Topic 3 The External Environment is part of Strategic Management Model

1. Topic 3 The External Environmentis part of Strategic Management Model • 10/2/2014 • SCANNING AND MONITORING THE EXTERNAL ENVIRONMENT • FORMULATING STRATEGIES • IMPLEMENTING STRATEGIES • EVALUATING AND CONTROLLING STRATEGIES

2. The External AuditCan be described as:1. collecting and evaluating social-cultural, demographic, political/legal, economic , technological (general societal information) and collecting and evaluating 2. Industry/competitive/task information. • Scanning: Is looking for anything that might be important • Monitoring: Is looking at environment on a continuous basis

3. External Environmental Variables can be described as (O)Opportunities or (T)Threats Internal Environmental variables can be described as (S)Strengths or (W)weaknesses Together looking at external environment and internal environment is called SWOT analysis

4. External Societal • Should not be company specific • This information will be general information that is effecting most organizations in this or other industries. • Should not be industry specific • This information will not include what is happening in the industry among competitors in the industry, nor will it be information about specific technology the industry uses, nor government regulation of this industry in particular. It does not include the specific customers for the products of this industry.

5. When looking at Opportunities and Threats in the Societal and Industry external environments Information should be assessed as to whether it is a Strategic Issue orStrategic Factor Strategic Issues • External Variables that may affect the future environment of our organization Strategic Factors (are issues that we believe will have meaningful effect on our organization- we now call them strategic factors • Those strategic issues with high probability of occurrence and high probable impact on corporation are factors • Strategic Group: Group pursuing similar markets with similar products.

6. Probable Impact on Corporation Low High Medium High High Medium High Priority Priority Priority High Medium Low Probability of Occurrence Medium Priority Priority Priority Medium Low Low Low Priority Priority Priority Issues Priority Matrix is used to determine which issues are strategic factors

7. Scanning the External Societal and Competitive Environments Analysis of Societal Environment Economic, Sociocultural, Technological, Political-Legal Factors Market Analysis Community Competitor Analysis Analysis Supplier Analysis Selection of Strategic Factors Interest Group Governmental Analysis Analysis • Opportunities • Threats

8. Some Important Variables in the Societal Environment Economic GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability and 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

9. Each team needs to gather information on their assigned industry and present an integrated summary of their findings in their Case write-up and presentation. • See Handout - Ten(10) Outside Bibliographical Sources required. Pick sources that speak comprehensively about the industry. Sources should be several pages long if possible. Put number of pages at end of citation. • Review the several pages in the book that discuss indexes, and internet cites, and strategic planning programs. (in chapter 3)

10. External Industry/Task Environment • Success hinges on competition in industry. In industries that have a small amount of competition, and high profit margins-- success is relatively easy. • The following, according to Porter, is what drives industry competition. In our case industry analysis we will use the categories, demand, supply, competitive structure, government groups, and interest groups to analyze and industry.

11. 3 Potential Entrants Threat of New Entrants Relative Power of Unions, Governments, Industry etc. Other Bargaining Competitors Stakeholders Power of Buyers Buyers Suppliers Rivalry Among Bargaining Existing Firms Power of Suppliers Threat of Substitute Products or Services Substitutes Forces Driving Industry Competition by Michael E. Porter.

12. Intense rivalry among firms reduces profits and increases competitive pressures. • Factors effecting demand include: • Rate of growth in consumer needs • Alternative replacement products for consumers • Product or service characteristics • Elasticity of demand (how consumers are effected by a change in price (elastic or inelastic products) • Bargaining power of buyers • Rate of Industry Growth

13. Factors effecting Supply include: • Capacity of the industry • Availability and control of raw materials..parts • Number of competitors • Price levels of product • Economies of scale • Access to distribution channels

14. Factors Making Competitive Structure include: • What type of competition you are in (monopoly, oligopoly, monopolistic competition) • Stage in Product Life Cycle and Industry evolution • Threat of Substitutes • Threat of Entrant • Height of Entrance Barriers and Exit Barriers including those developed by governments • Diversity of Rivals • Switching Costs

15. Government Groups affecting an industry include: • State, county, city, and other governmental unit regulators. • Specific agencies set up to oversee and industry’s environmental practices, pricing policies, work rules, accounting requirements, safety, • Courts and legal practices (liability insurance) • Groups that set wages, employee taxes, disability insurance, work person’s compensation. Etc.,

16. Interest Groups studied when you study an industry include: • Customer representatives • Local community, city, state groups in which companies are located • Those effected by environmental pollution • Social action groups (e. g. MADD) • Groups effected by tax abatements of industry or direct governmental grants

17. High Red Lobster Olive Garden ChiChi's Perkins International House of Pancakes Ponderosa Bonanza Shoney's Denny's Country Kitchen Kentucky Fried Chicken Pizza Hut Long John Silver's Arby's Wendy's Domino's Dairy Queen Hardee's Taco Bell Burger King McDonald's Low Limited Menu Full Menu Product-Line Breadth Sometimes competitors in an industry see themselves in a competitive group.Mapping Strategic Groups in the U.S. Restaurant Chain Industry below is similar to perceptual maps in simulation Price

18. In Analyzing your competitors and your company, it should help to determine which Strategic Types you are dealing with • Defenders - improve existing efficiencies • Prospectors - broad lines innovators • Analyzers - (Defender & prospector depending on line) • Reactors - lack of consistent strategy

19. EnvironmentalScanning ForecastingFuture Trendsand Fashions PresentTrends andFashions Assumptionsfor StrategicPlanning andDecision Making We can scan and monitor all we want but in the end we don’t know what future is so we must Forecast

20. Popular Forecasting Techniques • Extrapolation • Brain storming • Expert opinion • Statistical modeling • Scenario writing • POM (Moving weighted averages) • Regression analysis

21. Industry Scenarios 1. Examine possible shifts in societal variable globally. 2. Identify uncertainties in each of the six forces of the task environment. 3. Make a range of plausible assumptions about future trends. 4. Combine assumptions into internally consistent scenarios. 5. Analyze the industry situation under each scenario. 6. Determine sources of competitive advantage under each scenario. 7. Predict competitors’ behavior under each scenario. 8. Select most likely scenario to use in strategy formulation.

22. External Factor Analysis Summary (EFE) ExternalStrategic Factors Rating Weighted Score Weight Comments 1 2 3 4 5 Opportunities Threats Total Weighted Score 1.00 1st determine your variables, 2nd determine weights, 3rd give a rating from 1-5 for the Variable’s influence on your strategy, 4th figure weighted scores 5th added weighted score which is your EFE rating

23. External Factor Analysis Summary (EFE): Maytag as Example ExternalStrategic Factors Rating Weighted Score Weight Comments 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 1 .20 .10 .05 .05 .10 .10 .10 .15 .05 .10 2 4 5 1 2 2 4 4 3 1 2 3 .80 .50 .05 .10 .20 .40 .40 .45 .05 .20 4 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 5 1.00 3.15