FACTORS THAT SHAPE A FACTORS THAT SHAPE A COMPANY’S STATEGYCOMPANY’S STATEGY

Analysis Of The Macro environment Analysis Of The Industry Analysis Of The Industry A Framework For Competitor Analysis A Framework For Competitor Analysis Structural Analysis Within IndustriesInternal Organizational Analysis Internal Organizational Analysis Environmental Scanning Environmental Scanning Forecasting The Environment

Analysis Of The Macroenvironment

–Political And Regulatory Forces Political And Regulatory Forces

Economic Forces Economic Forces –Technological Forces Technological Forces

–Social ForcesSocial Forces

Analysis Of The Industry

The Elements Of Industries Structure The Elements Of Industries Structure – Threat Of New Entrants Threat Of New Entrants – Threat Of Substitutes Threat Of Substitutes – Bargaining Power Of Buyers Bargaining Power Of Buyers – Bargaining Power Of Suppliers Bargaining Power Of Suppliers – Rivalry Among Existing FirmsRivalry Among Existing Firms

A Framework For Competitor Analysis – Future GoalsFuture Goals – Assumptions Assumptions – Current Strategy – Capabilities Capabilities – Putting The Four Components TogetherPutting The Four Components Together

Structural Analysis Within Industries Structural Analysis Within Industries – Firm's Profitability Firm's Profitability – Industries ChangeIndustries Change

Internal Organizational Analysis Internal Organizational Analysis – The Areas That Most Businesses Should The Areas That Most Businesses Should

AnalyzeAnalyze

Environmental Scanning Environmental Scanning – Forecasting The EnvironmentForecasting The Environment

Analysis Of The Macro environmentAnalysis Of The Macro environment

All organizations are affected by four All organizations are affected by four macro environmental forces: macro environmental forces:

political-legal,political-legal,

economic, economic,

technological, and technological, and

socialsocial. .

Political And Regulatory ForcesPolitical And Regulatory Forces

Political-legal forces include the Political-legal forces include the outcomes of elections, legislation, outcomes of elections, legislation, and court judgments, as well as the and court judgments, as well as the decisions rendered by various decisions rendered by various commissions and agencies. commissions and agencies.

The political sector of the The political sector of the environment presents actual and environment presents actual and potential restriction on the way an potential restriction on the way an organization operates. organization operates.

Among the most important Among the most important government actions are: government actions are:

Regulation, taxation, expenditure, Regulation, taxation, expenditure, takeover.takeover.

The differences among local, The differences among local, national, and international sub national, and international sub sectors of the political environment sectors of the political environment are often quite dramatic. are often quite dramatic.

Technological ForcesTechnological Forces

Technological forces influence Technological forces influence organizations in several ways.organizations in several ways.

A technological innovation can have a A technological innovation can have a sudden and dramatic effect on the sudden and dramatic effect on the environment of a firm. environment of a firm.

First, technological developments can First, technological developments can significantly alter the demand for an significantly alter the demand for an organization's or industry's products or organization's or industry's products or services. services.

Technological change can destroy Technological change can destroy existing businesses and even entire existing businesses and even entire industries, since its shifts demand industries, since its shifts demand from one product to another. from one product to another.

Moreover, changes in technology can Moreover, changes in technology can affect a firm's operations as well as affect a firm's operations as well as its products and services. its products and services.

These changes might affect processing These changes might affect processing methods, raw materials, and service methods, raw materials, and service delivery. delivery.

In international business, one country's In international business, one country's use of new technological developments use of new technological developments can make another country's products can make another country's products overpriced and noncompetitive. overpriced and noncompetitive.

The rate of technological change The rate of technological change varies considerably from one varies considerably from one industry to another.industry to another.

In electronics, for example change is In electronics, for example change is rapid and constant, but in furniture rapid and constant, but in furniture manufacturing, change is slower and manufacturing, change is slower and more gradual. more gradual.

Technological strategy deals with Technological strategy deals with ""choices in technology, product choices in technology, product design and development, sources design and development, sources of technology and R&D of technology and R&D management and fundingmanagement and funding""

The effect that changing technology The effect that changing technology can have upon the competition in an can have upon the competition in an industry .industry .

Technological forecasting can help Technological forecasting can help protect and improve the profitability of protect and improve the profitability of firms in growing industries. firms in growing industries.

Technological forecasting can help Technological forecasting can help protect and improve the profitability protect and improve the profitability of firms in grow in Social forces of firms in grow in Social forces include traditions, values, societal include traditions, values, societal trends, consumer psychology, and a trends, consumer psychology, and a society's expectations of business. society's expectations of business.

The following are some of the key The following are some of the key concerns in the social environmentconcerns in the social environment:: ecologyecology (e.g., global warming, (e.g., global warming, pollution);pollution); demographicsdemographics (e.g., population (e.g., population growth rates, aging work force in growth rates, aging work force in industrialized countries, high industrialized countries, high educational requirements); educational requirements); quality of lifequality of life (e.g., education, (e.g., education, safety, health care, standard of safety, health care, standard of living); living);

The word The word industryindustry is used to refer to a is used to refer to a group of firms whose products are group of firms whose products are sufficiently close substitutes for each sufficiently close substitutes for each other that the member firms are drawn other that the member firms are drawn into competitive rivalry to serve the into competitive rivalry to serve the same needs of some or all the same same needs of some or all the same types of buyers. types of buyers. In analyzing an industry, it is also useful In analyzing an industry, it is also useful to determine if the industry is a global to determine if the industry is a global industry, that is, an industry that industry, that is, an industry that requires global operations to competerequires global operations to compete effectively effectively

The elements of the industry The elements of the industry structure :structure :

The stage in the life cycle of products The stage in the life cycle of products in the industry. in the industry.

The direction the industry is headed The direction the industry is headed (for example, overcapacity, requiring (for example, overcapacity, requiring rationalization). rationalization).

The forces (for example, political, The forces (for example, political, social, economic, technological) social, economic, technological) driving the industry in a particular driving the industry in a particular direction. direction. The underlying economics and The underlying economics and performance of the business (for performance of the business (for example, cost structures, profit example, cost structures, profit levels). levels). The key success factors (for example, The key success factors (for example, cost, delivery). cost, delivery). Demand segments and strategic Demand segments and strategic groups groups

Porter identifies five basic competitive Porter identifies five basic competitive forces, which determine the state of forces, which determine the state of competition an its underlying economic competition an its underlying economic structure: structure:

The intensity of rivalry among existing The intensity of rivalry among existing competitors competitors The threat of substitute products or services The threat of substitute products or services The bargaining power of buyers The bargaining power of buyers The bargaining power of suppliers The bargaining power of suppliers These five forces of competition determine These five forces of competition determine the rate of return on invested capital (ROI) in the rate of return on invested capital (ROI) in industry, relative to the industry's cost of industry, relative to the industry's cost of capital. capital.

Threat Of New EntrantsThreat Of New Entrants

A major force shaping competition A major force shaping competition within an industry is the threat of within an industry is the threat of new entrants. new entrants.

The threat of new entrants is a The threat of new entrants is a function of both barriers to entry and function of both barriers to entry and the reaction from existing the reaction from existing competitors. competitors.

There are several types of entry There are several types of entry barriers: barriers:

Economies of scaleEconomies of scale..

Product differentiationProduct differentiation

Capital requirementsCapital requirements

Cost advantages independent of Cost advantages independent of scalescale..

Switching costsSwitching costs

Access to distribution channelsAccess to distribution channels..

Governmental and legal barriersGovernmental and legal barriers..

All firms in and industry compete All firms in and industry compete with other industries offering with other industries offering substitute products or services. substitute products or services. Steel producers are in competition Steel producers are in competition with aluminum producers. with aluminum producers. Sugar producers are in competition Sugar producers are in competition with the firms which are introducing with the firms which are introducing sugar-free products. sugar-free products. The competitive force of closely-The competitive force of closely-related substitute products impact related substitute products impact sellers in several ways. sellers in several ways.

Bargaining Power Of BuyersBargaining Power Of Buyers

Buyer power refers to the ability of Buyer power refers to the ability of customers of the industry to influence customers of the industry to influence the price and terms of purchase. the price and terms of purchase.

The buyers are powerful when: The buyers are powerful when:

They are concentrated and buy in They are concentrated and buy in large volume. large volume.

The buyer's purchases are a sizable The buyer's purchases are a sizable percentage of the selling industry's percentage of the selling industry's total sales. total sales.

Bargaining Power Of SuppliersBargaining Power Of Suppliers

Supplier power refers to the ability of Supplier power refers to the ability of providers of inputs to determine the providers of inputs to determine the price and terms of supply. price and terms of supply.

Suppliers can exert power over firms Suppliers can exert power over firms an industry by raising prices or an industry by raising prices or reducing the quality of purchased reducing the quality of purchased goods and services, so reducing goods and services, so reducing profitability. profitability.

Rivalry refers to the degree to which Rivalry refers to the degree to which firms respond to competitive moves firms respond to competitive moves of the other firms in the industry. of the other firms in the industry.

Rivalry among existing firms may Rivalry among existing firms may manifest itself in a number of ways- manifest itself in a number of ways- price competition, new products, price competition, new products, increased levels of customer service, increased levels of customer service, warranties and guarantees, warranties and guarantees, advertising, better networks of advertising, better networks of wholesale distributors, and so on. wholesale distributors, and so on.

A central aspect of strategy A central aspect of strategy formulation is perceptive competitor formulation is perceptive competitor analysis. analysis. There are four diagnostic There are four diagnostic components to a competitor analysis: components to a competitor analysis: future future goalsgoals, current , current strategystrategy, , assumptionsassumptions, and , and capabilitiescapabilities. . A basic framework for performing A basic framework for performing individual competitive analysis has individual competitive analysis has been postulated by been postulated by Michael PorterMichael Porter. .

Future GoalsFuture GoalsAs can be seen, two factors must be As can be seen, two factors must be analyzed to determine what drivers analyzed to determine what drivers the competitor. the competitor. First, its First, its future goalsfuture goals must be must be identified.identified. A knowledge of goals will allow A knowledge of goals will allow predictions about whether or not predictions about whether or not each competitor is satisfied with its each competitor is satisfied with its position and financial results, and position and financial results, and how likely that competitor is to how likely that competitor is to change strategy. change strategy.

AssumptionsAssumptions

The second crucial component in The second crucial component in competitors analysis is identifying each competitors analysis is identifying each competitor's assumptions. competitor's assumptions.

These fall into two major categories: These fall into two major categories:

The competitor's assumptions about itself The competitor's assumptions about itself

The competitor's assumptions about the The competitor's assumptions about the industry and the other companies in it. industry and the other companies in it.

CapabilitiesCapabilitiesA realistic appraisal of each competitor's A realistic appraisal of each competitor's capabilities - its strengths and capabilities - its strengths and weaknesses- is the final diagnostic step in weaknesses- is the final diagnostic step in competitor analysis. Its strengths and competitor analysis. Its strengths and weaknesses will determine its ability to weaknesses will determine its ability to initiate or react to strategic moves and to initiate or react to strategic moves and to deals with environmental or industry deals with environmental or industry events that occur. events that occur.

Putting The Four Components Putting The Four Components TogetherTogether

After the competitor's future goals, After the competitor's future goals, assumptions, current strategies, and assumptions, current strategies, and capabilities are analyzed, a capabilities are analyzed, a competitor competitor response profile is developedresponse profile is developed. . This profile, designed to indicate how a This profile, designed to indicate how a competitor is likely to respond in its competitor is likely to respond in its competitive environment.competitive environment.

Definition of an industry is not the Definition of an industry is not the same as definition of where the firm same as definition of where the firm wants to compete. In many wants to compete. In many industries, there are firms that have industries, there are firms that have adopted very different competitive adopted very different competitive strategy and have achieved differing strategy and have achieved differing levels of market share. levels of market share.

The following strategic dimensions usually The following strategic dimensions usually capture the possible differences among a capture the possible differences among a firm's strategic options in a given industry: firm's strategic options in a given industry: specialization, brand identification, push specialization, brand identification, push versus pull, channel selection,product versus pull, channel selection,product quality, technological leadership, vertical quality, technological leadership, vertical integration, cost position, service, price integration, cost position, service, price policy, leverage, relationship with parent policy, leverage, relationship with parent company, and relationship to home and company, and relationship to home and host government. host government.

The task of analyzing a company's The task of analyzing a company's external situation is not a mechanical external situation is not a mechanical exercise in which analysts plug in exercise in which analysts plug in data and definitive conclusions come data and definitive conclusions come out. out. There can be several appealing There can be several appealing scenarios about how an industry will scenarios about how an industry will evolve and what future competitive evolve and what future competitive conditions will be like. conditions will be like.

There are numerous types of driving There are numerous types of driving forces which can exist to produce forces which can exist to produce evolutionary change in an industry: evolutionary change in an industry: Changes in the long-term industry growth Changes in the long-term industry growth rate rate Changes in buyer composition Changes in buyer composition Product innovation Product innovation Technological change Technological change Marketing innovation Marketing innovation Entry or exit of major firms Entry or exit of major firms Diffusion or technical know-how Diffusion or technical know-how

Increasing globalization of the industry Increasing globalization of the industry Changes in cost and efficiency Changes in cost and efficiency Emerging buyer preference for a Emerging buyer preference for a differentiated instead of commodity differentiated instead of commodity product (or for a more standardized product (or for a more standardized product instead of strongly differentiated product instead of strongly differentiated products) products) Regulatory influences and government Regulatory influences and government policy changes policy changes Changing societal concerns, attitudes, and Changing societal concerns, attitudes, and lifestyles lifestyles Reduction in uncertainty and business risk Reduction in uncertainty and business risk

The Areas That Most Businesses The Areas That Most Businesses Should AnalyzeShould AnalyzeAn internal organizational analysis An internal organizational analysis evaluates all relevant factors in an evaluates all relevant factors in an organization in order to determine its organization in order to determine its strengths and weaknesses. Some of strengths and weaknesses. Some of the areas that most businesses the areas that most businesses should analyze include the following: should analyze include the following: Financial positionFinancial position. The financial . The financial position of a business plays a crucial position of a business plays a crucial role in determining what it can or role in determining what it can or cannot do in the future. cannot do in the future.

Product positionProduct position. For a business to be . For a business to be successful, it must be acutely aware of its successful, it must be acutely aware of its product position in the marketplace. product position in the marketplace. Marketing capabilityMarketing capability. Closely allied with an . Closely allied with an organization's product position is its marketing organization's product position is its marketing capabilities (i.e., its ability to deliver the right capabilities (i.e., its ability to deliver the right product at the right time at the right price). product at the right time at the right price). Research and development capabilityResearch and development capability. . Every organization must be concerned about its Every organization must be concerned about its ability to develop new products. ability to develop new products. Organizational structureOrganizational structure. Organizational . Organizational structure can either help or hinder an structure can either help or hinder an organization in achieving its objectives. organization in achieving its objectives.

Human resourcesHuman resources. All the activities of . All the activities of an organization are significantly an organization are significantly influenced by the quality and quantity of influenced by the quality and quantity of its human resources. its human resources. Condition of facilities and Condition of facilities and equipmentequipment. The condition of an . The condition of an organization's facilities and equipment organization's facilities and equipment can either enhance or hinder its can either enhance or hinder its competitiveness. competitiveness. Past objectives and strategiesPast objectives and strategies. In . In assessing its internal environment, every assessing its internal environment, every business should attempt to explicitly business should attempt to explicitly describe its past objectives and describe its past objectives and strategies. strategies.

Internal analysis is difficult and Internal analysis is difficult and challenging. The checklists provided above challenging. The checklists provided above can be helpful in determining specific can be helpful in determining specific strengths and weaknesses in the strengths and weaknesses in the functional areas of business. functional areas of business. The second component of environmental The second component of environmental analysis is to develop information about analysis is to develop information about the environment. Information has two the environment. Information has two primary strategic role - in primary strategic role - in objective objective settingsetting and in and in strategy formulationstrategy formulation. As . As managers scan the environment, they managers scan the environment, they interpret environmental influence in the interpret environmental influence in the light of their own perceptions, light of their own perceptions, expectations, and values. expectations, and values.

Environmental scanning is the process of Environmental scanning is the process of gathering information about events and gathering information about events and their relationships within an organization's their relationships within an organization's internal and external environments. internal and external environments.

The basic purpose of environmental The basic purpose of environmental scanning is to help management scanning is to help management determine the future direction of the determine the future direction of the organization. organization.

The most widely accepted method for The most widely accepted method for categorizing different forms of scanning categorizing different forms of scanning divides into the following three types: divides into the following three types:

Irregular scanning systems: These consist Irregular scanning systems: These consist largely of ad hoc environmental studies. largely of ad hoc environmental studies.

Regular Scanning systems: These systems Regular Scanning systems: These systems revolve around a regular review of the revolve around a regular review of the environment or significant environmental environment or significant environmental components. This review is often made components. This review is often made annually. annually.

Continuous scanning systemsContinuous scanning systems: These : These systems constantly monitor components systems constantly monitor components of the organizational environment. of the organizational environment.

Forecasting Forecasting

Forecasting The EnvironmentForecasting The EnvironmentMacroenvironmental and industry Macroenvironmental and industry scanning are only marginally useful if all scanning are only marginally useful if all they do is reveal current conditions. To be they do is reveal current conditions. To be truly meaningful, such analyses must truly meaningful, such analyses must forecast future trends and changes. forecast future trends and changes. Environmental forecasting is a technique Environmental forecasting is a technique whereby managers attempt to predict the whereby managers attempt to predict the future characteristics of the organizational future characteristics of the organizational environment and hence make decisions environment and hence make decisions today that will help the firm deal with the today that will help the firm deal with the environment of tomorrow. environment of tomorrow.

Forecasting involves the use of statistical Forecasting involves the use of statistical and nonstatistical, or qualitative, and nonstatistical, or qualitative, techniques. Four techniques can be techniques. Four techniques can be particularly helpful: particularly helpful: time series analysis, time series analysis, judgmental forecasting, multiple judgmental forecasting, multiple scenarios, and the Delphi technique.scenarios, and the Delphi technique.

Macroenvironmental and industry Macroenvironmental and industry scanning are only marginally useful if all scanning are only marginally useful if all they do is reveal current conditions. To be they do is reveal current conditions. To be truly meaningful, such analyses must truly meaningful, such analyses must forecast future trends and changes. forecast future trends and changes.