strategic management chapter 3
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Strategic Mgt Ppt SlidesTRANSCRIPT
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Chapter 3Environmental Scanning
and
Industry Analysis
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It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. –Charles Darwin
External Assessment
Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo
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Environments
Environmental uncertainty:
The degree of complexitydegree of complexity plus the degree of changedegree of change existing in an organization’s external environment.
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Environments
Environmental scanning:
• The monitoring, evaluating, and disseminating of information
• from the external and internal environments to key people within the corporation
• to avoid strategic surprise and • ensure the long-term health of the firm.
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External Environment
External Environmental Variables:
Societal environmentSocietal environment:
General forces that do not directly touch on the short-run activities but often influence its long-run decisions.
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External Environment
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External Environment
Societal environment forcesSocietal environment forces:
• Economic forces– Regulate the exchange of materials, money, energy,
and information
• Technological forces– Generate problem-solving inventions
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External Environment
Societal environment forcesSocietal environment forces:
• Political-legal forces– Allocate power, provide laws and regulations
• Sociocultural forces– Regulate values, norms, and customs
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Societal Environment: Important Variables
•Economic
•GDP trends
•Interest rates
•Money supply
•Inflation rates
•Unemployment levels
•Wage/price controls
•Devaluation/ revaluation
•Energy availability & cost
•Disposable and discretionary income
•Technological
•Total government spending for R&D
•Total industry spending for R&D
•Focus of technological efforts
•Patent protection
•New products
•New developments in technology transfer from lab to marketplace
•Productivity improvements through automation
•Political-Legal
•Antitrust regulations
•Environmental protection laws
•Tax laws
•Special incentives
•Foreign trade regulations
•Attitudes toward foreign companies
•Laws on hiring and promotion
•Stability of government
•Sociocultural
•Lifestyle changes
•Career expectations
•Consumer activism
•Rate of family formation
•Growth rate of population
•Age distribution of population
•Regional shifts in population
•Life expectancies
•Birth rates
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External Environment
Sociocultural Trends
• Increasing environmental awareness• Growth of the seniors market• Impact of Generation Y boomlet• Decline of the mass market• Changing pace and location of life• Changing household composition
• Increasing diversity of workforce and markets
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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 the corporation– Low to High
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Issues Priority Matrix
High Priority
HighPriority
High Priority
Medium Priority
Medium Priority
Medium Priority
Probable Impact on Corporation
Low Priority
Low Priority
Low Priority
LowMediumHigh
Med
ium
Hig
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ow
Pro
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y o
f O
ccu
rren
ce
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External Environment
External Strategic Factors
Key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation.
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External Environment
External Environmental Variables:
Task environmentTask environment:Those elements or groups that directly affect the
corporation and, in turn, are affected by it. The task environment is the industry within which that firm operates.
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External Environment
External Environmental Variables:
Industry analysisIndustry analysis:
An in-depth examination of key factors within a corporation’s task environment.
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Industry Analysis
IndustryA group of firms producing a similar product or service, such as soft drinks or financial services.
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Industry Analysis
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Industry Analysis Porter’s approach:Porter’s approach:
Assess the six forces --• 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 --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 --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/ServicesThreat of Substitute Products/Services
Substitute Products:Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry.
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Industry Analysis
Bargaining Power of Buyers --Bargaining Power of Buyers --
Buyer is powerful when:• Buyer purchases large proportion of seller’s products• Buyer has the potential to integrate backward• Alternative suppliers are plentiful• Changing suppliers costs very little• Purchased product represents a high percentage of a buyer’s costs• Buyer earns low profits• Purchased product is unimportant to the final quality or price of a
buyer’s products
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Industry Analysis
Bargaining Power of Suppliers --Bargaining Power of Suppliers --
Supplier is powerful when:• Supplier industry is dominated by a few companies but sells
to many• Its product is unique and/or has high switching costs• Substitutes are not readily available• Suppliers are able to integrate forward and compete directly
with present customers• Purchasing industry buys only a small portion of the
supplier’s goods.
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Industry Analysis
Industry EvolutionIndustry Evolution
Fragmented Industry –No firm has large market share and each firm serves only a small piece of the total market in competition with others.
Consolidated Industry –Dominated by a few large firms, each of which struggles to differentiate its products from the competition.
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Continuum of International Industries
Multidomestic
Industry in which companies tailor their products to the specific needs of consumers in a particular country.
• Retailing
• Insurance
• Banking
Global
Industry in which companiesmanufacture and sell the same products, with only minor adjustments made for individual countries around the world.
Automobiles
• Tires
• Television sets
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Industry Analysis
Global IndustriesGlobal IndustriesIndustry primarily multidomestic or primarily global based on:
– Pressure for coordination– Within the multinationals in that industry
– Pressure for local responsiveness– Individual country markets
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Industry Analysis
Strategic GroupsStrategic Groups
Defined:
A set of business units or firms that pursue similar strategies with similar resources.
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Industry Analysis
Strategic TypesStrategic Types
Defined:
Category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy.
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Industry Analysis
Strategic Types –Strategic Types –
Categorized by one of four general strategic orientations:
• Defenders– Companies with a limited product line; focus on
improving efficiency of current operations• Prospectors:
– Companies with fairly broad product lines; focus on product innovation and market opportunities.
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Industry Analysis
Strategic Types Strategic Types (continued)––
• Reactors:
– Corporations that lack a consistent strategy-structure-culture relationship.
• Analyzers:– Corporations that operate in at least two different product-
market areas – one stable and one variable.
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Research Findings
“Approximately 20% of a firm’s profitability can be explained by the industry,
whereas 36% of the variance in profitability is attributed to the firm’s internal factors”
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External Factor Analysis Summary (EFAS)
ExternalFactors Weight Rating
Weighted Score Comments
1 2 3 4 5
1.00
Opportunities
Threats
Total Weighted Score
Notes: 1. List opportunities and threats (5–10) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s 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 company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s 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.
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Industry Analysis (EFE)
Five-Step process:Five-Step process:
• List key external factors (10-20)– Opportunities & threats
• Assign weight to each (0 to 1.0)– Sum of all weights = 1.0
• Assign 1-4 rating to each factor– Firm’s current strategies response to the factor
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Industry Analysis (EFE)
Five-step process:Five-step process:
• Multiply each factor’s weight by its rating– Produces a weighted score
• Sum the weighted scores for each– Determines the total weighted score for the
organization.
• Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5
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.201.20 Govt. Administration
.202.10 Bad media exposure from FDA
.102.05 Special interest groups against the industry
.153.05 Production limits on tobacco
.202.10 Legislation against the tobacco industry
Threats
.303.10 More social pressure to quit smoking
2.101.00TOTAL
.604.15 Increased number of immigrants (smokers)
.051.05 Astronomical Internet growth
.153.05 Increased demand
.151.15 Global markets untapped
Weighted
scoreRatingWeight
US Smokeless Tobacco Co.—Key External Factors
Opportunities
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External Factor Analysis Summary (EFAS)Maytag Example
External Factors Weight RatingWeighted Score Comments
1.00
Opportunities• Economic integration of
European Community
• Demographics favor quality appliances
• 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 Australia
3.15
1 2 3 4 5
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Industry Analysis (EFE)
Total weighted score of 4.0 =
Organization response is outstanding to threats & opportunities
Total weighted score of 1.0 =
Firm’s strategies not capitalizing on opportunities or avoiding threats
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Industry Analysis (EFE)
UST (in the previous example), has a total weighted score of 2.10
• indicating that the firm is below average in its effort to pursue strategies
• that capitalize on external opportunities and avoid threats.
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Industry Analysis (EFE)
Important
• Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
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Industry Analysis (CPM)
Competitive Profile Matrix
• Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position
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Industry Matrix
Key Success Factors Weight
Company ARating
Company AWeighted Score
Company BRating
Company BWeighted 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 by permission.
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(CPM) Procter Avon L’Oreal &
Gamble
2.803.25
3.15
1.00Total
0.1530.20
40.05
10.05Market Share
0.4020.40
20.80
40.20Global Expansion
0.2020.40
40.40
40.10Customer Loyalty
0.4530.45
30.60
40.15Financial Position
0.3030.30
30.40
40.10Management
0.4040.30
30.30
30.10Price Competition
0.3030.40
40.40
40.10Product Quality
0.6030.80
40.20
10.20Advertising
ScoreRating
Score
Rating
Score
Rating
Weight
Critical Success Factor
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Industry Analysis
Forecasting Techniques:Forecasting Techniques:
• Extrapolation• Brainstorming• Expert opinion• Statistical modeling• Scenario writing
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Origin and Nature of BusinessEach term is distinct and has a specific meaning which define the scope and degree
of interaction with their operations outside of their “home” country.• International companies
– are importers and exporters, – they have no investment outside of their home country.
• Multinational companies – have investment in other countries, – do not have coordinated product offerings in each country. – More focused on adapting their products and service to each individual local market.
• Global companies – have invested and are present in many countries. – Market their products through the use of the same coordinated image/brand in all
markets. – Generally one corporate office that is responsible for global strategy. Emphasis on
volume, cost management and efficiency. • Transnational companies
– Much more complex organizations. – Have invested in foreign operations, – have a central corporate facility but give decision-making, R&D and marketing
powers to each individual foreign market.
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Evolving motivations: Changing perspectives
GlobalCoordinationIntegration
High
High
Low
Low
Global
International
Transnational
Multinational
Local Responsiveness
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Env. of MNC:
The Classification of Business
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Eth nocentric Attitude Polycen tric Attitude
Regiocentric Attitude Geocen tric Attitude
H Qs Orientation to ward subsidiaries (source : adapta tion libre de He ena n D.A., Per lmutter H.W. , Multinational Organiza tionDevelopment , Addison Wesley Publish ing , 1979)
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