Strategic Management Chapter 3

Chapter 3 Environmental Scanning and Industry Analysis

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External Assessment It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. – Charles Darwin

Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo 2

Environments Environmental uncertainty: The degree of complexity plus the degree of change existing in an organization’s external environment.

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Environments Environmental scanning: • The monitoring, evaluating, and disseminating of information • from the external and internal environments to key people within the corporation • to avoid strategic surprise and • ensure the long-term health of the firm. 4

External Environment External Environmental Variables: Societal environment: environment General forces that do not directly touch on the short-run activities but often influence its long-run decisions.

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External Environment

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External Environment Societal environment forces: forces • Economic forces – Regulate the exchange of materials, money, energy, and information

• Technological forces – Generate problem-solving inventions

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External Environment Societal environment forces: forces • Political-legal forces – Allocate power, provide laws and regulations

• Sociocultural forces – Regulate values, norms, and customs

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Societal Environment: Important Variables •Economic

•Technological

•Political-Legal

•Sociocultural

•GDP trends

•Total government spending for R&D

•Antitrust regulations

•Lifestyle changes

•Total industry spending for R&D

•Environmental protection laws

•Career expectations

•Focus of technological efforts

•Tax laws

•Consumer activism

•Interest rates •Money supply •Inflation rates •Unemployment levels •Wage/price controls •Devaluation/ revaluation •Energy availability & cost •Disposable and discretionary income

•Patent protection •New products •New developments in technology transfer from lab to marketplace •Productivity improvements through automation

•Special incentives •Foreign trade regulations •Attitudes toward foreign companies •Laws on hiring and promotion •Stability of government

•Rate of family formation •Growth rate of population •Age distribution of population •Regional shifts in population 9 •Life expectancies

External Environment Sociocultural Trends • • • • • • •

Increasing environmental awareness Growth of the seniors market Impact of Generation Y boomlet Decline of the mass market Changing pace and location of life Changing household composition Increasing diversity of workforce and markets

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External Environment External Strategic Factors Factors influencing the choice: – – – –

Personal values of managers Functional experience of managers Success of current strategies Strategic myopia • Willingness to reject unfamiliar as well as negative information

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External Environment

Issues Priority Matrix •

Identify likely trends: – Societal and task environments • Strategic environmental issues

•

Assess probability of trends occurring – Low to High

•

Ascertain likely impact of trends on the corporation – Low to High

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Issues Priority Matrix High

Medium

Low

High

High Priority

High Priority

Medium Priority

Medium

High Priority

Medium Priority

Low Priority

Low

Probability of Occurrence

Probable Impact on Corporation

Medium Priority

Low Priority

Low Priority

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External Environment

External Strategic Factors Key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation.

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External Environment External Environmental Variables: Task environment: environment Those elements or groups that directly affect the corporation and, in turn, are affected by it. The task environment is the industry within which that firm operates.

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External Environment External Environmental Variables: Industry analysis: analysis An in-depth examination of key factors within a corporation’s task environment.

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Industry Analysis

Industry A group of firms producing a similar product or service, such as soft drinks or financial services.

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Industry Analysis

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Industry Analysis Porter’s approach: Assess the six forces -• • • • • •

Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Relative power of other stakeholders 19

Industry Analysis Threat of New Entrants -Barriers to entry: • • • • • • •

Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Size Government Policy

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Industry Analysis Rivalry Among Existing Firms -Intense rivalry related to: • • • • • • •

Number of competitors Rate of Industry Growth Produce or Service Characteristics Amount of Fixed Costs Capacity Height of Exit Barriers Diversity of Rivals

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Industry Analysis Threat of Substitute Products/Services Substitute Products: Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry.

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Industry Analysis Bargaining Power of Buyers -Buyer is powerful when: • • • • • • •

Buyer purchases large proportion of seller’s products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyer’s costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyer’s products

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Industry Analysis Bargaining Power of Suppliers -Supplier is powerful when: • Supplier industry is dominated by a few companies but sells to many • Its product is unique and/or has high switching costs • Substitutes are not readily available • Suppliers are able to integrate forward and compete directly with present customers • Purchasing industry buys only a small portion of the supplier’s goods.

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Industry Analysis Industry Evolution Fragmented Industry – No firm has large market share and each firm serves only a small piece of the total market in competition with others.

Consolidated Industry – Dominated by a few large firms, each of which struggles to differentiate its products from the competition.

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Continuum of International Industries Global

Multidomestic

Industry in which companies tailor their products to the specific needs of consumers in a particular country. • Retailing • Insurance • Banking

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 26

Industry Analysis Global Industries Industry primarily multidomestic or primarily global based on: – Pressure for coordination – Within the multinationals in that industry

– Pressure for local responsiveness – Individual country markets

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Industry Analysis Strategic Groups Defined: A set of business units or firms that pursue similar strategies with similar resources. 28

Industry Analysis Strategic Types Defined: Category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy.

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Industry Analysis Strategic Types – Categorized by one of four general strategic orientations: •

•

Defenders – Companies with a limited product line; focus on improving efficiency of current operations Prospectors: – Companies with fairly broad product lines; focus on product innovation and market opportunities. 30

Industry Analysis Strategic Types (continued)–

•

Reactors: – Corporations that lack a consistent strategy-structure-culture relationship.

•

Analyzers: – Corporations that operate in at least two different productmarket areas – one stable and one variable. 31

Research Findings “Approximately 20% of a firm’s profitability can be explained by the industry, whereas 36% of the variance in profitability is attributed to the firm’s internal factors”

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External Factor Analysis Summary (EFAS)

External Factors Opportunities

Weight 1

Weighted Score

Rating 2

3

Comments 4

5

Threats

Total Weighted Score

1.00

Notes: 1. List opportunities and threats (5–10) 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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Industry Analysis (EFE) Five-Step process: •

List key external factors (10-20) – Opportunities & threats

•

Assign weight to each (0 to 1.0) – Sum of all weights = 1.0 Assign 1-4 rating to each factor – Firm’s current strategies response to the factor

•

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Industry Analysis (EFE) Five-step process: •

Multiply each factor’s weight by its rating – Produces a weighted score

•

Sum the weighted scores for each –

•

Determines the total weighted score for the organization.

Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5 35

US Smokeless Tobacco Co.—Key External Factors

Weight

Rating

Weighte d score

.15

1

.15

Increased demand

.05

3

.15

Astronomical Internet growth

.05

1

.05

.15

4

.60

.10

3

.30

Legislation against the tobacco industry Production limits on tobacco

.10

2

.20

.05

3

.15

Special interest groups against the industry Bad media exposure from FDA

.05

2

.10

.10

2

.20

.20

1

.20

Opportunities Global markets untapped

Increased number of immigrants (smokers) More social pressure to quit smoking

Threats

Govt. Administration TOTAL

1.00

2.10 36

External Factor Analysis Summary (EFAS) Maytag Example External Factors Opportunities

Weight 1

• Economic integration of European Community • Demographics favor quality appliances • Economic development of Asia • Opening of Eastern Europe • Trend to “Super Stores”

Threats • Increasing government regulations • Strong U.S. competition • Whirlpool and Electrolux strong globally • New product advances • Japanese appliance companies

Total Scores

Weighted Score

Rating 2

3

Comments 4

5

.20

4

.80

.10

5

.50

.05 .05 .10

1 2 2

.05 .10 .20

Low Maytag presence Will take time Maytag weak in this channel

.10 .10 .15

4 4 3

.40 .40 .45

Well positioned Well positioned Hoover weak globally

.05 .10

1 2

.05 .20

Questionable Only Asian presence is Australia

1.00

3.15

Acquisition of Hoover Maytag quality

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Industry Analysis (EFE) Total weighted score of 4.0 = Organization response is outstanding to threats & opportunities

Total weighted score of 1.0 = Firm’s strategies not capitalizing on opportunities or avoiding threats

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Industry Analysis (EFE) UST (in the previous example), has a total weighted score of 2.10 • indicating that the firm is below average in its effort to pursue strategies • that capitalize on external opportunities and avoid threats.

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Industry Analysis (EFE) Important •

Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned. 40

Industry Analysis (CPM) Competitive Profile Matrix •

Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position

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Industry Matrix Key Success Factors

Weight 1

Total

2

Company A Rating

Company A Weighted Score

Company B Rating

Company B Weighted Score

3

4

5

6

1.00

Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix.” Copyright © 2001 by Wheelen and Hunger Associates. Reprinted by permission.

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(CPM)

Procter L’Oreal &

Avon Gamble Critical Success Factor

Weigh Ratin Scor t g e

Advertising

0.20

Product Quality

0.10

Price Competition

0.10

Management

0.10

Financial Position

0.15

Customer Loyalty

0.10

Global Expansion

0.20

Market Share

0.05

Total

1.00

1 4 3 4 4 4 4 1

0.2 0 0.4 0 0.3 0 0.4 0 0.6 0 0.4 0 0.8 0 0.0 5 3.1 5

Ratin Scor g e

4 4 3 3 3 4 2 4

Ratin Score g

0.8 0 0.4

3

0.60

3

0.30

0 0.3 0 0.3

4

0.40

3

0.30

0 0.4 5 0.4

3

0.45

2

0.20

0 0.4 0 0.2

2

0.40

3

0.15

0 3.2 5

2.80 43

Industry Analysis Forecasting Techniques: • • • • •

Extrapolation Brainstorming Expert opinion Statistical modeling Scenario writing

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Origin and Nature of Business Each term is distinct and has a specific meaning which define the scope and degree of interaction with their operations outside of their “home” country. • International companies – are importers and exporters, – they have no investment outside of their home country.

•

Multinational companies – have investment in other countries, – do not have coordinated product offerings in each country. – More focused on adapting their products and service to each individual local market.

•

Global companies – have invested and are present in many countries. – Market their products through the use of the same coordinated image/brand in all markets. – Generally one corporate office that is responsible for global strategy. Emphasis on volume, cost management and efficiency.

•

Transnational companies – Much more complex organizations. – Have invested in foreign operations, – have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market. 45

Evolving motivations: Changing perspectives High Global

Transnational

International

Multinational

Global Coordination Integration

Low Low

Local Responsiveness

High

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Env. of MNC: The Classification of Business

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Ethnocentric Attitude

Regiocentric Attitude

Polycentric Attitude

Geocentric Attitude

HQs Orientation toward subsidiaries (source : adaptation libre de Heenan D.A., Perlmutter H.W., Development , Addison Wesley Publishing, 1979)

Multinational Organization

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