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Strategic Management Lecture 2

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This is Lecture 2 of Strategic Management subject

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Strategic Management Lecture 2

  1. 1. External Environmental Analysis Strategic Management
  2. 2. • Diagnosing a company’s situation has two facets – Assessing the company’s external or macro-environment (Societal or General Environment) • General environment conditions • Forces acting to reshape this environment – Assessing the company’s internal or micro-environment (Specific or task Environment) • Market position and competitiveness • Competencies, capabilities, resource strengths Understanding the Factors that Determine a Company’s Situation
  3. 3. From Thinking Strategically about the Company’s Situation to Choosing a Strategy
  4. 4. The Components of a Company’s Macro-environment
  5. 5. Thinking Strategically about a Company’s Macro-environment • A company’s macro-environment includes all relevant factors and influences outside its domain • Diagnosing a company’s external situation involves assessing strategically important factors that have a bearing on the decisions a company’s makes about its – Direction – Objectives – Strategy – Business model • Requires that company managers scan the external environment to – Identify potentially important external developments – Assess their impact and influence – Adapt a company’s direction and strategy as needed
  6. 6. Environmental Scanning • General Environment/ Societal environment 1. Economic forces that regulate exchange of materials, money, energy, and information 2. Technological forces that generate problem solving 3. Political –legal forces that allocate power and provide constraining and protecting laws and regulations 4. Socio-cultural forces that regulate the values, mores, and customs of society
  7. 7. Prentice Hall, 2000 Chapter 3 7 Some Important Variables in the Societal Environment Economic GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revalu ation Energy availability and cost Disposable and discretionary income Technological Total government spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products New developments in technology transfer from lab to marketplace Productivity improvements through automation Political-Legal Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government Socio-cultural Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates
  8. 8. Important variables in International Societal Environment Economic Technological Political-legal Socio-cultural Economic Development Per capita income GDP tends Monetary and Fiscal policies Employment level Currency convertibility Nature of competition Regulation in technology transfer Energy availability Natural resource availability Skill level of workforce Patent-trademark protection Internet availability Telecommunication infrastructure Form of government Political ideology Tax laws Stability of government Regulation of foreign ownership Trade regulations Foreign policies Terrorist activity Legal system Customs, norms, values Language Demographics Life-styles Religious beliefs Attitude towards foreigners Literacy level Human rights Environmentalism
  9. 9. Key Questions Regarding the Industry and Competitive Environment What are the industry’s dominant traits? How strong are competitive forces? What forces are driving change in the industry? What market positions do rivals occupy? What moves will they make next? What are the key factors for competitive success? How attractive is the industry from a profit perspective?
  10. 10. Question 1: What are the Industry’s Dominant Economic Traits? • Analyzing a company’s industry and competitive environment begins with identifying an industry’s dominant economic features and forming a picture of what the industry landscape is like • It not only sets the stage for the analysis to come but also promotes understanding of the kind of strategic moves that industry members are likely to employ
  11. 11. • 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 Industry’s Dominant Economic Traits?
  12. 12. What to Consider in Identifying an Industry’s Dominant FeaturesWhat to Consider in Identifying an Industry’s Dominant Features FeaturesFeatures Questions to answerQuestions to answer Market size andMarket size and growth rategrowth rate How big is the industry and how fast it is growing?How big is the industry and how fast it is growing? What does the industry’s position in the businessWhat does the industry’s position in the business life cycle (early development, rapid growth, earlylife cycle (early development, rapid growth, early maturity, maturity, stagnation, decline) revealmaturity, maturity, stagnation, decline) reveal about the industry’s growth position?about the industry’s growth position? Scope ofScope of competitivecompetitive rivalryrivalry Is the geographic area over which most companiesIs the geographic area over which most companies compete local, regional, national, multinational, orcompete local, regional, national, multinational, or global? Is having a presence in foreign marketsglobal? Is having a presence in foreign markets becoming more important to a company’s long-becoming more important to a company’s long- term competitive success?term competitive success?
  13. 13. Number of RivalsNumber of Rivals Is the industry fragmented into many smallIs the industry fragmented into many small companies or dominated by a few large firms?companies or dominated by a few large firms? Is the industry going through a period ofIs the industry going through a period of consolidation to a smaller number of competitors?consolidation to a smaller number of competitors? Buyer needs andBuyer needs and requirementsrequirements What are the final buyers (as well middlemen)What are the final buyers (as well middlemen) looking for – what attributes prompt to choose onelooking for – what attributes prompt to choose one brand over another?brand over another? Are buyers needs or requirementsAre buyers needs or requirements changing? If so what is driving such changes?changing? If so what is driving such changes? ProductionProduction CapacityCapacity Is a surplus capacity pushing prices and profitsIs a surplus capacity pushing prices and profits down?down? Is the industry overcrowded with too manyIs the industry overcrowded with too many competitors?competitors?
  14. 14. ProductionProduction CapacityCapacity Is a surplus capacity pushing the prices and profitIs a surplus capacity pushing the prices and profit margins down?margins down? Is the industry over crowded with too manyIs the industry over crowded with too many competitors?competitors? Pace ofPace of TechnologicalTechnological ChangeChange What role does technology play in this industry?What role does technology play in this industry? Are ongoingAre ongoing upgrades of facilities/ equipment essential because ofupgrades of facilities/ equipment essential because of rapidly advancing production process technologies?rapidly advancing production process technologies? Do most industryDo most industry members have a need for strong technologicalmembers have a need for strong technological capabilities? Why?capabilities? Why? Degree ofDegree of ProductProduct DifferentiationDifferentiation Are the products of rivals becoming differentiated orAre the products of rivals becoming differentiated or less differentiated?less differentiated? Are increasing look alike products of rivals causingAre increasing look alike products of rivals causing heightened price competition?heightened price competition?
  15. 15. ProductProduct InnovationInnovation Is the industry characterized by rapid product innovation andIs the industry characterized by rapid product innovation and short product life cycle? How important is R&D and productshort product life cycle? How important is R&D and product innovation? Are there opportunities to overtake key rivals byinnovation? Are there opportunities to overtake key rivals by being first-to-market with next generation products?being first-to-market with next generation products? VerticalVertical IntegrationIntegration Are some competitors in the industry partially or fullyAre some competitors in the industry partially or fully integrated? Are there any important cost differences among fullyintegrated? Are there any important cost differences among fully versus partially versus non-integrated firms? Is there anyversus partially versus non-integrated firms? Is there any competitive advantage or disadvantage associated with beingcompetitive advantage or disadvantage associated with being fully or partially integrated?fully or partially integrated? Economies ofEconomies of ScaleScale Is industry characterized by economies of scale in purchasing,Is industry characterized by economies of scale in purchasing, manufacturing, and other activities? Do companies with highmanufacturing, and other activities? Do companies with high scale operations have an important cost advantage over smallscale operations have an important cost advantage over small scale firmsscale firms Learning andLearning and experienceexperience curve effectscurve effects Do some companies have a significant cost advantageDo some companies have a significant cost advantage because of their experience in performing particularbecause of their experience in performing particular activities?activities?
  16. 16. Question 2: What Kind of Competitive Forces are Industry Members Facing? • Objectives are to identify: – Main sources of competitive forces – Strength of these forces • Key analytical tool – Five Forces Model of Competition
  17. 17. Fig. 3.3: The Five Forces Model of Competition
  18. 18. Analyzing the Five Competitive Forces: How to Do It Step 1: Identify the specific competitive pressures associated with each of the five forces Step 2: Evaluate the strength of each competitive force -- fierce, strong, moderate to normal, or weak? Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits
  19. 19. Factors Affecting Threat of Entry
  20. 20. Threat of New Entrants/ Entry BarriersThreat of New Entrants/ Entry Barriers Factors HUF MUF Neutral MF HF comment Economies of scale Capital required Access to distribution channels Expected retaliation Differentiati on Brand Loyalty Experience Curve Govt. Action Low Low Ample Low Low Low Insignifi cant Low High High Restri cted High High High Signifi cant high
  21. 21. Exit Barriers • Exit Barriers Factors HUF MUF Neutral MF HF Comments Specialized Assets Fixed Cost of Exit Strategic interrelations hip Government Barriers Hi Hi Hi Hi Low Low Low Low
  22. 22. Weapons for Competing and Factors Affecting Strength of Rivalry Weapons for Competing and Factors Affecting Strength of Rivalry
  23. 23. Competitive RivalryCompetitive Rivalry Factors HUF MUF Neutral MF HF Comment Composition of Competitors Mkt. Growth rate Scope of competition Fixed storage Cost Capacity Increase Degree of differentiation Strategic Stake Equal Size Slow Global High Large Commodity High Unequal Size High Domestic Low Small High Low
  24. 24. Factors Affecting Bargaining Power of Buyers
  25. 25. Power Of BuyerPower Of Buyer Factors HUF MUF N MF HFA Comment Number of Important buyers Threat of Backward integration Product supplied Switching cost % of buyer’s cost Profit earned by buyer Importance to final quality of buyers Product. Few High Commodity High High Low Low Many Low Specialty Low Low High High
  26. 26. How Seller – Buyer Partnership Can Create Competitive Pressures • Sellers that provide items to business have found it is in their mutual interest 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 line system 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 other efficiency tools - loading a customer’s software at the factory - installing asset tags so that customer setup time is minimal - helping customers upgrade their PC’s to next generation hardware and software
  27. 27. Fig. 3.7: Factors Affecting Bargaining Power of Suppliers
  28. 28. Power of SupplierPower of Supplier Factors HUF MUF N MF HF Comment No, of important Suppliers Switching cost Availability of substitutes Threat of forward integration Importance of Buyer industry to suppliers Importance of supplier’s product to the buyer’s business Few High Difficult High Buys small Proporti on High Importa nce Many Low Many Low Buys large proport ion Low Import ance
  29. 29. How Seller-Buyer Partnership Can Create Competitive Pressures 1. Reduce inventory and logistic costs 2. Speed the availability of next generation components 3. Enhance the quality of parts and components being supplied and reduce defect rates 4. Squeeze the cost savings for both themselves and suppliers
  30. 30. Factors Affecting Competition From Substitute Products
  31. 31. Threat Of Substitute ProductThreat Of Substitute Product Factors HUF MUF N MF HF Comment Threat of Obsolescence of Industry’s product Aggressiveness of substitute products in promotion Switching Cost Perceived price/ value Hi Hi Low Hi Low Low High Low
  32. 32. Overall Industry AttractivenessOverall Industry Attractiveness Factors Unfavorable Neutral Favorable Entry Barriers Exit Barriers Rivalry among existing firms Power of buyers Power of Suppliers Threat of substitutes
  33. 33. Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? • As a rule, stronger the collective impact of the five forces, the lower the combined profitability of industry participants • Fierce to strong competitive pressures come from all five forces driving industry profitability to unacceptably low levels • An industry can be competitively unattractive even when not all five forces are strong • Intense competitive pressure from just two or three forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business
  34. 34. Matching Company Strategy to Competitive Conditions • Effectively matching a company’s strategy to prevailing competitive conditions have two aspects: 1. Pursuing avenues that shield the firm from as many of the different competitive pressures as possible 2. Initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in company’s favor, putting added competitive pressure on rivals, and perhaps even defining a business model for the industry
  35. 35. Question 3: What Factors are Driving Industry Change and what Impact will they have? • Industries change because forces are driving industry participants to alter their actions • Driving forces are the major underlying causes of changing industry and competitive conditions • Where do driving forces originate? – Outer ring of macroenvironment – Inner ring of microenvironment ( Most frequent)
  36. 36. Driving Forces of Change  The internet and new e-commerce opportunities and threats in the industry  Increasing Globalization: 1. Where scale economies are so large that rival firms need to market their products in many countries to gain enough volume to drive unit cost down 2. Where low cost production is a critical consideration (making it imperative to locate manufacturing facilities in countries where lowest cost could be achieved) 3. Where one or more globally ambitious companies are pushing hard to gain significant competitive position in many attractive markets 4. Where local governments are privatizing government- owned monopolies
  37. 37. Driving Forces  Changes in long-term industry growth rate 1. Upsurge in long-term demand triggers a race for growth among existing firms and attract new comers 2. A shrinking market heightens competitive pressures for market share inducing mergers and acquisitions that result in industry consolidation  Changes in who buys the product and how they use it  Product innovation  Technological change  Marketing innovation  Entry or exit of a major firm
  38. 38. Drivers of Change  Diffusion of technical know how across more companies and countries  Changes in cost and efficiency  Growing preference for differentiated products instead of commodity or vice versa  Regulatory influences and government policy changes  Changing societal concerns, attitudes and life styles
  39. 39. Assessing the Impact of the Driving Forces • Are the driving forces causing demand for the industry’s product to increase or decrease? • Are the driving forces acting to make competition more or less intense? • Will the driving forces lead to higher or lower industry profitability?
  40. 40. Categorizing International Industries • Multi-domestic Industries:  Are specific to each country or group of countries  Collection of essentially domestic industries  Each subsidiary is essentially independent of the activities of the MNC’s subsidiaries in other countries • Global Industries:  Operate world wide, with MNC making only small adjustment for country specific circumstances  MNC’s produce products or services in various locations through out the world and sell them making only small adjustments for country requirements
  41. 41. Prentice Hall, 2000 Chapter 3 41 Continuum of International Industries 3.9 Continuum of International Industries (Fig. 3.4) Multi-domestic Industry in which companies tailor their products to the specific needs of consumers in a particular country. • Retailing • Insurance • Banking Global Industry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles • Tires • Television sets
  42. 42. Factors that Determine whether Industry would be Global or Multi- domestic 1. Pressure for coordination within multinational corporations operating in that country 2. Pressure for local responsiveness on the part of individual country markets
  43. 43. 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 dimensions I. Business Scope Commitment: (1) The target market segment (2) types of products offered (3) geographical reach II. Resource Allocation Commitment: Allocation of resources to functional areas considered central in achieving competitive advantage
  44. 44. 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 Low Limited Menu Full Menu Arby's Wendy's Domino's Dairy Queen Hardee's Taco Bell Burger King McDonald's Shoney's Denny's Country Kitchen Kentucky Fried Chicken Pizza Hut Long John Silver's Ponderosa Bonanza Perkins International House of Pancakes Red Lobster Olive Garden ChiChi's Price
  45. 45. Implications of Strategic Groups • The strategic group a firm should consider entering • The type and level of entry barriers the firm will face • The number and type of entry barriers the firm will face • The strategic dimensions that will make the firm similar to its strategic group members and different from members of different strategic groups • The relative effect of five forces of competition on its relative profitability
  46. 46. Key Success Factors • Key success factors affect the ability of industry members to prosper in market place • On what basis do customers chose between the competing brands of sellers? • What must seller do to be competitively successful- what resources and competitive capabilities does it need? • What does it take for sellers to achieve a sustainable competitive advantage?
  47. 47. Common Types of Industry Key Success Factors (KSF)Common Types of Industry Key Success Factors (KSF) TechnologyTechnology RelatedRelated Expertise in particular technology or in scientific research ( important inExpertise in particular technology or in scientific research ( important in pharmaceuticals, internet applications, mobile communications, andpharmaceuticals, internet applications, mobile communications, and many high tech. industrymany high tech. industry Proven ability to improve production processes (important in industriesProven ability to improve production processes (important in industries where advancing technology opens the way for higher manufacturingwhere advancing technology opens the way for higher manufacturing efficiency and lower production costs)efficiency and lower production costs) ManufacturingManufacturing Related KSF’sRelated KSF’s Ability to achieve scale economies and/or capture learningAbility to achieve scale economies and/or capture learning curve effects (important to achieving low production costs)curve effects (important to achieving low production costs) Quality control know-howQuality control know-how ( important in those industries where customers insists on( important in those industries where customers insists on product reliability)product reliability) High utilization of fixed assets (important in capital intensive/High utilization of fixed assets (important in capital intensive/ high fixed cost industries)high fixed cost industries) Access to attractive supplies of killed laborAccess to attractive supplies of killed labor High labor productivity ( important for items with high laborHigh labor productivity ( important for items with high labor content)content) Low cost product design and engineering ( reducesLow cost product design and engineering ( reduces manufacturing costs)manufacturing costs) Ability to manufacture or assemble products that areAbility to manufacture or assemble products that are customized to buyer specificationcustomized to buyer specification
  48. 48. DistributionDistribution relatedrelated KSF’sKSF’s A strong network of wholesale distributors/dealersA strong network of wholesale distributors/dealers Strong direct sales capabilities via the internet and or havingStrong direct sales capabilities via the internet and or having company owned retail outletscompany owned retail outlets Ability to secure favorable display space on retailer shelvesAbility to secure favorable display space on retailer shelves MarketingMarketing RelatedRelated KSF’sKSF’s A talented workforceA talented workforce Distribution capabilitiesDistribution capabilities Product innovation capabilitiesProduct innovation capabilities Short delivery time capabilityShort delivery time capability Supply chain management capabilitiesSupply chain management capabilities Strong e-commerce capabilitiesStrong e-commerce capabilities Breadth of product line and product selectionBreadth of product line and product selection A well known and respected brand nameA well known and respected brand name Courteous, personalized customer serviceCourteous, personalized customer service Customer guarantees and warrantiesCustomer guarantees and warranties Clever advertisingClever advertising HRHR Related KSF’sRelated KSF’s
  49. 49. Prentice Hall, 2000 Chapter 3 49 Industry Matrix/ Competitive Profile Matrix (CPM) Strategic Factors Weight Company A Rating Company A Weighted Score Company B Rating Company B Weighted Score 1 2 3 4 5 6 Total 1.00 Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix.” Copyright © 1997 by Wheelen and Hunger Associates. Reprinted by permission.
  50. 50. 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 higher the weight the more important is this factor to the current and future success of the company. All weights must sum to 1.0 regardless of the number of factors • Column 3 (Rating) ,assign a rating to each factor from 5.0 ( outstanding) to 1.0 (poor) based on management’s current response to a particular factor • Column 4 ( weighted score) Multiply the weight in column 2 for each factor in column 3 to obtain each factor’s weighted score. • Column 5 ( comments), note why a particular factor was selected and how its weight and rating were estimated • Add the individual weighted score for all external factors in column 4 to determine the total weighted score for that particular company. The weighted score of 3 = average, 4 = above average, less than 2.5 as below average
  51. 51. Prentice Hall, 2000 Chapter 3 51 External Factors Analysis Summary (EFAS) 3.16 External Factor Analysis Summary (EFAS): Blank External Strategic Factors Weight Rating Weighted Score 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 2 based on that factor’s probable impact on the company’s 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 company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score 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.

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