Lecture 02 External Analysis

• External Analysis: Key concept in strategic management focusing on evaluating external factors impacting a business.

Page 2: The Strategic Management Process

• Step 1: Define current business mission and objectives.

• Step 2: Perform external and internal audits.

• Step 3: Formulate strategies based on audits.

• Step 4: Translate strategies into operational goals.

• Step 5: Formulate operational tactics.

• Step 6: Implement strategies and tactics.

• Step 7: Evaluate performance against strategic goals.

Page 3: Inputs from Internal Analysis

• Identify Resources: Valuable, rare, difficult to imitate, and substitute resources.

• Capabilities: Understand the firm's internal capabilities.

• Strengths and Weaknesses: Conduct analysis to identify strengths and weaknesses.

• Value Chain Analysis: Analyze the value-adding processes in the business.

• Business Level Strategies: Focus on potential strengths/weaknesses and market opportunities.

• Inputs from External Analysis:

  • Macro Environment Analysis

  • Industry Analysis

  • Competitors’ Objectives and Strategies

  • SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats.

  • Strategic Groups Analysis: Examine similar firms within an industry.

Page 4: Environmental Analysis Levels

• Levels of Analysis:

  • Firm Level: Internal resources and capabilities.

  • Industry Level: Competitive forces shaping the industry.

  • Macro Level: External environmental factors impacting all players in the industry.

• Determining Opportunities and Threats: Analyze external factors affecting industry and firm performance.

Page 5: Environmental Analysis Tools

• Types of Analysis:

  • PEST Analysis: Political, Economic, Social, Technological factors.

  • SWOT Analysis: Assess internal inputs for strength and weaknesses.

  • Porter’s Five Forces Analysis: Analyze competitive environment.

  • Key Success Factors: Identify critical areas for competitive success.

  • Strategic Group Mapping: Visual representation of competitive positioning.

Page 6: Macro Environment (Socio-Cultural & Political/Legal)

• Socio-Cultural Segment Factors:

  • Women in the workforce, attitudes about quality of work life, workforce diversity.

  • Concerns about the environment, shifts in work preferences.

• Political/Legal Factors:

  • Antitrust laws, taxation, labor laws, deregulation.

Page 7: Macro Environment (Economic & Technological)

• Economic Factors:

  • Inflation rates, interest rates, trade deficits, savings rates, GDP.

• Technological Factors:

  • Innovations, R&D focus, communication technologies.

Page 8: Macro Environment (Global & Demographic)

• Global Factors:

  • Key global political events, new markets, differences in culture and institutional behavior.

• Demographic Factors:

  • Population size, age structure, geographic distribution, ethnic mix.

Page 9: Environmental Trends Impacting Industries

• Industry Trends:

  • Aging population, rising affluence, health care demand.

• Sociocultural Trends:

  • More women in the workforce, increased health and fitness awareness.

• Political/Legal Trends:

  • Tort reform impacts on legal services, ADA implications in various sectors.

• Technological Trends:

  • Genetic engineering implications across various industries.

• Economic Trends:

  • Increasing interest rates and their implications on different sectors.

Page 10: SWOT Analysis Overview

• Strengths: Internal advantages.

• Weaknesses: Internal limitations.

• Opportunities: External potential advantages.

• Threats: External challenges.

• Strategy Alignment: Ensure strategies align with internal capabilities and external opportunities.

Page 11: Detailed SWOT Analysis Example

• Resource Strengths:

  • Core competencies, strong brand presence, economies of scale.

• Resource Weaknesses:

  • Lack of managerial talent, obsolete facilities, debt issues.

• Opportunities:

  • Expansion, new technology adoption, regulatory changes.

• Threats:

  • Competition, market saturation, adverse regulations.

Page 12: Porters Five Forces Model of Competition

• Competitive Forces:

  • Rivalry: Intensity among existing competitors.

  • New Entrants: Threat posed by new companies entering the market.

  • Substitutes: Competitive pressure from alternative products.

  • Suppliers: Bargaining power of suppliers.

  • Buyers: Bargaining power of purchasers.

Page 13: Analyzing the Five Competitive Forces

• Assessment Criteria:

  • Strength of each force: strong, moderate, weak.

  • Understanding how each force creates competitive pressure.

Page 14: Rivalry Among Competing Sellers

• Key Drivers:

  • Price, quality, innovation, customer service, advertising.

• Competitive Tools: How firms compete to gain market share.

Page 15: Factors Affecting Rivalry Strength

• When Rivalry is Strong:

  • Many equally sized firms, slow market growth, low switching costs.

Page 16: Competitive Force of Threat of New Entry

• Threat Level: Depends on entry barriers and reactions from existing firms.

Page 17: Common Barriers to Entry

• Types of Barriers:

  • Economies of scale, brand loyalty, capital requirements, regulatory obstacles.

Page 18: Assessing Substitute Products Threat

• Indicators of Threat:

  • Growth in substitution sales, low customer switching costs.

Page 19: Importance of Substitute Products

• Customer Preference: Attraction to substitutes from competing industries affects market dynamics.

Page 20: Competitive Force of Suppliers

• When Suppliers are Powerful:

  • Product significance, high switching costs, unique components.

Page 21: Competitive Force of Buyers

• When Buyers are Strong:

  • Large purchases, ability to integrate backwards, low switching costs.

Page 22: Implications of the Five Forces

• Unattractive Environment: High rivalry, low entry barriers, strong substitutes, powerful buyers/suppliers.

• Ideal Environment: Moderate rivalry, high barriers, weak substitutes.

Page 23: Key Success Factors (KSF)

• Definition: Elements crucial for competitive success across strategic groups.

• Strategic Focus: Understanding and excelling at KSFs to ensure long-term success.

Page 24: Strategy and KSFs

• Strategic Foundation: Aiming to excel at industry KSFs can drive success in the market.

Page 25: Example of KSFs in the Beer Industry

• Key Success Factors:

  • Brewing capacity, distribution networks, advertising effectiveness.

Page 26: Strategic Group Mapping

• Purpose: To visualize competitive positions and strategy similarities among industry players.

Page 27: Example: Strategic Group in the Automobile Industry

• Competitors: Highlight of various automobile brands across a spectrum of product lines.

Page 28: Constructing a Strategic Group Map

• Procedure: Detailed steps for mapping competitive positioning using differentiating characteristics.

Page 29: Guidelines for Strategic Group Maps

• Selecting Variables: Must be core competitive differentiators.

Page 30: Interpreting Strategic Group Maps

• Insights: Understanding competition can aid in strategizing effectively against rivals.

Page 31: Strategic Group Positioning Factors

• Contextual Analysis: Price versus quality, product line breadth, and competitive gap analysis.