Business Strategies Slides 4

4

External Analysis

1
Environments

Uncertainty:
The degree of complexity plus the degree of

change existing in an organization’s external
environment.
Uncertain, certain, turbulent, dynamic

environments
2
Certainty ( Stable) Environment
 All variables are known.

 No changes or only a little change in variables is
observed within a long period of time.
 All interesred parties understand each other.
 Decision makers are confident about the
success.
 Ex: Markets having products at the maturity
level of product life cycle.
Risk environment
(Moderately dynamic)
 Limited change in variables in time

 Interest groups may not understand each other
from time to time.
 New entrants into the market
 Increasing competition
 Small changes in technology
 Possibility of failure
 Probability calculations can be used
Uncertainty (Turbulent)
Environment
 Important changes in time

 Conflicts between interest groups
 New competitors,new interest groups
 Closing companies
 Important changes in
technology/legislation
 High probability for wrong assumptions
Uncertainty (Turbulent with increasing rate of change)
Environment
 In order to survive, firms
 need to invest in R & D,

 need innovations,
 need discoveries.
Ex: Electronics, computer industries

Ambiguity Environment
 Unclear targets
 Weak descriptions for alternatives
 Insufficient information
 Failure is the most possible outcome.
 The most risky and difficult decision
making environment
Environmental analysis
The monitoring, evaluating, and distribution of

information from the external and internal
environments to people within the corporation to
support in strategic decision making.
8
External Environmental Variables
1- General forces that do not directly touch on the

short-run activities but often influence its long-run
decisions:
Political-legal , Economic , Sociocultural , Technological

factors : PEST Analysis
9
2- Elements or groups that directly affect the

corporation and, in turn, are affected by it.
10
Industry analysis:
An in-depth examination of factors within a
corporation’s task environment.
11
Environmental Forces
 Economic forces
– Arrange the exchange of materials,
money, energy, and information
 Technological forces
– Create problem-solving inventions
12
Environmental Forces
 Political-legal forces
– Allocate power, prepare laws and regulations
 Sociocultural forces
– Determine values, beliefs, and customs
13
Important Variables
Economic Technological Political-Legal Sociocultural

GDP trends Total industry spending Environmental protection Lifestyle changes
for R&D laws
Interest rates Career expectations
Focus of technological Tax laws
Money supply Consumer activism
efforts
Special incentives
Inflation rates Rate of family formation
Patent protection
Foreign trade regulations
Unemployment levels Growth rate of population
New products
Attitudes toward foreign
Devaluation/revaluation Age distribution of
New developments in companies
population
Disposable income technology transfer from
Stability of government
lab to marketplace Regional shifts in
population
Productivity
improvements through Life expectancies
automation
Birth rates
14
Breakthrough developments in
technology
 Portable information devices and electronic

networking
 Fuel cells and alternative energy sources
 Precision farming (Use of technology: GPS,
sensors, information mgnt systems, satellites…)
 Virtual personal assistants
 Genetically altered organisms
 Smart , mobile robots
External Environment
Sociocultural Trends
 Increasing environmental awareness

 Changing location of life
 Changing household composition
 Increasing diversity of workforce and markets
16
Identifying External Strategic Factors
 We can use a priority matrix
 Why do we need to use a priority matrix:

Due to various reasons ( personal values, experiences, bias
in perceptions....) there may be a willingness to reject
unfamiliar as well as negative information : STRATEGIC
MYOPIA.
External Environment
How to Use Priority Matrix
 Identify likely trends
 Estimate probability of trends occurring
 Estimate impact of trends on the corporation
18
Priority Matrix
Probable Impact on Corporation
High High Medium Low
High High Medium

Priority Priority Priority
Probability of Occurrence
Medium
High Medium Low

Medium Low Low

Low

19
External Factor Analysis Summary (EFAS)
External Weighted
Factors Weight Rating Score Comments
1 2 3 4 5
Opportunities
Threats
Total Weighted Score 1.00
20
Industry Analysis
Porter’s approach:
The five forces --

 Threat of new entrants
 Rivalry among existing firms
 Threat of substitute products
 Bargaining power of buyers
 Bargaining power of suppliers
21
Threat of New Entrants --
Barriers to entry:
 Economies of Scale
 Product Differentiation
 Capital Requirements
 Switching Costs
 Access to Distribution Channels
 Cost Disadvantages
 Government Regulations
22
Industrial Rivalry
Intense rivalry is related to:

 Number of competitors
 Rate of Industry Growth
 Product or Service Characteristics
 Amount of Fixed Costs
 Capacity
 Exit Barriers
 Diversity of Rivals
23
Threat of Substitute Products/Services
Substitute Products:
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.
* Perception is important .
24
Bargaining Power of Buyers
Buyer is powerful if:
 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 (they look around for lower costs)
 Buyer earns low profits (sensitive to cost & service differences)
 Purchased product is unimportant to the final quality or price of
a buyer’s products
25
Bargaining Power of Suppliers
Supplier is powerful if:
 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.
26
Nature of the Competition
 The form and intensity of competition

depends on the relative strength and
interactions of these five forces .
Forms of Competition
 Price competition
 Brand and product differentiation
 Discounts, credits, other financial
arrangements like “locking-in”
 Mergers, takeovers
 Direct government regulation &
intervention
Competitor Intelligence System
 Used for evaluating competitors
 Data from various

sources:Primary/secondary data
Assessment of Potential Competitor
Response
 1) Competitor’s satisfaction level from present

situation and its desire to avoid unnecessary
competition
 2)Perception of competitor about whether or not

an emergency response is necessary
 3)Perception of competitor about the

appropriateness of alternative actions.
Porter’s Ideal Strategy
 A strategy that competitors are frozen

from reacting to, given their
circumstances.
(The cost of reaction may be too high).

Evolutionary Phases of an Industry
(Industry life cycle)
Fragmented Industry –
No firm has large market share and each firm serves only
a small piece of the total market in competition with
others. ( People buy the product regardless of price
because it fulfills a unique need.)
Consolidated Industry (Mature)–

Dominated by a few large firms, each of which struggles
to differentiate its products from the competition.
(Buyers become sophisticated, they have better
information)
32
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
33
Strategic Groups
A set of business units or companies that use

similar strategies with similar resources.
Ex: Burger King, Mc Donald’s, .....

Pizza Hut , Domino’s, Arby’s, KFC, ...........
Köfteci Ramiz, Sultanahmet Köftecisi, ..........
Strong rivalry in each strategic group since they

are very similar.
34
Strategic Types
MILES and SNOW’s

Categories of companies with similar strategic
orientation and structure, culture, and processes
consistent with that strategy.
Defenders, Prospectors, Analyzers, Reactors
35
Strategic Types
Defenders:
– Companies with a limited product

line; focus on improving efficiency
of current operations
36
Strategic Types
Prospectors:
– Companies with fairly broad product

lines; focus on product innovation
and market opportunities.
37
Strategic Types
Analyzers:
– Corporations that operate in at least

two different product-market areas:
one stable and one variable
38
Strategic Types
Reactors:
– Corporations that lack a consistent

strategy - structure - culture
relationship.
39
Market Analysis
 Market research
 Sales and market forecast
 Consumer- Buyer behaviour
 Market segmentation
Market Research
 Basic information about customers

 What will they buy?
 Who are they?
 Where are they?
 Who are not our customers?
 Why do not they buy?
 What is the composition of market?
 What are the characteristics of demand?
 How is the market segmented?
 What changes are expected in the market?
Market Research
 Desk Research
Internal sources vs. External sources
 Field Research
Methods: Interview, Telephone survey,
mail survey, consumer panel
Forecasting Methods:
 Extrapolation
 Brainstorming
 Expert opinion
 Statistical modeling
 Scenario writing
43
Forecasting Methods:
Consumer Behaviour
 Economic determinats:
- Individual disposable income
- Product price
- «value for money» perception
- Relative prices of complementary products
- Relative prices of substitute products
and their desirability
Consumer Behaviour
 Behavioral determinants:
- Individual personality
- Individual motivation
- Family
- Position in family life cycle
- Social class
- Culture
- Life style
- Opinion leaders
- Referans groups
Industrial Buyer Behaviour
 Determinants of purchasing behaviour:

- Type of purchase
- Demands of their own customers
- Bargaining power
- Advanced requests about products/services
- Organizational purchasing policies
- Influences of people involved in purchasing decision
Market segmentation
 Describing specific customer categories

based on various methods:
- Customer/user characteristics segmentation

- Product/benefit segmentation
Market Analysis
 Strategic planning sets the direction of

business and marketing provides the link
between business and environment.
Market Analysis
 Questions linking marketing and strategic

planning process:
Where are we now?
How did we get there
Where are we heading?
Where would we like to be?
How do we get there?
Are we on course?

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4

The degree of complexity plus the degree of

Uncertain, certain, turbulent, dynamic

 All variables are known.

 Limited change in variables in time

 Important changes in time

 In order to survive, firms

 need to invest in R & D,

Ex: Electronics, computer industries

The monitoring, evaluating, and distribution of

1- General forces that do not directly touch on the

Political-legal , Economic , Sociocultural , Technological

2- Elements or groups that directly affect the

Economic Technological Political-Legal Sociocultural

 Portable information devices and electronic

 Increasing environmental awareness

 We can use a priority matrix

 Why do we need to use a priority matrix:

How to Use Priority Matrix

 Identify likely trends

 Estimate probability of trends occurring

 Estimate impact of trends on the corporation

Probable Impact on Corporation

High High Medium Low

High High Medium

High Medium Low

Medium Low Low

Priority Priority Priority

Total Weighted Score 1.00

The five forces --

Intense rivalry is related to:

Products that appear to be different but can satisfy the

* To the extent that switching costs are low, substitutes can

Buyer is powerful if:

 Buyer purchases large proportion of seller’s products

Supplier is powerful if:

 Supplier industry is dominated by a few companies but sells

 The form and intensity of competition

 Used for evaluating competitors

 Data from various

 1) Competitor’s satisfaction level from present

 2)Perception of competitor about whether or not

 3)Perception of competitor about the

 A strategy that competitors are frozen

(The cost of reaction may be too high).

Consolidated Industry (Mature)–

Key Success Company A Company A Company B Company B

A set of business units or companies that use

Ex: Burger King, Mc Donald’s, .....

Strong rivalry in each strategic group since they

MILES and SNOW’s

Defenders, Prospectors, Analyzers, Reactors

– Companies with a limited product

– Companies with fairly broad product

– Corporations that operate in at least

– Corporations that lack a consistent

 Basic information about customers

 Determinants of purchasing behaviour:

 Describing specific customer categories