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Analysis
Chapter 3
Understanding the Factors that
Determine a Company’s Situation
• Diagnosing a company’s situation has two facets
– Assessing the company’s external or
macro-environment (Societal or General Environment)
• Industry and competitive 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
and weaknesses, and competitiveness
From Thinking Strategically about the
Company’s Situation to Choosing a Strategy
The Components of a Company’s
Macro-environment
Thinking Strategically about a
Company’s Macro-environment
• A company’s macro-environment includes all relevant factors and
influences outside its boundaries
• 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
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
Some Important Variables in the
Societal Environment
Technologic Political-Legal Sociocultural
Economic
al
Antitrust Lifestyle changes
GDP trends Total government regulations
Career
Interest rates spending for
Environmental expectations
R&D
Money supply protection laws
Consumer
Total industry
Inflation rates Tax laws activism
spending for
Unemployment R&D Special incentives Rate of family
levels formation
Focus of Foreign trade
Wage/price technological regulations Growth rate of
controls efforts population
Attitudes toward
Devaluation/reval Patent protection foreign Age distribution of
uation companies population
New products
Energy Laws on hiring Regional shifts in
New
and promotion population
availability and developments in
technology Stability of Life expectancies
cost
transfer from lab government
Disposable and Birth rates
Prentice Hall, 2000
to marketplace Chapter 3 7
discretionary
income Productivity
Important variables in international
Societal Environment
Economic Technological Political-legal Socio-cultural
What forces
How strong are
are driving
competitive
change in the
forces?
industry?
Market size and How big is the industry and how fast it is growing?
growth rate What does the industry’s position in the business
life cycle (early development, rapid growth, early
maturity, maturity, stagnation, decline) reveal
about the industry’s growth position?
Scope of Is the geographic area over which the most
competitive companies compete local, regional, national,
rivalry multinational, or global?
Is having a presence in foreign markets becoming
more important to a company’s long-term
competitive success?
Number of Rivals Is the industry fragmented into many small
companies or dominated by a few large firms?
Is the industry going through a period of
consolidation to a smaller number of competitors?
Buyer needs and What are the final buyers( as well middlemen)
requirements looking for – what attributes prompt to choose one
brand over another?
Are buyers needs or requirements
changing? If so what is driving such changes?
Production Is a surplus capacity pushing prices and profits
Capacity down?
Is the industry overcrowded with to many
competitors?
Production Is a surplus capacity pushing the prices and profit
Capacity margins down?
Is the industry over crowded with too many
competitors?
Specialized Hi LOW
Assets
Fixed Cost of Hi Low
Exit
Strategic Low
Hi
interrelationshi
p
Government Low
Barriers Hi
Barriers and profitability
Entry Barriers
low high
Exit Barriers
Weapons for Competing and Factors
Affecting Strength of Rivalry
Competitive Rivalry
Factors HUF MUF Neutra MFA HFA Comment
A A l
Composition of Equal Unequal
Competitors Size Size
Mkt. Growth rate Slow High
Scope of Global Domestic
competition Low
Fixed storage Cost High
Capacity Increase Small
Large
Degree of High
differentiation Commo
dity
Strategic Stake Low
High
Factors Affecting Bargaining Power of
Buyers
Power Of Buyer
Factors HUFA MUFA N MFA HFA Comment
Threat of Hi Low
Obsolescence of
Industry’s
product
Aggressiveness
of substitute Hi Low
products in
promotion
Switching Cost Low High
Perceived price/
value Hi Low
Overall Industry attractiveness
Continuum of International
Industries
Multidomestic Global
Perkins
International House
of Pancakes
Ponderosa
Price
Bonanza Shoney's
Denny's
Country Kitchen
Arby's Wendy's
Domino's Dairy Queen
Hardee's Taco Bell
Burger King McDonald's
Low
Limited Menu Full Menu
Product-Line Breadth
Prentice Hall, 2000 Chapter 3 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
Key Success Factors
• Key success factors are those things that
most 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
Common Types of Industry Key Success Factors (KSF)
Expertise in particular technology or in scientific research ( important in
Technology pharmaceuticals, internet applications, mobile communications, and
Related many high tech. industry
Proven ability to improve production processes ( important in industries
where advancing technology opens the way for higher manufacturing
efficiency and lower production costs)
Ability to achieve scale economies and/or capture learning
Manufacturing
curve effects (important to achieving low production costs)
Related KSF Quality control know-how
( important in those industries where customers insists on
product reliability)
High utilization of fixed assets (important in capital intensive/
high fixed cost industries)
Access to attractive supplies of killed labor
High labor productivity ( important for items with high labor
content)
Low cost product design and engineering ( reduces
manufacturing costs)
Ability to manufacture or assemble products that are
customized to buyer specification
Distribution A strong network of wholesale distributors/dealers
Strong direct sales capabilities via the internet and or having
related KSF company owned retail outlets
Ability to secure favorable display space on retailer shelves
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.
Prentice Hall, 2000 Chapter 3 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
3.16 External Factor Analysis Summary (EFAS): Blank
Threats
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
HungerPrentice Hall,
Associates. 2000 by permission.
Reprinted Chapter 3 52
Discussion Questions
• Discuss how a development in a corporation's societal environment
can affect the corporation through its task environment ?
` Developments or trends in a corporation's societal environment
typically do not affect the corporation directly but indirectly through
their impact on one or more stakeholder groups in the corporation's
task environment. As mentioned in the text, the trend toward dual-
career couples is a recent development in the societal environment
of any company
Sociocultural forces regarding the changing role of women plus the
trend toward single family households combined with the economic
forces of high interest rates and inflation in the 1970s to send both
men and women searching for full-time jobs in addition to their being
parents.
This development in the societal environment continues to affect
companies through its impact on employee/union groups (who ask
for parental leave and/or company-sponsored day care centers),
customers (employed parents who increasingly shop for
convenience goods because of time constraints), and special
interest groups and even governments (who ask business firms to
help support local schools and deal with community social problems
• Why is environmental uncertainty an important concept in
strategic management?
It can be argued that without environmental uncertainty, there
would be no need for strategic management. The Arab oil
embargo of 1973 is said to be the single most influential event
causing the formation of planning departments in most U.S.
corporations. The embargo showed managers just how
vulnerable their companies were to environmental change.
A key part of strategic management, environmental scanning
is a tool used to help avoid strategic surprise and cope with an
uncertain environment.
If the environment was certain and predictable, environmental
scanning would be a rather easy chore. Simple extrapolation
would be the only type of forecasting needed. In a complex
and changing world, however, those corporations which
engage in environmental scanning and strategic planning tend
to deal better with environmental uncertainty and to be more
successful than their non-planning brethren.
• What can a corporation do to ensure that information about
strategic environmental factors gets to the attention of strategy
makers?
• This is a very real problem in most large corporations given the
usual obstacles to good communication. The very people who
are in the best positions to gather this data are often the ones
who either fail to pass it on because it's too much of a chore or
they fail to notice it because no one told them how important
certain developments are to top management
• Since proper information dissemination is an important part of
environmental scanning, corporations attempt to schedule a
series of analytical reports for top management's information.
Some of these reports are depicted in Figure 3.1 in the text.
The purchasing department, for example, might be tasked with
the job of compiling a quarterly analysis of the availability and
reliability of present and future suppliers.
• The market research department might prepare analyses of
present and future customers for certain products and services
with special attention to demographic shifts. Each report would
need to conclude with a list of strategic factors to monitor in the
coming months or years.
• If most long-term forecasts are usually incorrect, why bother
doing them?
• This question is based upon the questionable assumption that
most long-term forecasts are usually incorrect. One must keep
in mind that some things are easier to forecast than others. For
example, a forecasted drop in the demand for tricycles in three
years will very likely occur if it is based upon a strong drop in
the present birth rate. Nevertheless, most people would
probably agree that forecasts going out five to ten years have a
low probability of becoming reality in today's dynamic world.
The text takes the position that even if predictions prove to be
wrong, the very act of scanning and forecasting the
environment helps managers take a broader perspective. It
also forces managers to take an active rather than a passive
orientation toward its external environment. It encourages
calculated risks over WAHS (wild a -- hunches) and is more
likely to result in strategic management instead of reactive
management