The External Environmental Think in terms of Opportunities and Threats - the “O” and “T” of TOWS Relate Strategic Objectives to “O” and “T” n increased sales and/or market share (Cereal) n new product offerings (Toys) n processing technology innovation (Semiconductors) n decreased environmental impact (Chemicals) Continually scan to identify “O’s” and “T’s”

The External Environmental n The Company should achieve Strategic Fit – What is needed to respond to changes in the external environment and what does the company possess to respond to these changes? – What does the company need and what does the external environment possess to provide to the company?

The External Environmental The General Environment n Demographic: age, ethnicity, household size, occupation n Economic: income distribution, inflation, interest rates, exchange rates, urbanization n Political/Legal: consumer and environmental protection, unions

The External Environmental The General Environment n Social and Cultural: conservatism/ liberalism, nesting, materialism n Technological: e-tailing, intranets, diffusion rates n Global: nationalism, transnational corporations, cultural differences

The External Environmental n “Age of Functionality” (Osborn, 2002) – Strategic Perspective – “What risk do you take?” n Honda’s Element n Chrysler’s PT Cruiser n Pontiac Vibe n Toyota Matrix – - To what degree does a company try to meet the needs of a increasingly fragmented market?

The External Environmental n What changes are going on in the General Environment that you think businesses need to pay attention to? – Are these changes only short term? Are they cyclical? Are they more long term and lasting?

The External Environmental The Industry Environment The following factors in an Industry… n Bargaining Power of Buyers n Bargaining Power of Suppliers n Threat of New Entrants n Threat of Substitute Products...Determine Intensity of Competitive Rivalry

The External Environmental Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Competitive Rivalry The Industry Environment

The External Environmental Threats of New Entrants decreases if barriers to entry are high...  Economies of Scale are high  Product Differentiation is high  Capital Requirements are high  Switching Costs are high  Access to Distribution Channels is limited  Cost Disadvantages Independent of Scale are high  Government Policy is restrictive  Expected Retaliation is high Threat of New Entrants

The External Environmental Suppliers are likely to be powerful if:  Supplier industry dominated by a few firms  Suppliers’ products have few substitutes  Buyer is not important customer  Suppliers’ product is an important input  Suppliers’ products are differentiated  Suppliers’ products have high switching costs  Supplier poses credible threat to forward integration Bargaining Power of Suppliers

The External Environmental Buyers are likely to be powerful if:  They are concentrated or purchases are large relative to seller’s sales  Purchase accounts for a significant fraction of supplier’s sales  Product unimportant to quality  Products are undifferentiated  Buyers face few switching costs  Buyers’ industry earns low profits  Buyer has full information  Buyer presents a credible threat to backward integration Bargaining Power of Buyers

The External Environmental The keys to evaluating Substitute Products are:  Products with improving price/performance tradeoffs relative to present industry products  For example:  Electronic security systems in place of security guards  and fax machines in place of overnight mail delivery Threat of Substitute Products

The External Environmental n Fresh & Co. (Yugoslavian fruit juice company) – Supply of packaging – only one supplier in country with limited styles. – Supply of raw material (fruits) – large number of small suppliers located throughout the country for most fruits, imports tropical – Limited, but increasing domestic incomes – Brand conscious younger generation – Health conscious parents

The External Environmental n Forecasting – perhaps the most challenging issue for business success – directly impacts financial planning and internal resource allocation – Based on a mix of hard data and luck/intuition – Use brainstorming, statistical modeling, and scenario planning.

The External Environmental n Forecasting – – For the simulation, consider n What is existing industry demand in each segment? n What market share of each segment does your company possess? n How much will the segment grow? n What will be the change (+ or -) in your market share of each segment? – Let’s take a look under Tutorials for an excellent description of doing Sales Forecasts in the Simulation!

The External Environmental n Future objectives: goals and risks, ability to achieve n Current strategy: competitive advantages n Retaliation: How will competitor(s) respond to your actions? n Assumptions: Can competitor(s) adapt to changing environment? n Capabilities: relative strengths and weaknesses? Understanding Competitors

The External Environmental n numerous and/or equally balanced competitors n slow growth industry n high fixed costs n high storage costs n lack of differentiation n capacity added in large increments n diverse competitors n high strategic stakes n high exit barriers Cutthroat Competition:

The External Environmental High Exit Barriers: Economic, strategic, and emotional factors that cause companies to remain in an industry even when future profitability is questionable. Include: specialized assets, fixed cost to exit (labor agreements), strategic relationships & networks, emotional links &/or history, government & social restrictions.

External Factor Analysis Summary

n External Factors: List the 8 to 10 most important opportunities and threats (developments in the General and Industry environments) facing the company. n Weight: Assign a weight to each External Factor from 1.0 (most important) to 0.0 (not important) based on the factor’s probable impact on the company’s current strategic position. All weights must sum to n Rating: Assign a rating to each factor from 5.0 (Outstanding) to 1.00 (Poor) based on the company’s current response to that particular factor.

External Factor Analysis Summary n Weighted Score: Multiply the weight times the rating to get the weighted score for each factor. n Comments: Describe (1) why you selected each External Factor and (2) how you estimated the weight and rating. n Total Weighted Score: Add the Weighted Scores for the External Factors to get the Total Weighted Score. The Total Weighted Score is useful as a comparison to other companies in the industry group. n See pages 73 and 74 in the text for more information.