External Environmental

Analysis
Strategic Management

Understanding the Environment

Diagnosing a companys situation has two facets
Assessing the companys external or
macro-environment
General environment conditions
Forces acting to reshape this environment
Assessing the companys internal or
micro-environment (task environment)
Market position and competitiveness
Competencies, capabilities, and resource
strengths and weaknesses

From Thinking Strategically about the

Companys Situation to Choosing a Strategy

The Components for a Companys

Macro-environment

Some Important Variables in the

Domestic Environment
Economic
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment
levels
Wage/price
controls
Devaluation/reval
uation
Energy
availability and

cost
Disposable and
discretionary
Prentice Hall, 2000
income

Technologica Politicall
Legal
Total government
spending for
R&D

Antitrust regulations

Total industry
spending for
R&D

Tax laws

Focus of
technological
efforts
Patent protection
New products
New
developments in
technology
transfer from lab
to marketplace
Chapter 3
Productivity
improvements

Environmental
protection laws
Special incentives
Foreign trade
regulations
Attitudes toward
foreign companies
Laws on hiring and
promotion

Sociocultural
Lifestyle changes
Career
expectations
Consumer
activism
Rate of family
formation
Growth rate of
population

Stability of
government

Age distribution of
population

Level of good
governance

Regional shifts in
population

Cost of doing
business

Life expectancies

Doing business
indicators

Birth
rates
5

Some Important Variables in the

International 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

Key Questions Regarding the

Industry and Competitive Environment
What are the
industrys
dominant traits?

How strong are

competitive
forces?
What market
positions do rivals
occupy?
What could be their
next moves?

What forces
are driving
change in the
industry?
What are the
key factors for
competitive
success?

How attractive
is the industry
from a profit
perspective?

What to Consider in Identifying an Industrys Dominant Features

Features
Market size and
growth rate

Questions to answer
How big is the industry and how fast it is growing?
What does the industrys position in the business
life cycle (early development, rapid growth, early
maturity, maturity, stagnation, decline)?

Scope of
competitive
rivalry

Is the geographic area over which most companies compete

local, regional, national, multinational, or global?
Is having a presence in foreign markets becoming more
important to a companys long-term competitive success?
Is a surplus capacity pushing prices and profits down?
Is the industry overcrowded with too many competitors?

Number of Rivals

Is the industry fragmented into many small

companies or dominated by a few large firms?
Who are the major market shareholders?

Overall profile of Total market size, consumption, growth,

the industry
production capacity, demand and supply gap, key
players, market shares, input suppliers
Changing needs of buyers
unsatisfied needs, brand loyalty

&

consumers,

Pace of technology change, degree of product

differentiation & product innovation, substitute
products, vertical integration, economies of scale,
learning and experience curve effects, legislation &
policies for industry

The Five Forces Model of Competition

Threat of New Entrants / Entry Barriers

Factors

Level

Comments

Economies of scale

Low

Capital required

Low

Access to distribution
channels

High/Ample

There is a
threat
of
entrants as
barriers are
low.

Expected retaliation

Low

Brand Loyalty

Low

Experience Curve

Low/Insignificant

Govt. Action/Approval

Low

great
new
entry
very

Exit Barriers
Factors

Level

Comments

Un-disposable Specialized
Assets

High

Loss of Outstanding Credits

High

There is a great
difficulty in exit as
exit barriers are
very high.

Fixed Cost of Exit

High

Strategic interrelationships & Low

Contracts
Government Barriers

High

Factors Affecting Bargaining

Power of Buyers

How SellerBuyer Partnership Can

Create Competitive Edges

The seller-buyer strategic relations or even minor partnership can provide

mutual benefits to both on matters such as:
- defect-less & quality inputs at low price
- timely order processing
- just-in-time inventories (to reduce inventory and logistic costs)
- electronic invoice payments
- data sharing
- supply of next generation components

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 customers software at the factory
- installing asset tags so that customer setup time is minimal
- helping customers upgrade their PCs to next generation hardware and
software

Factors Affecting Bargaining

Power of Suppliers

Power of Buyers or Suppliers

Factors

Level/Remarks Detailed Comments

No. of important Buyers / Suppliers

Few

Switching cost (to other products)

High

Availability of substitutes
Threat of forward integration

Difficult
Low

Importance of buyers / suppliers

High

The company
has to play
very carefully
because
of
fewer number
of buyers and
suppliers.

Factors Affecting Competition From

Substitute Products

Threat Of Substitute Product

Factors

Level

Threat of Obsolescence of
Industrys product

High

Aggressiveness of substitute
products in promotion

High

Switching Cost (for buyers)

Low

Perceived price/value

High

Comment
The company has to
play very carefully
because of
availability of
abundant substitute
products.

Overall Industry Attractiveness

Factors
Entry barriers
Exit barriers
Rivalry among
existing firms
Power of buyers
Power of suppliers
Threat of
substitutes

Unfavorable

Neutral Favorable

Categorizing International Industries

Multi-domestic Industries:
Independent subsidiaries in all countries
Differentiated products
Local responsiveness & adaptations

Global Industries:
Standardized products (with uniform company image
with uniform marketing, integrated packaging, &
delivery/supply chain system), but may do minor
adaptation or customization due to specific conditions
Reputation of global brands
Treats the world as a single market (with
homogenous needs)
Presence in almost all continents

Continuum of International
Industries
Multi-domestic

Global

Industry in which
companies tailor their
products to the
specific needs of
consumers in a
particular country.
Retailing
Prentice Hall, 2000

Insurance

Industry in which
companies
manufacture and sell
the same products,
with only minor
adjustments made for
individual countries
Note: More detail will
be
21
around
the
world.
presented in later chapters.

Factors that Determine whether Industry

would be Global or Multi-domestic
1. Pressures for cost reduction may lead
to turn as a global industry
2. Pressures for local responsiveness
may lead to turn as a multi-domestic
industry

Key Success Factors (KSFs)

Key success factors affect the ability of
industry members to prosper in market place
On what basis do customers choose
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-wide Key Success Factors (KSF)

Technology
Related

Manufacturing
or Operations
Related KSFs

Expertise in particular technology; degree of automation;

R&D; rapid innovation in high tech. industries; state-of-theart production processes; process design; capacity planning;
Enterprise Resource Planning (ERP) systems; etc.
Ability to achieve scale economies
Capture learning & experience curve effects (important to
achieving low production costs)
Quality control applications
Access to skilled labor for high labor productivity
Low cost product design and engineering
Ability to reduce number of components and processes
SOPs for work specialization & certifications of excellence
Standardized and customized products (made up to buyer s
specifications)

Accounting Accuracy & expertise in financial planning & forecasting;

& Finance capital budgeting; annual budgeting; computerized accounting;
inventory & expenditure control; overall financial controls
related KSFs
Marketing
Related
KSFs

HR Related
KSFs

Unique & innovated product line and product selection

A well-known and respected brand name
Courteous, personalized customer service
Customer guarantees and warranties
Clever advertising & effective marketing
mix
A talented workforce
Proven management and leadership
Training and development (T&D)
Employee involvement and empowerment
Democratic and participative style of supervisors

Industry Matrix/Competitive Profile Matrix

(CPM)
Strategic Factors

Weight
1

Total

Company A
Rating

Company A
Weighted Score

Company B
Rating

Company B
Weighted Score

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

26

External Factor Analysis Summary (EFAS) /

External Factor Evaluation Matrix (EFEM)

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 managements 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 factors weighted score.

Column 5 (comments): Note that 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.

External Factors Analysis Summary (EFAS)

External
Strategic Factors
Opportunities

Weight
1

Weighted
Score

Rating
2

Comments
4

Threats

Total Weighted Score

1.00

Notes: 1. List opportunities and threats (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not
Important) in Column 2 based 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 factors 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
Prentice
Hall,
2000 by permission. Chapter 3
28
Hunger
Associates.
Reprinted