Strategic Managment

BUAD 4980-02

STRATEGIC MANAGEMENT

CHAPTER 2 EXTERNAL ANALYSIS

 Introduction: Let’s watch this YouTube video

https://www.youtube.com/watch?v=OPb0NvGeS9M

 External environment:

1. Definition: All the forces that are outside the boundaries of a company but that affect the company. They include opportunities and/or threats.

2. Purpose of the external environmental analysis: Identification of opportunities (O) and threats (T) in the external environment

2.1. Opportunities: External forces that a company can take advantage of to achieve its objectives.

2.2. Threats: External forces that will undermine a company’s ability to achieve its objectives.

3. Parts of the external environmental analysis: four parts:

3.1. Scanning: entails the study of all segments in the general environment. Firms use the scanning process to either detect early warning signals regarding potential changes or detect changes that are already underway

3.2. Monitoring: represents a process whereby analysts observe environmental changes over time to see if, in fact, an important trend begins to emerge

3.3. Forecasting: represents the process where analysts develop feasible projections of what might happen - and how quickly - as a result of the changes and trends detected through scanning and monitoring. Because of uncertainty, forecasting events and outcomes accurately is a challenging task

3.4. Assessing: determining the timing and significance of the effects of changes and trends in the environment on a firm.

Both assessing and in particular are a challenging task because of uncertainty.

4. Uncertainty: Understanding the external environment is difficult because of uncertainty.

4.1. Definition: Environment uncertainty can be defined as:

+ The inability to gather information on all relevant factors before making decisions

+ The inability to predict changes in those factors

4.2. Components of uncertainty: Uncertainty includes both:

+ Complexity: too many elements, while managers have limited cognitive capability

+ Rate of change: elements change so fast

4.3. Handling uncertainty: To minimize the difficulties caused by uncertainty, companies should:

+ Identify sources of information (internal, external), and conduct competitive intelligence (understanding rivals’ strengths and weaknesses) to handle complexity

+ Anticipate future trends (through forecasting techniques) to respond effectively to change. Forecasting techniques can be quantitative (regression), qualitative (surveys)

 Forces of the external environment: General environment and competitive environment:

1. General environment:

The external environment is composed of the forces that have an indirect impact on firms’ performance. Firms have little ability to predict and control these forces. General forces are:

1.1. Economic forces: several factors affect the nature and the direction of the economy. They include among others the gross domestic product or GDP (in particular its growth rates), interest rates, exchange rates, inflation rates, etc.

1.2. Demographic forces: there are several demographic forces. Population factors such as population (size, birth rate, family size), geographic distribution (movement of population), age structure (e.g. millennials, baby boomers), ethnic mix (increasing diversity in the workforce with cultural implications)

1.3. Socio-cultural forces: social attitudes and lifestyles, as well as cultural values, beliefs. Examples include health consciousness (diet & fitness), dual-income families, reliance on temporary workers, shift toward suburban life (with resulting transportation issues), shift in career preferences (including working from home).

1.4. Political/legal forces: the body of governmental laws and regulations that guide the interactions among firms as well as nations. Examples of these laws and regulations are anti-trust laws, federally mandated minimum wage, deregulation, free trade versus protectionism.

1.5. Technological forces: institutions and activities involved in with creating new knowledge and translating that knowledge into new products and processes. Technological forces (e.g. information technologies) can dramatically impact productivity, create entirely new industries, and alter existing industries

1.6. Global forces: globalization of markets with its opportunities (access to broad base of factors of production and to larger markets) and risks (political, social, economic), and global trends (e.g. emergence of new powers such as China and India, regional integration), can have a significant impact.

1.7. Physical forces: The interactions among ecological, social, and economic systems can influence what happens to the physical environment. Global warming, energy consumption and sustainability are examples of issues related to the physical forces.

2. Industry or competitive environment:

The industry environment is composed of forces that have a direct impact on firms’ performance. Industry forces that are widely discussed are Michael Porter’s “Five Competitive Forces”.

2.1. Five competitive forces: It is a strategic tool used to analyze competitive or industry environment. According to Michael Porter, five forces help to understand industry environment:

- Intensity of rivalry among existing competitors: it is determined by: # & size of competitors, industry growth rate, and exit barriers

- Threat of entry from potential competitors: determined by entry barriers: economies of scale, customer loyalty/brand image, capital requirements, access to supplies/distribution channels, government regulation, switching costs, etc.

- Threat of substitute products: determined by price of substitutes, their quality and performance.

- Supplier bargaining power: suppliers are powerful if there are few large suppliers, costly to switch suppliers, suppliers’ goods are differentiated. Suppliers exert power by threatening to perform forward vertical integration.

- Buyer bargaining power: buyers are powerful when they are few or they buy large portion of a firm’s output. Buyers exert power by threatening to perform backward vertical integration

2.2. Strategic groups: A tool used to map the competitive position of rival firms is called strategic group. A strategic group is a cluster of firms within an industry with similar strategic characteristics (degree of product quality, pricing policies, choice of distribution channels, degree and type of customer service, extent of technological leadership). Strategic groups include leaders, followers, and late movers. Mobility barriers are factors that prevent firms from changing strategic groups.

2.4. Industry life cycle: the stages that an industry goes through over that industry’s life. The main stages are introduction, growth, maturity, and decline. Stages in the life cycle can influence how firms in an industry compete. For example, in earlier stages (e.g. introduction), competition is primarily determined by product innovation (new technologies). However, in later stages (e.g. maturity), prices become crucial for firm survival, as technologies tend to be standardized.