External Factor Evaluation ANalysis

Prentice Hall, Inc. © 2008 4-1

STRATEGIC MANAGEMENT & BUSINESS POLICY11TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 4 Environmental Scanning and Industry Analysis

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Defined:

The degree of complexitydegree of complexity plus the degree of changedegree of change existing in an organization’s external environment.

Environmental uncertainty

Defined:

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.


Environmental Scanning

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Societal environment:Societal environment:

General forces that do not directly touch on the short-run activities but often influence its long-run decisions.




Societal environment --

–Economic forces–Technological forces–Political-legal forces–Sociocultural forces


Societal Environment

Economic Forces --

–Regulate exchange of materials, money, energy and information



Technological Forces --

–Generate problem-solving inventions



Political-legal Forces --

–Allocate power; provide laws and regulations



Sociocultural Forces --

–Regulate values, mores, and customs of society


Variables in Societal Environment


Demographic Trends


Transformational Sociocultural Trends

8 Current Trends –

–Increasing environmental awareness–Growing health consciousness–Expanding seniors market–Impact of the Generation Y boomlet–Declining mass market–Changing pace and location of life–Changing household composition–Increasing diversity of workforce & market


International Societal Environments

• Each country or group of countries in which a company operates presents a unique societal environment with a different set of economic, technological, political-legal, and sociocultural variables for the company to face.


International Societal Environments


Task Environment

Task environment --

–Elements or groups that directly affect a corporation and are affected by it


Task Environment

Industry Analysis --

–In-depth examination of key factors within a corporation’s task environment


Scanning the Task Environment


External Strategic Factors

Strategic myopia --

–Willingness to reject unfamiliar as well as negative information


Issues Priority Matrix


Issues Priority Matrix

1. Identify likely trends:• Societal and task environments

• Strategic environmental issues

2. Assess probability of trends occurring• Low to High

3. Ascertain likely impact of trends on the corporation• Low to High

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Defined:

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.

External Strategic Factors

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IndustryA group of firms producing a similar product or service, such as soft drinks or financial services.

Industry analysis: Analyzing the Task Environment

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Porter’s approach:Porter’s approach:

Assess the six forces --1. Threat of new entrants

2. Rivalry among existing firms

3. Threat of substitute products

4. Bargaining power of buyers

5. Bargaining power of suppliers

6. Relative power of other stakeholders





Porter’s Approach to Industry Analysis

Threat of New Entrants –Possible barriers to entry

–Economies of scale–Product differentiation–Capital requirements (Boeing and Airbus)

–Switching costs (software programs)

–Access to distribution channels–Cost disadvantages (operating system (MS-DOS)

–Government policy



Rivalry Among Existing Firms –Rivalry is related to several factors including:

–Number of competitors–Rate of industry growth–Product or service characteristics–Amount of fixed costs (airlines)–Capacity–Height of exit barriers–Diversity of rivals

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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.

Examples– Email & fax– Internet &video stores– Bottled water & cola


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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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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.




Relative Power of Other StakeholdersA six force should be added to Porter’s list• government• local communities• creditors (if not included with suppliers)• trade associations• special-interest groups• unions• complementora company or industry which whose product works well with a firm’s product and without which the product would lose much of its value such as:• Intel and Microsoft• the tire and automobile industries


Industry 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.


Industry Evolution

Consolidated Industry –

Dominated by a few large firms, each of which struggles to differentiate its products from the competition.


International Risk Assessment

Continuum of International Industries

The factors that tend to determine whether an industry will be multidomestic or primary global are:1.Pressure for coordination within the MNCs operating in that industry2.Pressure for local responsiveness on the part of individual country markets

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Defined:

A set of business units or firms that pursue similar strategies with similar resources.

Strategic Groups


Strategic Groups

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Identifying strategic groups

price

low

HighHigh

Product line breadthLimited menu Full menu

Strategic Groups

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Defined:– Category of firms based on a common strategic

orientation and a combination of structure, culture, and processes consistent with that strategy.

– General types are: 1.Defenders2.Prospectors3.Analyzers4.Reactors

Strategic Types


Strategic Types

1. Defenders• efficiency

2. Prospectors • product innovation and market opportunities

3. Analyzers• Works in at least two different product-market

areas, one stable (efficiency) and one variable (innovation). such as multidivisional firms (e.g. IBM and P&G)

4. Reactors• Lack a consistent strategy-structure-culture

relationship such as major US airlines

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External Factor Analysis Summary (EFAS)

ExternalFactors

Weight of importance

Firm’s response 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.

Using key success factors to create an industry matrix-- EFAS

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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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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.


Industry Matrix

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• Using EFAS, choose a local organization and analyse its external environment.

–Group work–Written assignment–Presentation–Deadline: The first lecture of the next

week

Exercise

Documents

External Factor Evaluation ANalysis