All Rights Reserved Ch. 3: 1 Strategic Management © Oxford Fajar Sdn. Bhd. (008974-T) 2010 Chapter 3 Strategic Planning Process: The External Environmental

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Strategic Management© Oxford Fajar Sdn. Bhd. (008974-T) 2010

Chapter 3

Strategic Planning Process: The External Environmental Analysis

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Learning Objectives

After reading this chapter, you should be able to: Explain the key external environmental forces. Describe the nature of the industry environment. Discuss the five forces that make up the industry

environment. Discuss the importance of monitoring the external

and industry trends and events. Explain how to analyse the external environment

using the positive and negative method and the weighted score method.

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External Environment

The external environment represents factors which are beyond the control of an organization.

It is divided into two categories: 1. General environment

2. Industry environment

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The General and Industry Environments

The general environment, also known as the macro environment, includes the environmental factors that have an impact on all organizations and firms within the company.

Easily remembered by the simple acronym PEST– P : Political factors

– E : Economic factors

– S : Socio-cultural factors

– T : Technological factors

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The General and Industry Environments (cont.)

The industry environment or the micro environment refers to factors that directly affect the firm and its competitive responses.– Threats of new entrants

– The bargaining power of the supplier

– The bargaining power of the buyers (customer)

– Threats of substitute products and services

– Rivalry among the existing firms.

These factors have the ability to affect the firm’s profitability and shape the competition in an industry.

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The General and Industry Environments (cont.)When formulating a business strategy, one of the

most important aspect is to consider the firm’s competitor.– Conduct a competitor analysis.– Involves analyzing the competitor’s strengths,

weaknesses, strategies and capabilities.Competitor analysis is an important element when

analyzing the external environment.Helps company to identify opportunities which can

then be matched with the firm’s core competencies to create competitive advantage.

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External Environmental Analysis

This analysis provides information to managers regarding the key trends and changes in the external environment, such as the following:– Population shifts

– Changing demographics (e.g. aging population)

– Information technology • Advancement in technology creates new opportunities

but also destroy the existing one.

– New government regulations

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External Environmental Analysis (cont.)

External environmental analysis reveals:

– Opportunities: External environment factors which can help the organization improve its performance and achieve its strategic objectives. (e.g. The rising petrol price is an opportunity for bicycle shops which have reported an increase in sales.)

– Threats: External environment factors which can hinder an organization’s performance and prevent the organization from achieving its strategic objectives

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External Environmental Analysis (cont.)

Based on the external environmental analysis, managers formulate strategies that:– Take advantage of opportunities– Avoid/reduce impact of threats

Sources of information for external environmental analysis include customer surveys, market surveys, periodicals, journals, reports, books, newspapers, conferences and the Internet.

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Factors in the General Environment

1. Political and Legal Factors Looks at how the government can influence organizations Comes from government and powerful group and

institutions. Examples:

– employment laws– environmental regulations – competitive regulations– government leadership– tax policies– quotas on goods produced– consumer protection laws

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Factors in the General Environment (cont.)

2. Economic Factors Unemployment rates Inflation rates Consumer and investor confidence Taxation level Inventory levels Currency exchange rates Gross Domestic Product (GDP) Read text chapter 3- pg 36 – pg 38

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3. Socio-cultural Factors Concerned with changes in

– society’s attitudes, – cultural values – demographic (age, gender, race, family size, etc), – lifestyle, – population shifts, – education levels of population,– immigration/emigration– Health– Living standard etc..

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3. Socio-cultural Factors Include factors such as:

– Demographic factors (e.g. population size and distribution, age distribution, education levels)

– Attitudes towards materialism, capitalism, free enterprise

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4. Technological Factors Include factors such as:

– Rate of technology transfer– Energy use and cost– New products and services of competitors– Changes in Internet– Changes in mobile technology

Technological breakthroughs can create new industries or create new products and services which might render existing products and services redundant.

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Factors in the Industry Environment

A set of factors that directly affects a firm Also known as micro environment These factors are analysed to assess how the

forces of the organization’s immediate environment affect the attractiveness or profitability potential of the firm.

Michael Porter’s Five Forces Model (1980) is one of the most widely used and best known conceptual frameworks to assess the industry environment.

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Industry Environment Analysis/Competitive Analysis: Michael Porter’s Five-Forces Model

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Potential entry of new competitors

Bargaining power of consumers

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Factors in the Industry Environment (cont.)

1. Threat of New Entrants New entrants to an industry can raise the level of

competition The threat of new entrants depend on the barriers

to entry Barriers of entry can be affected by economies of

scale, product differentiation, capital requirements, switching costs and government regulations.

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2. Bargaining Power of Suppliers A supplier group is powerful when

– the suppliers’ goods are critical to the buyers’ marketplace success.

– the inputs required by the buyers are unique, making it costly to switch suppliers.

– the buyers’ inputs do not represent a significant portion of the supplier’s business.

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– the buyers’ inputs are only available from a small group of suppliers.

– the suppliers can sell directly to the firm’s customers, bypassing the need for the firm.

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3. Bargaining Power of Buyers Customers (or buyer groups) have the most power

when– they are large and purchase most of the industry’s

output.– the industry has many small suppliers supplying the

product and the buyers are large.– the products represent a relatively large expense

for customers and sales of the product being purchased account for a significant portion of the seller’s annual revenues.

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– they have access to sufficient information and are able to evaluate the competitive offerings.

– the customers could switch to another product without incurring significant switching cost because the suppliers’ products are not unique or undifferentiated.

– the customers could possibly make the product themselves.


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4. Substitute Products Substitute products can be a threat when

– the product is undifferentiated and customers can easily switch away from one supplier to another supplier with little or insignificant switching costs.

– the customers or buyer groups are price sensitive and customers have little brand loyalty.

– there is no real benefit offered by the products in the industry and consumers can do without the product offered by the industry.


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5. Rivalry Among Competitors Rivalry among competitors is the strongest of the

five competitive forces and can vary widely among industries.

If rivalry among the competitors is intense, companies in the industry may need to enhance their product offerings to keep customers and firms may earn less profit.


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Rivalry among competitors can be most intense when– the industry has two or three dominant firms which

are battling to be the dominant firms in the industry.

– there are numerous competitors in the industry.

– the competitors are relatively equal in size and power.

– the firms are competing in a slow or shrinking industry.


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– there are high fixed costs of production. – the products are undifferentiated and are viewed by

customers as commodities. – there are high costs for exiting the business.


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Reference

Zainal Abidin Mohamed, Jo Ann Ho, Foong Yee Wong (2010) “Strategic Management” ,Oxford University Press, ISBN 9834509588, 9789834509583

Documents

All Rights Reserved Ch. 3: 1 Strategic Management © Oxford Fajar Sdn. Bhd. (008974-T) 2010 Chapter 3 Strategic Planning Process: The External Environmental