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Transcript of Lecture 2 of strategic management
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External Environmental
AnalysisStrategic Management
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Diagnosing a companys situation has two facets
Assessing the companys external o rm acro-environ m ent (Societal or GeneralEnvi ronment )
General environment conditions
Forces acting to reshape this environment
Assessing the companys in ternal orm icro-envi ronm ent (Spec i f ic or taskEnvi ronment )
Market position and competitiveness
Competencies, capabilities, resource strengthsand weaknesses and com etitiveness
Understanding the Factors thatDetermine a Companys Situation
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From Thinking Strategically about theCompanys Situation to Choosing a Strategy
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The Components of a CompanysMacro-environment
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Thinking Strategically about aCompanys Macro -environment
A companys macro -environment includes all re levant fac tors andinf luences outside its domain
Diagnosing a companys external situation involves assessings t ra tegical ly imp ortant fac tors that have a bearing on thedecisions a companys makes about its Direction Objectives Strategy Business model
Requires that company managers scanthe external enviro nm ent to Identify potentially important external developments Assess their impact and influence Adapt a companys direction and strategy as needed
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Environmental Scanning
General Environment/ Societal environment1. Economic forces that regulate exchange ofmaterials, money, energy, and information
2. Technological forces that generate problem solving
3. Political legal forces that allocate power andprovide constraining and protecting laws andregulations
4. Socio-cultural forces that regulate the values, mores,
and customs of society
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Prentice Hall, 2000 Chapter 3 7
Some Important Variables in theSocietal Environment
Economic
GDP trendsInterest rates
Money supply
Inflation rates
Unemploymentlevels
Wage/price controls
Devaluation/revaluation
Energy availabilityand cost
Disposable anddiscretionary income
Technological Total government
spending for R&D
Total industryspending for R&D
Focus of
technologicalefforts
Patent protection
New products
New developments
in technologytransfer from lab to marketplace
Productivityimprovementsthrough automation
Political-LegalAntitrust
regulations
Environmentalprotection laws
Tax laws
Special incentives
Foreign traderegulations
Attitudes towardforeign companies
Laws on hiring andpromotion
Stability ofgovernment
Socio-culturalLifestyle changes
Career expectations
Consumer activism
Rate of family
formationGrowth rate of
population
Age distribution ofpopulation
Regional shifts inpopulation
Life expectancies
Birth rates
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Important variables in InternationalSocietal Environment
Economic Technological Political-legal Socio-cultural
EconomicDevelopmentPer capita incomeGDP tendsMonetary andFiscal policiesEmployment level
CurrencyconvertibilityNature ofcompetition
Regulation intechnology transferEnergy availabilityNatural resourceavailabilitySkill level ofworkforce
Patent-trademarkprotectionInternet availabilityTelecommunicationinfrastructure
Form ofgovernmentPolitical ideology
Tax lawsStability ofgovernmentRegulation offoreign
ownershipTrade regulationsForeign policiesTerrorist activityLegal system
Customs, norms,valuesLanguageDemographicsLife-stylesReligious beliefs
Attitude towards
foreignersLiteracy levelHuman rightsEnvironmentalism
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Key Questions Regarding theIndustry and Competitive
EnvironmentWhat are theindustrysdominant traits?
How strong arecompetitiveforces?
What forcesare drivingchange in theindustry?
What marketpositions dorivals occupy?What moves will
they make next?
What are thekey factors forcompetitivesuccess?
How attractiveis the industryfrom a profitperspective?
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Market size and growth rate Number of rivals Scope of competitive rivalry
Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions
Pace of technological change Vertical integration Economies of scale Learning and experience curve effects
Question 1: What are the Industrys Dominant Economic Traits ?
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What to Consider in Identifying an Industrys Dominant Features
FeaturesQuestions to answer
Market size andgrowth rate
How big is the industry and how fast it is growing?What does the industrys position in the businesslife cycle (early development, rapid growth, earlymaturity, maturity, stagnation, decline) reveal aboutthe industrys growth position?
Scope ofcompetitive
rivalry
Is the geographic area over which most companies
compete local, regional, national, multinational, orglobal? Is having a presence in foreign markets becoming more important to a companys long -term competitive success?
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Number of Rivals Is the industry fragmented into many smallcompanies or dominated by a few large firms?Is the industry going through a period ofconsolidation to a smaller number of competitors?
Buyer needs andrequirements
What are the final buyers (as well middlemen)looking for what attributes prompt to choose one
brand over another?Are buyers needs or requirements changing? If sowhat is driving such changes?
ProductionCapacity
Is a surplus capacity pushing prices and profitsdown?Is the industry overcrowded with too manycompetitors?
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ProductionCapacity
Is a surplus capacity pushing the prices and profitmargins down?Is the industry over crowded with too manycompetitors?
Pace ofTechnological
Change
What role does technology play in this industry?Are ongoing upgrades of facilities/ equipmentessential because of rapidly advancing production
process technologies?Do most industry members have a need for strongtechnological capabilities? Why?
Degree ofProduct
Differentiation
Are the products of rivals becoming differentiated orless differentiated?Are increasing look alike products of rivals causingheightened price competition?
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ProductInnovation
Is the industry characterized by rapid product innovation andshort product life cycle? How important is R&D and productinnovation? Are there opportunities to overtake key rivals by
being first-to-market with next generation products?
VerticalIntegration
Are some competitors in the industry partially or fullyintegrated? Are there any important cost differences among fullyversus partially versus non-integrated firms? Is there any
competitive advantage or disadvantage associated with beingfully or partially integrated?
Economies of
Scale
Is industry characterized by economies of scale in purchasing,
manufacturing, and other activities? Do companies with highscale operations have an important cost advantage over smallscale firms
Learning andexperiencecurve effects
Do some companies have a significant cost advantage because of their experience in performing particular
activities?
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Question 2: What Kind of CompetitiveForces are Industry Members Facing?
Objectives are to identify:
Main sources of competitive forces
Strength of these forces
Key analytical tool
Five Forc es Mod elof Com pet it ion
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Fig. 3.3: The Five Forces Model of Competition
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Analyzing the Five CompetitiveForces: How to Do It
Step 1 : Identify the specific compet i t ivepressures associated with each ofthe five forces
Step 2 : Evaluate the s t reng th of each co m peti t ive fo rce -- fierce, strong,moderate to normal, or weak?
Step 3 : Determine whether the col lect ives t reng th of the five competitive forces
is conducive to earning attractive profits
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Factors Affecting Threat of Entry
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Threat of New Entrants/ Entry BarriersFactors HUF MUF Neutral MF HF comment
Economies
of scaleCapitalrequired
Access todistributionchannelsExpectedretaliationDifferentiationBrand
LoyaltyExperienceCurveGovt. Action
Low
Low
Ample
LowLow
Low
InsignificantLow
High
High
Restricted
HighHigh
High
Significanthigh
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x arr ers Exit BarriersFactors HUF MUF Neutral MF HF Comments
Specialized AssetsFixed Cost ofExit
StrategicinterrelationshipGovernmentBarriers
Hi
Hi
Hi
Hi
Low
Low
Low
Low
t g t
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eapons or ompet ng an actors Affecting Strength of Rivalry
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t t g g g
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actors ect ng arga n ng ower oBuyers
P Of B
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Power Of Buyer
Factors HUF MUF N MF HFA Comment
Number of
ImportantbuyersThreat ofBackwardintegrationProductsuppliedSwitchingcost% ofbuyers
costProfitearned bybuyerImportance tofinal quality ofbuyersProduct.
Few
High
Commodity
High
High
Low
Low
Many
Low
Specialty
Low
Low
High
High
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How Seller Buyer PartnershipCan Create Competitive Pressures
Sellers that provide items to business have found it is in their mutualinterest to collaborate closely on matters such as:- just in time inventories- order processing- electronic invoice payments- data sharing
Dell has partnered with its largest PC customers to create an on linesystem for over 50,000 corporate customers, providing their employees- information on approved product configurations- paperless purchase orders- real time order tracking, invoicing, purchasing history and otherefficiency tools
- loading a customers software at the factory - installing asset tags so that customer setup time is minimal- helping customers upgrade their PCs to next generation hardware andsoftware
Fi 3 7 F Aff i B i i
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Fig. 3.7: Factors Affecting BargainingPower of Suppliers
P f S li
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Power of Supplier
Factors HUF MUF N MF HF CommentNo, of importantSuppliersSwitching cost
Availability ofsubstitutesThreat of forward
integrationImportance ofBuyer industry tosuppliers
Importance of
suppliers productto the buyersbusiness
Few
High
DifficultHigh
BuyssmallProportionHighImportance
Many
Low
ManyLow
BuyslargeproportionLowImportance
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How Seller-Buyer Partnership CanCreate Competitive Pressures
1. Reduce inventory and logistic costs2. Speed the availability of next generation
components3. Enhance the quality of parts and
components being supplied and reducedefect rates
4. Squeeze the cost savings for boththemselves and suppliers
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Factors Affecting Competition FromSubstitute Products
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Threat Of Substitute Product
FactorsHUF MUF N MF HF
CommentThreat ofObsolescenceof Industrysproduct
Aggressivenessof substituteproducts inpromotionSwitching Cost
Perceivedprice/ value
Hi
Hi
Low
Hi
Low
Low
High
Low
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Overall Industry Attractiveness
Factors Unfavorable Neutral FavorableEntry BarriersExit BarriersRivalry amongexisting firmsPower of buyersPower ofSuppliersThreat ofsubstitutes
Is the Collective Strength of the
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Is the Collective Strength of theFive Competitive Forces Conducive
to Good Profitability? As a rule, stronger the collective impact of the five
forces, the lower the combined profitability of industryparticipants
Fierce to strong competitive pressures come from all fiveforces driving industry profitability to unacceptably lowlevels
An industry can be competitively unattractive even whennot all five forces are strong
Intense competitive pressure from just two or threeforces may suffice to destroy the conditions for goodprofitability and prompt some companies to exit thebusiness
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Matching Company Strategy toCompetitive Conditions
Effectively matching a companys strategy toprevailing competitive conditions have twoaspects:
1. Pursuing avenues that shield the firm from asmany of the different competitive pressures aspossible
2. Initiating actions calculated to producesustainable competitive advantage, thereby
shifting competition in companys favor, puttingadded competitive pressure on rivals, andperhaps even defining a business model forthe industry
Q ti 3 Wh t F t D i i g
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Question 3: What Factors are DrivingIndustry Change and what Impact will
they have ? Industries change because forces
are dr iv ing industry par t ic ipantsto al ter th ei r act io ns
Driv ing forces are them ajor un der ly ing c auses of changing industry andcompetitive conditions
Where do dr iv ing fo rces or ig ina te? Outer ring of macroenvironment
Inner ring of microenvironment ( Most frequent)
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Driving Forces of ChangeThe internet and new e-commerce opportunities and
threats in the industryIncreasing Globalization:
1. Where scale economies are so large that rival firmsneed to market their products in many countries to
gain enough volume to drive unit cost down2. Where low cost production is a critical consideration
(making it imperative to locate manufacturing facilitiesin countries where lowest cost could be achieved)
3. Where one or more globally ambitious companies arepushing hard to gain significant competitive position inmany attractive markets
4. Where local governments are privatizing government-
owned monopolies
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Driving ForcesChanges in long-term industry growth rate
1. Upsurge in long-term demand triggers a race for growthamong existing firms and attract new-comers
2. A shrinking market heightens competitive pressures formarket share inducing mergers and acquisitions that result
in industry consolidationChanges in who buys the product and how they use itProduct innovationTechnological change
Marketing innovationEntry or exit of a major firm
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Drivers of Change
Diffusion of technical know how across morecompanies and countriesChanges in cost and efficiencyGrowing preference for differentiated productsinstead of commodity or vice versaRegulatory influences and government policychangesChanging societal concerns, attitudes and life styles
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Assessing the Impact of theDriving Forces
Are the driving forces causing demandfor the industrys product to increase ordecrease?
Are the driving forces acting to makecompetition more or less intense?
Will the driving forces lead to higher or
lower industry profitability?
Categorizing International
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Categorizing InternationalIndustries
Multi-domestic Industries: Are specific to each country or group of countriesCollection of essentially domestic industriesEach subsidiary is essentially independent of theactivities of the MNCs subsidiaries in othercountries
Global Industries:Operate world wide, with MNC making only smalladjustment for country specific circumstances
MNCs produce products or services in variouslocations throughout the world and sell them makingonly small adjustments for country requirements
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Prentice Hall, 2000 Chapter 3 41
Continuum of InternationalIndustries
3.9 Continuum of International Industries (Fig. 3.4)
Multi-domestic Industry in which companies tailortheir products to the specificneeds of consumers in aparticular country. E.g.:
Telecommunication Insurance
Banking
Global Industry in which companiesmanufacture and sell the sameproducts, with only minoradjustments made for individualcountries around the world. E.g.:
Automobiles
Wrist watches
Electrical appliances
Factors that Determine whether
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Factors that Determine whetherIndustry would be Global or Multi-
domestic1. Pressure for coordination within
multinational corporations operating inthat country
2. Pressure for local responsiveness on thepart of individual country markets
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Strategic Groups A strategic group is a set of business units or firms
that pursue similar strategies with similar resources A firms competitive domain can be identified with
the concept of strategic group The strategic group map consists of two sets of
dimensionsI. Business Scope Commitment:
(1) The target market segment (2) types of productsoffered (3) geographical reachII. Resource Allocation Commitment: Allocation of
resources to functional areas considered central inachieving competitive advantage
3 10 M i S i G i h U S R Ch i I d (Fi 3 5)
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Prentice Hall, 2000 Chapter 3 44
Mapping Strategic Groups in the U.S.Restaurant Chain Industry
3.10 Mapping Strategic Groups in the U.S. Restaurant Chain Industry (Fig. 3.5)
Product-Line Breadth
High
LowLimited Menu Full Menu
Arby's Wendy'sDomino's Dairy Queen
Hardee's Taco BellBurger King McDonald's
Shoney'sDenny's
Country Kitchen
Kentucky Fried ChickenPizza Hut
Long John Silver's
PonderosaBonanza
PerkinsInternational House
of Pancakes
Red LobsterOlive Garden
ChiChi's
P r
i c e
I li i f S i
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Implications of StrategicGroups
The strategic group a firm should considerentering
The number, type and level of entry barriersthe firm will face
The strategic dimensions that will make thefirm similar to its strategic group membersand different from members of differentstrategic groups
The combined effect of five forces ofcompetition on its relative profitability
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Key Success Factors
Key success factors affect the ability ofindustry members to prosper in market place
On what basis do customers chose betweenthe competing brands of sellers?
What must a seller do to be competitivelysuccessful- what resources and competitivecapabilities does it need?
What does it take for sellers to achieve asustainable competitive advantage?
Common Types of Industry Key Success Factors (KSF)
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Common Types of Industry Key Success Factors (KSF)
TechnologyRelated
Expertise in particular technology or in scientific research ( important in pharmaceuticals, internet applications, mobile communications, andmany high tech. industry
Proven ability to improve production processes (important in industrieswhere advancing technology opens the way for higher manufacturingefficiency and lower production costs)
ManufacturingRelated KSFs
Ability to achieve scale economies and/or capture learning curveeffects (important to achieving low production costs)
Quality control know-how ( important in those industries wherecustomers insists on product reliability)High utilization of fixed assets (important in capital intensive/high fixed cost industries)Access to attractive supplies of skilled labor
High labor productivity ( important for items with high laborcontent)Low cost product design and engineering ( reducesmanufacturing costs)Ability to manufacture or assemble products that are customizedto buyer specification
A k f h l l di ib /d l
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Distributionrelated KSFs
A strong network of wholesale distributors/dealersStrong direct sales capabilities via the internet and or havingcompany owned retail outletsAbility to secure favorable display space on retailer shelves
MarketingRelatedKSFs
A talented workforce
Distribution capabilitiesProduct innovation capabilitiesShort delivery time capabilitySupply chain management capabilitiesStrong e-commerce capabilities
Breadth of product line and product selectionA well known and respected brand nameCourteous, personalized customer serviceCustomer guarantees and warrantiesClever advertising
HR
Related KSFs
External Factor Analysis Summary( EFAS) /
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External Factor Analysis Summary( EFAS) /External Factor Evaluation Matrix ( EFE)
Column 1( External Factors) list 8-10 most important
opportunities and threats facing the company Column 2 ( Weights) assign a weight to each factor. The higherthe weight the more important is this factor to the current andfuture success of the company. All weights must sum to 1.0regardless of the number of factors
Column 3 (Rating) ,assign a rating to each factor from 5.0 (outstanding) to 1.0 (poor) based on managements currentresponse to a particular factor
Column 4 ( weighted score) Multiply the weight in column 2 foreach factor in column 3 to obtain each factors weighted score.
Column 5 ( comments), note why a particular factor wasselected and how its weight and rating were estimated
Add the individual weighted score for all external factors incolumn 4 to determine the total weighted score for thatparticular company. The weighted score of 3 = average, 4 =
above average, less than 2.5 as below average
3 16 External Factor Analysis Summary (EFAS): Blank
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Prentice Hall 2000 Chapter 3 50
External Factors Analysis Summary(EFAS)
3.16 External Factor Analysis Summary (EFAS): Blank
ExternalStrategic Factors Weight Rating
WeightedScore Comments
1 2 3 4 5
1.00
Opportunities
Threats
Total Weighted Score
Notes: 1. List opportunities and threats (5 10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2based on that factors probable impact on the companys strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding)to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factorsweighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weightedscore for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment.Source: T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and Hunger Associates.Reprinted by permission.