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FACTORS THAT SHAPE A COMPANY’S STATEGYAnalysis Of The Macro environmentAnalysis Of The IndustryA Framework For CompetitorAnalysisStructural Analysis Within IndustriesInternal Organizational AnalysisEnvironmental Scanning Forecasting The Environment
Analysis Of The Macroenvironment–Political And Regulatory Forces Economic Forces –Technological Forces –Social Forces
Analysis Of The IndustryThe Elements Of Industries Structure– Threat Of New Entrants– Threat Of Substitutes– Bargaining Power Of Buyers– Bargaining Power Of Suppliers– Rivalry Among Existing Firms
A Framework For Competitor Analysis– Future Goals– Assumptions– Current Strategy– Capabilities– Putting The Four Components Together
Structural Analysis Within Industries– Firms Profitability– Industries ChangeInternal Organizational Analysis– The Areas That Most Businesses Should AnalyzeEnvironmental Scanning– Forecasting The Environment
Analysis Of The Macro environmentAll organizations are affected by fourmacro environmental forces:political-legal, economic,technological, andsocial.
Political And Regulatory ForcesPolitical-legal forces include theoutcomes of elections, legislation,and court judgments, as well as thedecisions rendered by variouscommissions and agencies.The political sector of theenvironment presents actual andpotential restriction on the way anorganization operates.
Among the most importantgovernment actions are:Regulation, taxation, expenditure,takeover.The differences among local,national, and international subsectors of the political environmentare often quite dramatic.
Technological ForcesTechnological forces influenceorganizations in several ways. A technological innovation can have asudden and dramatic effect on theenvironment of a firm.First, technological developments cansignificantly alter the demand for anorganizations or industrys products orservices.
Technological change can destroyexisting businesses and even entireindustries, since its shifts demandfrom one product to another.Moreover, changes in technology canaffect a firms operations as well asits products and services.
These changes might affect processingmethods, raw materials, and servicedelivery.In international business, one countrysuse of new technological developmentscan make another countrys productsoverpriced and noncompetitive.
The rate of technological changevaries considerably from oneindustry to another. In electronics, for example change israpid and constant, but in furnituremanufacturing, change is slower andmore gradual.
Technological strategy deals with"choices in technology, productdesign and development, sourcesof technology and R&Dmanagement and funding"
The effect that changing technologycan have upon the competition in anindustry .Technological forecasting can helpprotect and improve the profitability offirms in growing industries.
Technological forecasting can helpprotect and improve the profitabilityof firms in grow in Social forcesinclude traditions, values, societaltrends, consumer psychology, and asocietys expectations of business.
The following are some of the keyconcerns in the social environment: ecology (e.g., global warming,pollution); demographics (e.g., populationgrowth rates, aging work force inindustrialized countries, higheducational requirements);quality of life (e.g., education,safety, health care, standard ofliving);
The word industry is used to refer to agroup of firms whose products aresufficiently close substitutes for eachother that the member firms are drawninto competitive rivalry to serve thesame needs of some or all the sametypes of buyers.In analyzing an industry, it is also usefulto determine if the industry is a globalindustry, that is, an industry thatrequires global operations to competeeffectively
The elements of the industrystructure :The stage in the life cycle of productsin the industry.The direction the industry is headed(for example, overcapacity, requiringrationalization).
The forces (for example, political,social, economic, technological)driving the industry in a particulardirection.The underlying economics andperformance of the business (forexample, cost structures, profitlevels).The key success factors (for example,cost, delivery).Demand segments and strategicgroups
Porter identifies five basic competitiveforces, which determine the state ofcompetition an its underlying economicstructure:
The intensity of rivalry among existingcompetitorsThe threat of substitute products or servicesThe bargaining power of buyersThe bargaining power of suppliersThese five forces of competition determinethe rate of return on invested capital (ROI)in industry, relative to the industrys cost ofcapital.
Threat Of New EntrantsA major force shaping competitionwithin an industry is the threat ofnew entrants.The threat of new entrants is afunction of both barriers to entry andthe reaction from existingcompetitors.There are several types of entrybarriers:
Economies of scale.Product differentiationCapital requirementsCost advantages independent ofscale.Switching costsAccess to distribution channels.Governmental and legal barriers.
All firms in and industry competewith other industries offeringsubstitute products or services.Steel producers are in competitionwith aluminum producers.Sugar producers are in competitionwith the firms which are introducingsugar-free products.The competitive force of closely-related substitute products impactsellers in several ways.
Bargaining Power Of BuyersBuyer power refers to the ability ofcustomers of the industry to influencethe price and terms of purchase.The buyers are powerful when:They are concentrated and buy inlarge volume.The buyers purchases are a sizablepercentage of the selling industrystotal sales.
Bargaining Power Of SuppliersSupplier power refers to the ability ofproviders of inputs to determine theprice and terms of supply.Suppliers can exert power over firmsan industry by raising prices orreducing the quality of purchasedgoods and services, so reducingprofitability.
Rivalry refers to the degree to whichfirms respond to competitive movesof the other firms in the industry.Rivalry among existing firms maymanifest itself in a number of ways-price competition, new products,increased levels of customer service,warranties and guarantees,advertising, better networks ofwholesale distributors, and so on.
A central aspect of strategyformulation is perceptive competitoranalysis.There are four diagnosticcomponents to a competitoranalysis: future goals, currentstrategy, assumptions, andcapabilities.A basic framework for performingindividual competitive analysis hasbeen postulated by Michael Porter.
Future GoalsAs can be seen, two factors must beanalyzed to determine what driversthe competitor.First, its future goals must beidentified. A knowledge of goals will allowpredictions about whether or noteach competitor is satisfied with itsposition and financial results, andhow likely that competitor is tochange strategy.
AssumptionsThe second crucial component incompetitors analysis is identifying eachcompetitors assumptions.These fall into two major categories:The competitors assumptions about itselfThe competitors assumptions about theindustry and the other companies in it.
CapabilitiesA realistic appraisal of each competitorscapabilities - its strengths andweaknesses- is the final diagnostic step incompetitor analysis. Its strengths andweaknesses will determine its ability toinitiate or react to strategic moves and todeals with environmental or industryevents that occur.
Putting The Four ComponentsTogetherAfter the competitors future goals,assumptions, current strategies, andcapabilities are analyzed, a competitorresponse profile is developed.This profile, designed to indicate how acompetitor is likely to respond in itscompetitive environment.
Definition of an industry is not thesame as definition of where the firmwants to compete. In manyindustries, there are firms that haveadopted very different competitivestrategy and have achieved differinglevels of market share.
The following strategic dimensions usuallycapture the possible differences among afirms strategic options in a given industry:specialization, brand identification, pushversus pull, channel selection,productquality, technological leadership, verticalintegration, cost position, service, pricepolicy, leverage, relationship with parentcompany, and relationship to home andhost government.
The task of analyzing a companysexternal situation is not a mechanicalexercise in which analysts plug indata and definitive conclusions comeout.There can be several appealingscenarios about how an industry willevolve and what future competitiveconditions will be like.
There are numerous types of drivingforces which can exist to produceevolutionary change in an industry:Changes in the long-term industry growthrateChanges in buyer compositionProduct innovationTechnological changeMarketing innovationEntry or exit of major firmsDiffusion or technical know-how
Increasing globalization of the industryChanges in cost and efficiencyEmerging buyer preference for adifferentiated instead of commodityproduct (or for a more standardizedproduct instead of strongly differentiatedproducts)Regulatory influences and governmentpolicy changesChanging societal concerns, attitudes, andlifestylesReduction in uncertainty and business risk
The Areas That Most BusinessesShould AnalyzeAn internal organizational analysisevaluates all relevant factors in anorganization in order to determine itsstrengths and weaknesses. Some ofthe areas that most businessesshould analyze include the following:Financial position. The financialposition of a business plays a crucialrole in determining what it can orcannot do in the future.
Product position. For a business to besuccessful, it must be acutely aware of itsproduct position in the marketplace.Marketing capability. Closely allied with anorganizations product position is its marketingcapabilities (i.e., its ability to deliver the rightproduct at the right time at the right price).Research and development capability.Every organization must be concerned about itsability to develop new products.Organizational structure. Organizationalstructure can either help or hinder anorganization in achieving its objectives.
Human resources. All the activities ofan organization are significantlyinfluenced by the quality and quantity ofits human resources.Condition of facilities andequipment. The condition of anorganizations facilities and equipmentcan either enhance or hinder itscompetitiveness.Past objectives and strategies. Inassessing its internal environment, everybusiness should attempt to explicitlydescribe its past objectives andstrategies.
Internal analysis is difficult andchallenging. The checklists provided abovecan be helpful in determining specificstrengths and weaknesses in thefunctional areas of business.The second component of environmentalanalysis is to develop information aboutthe environment. Information has twoprimary strategic role - in objectivesetting and in strategy formulation. Asmanagers scan the environment, theyinterpret environmental influence in thelight of their own perceptions,expectations, and values.
Environmental scanning is the process ofgathering information about events andtheir relationships within an organizationsinternal and external environments.The basic purpose of environmentalscanning is to help managementdetermine the future direction of theorganization.The most widely accepted method forcategorizing different forms of scanningdivides into the following three types:
Irregular scanning systems: These consistlargely of ad hoc environmental studies.Regular Scanning systems: These systemsrevolve around a regular review of theenvironment or significant environmentalcomponents. This review is often madeannually.Continuous scanning systems: Thesesystems constantly monitor componentsof the organizational environment.Forecasting
Forecasting The EnvironmentMacroenvironmental and industry scanningare only marginally useful if all they do isreveal current conditions. To be trulymeaningful, such analyses must forecastfuture trends and changes.Environmental forecasting is a techniquewhereby managers attempt to predict thefuture characteristics of the organizationalenvironment and hence make decisionstoday that will help the firm deal with theenvironment of tomorrow.
Forecasting involves the use of statisticaland nonstatistical, or qualitative,techniques. Four techniques can beparticularly helpful: time series analysis,judgmental forecasting, multiplescenarios, and the Delphi technique.Macroenvironmental and industry scanningare only marginally useful if all they do isreveal current conditions. To be trulymeaningful, such analyses must forecastfuture trends and changes.