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 firm’s 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 (cont’d)

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 (cont’d)

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 (cont’d)

The Global Segment
 New
global markets
 Changing
markets
existing
 Important
international events
 Critical
cultural and
institutional
characteristics of
global markets
General Environment (cont’d)

The Technological Segment

Product innovations

Applications of knowledge

Focus of private and
government-supported
R&D expenditures

New communication
technologies
General Environment (cont’d)

The Political/Legal
Segment
 Antitrust
laws
 Taxation
laws
 Deregulation
philosophies
 Labor
training laws
 Educational
philosophies and
policies
General Environment

The Demographic
Segment
 Population
 Age
size
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
Porter’s Five Forces
Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms in
Industry
Threat of
Substitute
Products
Bargaining
Power of
Buyers
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 industry’s
total output
 the sales of the product being purchased account
for a significant portion of the seller’s annual
revenues
 they could easily switch to another product
 the industry’s products are undifferentiated or
standardized, and buyers pose a credible threat if
they were to integrate backward into the seller’s
industry
Threat of Substitute Products
 Product substitutes are strong threat when:
 customers face few switching costs
 substitute product’s price is lower
 substitute product’s 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 company’s 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
Low
Entry
Barriers
High
High
Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low
Low
Entry
Barriers
High
Low, Stable
Returns
High
Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low
Low
Low, Stable
Returns
Entry
Barriers
High
High, Stable
Returns
High
Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low
Low
High
Low, Stable
Returns
Low, Risky
Returns
Entry
Barriers
High
High, Stable
Returns
Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low
Low
High
Low, Stable
Returns
Low, Risky
Returns
High, Stable
Returns
High, Risky
Returns
Entry
Barriers
High
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
Users/
buyers
Growth
Maturity
Few:
Growing adopters: Growing selectivity Saturation of
trial of
of purchase
trial of
users
early
product/service
Repeat purchase
adopters
reliance
Entry of
competitors
Competitive
conditions
Shakeout
Attempt to
achieve trial
May be many
Fight to maintain
share
Decline
Drop-off
in usage
Exit of some
competitors
Likely price cutting
Difficulties in
Selective
Few
for volume
gaining/taking
distribution
competitors
share
Fight for share
Shake-out of
Undifferentiated
Emphasis on
weakest
products/services competitors
efficiency/low cost
Industry Analysis (EFE)
External Factor Evaluation Matrix
Summarize & evaluate:
Economic
Demographic
Governmental
Social
Environmental
Technological
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
•

Firm’s current strategies response to the factor
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
Key External Factors
Weight
Rating
Weighted
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
Legislation against the tobacco industry
.10
2
.20
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
Opportunities
Threats
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 =
Firm’s 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 firm’s
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
Apple
Product Quality
High
Dell
Compaq
Hewlett-Packard
IBM
Fragmented
Players
Low
Gateway
Packard Bell
AST Research
Tandy
Exited from
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 firm’s 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
Current Strategy:
 How are we currently
competing?
 Does this strategy support
changes in the competitive
structure?
Competitor Analysis
Future objectives
Current strategy
Assumptions
Assumptions:
 Do we assume the future will
be volatile?
 Are we operating under a
status quo?
 What assumptions do our
competitors hold about the
industry and themselves?
Competitor Analysis
Future objectives
Current strategy
Assumptions
Capabilities
Capabilities:
 What are our strengths and
weaknesses?
 How do we rate compared to
our competitors?
Competitor Analysis
Future objectives
Response
Response:
Current strategy
Assumptions
Capabilities
 What will our competitors do
in the future?
 Where do we hold an
advantage over our
competitors?
 How will this change our
relationship with our
competitors?
Industry Analysis (CPM)
Competitive Profile Matrix

Identifies firm’s major competitors
and their strengths & weaknesses
in relation to a sample firm’s
strategic position
(CPM)
Critical Success
Factor
Avon
L’Oreal
Procter
& Gamble
Weight Rating Score Rating Score Rating Score
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
0.20
0.40
0.30
0.40
0.60
0.40
0.80
0.05
3.15
4
4
3
3
3
4
2
4
0.80
3
0.60
0.40
3
0.30
0.30
4
0.40
0.30
3
0.30
0.45
3
0.45
0.40
2
0.20
0.40
2
0.40
0.20
3
0.15
3.25
2.80