External Environmental Analysis

Macro-environment, Industry, and

Competitive Analysis

Predicting outcomes of
strategic Decisions: Profit Pool
Strategic leaders attempt to predict the
outcomes of their decisions before taking efforts to
implement them.

Mapping an industrys profit pool is something

strategic leaders can do to anticipate the possible
outcomes of different decisions.
Profit pool total profits earned in an industry at all
points along the value chain
Helps in understanding primary source of profits in
an industry.

Identifying Profit Pool

Define the pools boundaries
Estimate the pools overall size
Estimate the size of the value chain activity in the pool.
Reconcile the calculation.

Macro-environmental Forces

General Environment
Dimensions in the broader society that
influence industry and the firms within it
Economic

Sociocultural
Global
Technological
Political/legal
Demographic

The Firm
Micro
Environment

Meso
Environment

Macro
Environment

Planning for the Future

Dynamism
Complexity

Unpredictability
Scenario Planning: based on grouping of
key environmental factors.

Low

Intensity
High

Dynamism

Low
Frequency
High
Low

High

No. of factors
(heterogeneity, diversity)
Complexity

Low
Relatedness of factors
High
Linear Cyclical
Linear & Cyclical
Unclear data
Ignorance of data

Data not available

Unpredictability

Environmental
Turbulence

Scenarios in Practice
Clear enough future

Alternate futures

A range of futures

True ambiguity

A single forecast
precise enough for
determining strategy

A few discrete
outcomes that define
the future

A range of possible
outcomes but no
natural scenarios

No basis to forecast the

future

Traditional Strategy
Tool Kit

Decision Analysis;
Option Valuation
Models;
Game Theory;
Scenario Planning

Latent Demand
Research;
Technology
Forecasting;
Scenario Planing

Analogies and Pattern

Recognition;
Nonlinear Dynamic
Models

What can be
known

Analytic tools

Courtney, Kirkland and Viguerie (1997)

Flexible Firm and Fitting With The

Environment
World becoming increasing turbulent - ability of
firms to respond is determined by whether they
have rigid or flexible organizational forms and
prevailing social structures.
Real challenge where macro-forces demand change
and yet the firm is structurally rigid and resistant to
alteration.
Structural rigidities impede change and cause
Strategic Drift- firms begin to fall out of alignment
with the changing business context.

Using an ESTEMPLE analysis

Identify the macro-environmental drivers for
change in the piano industry:
ESTEMPLE analysis shows substantial changes in the
macro environment.

Technology
Social Context
Media
Politically and Economically

Construct an impact matrix to show how these

changes affected Broadwoods and its main competitor,
Steinway.
Key macro influences

Broadwoods

Steinway

Innovations in technology
-iron frame
- heavier strings
- superior key action

Low investment in R&D

--

High investment in R&D and

willingness to experiment
++

Convergence of customer requirements

Many diverse products

--

Central product planing

++

Customers want more value for money

High labor costs

--

Beginning of automation
++

Europeanestablishment norms
Technicians well respected Links
-UK music press favored
Up-starts
with great composers
Broadwoods
-++
-Establishment used to "Broadwoods sound"
Political/Social
-Decay of the British Empire
Total

Contracting markets
--

Opportunity
+
-5

Industry Environment
Set of factors directly influencing a firm and
its competitive actions and competitive
responses

Competitor Environment
All of the companies that the firm competes against.

Analysis of the External Environments

General environment
Focused on the future
Industry environment

Focused on factors and conditions influencing a

firms profitability within an industry
Competitor environment
Focused on predicting the dynamics of competitors
actions, responses and intentions

Opportunities and Threats

Opportunity
A condition in the general environment that if
exploited, helps a company achieve strategic
competitiveness

Threat
A condition in the general environment that may
hinder a companys efforts to achieve strategic
competitiveness

External Environmental Analysis

A continuous process which includes
Scanning for early signals of potential
changes and trends in the general environment

Monitoring changes to see if a trend emerges from

among those spotted by scanning
Forecasting projections of outcomes based on
monitored changes and trends
Assessing the timing and significance of changes
and trends on the strategic management of the
firm

General Environment
The Economic Segment

The Socio-cultural Segment

Inflation rates

Women in the workplace

Interest rates

Workforce diversity

Trade deficits or surpluses

Budget deficits or surpluses

Attitudes about quality of

work-life

Personal savings rate

Concerns about environment

Business savings rates

Shifts in work and career

preferences

Gross domestic product

Shifts in product and service

preferences

General Environment
The Global Segment

The Technological Segment

Important political events

Product innovations

Critical global markets

Applications of knowledge

Newly industrialized countries

and emerging markets

Focus of private and

government-supported R&D
expenditures

Different cultural and

institutional attributes

New communication
technologies

General Environment
The Political/Legal Segment

The Demographic Segment

Antitrust laws

Population size

Taxation laws

Age structure

Deregulation philosophies

Geographic distribution

Labor training laws

Ethnic mix

Educational philosophies and

policies

Income distribution

Industry Environment
Industry Defined
A group of firms producing products that are close
substitutes
Firms that influence one another
Includes a rich mix of competitive strategies
that companies use in pursuing strategic
competitiveness and above-average returns

The Five Forces of Competition Model

Barriers to entry
A barrier to entry is any factor that
Increases the costs born by potential entrants
(relative to incumbents), after they enter the
market
Decreases the market share potential entrants
might receive upon entering the industry
Other factors
Trade restrictions (tariffs, quotas, voluntary
export restraints, infant industry protection,
embargoes)
Government regulation of industries
Industry certification boards (CPAs, Actuaries)

Barriers that Increase Cost

Capital markets (requires inefficient capital
markets)
Proprietary technology (patents, copyrights,
trade secrets)

Know-how (knowledge, routines, capabilities)

Access to raw materials (unanticipated value)
Geographic locations
Economies of scale
Learning by doing

Barriers Limiting Market Share

Product differentiation
Advertising/Brand image
Access to distribution
Customer switching costs
Expected retaliation

Barriers to Entry
o Economies of Scale
o Marginal improvements in efficiency that a firm experiences as it
incrementally increases its size
Product differentiation

Capital Requirements

Unique products

Physical facilities

Customer loyalty

Inventories

Products at competitive prices

Marketing activities

Switching Costs
One-time costs customers
incur when they buy from a
different supplier
New equipment
Retraining employees
Psychic costs of ending a
relationship

Availability of capital
Access to Distribution Channels
Stocking or shelf space
Price breaks
Cooperative advertising
allowances

Barriers to Entry (contd)

Cost Disadvantages Independent of
Scale
Proprietary product
technology
Favorable access to raw
materials
Desirable locations

Government policy
Licensing and permit
requirements
Deregulation of industries
Expected retaliation
Responses by existing
competitors may depend on a
firms present stake in the
industry (available business
options)

Power of Suppliers
Suppliers deliver inputs such as
Labor
Management
Technology
Materials

Suppliers influence our costs through the

strength of their bargaining power

Bargaining Power of Suppliers

Supplier power increases when:
Suppliers are large and few in number
Suitable substitute products are not available
Individual buyers are not large customers of
suppliers and there are many of them
Suppliers goods are critical to buyers marketplace
success

Suppliers products create high switching costs.

Suppliers pose a threat to integrate forward into
buyers industry

Buyer/Customer Power &

Preferences
Buyers/Customers influence our prices
through:
Their ability to exercise bargaining power
over us industrial markets with few buyers

The strength of their preferences consumer

sovereignty and elasticity of demand

Bargaining Power of
Buyers/Customers
Buyer power increase when:
Buyers are large and few in
number
Buyers purchase a large portion of an industrys
total output
Buyers purchases are a significant portion of a
suppliers annual revenues
Buyers can switch to another product without
incurring high switching costs
Buyers pose threat to integrate backward into the
sellers industry

Threat of Substitute Products

Substitutes are defined by product function, not
by product form
The threat of substitute products increases when:
Buyers face few switching costs
The substitute products price is lower
Substitute products quality and performance are
equal to or greater than the existing product
Consumer tastes and preferences
Differentiated industry products that are valued by
customers reduce this threat

Intensity of Rivalry/Threat of Rivalry

Rivalry is the threat of established firms
competing away their economic profits
Price competition
Frequent introduction of new products
Intense advertising campaigns
Rapid competitive response

Intensity of Rivalry Among

Competitors
Industry rivalry increases when:
There are numerous or equally balanced
competitors
Industry growth slows or declines
There are high fixed costs or high storage costs
There is a lack of differentiation opportunities or
low switching costs

When the strategic stakes are high

When high exit barriers prevent competitors from
leaving the industry

Interpreting Industry Analyses

Suppliers and buyers have strong positions
Low entry barriers
Strong threats from substitute products
Intense rivalry among competitors

Unattractive
Industry
Low profit potential

Interpreting Industry Analyses

High entry barriers
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors

Attractive
Industry
High profit potential

Competitor Analysis
Competitor Intelligence
The ethical gathering of needed information and
data that provides insight into:
A competitors direction (future objectives)
A competitors capabilities and intentions
(current strategy)
A competitors beliefs about the industry (its
assumptions)
A competitors capabilities

Competitor Analysis
Components

Determining Current Strategy

Clustering, integrating, and developing themes from
a large set of actions and decisions are challenging
Idea Trees: DuPont chart or Pareto diagram
similar to Fishbone diagram used in quality
management.

Word of
Mouth

Friends

Critics

Reputation
Advertising

Efficiency
Price
Demand

Value

Supplier
Management
Quality

Car access

Parking

Non car

Shuttle

Accessibility

Ensure only relevant facts are included

Why should -------------- be eliminated from the
below list of WineRidge actions and decisions:

Made acquisitions in the US.

Grows grapes in Australia.
Exports to many countries.
Capability in premium red.
Sells 15 brands in Australia.
Joint venture in the US.

Export
International

Acquisition

JV

Current
Strategy

Domestic

15 brands
sold

Grape
growing