External

Environment

2nd Lecture
MSc Agricultural
Economics and
Management
Introduction

All companies face competition.

For resources, customers, sales revenues, and
profits.
All companies face uncertain industry
environments.
Managers must position the organizations
strategically in order to compete successfully.
This is what we call business definition.
Requires that managers understand the dynamics of
their firms markets before formulating strategies.
Introduction (cont.)

Rapidly growing markets (emerging industries)

tend to be less competitive and often attract new
entrants.
Usually provide sufficient room in competitive space for
making some mistakes.
Mature, concentrated markets provide firms with
very little breathing room.
Mistakes by one firm can significantly impact entire
industry.
One firms price reductions can set off industry-wide price
war.
Purpose of External Analysis

To understand the external environment

as it affects the enterprise
3 levels of analysis:
General changes in business environment
Changes within the industry
Activities of competitors and other specifics
Selecting analytical tools

Vast range of tools available

Usually use several tools but choice is
important
Choice depends on:
Data available
Nature of issues to be resolved
Time and skills available
 External Environmental
Analysis

A continuous process which includes

Scanning: Identifying early signals of environmental
changes and trends
Monitoring: Detecting meaning through ongoing
observations of environmental changes and trends
Forecasting: Developing projections of anticipated
outcomes based on monitored changes and trends
Assessing: Determining the timing and importance of
environmental changes and trends for firms strategies and
their management
Steps in Environmental
Analysis

Assess the nature of the

environment

Audit environmental
influences

Identify key
competitive forces

Identify
competitive position

Identify key
opportunities
and threats

Strategic
Strategic
position
position
External Environment
General Environment
Dimensions in the broader society that influence
and industry and the firms within it
Economic
Sociocultural
Global
Technological
Political/legal
Demographic
General Environment (contd)
The Economic Segment
Inflation rates
Interest rates
Trade deficits or
surpluses
Budget deficits or
surpluses
Personal savings rate
Business savings rates
Gross domestic product
General Environment (contd)
The Sociocultural Segment
Women in the workplace
Workforce diversity
Attitudes about quality of
worklife
Concerns about
environment
Shifts in work and career
preferences
Shifts in product and
service preferences
General Environment (contd)
The Global Segment
New global markets
Changing existing
markets
Important
international events
Critical cultural and
institutional
characteristics of
global markets
General Environment (contd)

The Technological Segment

Product innovations
Applications of knowledge
Focus of private and
government-supported
R&D expenditures
New communication
technologies
General Environment (contd)

The Political/Legal
Segment
Antitrust laws
Taxation laws
Deregulation
philosophies
Labor training laws
Educational philosophies
and policies
General Environment

The Demographic
Segment
Population size
Age structure
Geographic
distribution
Ethnic mix
Income distribution
Industry Environment
Set of factors directly influencing a firm and its
competitive actions and competitive responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry among competitors
 Porters Five Forces
Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Suppliers Industry Buyers

Threat of
Substitute
Products
 Five Forces Model
of Competition
Identify current and potential competitors and
determine which firms serve them
Conduct competitive analysis
Recognize that suppliers and buyers can become
competitors
Recognize that producers of potential substitutes
may become competitors
Threat of New Entrants

Barriers to entry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation
Bargaining Power of Suppliers

A supplier group is powerful when:

it is dominated by a few large companies
satisfactory substitute products are not available to
industry firms
industry firms are not a significant customer for the
supplier group
suppliers goods are critical to buyers marketplace
success
effectiveness of suppliers products has created high
switching costs
suppliers are a credible threat to integrate forward into
the buyers industry
Bargaining Power of Buyers

Buyers (customers) are powerful when:

they purchase a large portion of an industrys
total output
the sales of the product being purchased account
for a significant portion of the sellers annual
revenues
they could easily switch to another product
the industrys products are undifferentiated or
standardized, and buyers pose a credible threat if
they were to integrate backward into the sellers
industry
Threat of Substitute Products

Product substitutes are strong threat when:

customers face few switching costs
substitute products price is lower
substitute products quality and performance
capabilities are equal to or greater than those of
the competing product
Intensity of Rivalry

Intensity of rivalry is stronger when competitors:

are numerous or equally balanced
experience slow industry growth
have high fixed costs or high storage costs
lack differentiation or low switching costs
experience high strategic stakes
have high exit barriers
High Exit Barriers
Common exit barriers include:
specialized assets (assets with values linked to a
particular business or location)
fixed costs of exit such as labor agreements
strategic interrelationships (relationships of mutual
dependence between one business and other parts
of a companys operation, such as shared facilities
and access to financial markets)
emotional barriers (career concerns, loyalty to
employees, etc.)
government and social restrictions
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low

Entry
Barriers

High
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers

Low High

Low, Stable
Low Returns

Entry
Barriers

High
 Effects of Entry Barriers and Exit
Barriers on Industry Profits

Exit Barriers

Low High

Low, Stable
Low Returns

Entry
Barriers

High, Stable
High Returns
 Effects of Entry Barriers and Exit
Barriers on Industry Profits

Exit Barriers

Low High

Low, Stable Low, Risky

Low Returns Returns

Entry
Barriers

High, Stable
High Returns
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers

Low High

Low, Stable Low, Risky

Low Returns Returns

Entry
Barriers

High, Stable High, Risky

High Returns Returns
Limitations of the Five Forces
Model
Attempt to minimize the impact of any of
the forces that are acting to make the
industry attractive.
Make their industries more attractive by reducing the
power of the five forces; or
Shield or protect their companies from the power of
the forces.
Certain action may lead to allegations of collusion or
other unfair practices (Microsoft vs. Justice
Department).
Limitations of the Five Forces
Model (cont.)
Model provides snapshot of industry at
that time, but fails to show how industry is
changing.
Most managers assume that conditions will
remain relatively stable.
 The life cycle model

Development Growth Shakeout Maturity Decline

Few:
Users/ Growing adopters: Growing selectivity Saturation of Drop-off
trial of
buyers trial of of purchase users in usage
early
product/service Repeat purchase
adopters
reliance
Entry of May be many Fight to maintain Exit of some
competitors share competitors
Attempt to Likely price cutting Difficulties in
Competitive Few achieve trial for volume Selective
gaining/taking
conditions competitors distribution
Fight for share share
Shake-out of
Undifferentiated weakest Emphasis on
products/services competitors efficiency/low cost
Industry Analysis (EFE)

External Factor Evaluation Matrix

Summarize & evaluate:

Economic Demographic Government

al
Social Environmental Technologica
l
Cultural Political Competitive
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
 Industry Analysis (EFE)
Assign 1-4 rating to each factor
Firms current strategies response to the factor

Multiply each factors 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
 Key External Factors Weighte
Weight Rating d
Opportunities score
Global markets untapped .15 1 .15
Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30
Threats
Legislation against the tobacco .10 2 .20
industry
Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Clinton Administration .20 1 .20
TOTAL 1.00 2.10
Industry Analysis (EFE)

Total weighted score of 4.0 =

Organization response is outstanding to
threats & weaknesses

Total weighted score of 1.0 =

Firms strategies not capitalizing on
opportunities or avoiding threats
Industry Analysis (EFE)

The firm 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.
Industry Analysis (EFE)

Important

Understanding of the factors used in the

EFE Matrix is more important than the
actual weights and ratings assigned.
 Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firms
Competitors

Industry
Environment

Competitive
Environment
Competitor Environment

All of the companies that the firm

competes against.
Strategic Groups

Strategic group: a group of firms in an industry

following the same or similar strategy along the
same strategic dimensions
The strategy followed by a strategic group differs
from strategies being implemented by other
companies in the industry
Strategic Group Analysis

Strategic Group Analysis is useful to:

Identify firms with similar strategic characteristics
Therefore identify the most direct competitors
Identify mobility barriers
Identify strategic opportunities (strategic
spaces)
Strategic threats and problems
It is useful to consider the extent to which organisations differ in terms of
characteristics such as:

Extent of product (or service) diversity

Extent of geographic coverage
Number of market segments served
Distribution channels used
Extent (number) of branding
Marketing effort (e.g. advertising spread, size of salesforce)
Extent of vertical integration
Product or service quality
Technological leadership (a leader or follower)
R&D capability (extent of innovation in product or process)
Cost position (e.g. extent of investment in cost reduction)
Utilisation of capacity
Pricing policy
Level of gearing
Ownership structure (separate company or relationship with parent)
Relationship to influence groups (e.g. government, the City)
Size of organisation
Strategic Groups
in the Personal Computer Industry

High Apple Dell

Compaq
Product Quality

Hewlett-Packard Gateway
IBM

Packard Bell
AST Research
Tandy
Fragmented
Players Exited from
Low market, 1999
Low High
Customization and Speed of Delivery
Trends in Strategic Groups

Strategic groups can shift over time as market

changes
Entire strategic groups can emerge or disappear
over time
Industry consolidation alters strategic groups
Distinctiveness enhances firms sustainable
competitive advantage
Competitor Environment
Competitor intelligence is the ethical gathering of
needed information and data about competitors
objectives, strategies, assumptions, and capabilities

What drives the competitor as shown by its future

objectives
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 the competitor may be able to do, as shown
by its capabilities
Competitor Analysis

Future objectives Future Objectives:

How do our goals compare
with our competitors goals?
Where will the emphasis be
placed in the future?
What is the attitude toward
risk?
Competitor Analysis

Future objectives Current Strategy:

How are we currently
competing?
Current strategy
Does this strategy support
changes in the competitive
structure?
Competitor Analysis

Future objectives Assumptions:

Do we assume the future will
be volatile?
Are we operating under a
Current strategy status quo?
What assumptions do our
competitors hold about the
Assumptions industry and themselves?
Competitor Analysis

Future objectives Capabilities:

What are our strengths and
weaknesses?
Current strategy
How do we rate compared to
our competitors?

Assumptions

Capabilities
Competitor Analysis

Future objectives Response

Response:
Current strategy What will our competitors do
in the future?
Where do we hold an
advantage over our
Assumptions competitors?
How will this change our
relationship with our
Capabilities competitors?
Industry Analysis (CPM)

Competitive Profile Matrix

Identifies firms major competitors

and their strengths & weaknesses
in relation to a sample firms
strategic position
 (CPM) Procter
Avon LOreal & Gamble

Critical Success Weigh Ratin Scor Ratin Scor Ratin Score

Factor t g e g e g
Advertising 0.20 0.2 0.8 3 0.60
1 4
Product Quality 0 0
0.10 4 0.4 4 0.4 3 0.30
Price Competition 0.10 0
0.3 0
0.3 4 0.40
3 3
Management 0.10 0
0.4 0
0.3 3 0.30
4 3
Financial Position 0 0
0.15 4 0.6 3 0.4 3 0.45
Customer Loyalty 0.10 0
0.4 5
0.4 2 0.20
4 4
Global Expansion 0 0
0.20 4 0.8 2 0.4 2 0.40
Market Share 0.05 0
0.0 0
0.2 3 0.15
1 4
5 0
Total 1.00 3.1 3.2 2.80
5 5