Competitve Advantages Of A Nation

ANALYSIS OF EXTERNAL INFLUENCE

SESSION 2: Dr. Sasmita Palo TISS, Mumbai

Today's agenda ØWhat is the external environment? ØKey components of external environment ØAnalysis of external environment ØTechniques of scanning of general environment ØPEST Analysis ØSWOT Analysis ØCASE STUDY ANALYSIS

• What is external environment?

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A Copernican view of the Organisation.

The Copernican Universe

A Copernican view of the Organisation.

A Ptolemaic view

Alternative Models of Superior Returns The I/O Model: Porter, Rumelt Industrial Organization model suggests that above-average returns for any firm are largely determined by characteristics outside the firm. The

Resource-based Model of AboveAverage Returns:barney, Wernerfelt 1. Firm’s Resources

The Firm

1. Strategy dictated by the firm’s unique resources and capabilities 2. Find an environment in which to exploit these assets (where 7

Alignment of Firm-Strategy-Environment

I/O model –External Analysis --What might

Alignment/ ”Fit” Integrat ion

Environme nt Competitive Arena Social, Political,

Strategy Position ing Intent, Mission, Core Strategy, Goals, Effectiveness

Economic,

Resource-Based Model --Internal Analysis

FIRM Core Competencies Resources & Capabilities Valuable, rare, hard to imitate

Technological, Industry Forces

Leadership, Governance

Value chain, culture, control systems 8

External Analysis: Identification of Opportunities Opportunities

Threats

Layers of the Business Environment

Components of EXTERNAL Analysis

• • • •

Scanning: collecting information Monitoring: detecting the trend Forecasting: anticipating the future Assessing: impact on the firm

What is Environmental Scanning Environmental scanning is the acquisition and use of information about various events in an organization's external environment, the knowledge of which would assist management in planning the organization's future course of action.

Objectives Of An Environmental Scanning System detecting scientific, technical, economic, social, and political trends and events important to the institution, defining the potential threats, opportunities, or changes for the institution implied by those trends and events, and

env. scanning is an important component of the organization's strategic planning process, improving the org 's ability to react to and implement change in response to external factors.

• • • •

Competitor intelligence Competitive intelligence Business intelligence Environmental scanning

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External Audit Techniques • PESTEL • SWOT Analysis

Macro-environment – PESTEL

POLITICAL/ GOVERNMENT political stability and risk political climate - amount of government activity Political party in power and its philosophy

Economy

GNP or GDP per capita GNP or GDP growth unemployment rate inflation rate consumer and investor confidence Disposable income currency exchange rates trading partners balance of payments government debt budget deficit or surplus future trends

Socio-Cultural

demographic factors such as:      

population size and distribution age distribution education levels income levels ethnic origins religious affiliations

attitudes towards:      

materialism, capitalism, free enterprise individualism, role of family, role of government, collectivism role of religion consumerism environmentalism importance of work, pride of accomplishment

cultural structures including:

 diet and nutrition  housing conditions

Technology

efficiency of infrastructure, including: roads, ports, airports, hospitals, education, healthcare, communication, etc. industrial productivity new manufacturing processes new products and services of competitors new products and services of supply chain partners any new technology that could impact the company cost and accessibility of electrical power

Ecology Environmental laws ecological concerns that affect

o the firms production processes o customers' buying habits o customers' perception of the company or product

LEGAL Industrial laws Labour laws corporate and personal tax rates payroll taxes import tariffs and quotas export restrictions restrictions on international financial flows

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Key Aspects of PESTEL • Not just a list of influences • Need to understand key drivers of change • Focus is on future impact of environmental factors • Combined effect of some of the factors likely to be most important

Issues Priority Matrix Probable Impact on Corporation Medium

Low

High Priority

High Priority

Medium Priority

High Priority

Medium Priority

Low Priority

Medium Priority

Low Priority

Low Priority

Medium Low

Probability of Occurrence

High

High

Issues Priority Matrix Probable Impact on Corporation Medium

Low

High Priority

High Priority

Medium Priority

High Priority

Medium Priority

Low Priority

Medium Priority

Low Priority

Low Priority

Medium Low

Probability of Occurrence

High

High

Internal Audit Techniques: SWOT (1) • After an environmental scan, a SWOT will help analyze your results

Internal Environment l Strengths

Weaknesses

External Environment l Opportunities

Threats

The SWOT analysis

The SWOT analysis

External Factor Analysis Summary (EFAS) External Factors Opportunities

Weight 1

2

Ratin g

Weighted Score 3

4

Comment s

Threats

Total Weighted Score 1 .00 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. A weighted score of 3.0 means average performance. Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates. Reprinted by permission.

Internal Factor Analysis Summary (IFAS) Internal Factors Strengths

Weight 1

2

Ratin g

Weighted Score 3

4

Comment s

Weaknesses

Total Weighted Score 1 .00 Notes: 1. List st and wea(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 relevance of the factor to 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 A weighted score of 3.0 means average performance.. 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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IE Matrix • Based on two key dimensions – The IFE total weighted scores on the x-axis – The EFE total weighted scores on the y-axis • Divided into three major regions – Grow and build – Cells I, II, or IV – Hold and maintain – Cells III, V, or VII – Harvest or divest – Cells VI, VIII, or IX

• grow and build : market penetration, market development, and product development) or integrative (backward integration, forward integration, and horizontal integration) (intensive strategy) • hold and maintain - Market penetration and product development • harvest or divest - Liquidations, retrenchment and divestiture ( defensive strategy)

The Ansoff Matrix The Product/Market direction of the firm can be • • • •

modelled around the Ansoff Matrix. It identifies four basic business strategies for the firm: Market Penetration Market Development Product Development Diversification

The Ansoff Matrix

Produc Market Prese nt New

Present New Market Penetration Consolidation Contraction Market Development

Product Development

Diversification

Market Penetration Objective of this strategy is to increase market share. This is done in the following ways: • Increase the number of users – attract users from competitors – convert non-users into users • Increase the frequency of purchase • Increase the volume of product purchased

Product Development This strategy is aimed at creating new products aimed at existing customers. Possibilities are: • Product reformulation strategies • Product quality improvement • Product line extensions • Product feature enhancements • “New” product development

Market Development The strategy here is to increase the sales of present products by tapping new markets: Two Approaches: • Geographic market expansion • Using new distribution channels to reach un served customers

Diversification - Types Two basic types of diversification can be identified: • Concentric Diversification: diversification into related business areas q Vertical integration n Full integration (100% suppliers +controls distributors) n Taper integration (<50% supplies; use own and external distribution channels) n Quasi-integration (buy/sell from outside suppliers/distributors that under its partial control) n Long-term contract q Backward integration q Forward integration • Conglomerate Diversification: diversification into unrelated business areas

Examples ....

Integration: Backwards to sources of supply

Vertical Integration Strategy Forwards to the customer

“ Diversification is a strategic move into a new product/market activity that requires the development of new competencies or the augmentation of existing ones. “

Harvest strategy: Limits investment and optimizes cash flow. Divestiture: Company exits the industry by selling out early to others, avoiding liquidation. Daimler Chrysler selling Chrysler after a failed merger Liquidation - Arthur Andersen after conviction for evidence destruction which was later overturned. Retrenchment - specific examples in the construction industry due to the collapse of the housing market

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SWOT Matrix Four Types of Strategies §Strengths-Opportunities (SO) §Weaknesses-Opportunities (WO) §Strengths-Threats (ST) §Weaknesses-Threats (WT)

SO Strategies

Strengths Weaknesses Opportunities Threats SWOT

SO Strategies

Use a firm’s internal strengths to take advantage of external opportunities

WO Strategies

Strengths Weaknesses Opportunities Threats SWOT

WO Strategies

Improving internal weaknesses by taking advantage of external opportunities

ST Strategies

Strengths Weaknesses Opportunities Threats SWOT

ST Strategies

Use a firm’s strengths to avoid or reduce the impact of external threats

WT Strategies

Strengths Weaknesses Opportunities Threats SWOT

WT Strategies

Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats

SWOT Matrix

COMPETITVE ADVANTAGES OF A NATION

Porter’s Diamond • PESTEL factors differ from country to country –their competitive impact will differ from country to country • Porter’s (1990) suggests reasons why some countries are more competitive than others

Porter’s Diamond Model: The Determinants of National

Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.

Porter’s Diamond • Factor conditions – Education, infrastructure, cash, e.g., Taiwan

• Demand Conditions, e.g., Japanese demand for quality. • Firm Strategy, Structure & Rivalry. • Supporting Industries, e.g Italy, leather, Silicon Valley computer related industry

Strength of interaction • Industry clustering • Geographical location

What is competitiveness? • competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. • The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy.

Nation’s level of competitiveness • A nation’s level of competitiveness reflects the extent to which it is able to provide rising prosperity to its citizens.

12 pillars of • First pillar: Institutions- framework within which individuals, firms, and governments interact to generate income and wealth in the economy. It includes • Ways in which societies distribute the benefits • Influences investment decisions and the organization of production. • Government attitudes toward markets and freedoms and the efficiency of its operations, excessive bureaucracy and red tape, overregulation, corruption, dishonesty in dealing • with public contracts, lack of transparency and trustworthiness, or the political dependence of the judicial system • Role of private institutions, - accounting and reporting standards and transparency for preventing fraud and mismanagement, ensuring good governance, and

Second pillar: Infrastructure • Well developed infrastructure • quality and extensiveness of infrastructure networks such as quality roads, railroads, ports, and air transport • electricity supplies • solid and extensive telecommunications network

Third pillar: Macroeconomic stability • Inflation rate • interest payments on its past debts.

Fourth pillar: Health and primary education • quantity and quality of basic education received by the population • Health services provided

Fifth pillar: Higher education and training • measures secondary and tertiary enrollment rates • the quality of education as assessed by the business community. • The extent of staff training importance of vocational and continuous on-the-job training

Sixth pillar: Goods market efficiency • Healthy market competition • government intervention in form of distortionary or burdensome taxes, and by restrictive and discriminatory rules on foreign ownership or foreign direct investment (FDI). • demand conditions such as customer orientation and buyer sophistication

Seventh pillar: Labor market efficiency • Flexibility in the labour market • clear relationship between worker incentives and their efforts, as well as the best use of available talent — which includes equity in the business environment between women and men.

Eighth pillar: Financial market • capital available for private-sector investment from such sources as loans from a sound banking sector, well-regulated securities exchanges, venture capital, and other financial products. • ensuring that innovators with good ideas have the financial resources to turn those ideas into commercially viable products and services. • the banking sector needs to be trustworthy and transparent.

• Ninth pillar: Technological readiness • Tenth pillar: Market size • Eleventh pillar: Business sophistication (quality of a country’s business networks and supporting industries, which can be captured by using variables on the quantity and quality of local suppliers and the extent of their

12 pillars of

United States - 1 Switzerland ------2 Denmark 3 Sweden 4 Singapore 5 Finland 6 Germany 7 Netherlands 8 Japan 9 Canada 10 Hong Kong SAR 11 United Kingdom 12 Korea, Rep. 13 Austria 14 Norway 15 France

CAGE FRAMEWORK

Competitor Analysis • What the competitor is doing and can do, as revealed by its current strategy • What the competitor believes about itself and the industry, as shown by its assumptions • What the competitor’s capabilities are, as shown by its capabilities (its strengths and weaknesses)

Competitor Analysis Components