EXTERNAL
ENVIRONMENT
ANALYSIS
Kenichi Ohmae
“Quote”
Strategic Management Model
Environmental Strategy Strategy Evaluation
Scanning Formulation Implementation and Control
Mission
External
Reason for
Societal
existence
Environment Objectives
General Forces
What results
to
Task Strategies
accomplish
Environment
by when Plan to
Industry Analysis
achieve the Policies
mission &
Internal objectives Broad
guidelines for Programs
Structure decision Process
Chain of Command making Activities to monitor
needed to performance
Budgets
Culture accomplish and take
Beliefs, Expectations, a plan corrective
Cost of the
Values action
programs
Procedures
Resources
Sequence
Assets, Skills
of steps
Competencies,
needed to
Knowledge do the job Performance
Feedback/Learning
Definition
Monitoring and interpreting sweep of social,
political, economic, ecological, and technological
events to spot budding trends that could
eventually impact industry
Purpose
Raise consciousness of managers about potential
developments that could
Have important impact on industry conditions
Pose new opportunities and threats
Focuses on two considerations
◦ A company’s INTERNAL ENVIRONMENT
Its competencies, capabilities,
resource strengths and weaknesses,
and competitiveness
◦ A company’s EXTERNAL ENVIRONMENT
Industry and competitive conditions
MACROENVIRONMENT
The Economy
at Large
Suppliers Substitutes
COMPANY
Rival
Buyers
Firms
New
Entrants
IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT
Changes in long-term industry growth rate
Changes in who buys the product and how they use it
Product innovation
Technological change/ process innovation
Marketing innovation
Entry or exit of major firms
Diffusion of technical knowledge
Increasing globalization of industry
Changes in cost and efficiency
Market shift from standardized to differentiated
products (or vice versa)
New regulatory policies and/or government legislation
Changing societal concerns, attitudes, and lifestyles
Changes in degree of uncertainty and risk
1. Identify those forces likely to exert
greatest influence over next 1 - 3 years
Usually no more than 3 – 4 factors qualify
2. Assess impact
◦ What difference will the
forces make (favorable?
unfavorable?)
Scanning the External Environment
Analysis of Societal Environment
Economic, Sociocultural, Technological, Political-Legal Factors
Market
Analysis
Customer Competitor
Analysis Analysis
Supplier
Analysis
Selection of
Interest Group Strategic Factors Governmental
Analysis Analysis
• Opportunities
• Threats
Prentice Hall, 2000 Chapter 3 59
Substitute Products
(of firms in
other industries)
Rivalry
Suppliers
Among
of Key Buyers
Competing
Inputs
Sellers
Potential
New
Entrants
Assess strength of each competitive force (Strong?
Moderate? Weak? )
◦ Rivalry among competitors
◦ Substitute products
◦ Potential entry
◦ Bargaining power of suppliers
◦ Bargaining power of buyers
Explain how each force acts to create competitive
pressure
Decide whether overall competition is brutal, fierce,
strong, normal/moderate, or weak
Usually the most powerful of the five forces
Check which weapons of competitive rivalry are most
actively used by rivals in jockeying for position
◦ Price
◦ Quality
◦ Performance features offered
◦ Customer service
◦ Warranties/guarantees
◦ Advertising/promotions
◦ Dealer networks
◦ Product innovation
Seriousness of threat depends on
◦ Barriers to entry
◦ Reaction of existing firms to entry
Barriers exist when
◦ Newcomers confront obstacles
◦ Economic factors put potential entrant at a
disadvantage relative to incumbent firms
Economies of scale
Inability to gain access to specialized technology
Existence of learning/experience curve effects
Strong brand preferences and customer loyalty
Capital requirements and/or other specialized resource
requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies, tariffs, trade restrictions
Threat of entry is stronger when:
Entry barriers are low
Sizable pool of entry candidates exists
Incumbents are unwilling or unable to contest
a newcomer’s entry efforts
Newcomer can expect to earn attractive profits
Substitutes matter when customers are attracted
to the products of firms in other industries
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic vs. Glass vs. Metal
Newspapers vs. TV vs. Internet
Sales of substitutes are growing rapidly
Producers of substitutes are planning to
add new capacity
Their profits are up
The competitive threat of substitutes is
stronger when they are:
Readily available
Attractively priced
Believed to have comparable or better
performance features
Customer switching costs are low
Suppliers are a strong competitive force when:
◦ Item makes up large portion of product costs
◦ Item is crucial to production process, and/or significantly
affects product quality
◦ It is costly for buyers to switch suppliers
◦ They have good reputations and growing demand
◦ They can supply a component cheaper
◦ They do not have to contend with substitutes
◦ Buying firms are not important customers
Suppliers are a stronger force the more
they can exercise power over:
Prices charged
Quality/performance of items supplied
Amounts and delivery times
Buyers are a strong competitive force when:
◦ They are large and purchase a sizable percentage of
industry’s product
◦ They buy in volume quantities
◦ They can integrate backward
◦ Industry’s product is standardized
◦ Their costs in switching to substitutes or other brands are
low
◦ They can purchase from several sellers
◦ Product purchased does not save buyer money
Buyers are a stronger competitive force the more
they have leverage to bargain over:
Price
Quality
Service
Other terms and conditions of sale
Competitive environment is
unattractive when:
◦ Rivalry is strong
◦ Entry barriers are low
◦ Competition from
substitutes is strong
◦ Suppliers and customers have
considerable bargaining power
Competitive environment is ideal when:
◦ Rivalry is moderate
◦ Entry barriers are high
◦ Good substitutes do not exist
◦ Suppliers and customers are in a
weak bargaining position
Purpose : Gain information and understanding about:
• Overall industry
• Specific other firms, as a basis for our own strategy analysis
Open Sources:
• Trade press, shows, websites and company publications
• Annual reports, companies press releases
• Industry conferences
Semi-Open Resources: Specialized industry consultants
• Having comprehensive information on volumes, prices etc..
• Analyzing trends& scenarios
• Cannot disclose all information on specific company
Your Own Resources: In interaction between your company and other industry firms
• Marketing contracts
• Purchasing contracts
• Technical people at conferences
• Professional association
• Beware of ethical issues; reciprocal informal issues
Present Forecasting Assumptions
Environmental for Strategic
Trends and Future Trends
Scanning Planning and
Fashions and Fashions
Decision Making
Use the issue priority matrix in this way:
• Identify trends emerging in the societal and task environment
• Assess the probability of these trend actually occurring
• Attempt to estimate the likely impact of these trends
A corporation external strategic factors are: those key
environment trends that are judged to have both a medium to
high probability of occurrence and a medium to high of impact
on the organization.
High priority factors categorized as opportunities and threats
and are included in strategy formulation.
Probable Impact on Corporation
High Medium Low
High High Medium
High Priority Priority Priority
Probability
of Occurrence
Medium High Medium Low
Priority Priority Priority
Medium Low Low
Low Priority Priority Priority
Issues Priorities Matrix
Those factors that can affect significantly the overall competitive positions of all
companies within any particular industry
Industry Matrix
Key Success Company A Company A Company B Company B
Factors Weight Rating Weighted Score Rating Weighted Score
1 2 3 4 5 6
Total 1.00
Synthesis of External Factors
To summarize the external factors into generally accepted categories of opportunities and threats
the so called EFAS table can be established.
External Factors Analysis Summary (EFAS): Maytag Corporation
External Factors Weight Rating Weighted Comments
Score
1 2 3 4 5
Opportunities
Threats
Total Score
