essentially, this segment is concerned with:
Environment
• How firms try to understand the current and projected
influences of governments and political organizations on their
businesses
• How the firms try to influence governments

Antitrust laws Taxation laws Labor training laws

Deregulation philosophies Educational philosophies

 Macro Environment
⚫ The nature and direction of the economy in which a firm competes
or may compete.
02 ⚫ In general, firms seek to compete in relatively stable economies with
strong growth potential.
Economic ⚫ It has become increasingly important for firms to study the economic
Environment environment and predict economic trends that may occur and have
effects on them.
• A need for global perspective: Firms especially need to study
closely the economic environment in multiple regions and
countries around the world.

Inflation rates Interest rates Personal savings rate

Gross Domestic Product Trade surpluses and deficits

(GDP)
 Macro Environment
⚫ The sociocultural segment is concerned with a society’s attitudes
and cultural values.
03 ⚫ Attitudes and values: Form the cornerstone of a society
⚫ Often drive demographic, economic, political / legal, and
Socio-Cultural
technological conditions and changes
Environment
⚫ Are relatively stable, but can and often do change over time
⚫ Firms must identify these changes in order to stay ahead of their
competitors and stay relevant in the minds of their consumers.

Workforce diversity Work-life balance Consumer preferences

Age structure of population Ethnic mix of population

 Macro Environment
⚫ Includes the institutions and activities involved in creating new
knowledge and translating that knowledge into new outputs,
products, processes, and materials.
04
⚫ Firms should continuously scan the macro environment to identify:
Technological • Potential substitutes for technologies that are in current use
Environment • Newly emerging technologies from which their firm could derive
competitive advantage
⚫ Firms in all industries must become more innovative in order to
survive.

Product innovations Applications of knowledge New communication technologies

Private & government-supported R&D expenditures

 Macro Environment
⚫ Refers to potential and actual changes in the physical environment
are requires firms to positively respond to those changes in order to
05 create a sustainable environment.
⚫ An increasing number of companies are investing in sustainable
Ecological development.
Environment
• ESG management: Environment, Social, and Governance
• Carbon-neutral or low-carbon economy
• The emerging reusable energy (RE) movement

Energy consumption Developing new energy sources

Minimizing firms’ Producing environmentally-

environmental footprint friendly products
 Macro Environment
Firms should recognize that globalization of business markets may
create opportunities to enter new markets, as well as threats that
Global competitors from other economies may enter their market.
Perspective in ⚫ Socio-cultural elements: Korean ideology emphasizes
Analyzing communitarism; Chinese ideology emphasizes guanxi—personal
Macro connections; Japanese ideology emphasizes wa—group harmony and
Environment social cohesion.
⚫ “Global focusing”:
• Is a more cautious approach to globalization in which firms focus
on global niche markets
• Allows firms to build onto and use their competencies while
limiting their risks within the niche market

Important political events Newly industrialized countries

Differences in cultural and institutional attributes

 How to Analyze Macro Environment
Required Behaviors in Analyzing Macro Environment
⚫ Identifying opportunities and threats is an important objective of studying the general environment.
⚫ Effective scanning, monitoring, forecasting, and assessing are vital to the firm’s efforts to recognize and
evaluate opportunities and threats.

A B C D

Scanning Monitoring Forecasting Assessing

How to Analyze Macro Environment
⚫ Scanning entails the study of all segments in the macro environment.
⚫ Through scanning, firms:
A • Identify early signals of potential changes in the general
environment
Scanning • Detect changes that are already under way
⚫ Scanning activities must be aligned with the organizational context.
⚫ The Internet provides a wealth of opportunities for scanning.

⚫ When monitoring, analysts observe environmental changes to see if an

important trend is emerging from among those spotted through
B scanning.
⚫ Effective monitoring requires the firm to identify important stakeholders
Monitoring and understand its reputation among these stakeholders as the
foundation for serving their unique needs.
How to Analyze Macro Environment
⚫ When forecasting, analysts develop feasible projections of what might
happen, and how quickly, as a result of the events and trends detected
C through scanning and monitoring.
⚫ Forecasting events and outcomes accurately is challenging.
Forecasting
⚫ Forecasting demand for new technological products is difficult because
technology trends are continually shortening product life cycles.

⚫ When assessing, the objective is to determine the timing and

significance of the effects of environmental changes and trends that
have been identified.
D
⚫ The intent of assessment is to specify the implications of understanding
Assessing the general environment.
⚫ Although gathering and organizing information is important,
appropriately interpreting that information to determine if an identified
trend in the general environment is an opportunity or threat is critical.
4 The Industry Environment
Layers of External Environment
Macro Environment

Industry Environment

Firm
Firm
Firm
 The Industry Environment
⚫ An industry is a group of firms producing products that are close
substitutes (often murky and not clear-cut).
Macro Environment
⚫ An industry’s structural characteristics influence a firm’s choice
of strategies.
⚫ Compared with the macro environment, the industry Industry Environment
environment has a more direct effect on firms’ competitive
actions and responses.
Firm
Firm
⚫ To study an industry, the firm examines five forces that affect the
ability of all firms to operate profitably within a given industry:
1. The threats posed by new entrants
2. The power of suppliers
3. The power of buyers
4. Product substitutes
5. The intensity of rivalry among competitor
 SCP Paradigm
CONDUCT
STRUCTURE PERFORMANCE
of a firm
of an industry of a firm
• Pricing strategy
• Product differentiation
• Number of competitors • Profitability
strategy
• Heterogeneity of a • Growth
• R&D strategy
product • Quality of products
• Advertising and
• Cost of industry entry • Technological
marketing strategy
and exit innovation
• Competition strategy
• Productive efficiency
• Merger strategies

The SCP paradigm assumes a causal relationship between structure, conduct, and performance.
This paradigm was most influential during the 1950s and 1970s, with the development of the
Industrial Organization Economics.
Five Forces of Competition Model
• A framework for analyzing a firm’s
competitive environment.
• Proposed by Michael Porter in 1980s.
• Draws from industrial organization (IO)
economics to derive five forces that
determine the competitive intensity and,
therefore, the attractiveness of an industry in
terms of profitability.
Five Forces of Competition Model
1_ Threat of New Entrants
⚫ Identifying new entrants is important because they can threaten the
market share of existing competitors.
⚫ How likely firms will enter an industry is a function of two factors:
1. Barriers to entry
2. The retaliation expected from current industry participants
⚫ Entry Barriers
• Determines the degree to which a new competitor is able to enter
a industry to compete against existing rivaling firms.
• Firms considering entering an industry study entry barriers to
determine the likelihood of being able to identify an attractive
competitive position within the industry.
The Five Forces of Competition Model
⚫ Barriers to Entry
⚫ Economies of Scale
• With economies of scale, the cost of producing each unit declines as
the quantity of a product produced during a given period increases.
• To realize economies of scale, firms should have enough production
facilities (e.g., factories) and financial resources to support them.
• A new entrant is unlikely to quickly generate the level of demand for
its product that would allow it to develop economies of scale.
The Five Forces of Competition Model
⚫ Product Differentiation
• Over time, customers may come to believe that a firm’s product is unique and
consistently purchase that firm’s product. ➔ Brand royalty
• Products with brand royalty is able to be priced with high premiums.
• To combat the perception of uniqueness, new entrants frequently offer products
at lower prices.
• However, this may result in lower profits or even losses.
The Five Forces of Competition Model
⚫ Capital Requirements
• Competing in a new industry requires a firm to have capital for physical
facilities, inventories, marketing activities, and other critical business
functions.
• The capital required for successful market entry may not be available to
pursue the market opportunity.
The Five Forces of Competition Model
⚫ Switching Costs
• Switching costs are the one-time costs customers incur when they buy from a
different supplier. → “lock-in effect”
• If switching costs are high, a new entrant must attract buyers by offering either:
• A substantially lower price
• A much better product
 The Five Forces of Competition Model
⚫ Access to Distribution Channels
• After building a relationship with its
distributors, a firm will nurture it, thus
creating switching costs for the
distributors.
• New entrants may use price breaks and
cooperative advertising allowances to
persuade distributors to carry their
products.
• However, those practices can
reduce new entrants’ profit
potential.
The Five Forces of Competition Model
⚫ Government Policy
• Governmental decisions and policies that can control entry into an industry
include:
• The granting of licenses and permits
• Deregulation
• Antitrust issues
⚫ Other Entry Barriers: Proprietary product technology, favorable access to raw
materials, desirable locations, and government subsidies
 Five Forces of Competition Model
2_ Bargaining Power of Suppliers
⚫ Suppliers can exert power over firms competing within an industry by:
• Increasing prices
• Reducing the quality of their products
⚫ A supplier group is powerful when:
• It is dominated by a few large companies and is more concentrated
than the industry to which it sells. → monopoly
• Industry firms are not a significant customer for the supplier
group.
• Suppliers’ goods are critical to buyers’ marketplace success.
• The effectiveness of suppliers’ products has created high switching
costs for industry firms.
• It poses a credible threat for a firm to integrate backward into the
supplier’s industry.
 Five Forces of Competition Model
3_ Bargaining Power of Buyers
⚫ To reduce their costs, buyers bargain for:
• Higher quality
• Greater levels of service
• Lower prices
⚫ Customers (buyer groups) are powerful when:
• They purchase a large portion of an industry’s total output.
• The sales of the product being purchased account for a
significant portion of the seller’s annual revenues.
• They could switch to another product at little, if any, cost.
• The industry’s products are undifferentiated or
standardized, and the buyers pose a credible threat if they
were to integrate backward into the sellers’ industry.
 Five Forces of Competition Model
4_ Threat of Substitute Products
⚫ Substitute products are goods or services from outside a given
industry that perform similar or the same functions as a product that
the industry produces.
⚫ In general, product substitutes present a strong threat to a firm
when:
• Customers face few, if any, switching costs
• The substitute product’s price is lower
• The substitute product’s quality and performance capabilities are
equal to or greater than those of the competing product
⚫ To reduce a substitute’s attractiveness, a firm can differentiate a
product along dimensions that are valuable to customers, such as:
• Quality
• Service after the sale
• Location
 Five Forces of Competition Model
5_ Intensity of Rivalry among Competitors
⚫ Competitive rivalry intensifies when:
• A firm is challenged by a competitor’s actions
• A company recognizes an opportunity to improve its market
position
⚫ Common dimensions on which rivalry is based include:
• Price
• Service after the sale
• Innovation
⚫ Factors that increase the intensity of rivalries among firms include:
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs or high storage costs
• Lack of differentiation or low switching costs
• High strategic stakes
• High exit barriers
 Weaknesses of Five Forces of Model
⚫ Porter's Five Forces is a frequently used guideline for
evaluating the competitive forces of an industry
⚫ However, the model has drawbacks.
• Backward-looking and static: The findings of five-
forces model is mostly relevant only in the short term;
that limitation is compounded by the impact of
globalization.
• Little implication for individual company: Another big
drawback is that the model is for a broad industry
analysis, rather than finding solutions for an individual
firm.
• Inappropriate for diversified firms: Also problematic is
that the framework is structured so that each
company is placed in one industry group when some
⚫ Firms need to focus on the pivotal force of
companies straddle several.
their industry environment—the one with the
• Relative difference in importance of each force: greatest impact to the firms’ business
Another issue includes the need to assess all five
forces equally when some industries aren't as heavily
impacted by all five.
Weaknesses of Five Forces of Model