External Environmental

Analysis
Strategic Management

Understanding the Factors that

Determine a Companys Situation
Diagnosing a companys situation has two facets

Assessing the companys external or

macro-environment (Societal or General
Environment)
General environment conditions
Forces acting to reshape this environment
Assessing the companys internal or
micro-environment (Specific or task
Environment)
Market position and competitiveness
Competencies, capabilities, resource strengths
and weaknesses, and competitiveness

From Thinking Strategically about the

Companys Situation to Choosing a Strategy

The Components of a Companys

Macro-environment

Thinking Strategically about a

Companys Macro-environment
A companys macro-environment includes all relevant factors and
influences outside its domain
Diagnosing a companys external situation involves assessing
strategically important factors that have a bearing on the
decisions a companys makes about its
Direction
Objectives
Strategy
Business model
Requires that company managers scan
the external environment to
Identify potentially important external developments
Assess their impact and influence
Adapt a companys direction and strategy as needed

Environmental Scanning
General Environment/ Societal environment
1. Economic forces that regulate exchange of
materials, money, energy, and information
2. Technological forces that generate problem solving
3. Political legal forces that allocate power and
provide constraining and protecting laws and
regulations
4. Socio-cultural forces that regulate the values, mores,
and customs of society

Some Important Variables in the

Societal Environment
Economic
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment
levels
Wage/price controls
Devaluation/revalu
ation
Energy availability
and cost
Disposable and
discretionary income
Prentice Hall, 2000

Technological

Total government
spending for R&D

Total industry
spending for R&D

Antitrust
regulations

Lifestyle changes

Tax laws
Special incentives

Patent protection

Foreign trade
regulations

New products
New developments
in technology
transfer from lab to
Productivity
improvements
through automation

Socio-cultural

Environmental
protection laws

Focus of
technological
efforts

marketplace

Political-Legal

Attitudes toward
foreign companies
Laws on hiring and
promotion
Stability of
government

Chapter 3

Career expectations
Consumer activism
Rate of family
formation
Growth rate of
population
Age distribution of
population
Regional shifts in
population
Life expectancies
Birth rates
7

Important variables in International

Societal 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 moves will
they make next?

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?

Question 1: What are the Industrys

Dominant Economic Traits?
Analyzing a companys industry and
competitive environment begins with
identifying an industrys dominant
economic features and forming a picture of
what the industry landscape is like
It not only sets the stage for the analysis to
come but also promotes understanding of
the kind of strategic moves that industry
members are likely to employ

Question 1: What are the Industrys

Dominant Economic Traits?

Market size and growth rate

Number of rivals
Scope of competitive rivalry
Buyer needs and requirements
Degree of product differentiation
Product innovation
Supply/demand conditions
Pace of technological change
Vertical integration
Economies of scale
Learning and experience curve effects

What to Consider in Identifying an Industrys Dominant Features

Features

Questions to answer

Market size and

growth rate

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) reveal about
the industrys growth position?

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 longterm competitive success?

Number of Rivals

Buyer needs and

requirements

Production
Capacity

Is the industry fragmented into many small

companies or dominated by a few large firms?
Is the industry going through a period of
consolidation to a smaller number of competitors?
What are the final buyers (as well middlemen)
looking for what attributes prompt to choose one
brand over another?
Are buyers needs or requirements changing? If so
what is driving such changes?
Is a surplus capacity pushing prices and profits
down?
Is the industry overcrowded with too many
competitors?

Production
Capacity

Is a surplus capacity pushing the prices and profit

margins down?
Is the industry over crowded with too many
competitors?

Pace of
Technological
Change

What role does technology play in this industry?

Are ongoing upgrades of facilities/ equipment
essential because of rapidly advancing production
process technologies?
Do most industry members have a need for strong
technological capabilities? Why?

Degree of
Are the products of rivals becoming differentiated or
Product
less differentiated?
Differentiation Are increasing look alike products of rivals causing
heightened price competition?

Product
Innovation

Vertical
Integration

Economies of
Scale
Learning and
experience
curve effects

Is the industry characterized by rapid product innovation and

short product life cycle? How important is R&D and product
innovation? Are there opportunities to overtake key rivals by
being first-to-market with next generation products?

Are some competitors in the industry partially or fully

integrated? Are there any important cost differences among fully
versus partially versus non-integrated firms? Is there any
competitive advantage or disadvantage associated with being
fully or partially integrated?

Is industry characterized by economies of scale in purchasing,

manufacturing, and other activities? Do companies with high
scale operations have an important cost advantage over small
scale firms

Do some companies have a significant cost advantage

because of their experience in performing particular
activities?

Question 2: What Kind of Competitive

Forces are Industry Members Facing?

Objectives are to identify:

Main sources of competitive forces
Strength of these forces

Key analytical tool

Five Forces Model
of Competition

Fig. 3.3:

The Five Forces Model of Competition

Analyzing the Five Competitive

Forces: How to Do It
Step 1: Identify the specific competitive
pressures associated with each of
the five forces
Step 2: Evaluate the strength of each
competitive force -- fierce, strong,
moderate to normal, or weak?

Step 3: Determine whether the collective

strength of the five competitive forces
is conducive to earning attractive profits

Factors Affecting Threat of Entry

Threat of New Entrants/ Entry Barriers

Factors
Economies
of scale
Capital
required
Access to
distribution
channels
Expected
retaliation
Differentiati
on
Brand
Loyalty
Experience
Curve
Govt. Action

HUF MUF

Neutral

MF

HF

comment

Low

High

Low

High

Ample

Restri
cted

Low
Low

High
High

Low

High

Insignifi
cant
Low

Signifi
cant
high

Exit Barriers
Exit Barriers
Factors
Specialized
Assets
Fixed Cost of
Exit
Strategic
interrelations
hip
Government
Barriers

HUF MUF

Neutral

MF

HF

Comments

Hi

Low

Hi

Low

Hi

Low

Low

Hi

Weapons for Competing and Factors

Affecting Strength of Rivalry

Competitive Rivalry
HUF MUF

Factors
Composition of
Competitors
Mkt. Growth rate
Scope of
competition
Fixed storage
Cost
Capacity Increase

Equal
Size
Slow
Global

Degree of
differentiation

Commodity

Strategic Stake

High
Large

High

Neutral

MF

HF

Comment
Unequal
Size

High
Domestic

Low
Small

High

Low

Factors Affecting Bargaining Power of

Buyers

Power Of Buyer
Factors
Number of
Important
buyers
Threat of
Backward
integration
Product
supplied
Switching
cost
% of
buyers
cost
Profit
earned by
buyer
Importance to
final quality of
buyers
Product.

HUF

MUF

MF

HFA

Comment

Few

Many

High

Low
Specialty

Commodity

Low
High
Low
High
High

Low

High
Low

How Seller Buyer Partnership

Can Create Competitive Pressures

Sellers that provide items to business have found it is in their mutual

interest to collaborate closely on matters such as:
- just in time inventories
- order processing
- electronic invoice payments
- data sharing
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

Fig. 3.7: Factors Affecting Bargaining

Power of Suppliers

Power of Supplier
Factors
No, of important
Suppliers
Switching cost
Availability of
substitutes
Threat of forward
integration
Importance of
Buyer industry to
suppliers
Importance of
suppliers product
to the buyers
business

HUF

MUF

N MF

Comment

HF

Few

Many

High

Low

Difficult
High

Many
Low

Buys
small
Proporti
on
High
Importa
nce

Buys
large
proport
ion
Low
Import
ance

How Seller-Buyer Partnership Can

Create Competitive Pressures
1. Reduce inventory and logistic costs
2. Speed the availability of next generation
components
3. Enhance the quality of parts and
components being supplied and reduce
defect rates
4. Squeeze the cost savings for both
themselves and suppliers

Factors Affecting Competition From

Substitute Products

Threat Of Substitute Product

HUF

Factors
Threat of
Obsolescence
of Industrys
product
Aggressiveness
of substitute
products in
promotion
Switching Cost
Perceived
price/ value

MUF

MF

HF

Comment

Hi

Low

Hi

Low

Low

High

Hi

Low

Overall Industry Attractiveness

Factors
Entry Barriers
Exit Barriers
Rivalry among
existing firms
Power of buyers
Power of
Suppliers
Threat of
substitutes

Unfavorable

Neutral Favorable

Is the Collective Strength of the

Five Competitive Forces Conducive
to Good Profitability?
As a rule, stronger the collective impact of the five
forces, the lower the combined profitability of industry
participants
Fierce to strong competitive pressures come from all five
forces driving industry profitability to unacceptably low
levels
An industry can be competitively unattractive even when
not all five forces are strong
Intense competitive pressure from just two or three
forces may suffice to destroy the conditions for good
profitability and prompt some companies to exit the
business

Matching Company Strategy to

Competitive Conditions

Effectively matching a companys strategy to

prevailing competitive conditions have two
aspects:
1. Pursuing avenues that shield the firm from as
many of the different competitive pressures as
possible
2. Initiating actions calculated to produce
sustainable competitive advantage, thereby
shifting competition in companys favor, putting
added competitive pressure on rivals, and
perhaps even defining a business model for
the industry

Question 3: What Factors are Driving

Industry Change and what Impact will
they have?
Industries change because forces
are driving industry participants
to alter their actions
Driving forces are the
major underlying causes
of changing industry and
competitive conditions
Where do driving forces originate?
Outer ring of macroenvironment
Inner ring of microenvironment ( Most frequent)

Driving Forces of Change

The internet and new e-commerce opportunities and
threats in the industry
Increasing Globalization:
1. Where scale economies are so large that rival firms
need to market their products in many countries to
gain enough volume to drive unit cost down
2. Where low cost production is a critical consideration
(making it imperative to locate manufacturing facilities
in countries where lowest cost could be achieved)
3. Where one or more globally ambitious companies are
pushing hard to gain significant competitive position in
many attractive markets
4. Where local governments are privatizing governmentowned monopolies

Driving Forces
Changes in long-term industry growth rate
1. Upsurge in long-term demand triggers a race for growth
among existing firms and attract new-comers
2. A shrinking market heightens competitive pressures for
market share inducing mergers and acquisitions that result
in industry consolidation
Changes in who buys the product and how they use it
Product innovation
Technological change
Marketing innovation
Entry or exit of a major firm

Drivers of Change
Diffusion of technical know how across more
companies and countries
Changes in cost and efficiency
Growing preference for differentiated products
instead of commodity or vice versa
Regulatory influences and government policy
changes
Changing societal concerns, attitudes and life styles

Assessing the Impact of the

Driving Forces

Are the driving forces causing demand

for the industrys product to increase or
decrease?
Are the driving forces acting to make
competition more or less intense?
Will the driving forces lead to higher or
lower industry profitability?

Categorizing International
Industries

Multi-domestic Industries:
Are specific to each country or group of countries
Collection of essentially domestic industries
Each subsidiary is essentially independent of the
activities of the MNCs subsidiaries in other
countries
Global Industries:
Operate world wide, with MNC making only small
adjustment for country specific circumstances
MNCs produce products or services in various
locations throughout the world and sell them making
only small adjustments for country requirements

3.9

Continuum of International Industries (Fig. 3.4)

Continuum of International
Industries
Multi-domestic
Industry in which companies tailor
their products to the specific
needs of consumers in a
particular country. E.g.:

Telecommunication
Insurance
Banking

Global
Industry in which companies
manufacture and sell the same
products, with only minor
adjustments made for individual
countries around the world. E.g.:
Automobiles
Wrist watches
Electrical appliances

Prentice Hall, 2000

Chapter 3

41

Factors that Determine whether

Industry would be Global or Multidomestic
1. Pressure for coordination within
multinational corporations operating in
that country
2. Pressure for local responsiveness on the
part of individual country markets

Strategic Groups

A strategic group is a set of business units or firms

that pursue similar strategies with similar resources

A firms competitive domain can be identified with

the concept of strategic group

The strategic group map consists of two sets of

dimensions
I. Business Scope Commitment:
(1) The target market segment (2) types of products
offered (3) geographical reach
II. Resource Allocation Commitment: Allocation of
resources to functional areas considered central in
achieving competitive advantage

3.10 Mapping Strategic Groups in the U.S. Restaurant Chain Industry (Fig. 3.5)

Mapping Strategic Groups in the U.S.

Restaurant Chain Industry
High
Red Lobster
Olive Garden
ChiChi's

Perkins
International House
of Pancakes

Price

Ponderosa
Bonanza

Shoney's
Denny's
Country Kitchen

Kentucky Fried Chicken

Pizza Hut
Long John Silver's

Arby's Wendy's
Domino's Dairy Queen
Hardee's Taco Bell
Burger King McDonald's
Low
Limited Menu

Prentice Hall, 2000

Full Menu

Product-Line Breadth
Chapter 3

44

Implications of Strategic
Groups

The strategic group a firm should consider

entering
The number, type and level of entry barriers
the firm will face
The strategic dimensions that will make the
firm similar to its strategic group members
and different from members of different
strategic groups
The combined effect of five forces of
competition on its relative profitability

Key Success Factors

Key success factors affect the ability of
industry members to prosper in market place
On what basis do customers chose between
the competing brands of sellers?
What must a 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 Key Success Factors (KSF)

Technology
Related

Expertise in particular technology or in scientific research ( important in

pharmaceuticals, internet applications, mobile communications, and
many high tech. industry
Proven ability to improve production processes (important in industries
where advancing technology opens the way for higher manufacturing
efficiency and lower production costs)

Manufacturing Ability to achieve scale economies and/or capture learning curve

effects (important to achieving low production costs)
Related KSFs Quality control know-how ( important in those industries where
customers insists on product reliability)
High utilization of fixed assets (important in capital intensive/
high fixed cost industries)
Access to attractive supplies of skilled labor
High labor productivity ( important for items with high labor
content)
Low cost product design and engineering ( reduces
manufacturing costs)
Ability to manufacture or assemble products that are customized
to buyer specification

Distribution A strong network of wholesale distributors/dealers

Strong direct sales capabilities via the internet and or having
related KSFs company owned retail outlets
Ability to secure favorable display space on retailer shelves

Marketing
Related
KSFs

HR
Related KSFs

Breadth of product line and product selection

A well known and respected brand name
Courteous, personalized customer service
Customer guarantees and warranties
Clever advertising
A talented workforce
Distribution capabilities
Product innovation capabilities
Short delivery time capability
Supply chain management capabilities
Strong e-commerce capabilities

External Factor Analysis Summary( EFAS) /

External Factor Evaluation Matrix ( EFE)

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 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

3.16 External Factor Analysis Summary (EFAS): Blank

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 Hunger Associates.
Reprinted by permission.

Prentice Hall, 2000

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50