Session V

Analyzing the External

Environment
Learning about External Environment

· Assess the Nature of Environment

 Audit Environmental Influences
· Identify Key Competitive Forces-Structural
Analysis
 Identify Strategic Position
 Identify Key Opportunities and Threats
― Strategic Position
 Nature of Environment

 How Uncertain?
 What are the Relations?
 Diversity
 Complexity
 Inter-connected
 Dynamism
 Auditing Environment Influences

 Financial Policy
 Capital Markets
 Economic Forecasting
 Economic Factors and Restructuring
 Demographic Forecasting
 Environmental Sensing
 Socio-Cultural, Ecology
Auditing Environment Influences Contd…..
 R&D Policy
 Technology
 Labor Policy
 Labor Market
 Marketing Policy
 Competition
 Lobbying
 Government
 Purchasing Policy
 Supplies
 Resource
The Firm’s External Environment
Remote Environment (Global and Domestic)
• Economic • Political
• Social • Technological
• Ecological
Industry Environment (Global and Domestic)
• Entry barriers • Buyer power
• Supplier power • Substitute availability
• Competitive rivalry

Operating Environment (Global and Domestic)

• Competitors • Customers
• Creditors • Labor
• Suppliers

THE FIRM
 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
 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
 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
 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
 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
Factors used to Assess the International Environment
• Economic Environment • Political System
• Level of economic development • Form of government
• Population • Political ideology
• GNP • Stability of government
• Per capita income • Strength of opposition parties
• Literacy level • Social unrest
• Social infrastructure • Political strife and insurgency
• Natural resources
• Governmental attitude towards
• Climate
foreign firms
• Membership in economic blocs
• Foreign policy
• Monetary and fiscal policies
• Wage and salary levels
• Nature of competition
• Currency convertibility
• Inflation and interest rates
• Taxation system
Factors used to Assess the International Environment

Legal Environment Cultural Environment

• Legal tradition • Customs, norms, values, beliefs
• Effectiveness of legal system • Language
• Treaties with foreign nations • Attitudes
• Patent trademark laws • Motivations
• Laws affecting business firms • Social institutions
• Status symbols
• Religious beliefs
Forces Driving Industry Competition
Potential
entrants
Threat of new
entrants
Bargaining power Bargaining power
Industry
of suppliers of buyers
competitors
Suppliers Buyers
Rivalry Among
Existing Firms

Threat of substitute
products or services

Substitutes
Competitive Force: Threat of New Entrants

 Seriousness of threat depends on

― Barriers to entry
― Reaction of existing firms
 Barriers to entry
― Economies of scale
― Product differentiation
― Capital requirements
― Cost disadvantages independent of size
― Access to distribution channels
― Government policy
 Competitive Force: 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 differentiated, or has built up
switching costs
― It is not obliged to contend with other products for sale to
industry
― It poses a threat of integrating forward into industry’s
business
― Industry is not an important customer of supplier group
 Competitive Force: Buyers
 A buyer group is powerful if:
― It is concentrated or purchases in large volumes
― Products purchased from industry form a component of its
product, representing a significant fraction of its cost
― It earns low profits, creating incentives to lower its purchasing
costs
― Industry’s product is unimportant to quality of buyers’ products
or services
― Industry’s product does not save buyer money
― Buyers pose credible threat of integrating backward
Competitive Force: Substitute Products
 Relevance of substitutes
― By placing a ceiling on prices charged, they limit
profit potential of an industry
 Substitutes deserving the most attention are those
― Subject to trends improving their price-performance
trade-off with the industry’s product
― Produced by industries earning high profits
Competitive Force: Rivalry among Existing Competitors

 Usually the most powerful of the forces

 Weapons of competitive rivalry
― Price
― Quality
― Product introduction
― Customer service
― Advertising
 Industry and Competitive Analysis

1. What are the boundaries of the

industry?

Questions 2. What is the structure of the industry?

involved in
designing
viable
strategies 3. Which firms are our competitors ?

4. What are the major determinants of

competition?
Sources of Difficulty in Defining Industry Boundaries

Evolution of industries
over time creates new
opportunities and threats

Industry evolution creates Industries are

industries within becoming global in
industries scope
 Characteristics of Industry Structure
 Structural attributes - Enduring characteristics giving an industry
its distinctive character
 Variations among industries involves examining
― Concentration - Extent to which industry sales are dominated
by only a few firms
― Economies of scale - Savings firms within an industry achieve
due to increased volume
― Product differentiation - Extent to which customers perceive
products of firms in industry as different
― Barriers to entry - Obstacles a firm must overcome to enter an
industry
Objectives of Competitive Analysis

Identify current and

potential competitors

Identify potential Help firm devise

moves by competitors effective competitive
strategies
Analysis of Operating Environment Involves . . .

 Assessing firm’s competitive position via development of

competitor profiles
 Developing a profile of firm’s present and prospective
customers
 Assessing firm’s relationships with suppliers
 Assessing firm’s relationships with creditors
 Assessing nature of labor market, i.e. availability of human
resources
Criteria used in Constructing Competitor Profiles
1. Market share
2. Breadth of product line
3. Effectiveness of sales
distribution
4. Proprietary and key-account
advantages
5. Price competitiveness
6. Advertising/promotional
effectiveness
7. Location and age of facility
8. Capacity and productivity
9. Experience
10. Raw materials costs
11. Financial position
12. Relative product quality
13. R&D advantages/position
14. Caliber of personnel
15. General image
16. Customer profile
17. Patents and copyrights
18. Union relations
19. Technological position
20. Community reputation
 Competitor Profile
Weighted
Key Success Factors Weight Rating +
Score
Market Share 0.30 4 1.20

Price Competitiveness 0.20 3 0.60

Facilities location 0.20 5 1.00

Raw materials costs 0.10 3 0.30

Caliber of personnel 0.20 1 0.20

1.00 * 3.30
* Total of weights must always equal 1.00.
+ Rating scale suggested is as follows: very strong competitive position = 5
points; strong = 4; average = 3; weak = 2; very weak = 1.
Major Segmentation Variables: Consumer Markets

Geographic Variables Psychographic Variables

• Region • Social class
• Country size • Lifestyle
• City of SMSA size • Personality
• Density
• Climate
Major Segmentation Variables: Consumer Markets
(Concluded)
Demographic Variables Behavioral Variables
• Age • Occasions
• Sex
• Benefits
• Family size
• User status
• Family life cycle
• Income • Usage rate
• Occupation • Loyalty status
• Education • Readiness stage
• Religion • Attitude toward
• Race product
• Nationality
Major Segmentation Variables: Industrial
Markets
Demographic Variables Operating Variables
• Industry • Technology
• Company size • User-nonuser status
• Location • Customer capabilities

Purchasing Approaches
• Purchasing-function organization
• Power structure
• Nature of existing relationships
• General purchase policies
• Purchasing criteria
Major Segmentation Variables: Industrial
Markets (Concluded)
Situational Factors Perfect Characteristics

• Urgency • Buyer-seller
similarity
• Specific application
• Attitudes toward
• Size of order risk

• Loyalty
External Factor Analysis Summary (EFAS): Maytag As Example

External Factors Weight Rating Weighted Comments

Score
Opportunities
 Economic integration of European .20 4 .80 Acquisition of Hoover
Community
 Demographics favour quality .10 5 .50 Maytag quality
appliances
 Economic development of Asia .05 1 .05 Low Maytag presence
 Opening of Eastern Europe .05 2 .10 Will take time
 Trend to “Super Stores” .10 2 .20 Maytag weak in this channel

Threats
 Increasing government regulations .10 4 .40 Well positioned
 Strong U.S. competition .10 4 .40 Well positioned
 Whirlpool and Electrolux strong .15 3 .45 Hoover weak globally
globally
 New Product advances .05 1 .05 Questionable
 Japanese appliance companies .10 2 .20 Only Asian presence in
Australia
Total Scores 1.00 3.15