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Chapter 3Environmental Scanning and
Industry Analysis
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Chapter 3Wheelen/Hunger
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External Environment
External Strategic Factors
Factors influencing the choice:
Personal values of managers Functional experience of managers
Success of current strategies
Strategic myopia Willingness to reject unfamiliar as well as
negative information
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External Environment
Issues Priority Matrix Identify likely trends:
Societal and task environments Strategic environmental issues
Assess probability of trends occurring Low to High
Ascertain likely impact of trends on thecorporation Low to High
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Issues Priority Matrix
HighPriority
High
Priority
High
Priority
MediumPriority
Medium
Priority
Medium
Priority
Probable Impact on Corporation
Low
Priority
LowPriority
Low
Priority
LowMediumHigh
Probability
ofOccurre
nce
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External Environment
External Strategic Factors
Defined:
Key env ironmental trends that are
judged to have bo th a med ium to h igh
probabi li ty of occurrence and a
medium to high probabi li ty of impacton the corporation.
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Industry Analysis
Industry
A g roup o f fi rms produc ing a simi lar
product or serv ice, such as sof t dr inks
or f inanc ial services.
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Industry Analysis
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Industry Analysis
Porters approach:
Assess the six fo rces --
Threat of new entrants Rivalry among existing firms
Threat of substitute products
Bargaining power of buyers
Bargaining power of suppliers
Relative power of other stakeholders
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Industry Analysis
Threat of New Entrants --
Barriers to entry: Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Size
Government Policy
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Industry Analysis
Rivalry Among Existing Firms --
Intense rivalry related to: Number of competitors
Rate of Industry Growth
Produce or Service Characteristics
Amount of Fixed Costs
Capacity
Height of Exit Barriers
Diversity of Rivals
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Industry Analysis
Threat of Substitute Products/Services
Substitute Products:
Those products that appear to be
di f ferent but can sat isfy the same need as
ano ther product. To the extent that
sw itching cos ts are low , subst i tutes can
have a stro ng effect on an industry .
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Industry Analysis
Bargaining Power of Buyers --
Buyer is powerful when: Buyer purchases large proportion of sellers products
Buyer has the potential to integrate backward
Alternative suppliers are plentiful
Changing suppliers costs very little
Purchased product represents a high percentage of abuyers costs
Buyer earns low profits
Purchased product is unimportant to the final quality orprice of a buyers products
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Industry Analysis
Bargaining Power of Suppliers --
Supplier is powerful when:
Supplier industry is dominated by a few companies butsells to many
Its product is unique and/or has high switching costs
Substitutes are not readily available
Suppliers are able to integrate forward and competedirectly with present customers
Purchasing industry buys only a small portion of thesuppliers goods.
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Industry Analysis
Industry Evolution
Fragmented IndustryNo firm has large market share and each f irm
serves on ly a small piece of the total market in
competi t ion wi th o thers.
Consolidated IndustryDom inated by a few large f i rms , each of w hich
struggles to di f ferent iate its produc ts from the
compet i t ion.
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Industry Analysis
Strategic Groups
Defined:
A set of bus iness uni ts or f i rms that
pu rsue sim i lar strategies withsim i lar resources.
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Industry Analysis
Strategic Types
Defined:
Category of f i rm s based on a common
strategic o r ientat ion and a combinat ion o f
stru ctu re, cu l ture, and pro cesses
cons istent wi th that strategy .
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Industry Analysis
Strategic Types
Catego r ized by one of fou r general strategic
or ientat ions:
Defenders
Companies with a limited product line;focus on improving efficiency of current
operations
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Industry Analysis
Strategic Types (continued)
Prospectors:Companies with fairly broad product
lines; focus on product innovation
and market opportunities.
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Industry Analysis
Strategic Types (continued)
Analyzers:Corporations that operate in at least
two different product-market areas
one stable and one variable.
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Industry Analysis
Strategic Types (concluded)
Reactors:Corporations that lack a consistent
strategy-structure-culture
relationship.
I d M i
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Industry Matrix
Key Success
Factors Weight
Company A
Rating
Company A
Weighted Score
Company B
Rating
Company B
Weighted Score
1 2 3 4 5 6
Total 1.00
Source:T. L. Wheelen and J. D. Hunger, Industry Matrix. Copyright 2001 by Wheelen and Hunger Associates. Reprinted bypermission.
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External Factor Analysis Summary (EFAS)
External
Factors Weight Rating
Weighted
Score Comments
1 2 3 4 5
1.00
Opportunities
Threats
Total Weighted Score
Notes: 1. List opportunities and threats (510) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2based 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 factorsweighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weightedscore 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.
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External Factor Analysis Summary (EFAS)
Maytag Example
External Factors Weight Rating
Weighted
Score Comments
1.00
Opportunities
Economic integration of
European Community
Demographics favor qualityappliances
Economic development of Asia
Opening of Eastern Europe
Trend to Super Stores
Threats
Increasing government regulations
Strong U.S. competition
Whirlpool and Electrolux strong
globally
New product advances
Japanese appliance companies
Total Scores
.20
.10
.05
.05
.10
.10
.10
.15
.05
.10
4
5
1
2
2
4
4
3
1
2
.80
.50
.05
.10
.20
.40
.40
.45
.05
.20
Acquisition of
Hoover
Maytag quality
Low Maytag presence
Will take time
Maytag weak in this
channel
Well positioned
Well positioned
Hoover weak globally
Questionable
Only Asian presence is
Australia3.15
1 2 3 4 5