The Environmental Domain

• Organizational Environment
is defined as all elements that exist outside
the boundary of the organization and have
the potential to affect all or parts of the body
• Organization domain
Chosen environmental field of action. It is the
territory an organization stakes out for itself
with respect to products, services, and
markets served

Prentice Hall, 2000 Chapter 3 1

Prentice Hall, 2000 Chapter 3 2
3.1 Environmental Uncertainty

Environmental Uncertainty

• Degree of complexity
• Degree of change

Prentice Hall, 2000 Chapter 3 3

 Industry Dominant Features
• Market Size
• Scope of competitive rivalry ( local, regional, global)
• Market growth rate and position in business life
• Number of rivals and their relative sizes
• To what extent industry rivals have integrated backward
and forward integration
• The types of distribution channels used to access
consumers
• The pace of technological change in both production
process innovation and new product innovation
• Whether the products and services of rival firms are highly
differentiated, weakly differentiated
• Whether certain industry activities are characterized by
strong learning experience effects
• Capital requirements and ease of entry and exit
• Whether industry profitability is above / below par
Prentice Hall, 2000 Chapter 3 4
 Environmental Scanning
• General Environment/ Societal environment
1. Economic forces that regulate exchange of
materials, money, energy, and information
2. Technological forces that generate problem
solving
3. Political –legal forces that allocate power and
provide constraining and protecting laws and
regulations
4. Socio-cultural forces that regulate the values,
mores, and customs of society

Prentice Hall, 2000 Chapter 3 5

 Some Important Variables in
the Societal Environment
Economic Technologic Political-Legal Sociocultural
al Antitrust Lifestyle changes
GDP trends regulations
Total government Career
Interest rates spending for Environmental expectations
R&D protection laws
Money supply Consumer
Total industry Tax laws activism
Inflation rates
spending for
Unemployment R&D Special incentives Rate of family
levels formation
Focus of Foreign trade
Wage/price technological regulations Growth rate of
controls efforts population
Attitudes toward
Devaluation/reval Patent protection foreign Age distribution of
uation companies population
New products
Energy Laws on hiring Regional shifts in
New and promotion population
availability and
Prentice Hall, 2000 developments in Chapter 3 6
cost technology Stability of Life expectancies
 Important variables in international
Societal Environment
Economic Technological Political-legal Socio-cultural

Economic Regulation in Form of government Customs, norms,

Development technology transfer Political ideology values
Per capita income Energy availability Tax laws Language
GDP tends Natural resource Stability of Demographics
Monetary and Fiscal availability government
policies Skill level of workforce Life-style
Regulation of foreign
Employment level Patent-trademark ownership Religious beliefs
Currency protection Trade regulations Attitude towards
convertibility Internet availability Foreign policies foreigners
Nature of Telecommunication Terrorist activity Literacy level
competition infrastructure Legal system Human rights
Environmentism

Prentice Hall, 2000 Chapter 3 7

3.3 Scanning the External Environment (Fig. 3.1)

Scanning the External

Environment
Analysis of Societal Environment
Economic, Sociocultural, Technological, Political-Legal Factors

Market
Analysis

Community Competitor
Analysis Analysis

Supplier
Analysis
Selection of
Interest Group Strategic Factors Governmental
Analysis Analysis
• Opportunities
• Threats

Prentice Hall, 2000 Chapter 3 8

 Discussion Questions

• Discuss how development in a

corporation’s societal environment
can affect the corporation through
its task environment

Prentice Hall, 2000 Chapter 3 9

 The Five Forces of
Competition
• Threat of new entrants/ Barriers to
entry
• Bargaining power of Buyers
• Bargaining power suppliers
• Threat of substitute products or
services
• Rivalry among existing firms

Prentice Hall, 2000 Chapter 3 10

3.6 Forces Driving Industry Competition (Fig. 3.3)

Forces Driving Industry

Competition
Potential
Entrants

Ease
of exit Threat
of New
Entrants

Relative
Power
of Unions,
Governments,
etc. Industry
Other Competitors Bargaining
Stakeholders Power
of Buyers
Buyers

Suppliers Rivalry Among

Bargaining Existing Firms
Power
of Suppliers

Threat of Source:  Adapted/reprinted with

Substitute permission of The Free Press, an
Products imprint of Simon & Schuster, from
or Services
Competitive Strategy: Techniques for
Analyzing Industries and Competitors
by Michael E. Porter. Copyright © 1980
Substitutes by The Free Press.
Prentice Hall, 2000 Chapter 3 11
 Threat of New Entrants/ Entry Barriers
Factors HUF MUF Neutral MFA HFA comment
A A
Economies of Low High
scale
Capital required Low High
Access to
distribution Ample Restricted
channels
Expected
retaliation Low High
Differentiation
Brand Loyalty Low High
Experience Curve Low High
Govt. Action Insignifica Significant
nt
Low High

Prentice Hall, 2000 Chapter 3 12

Factors HUF MUFN MF HF Comment

Economies of scale Low 4 High Big Players present, have

reduced prices through
economies of scale, not
Capital required Low 5 High possible for new entrants.
Too much capital is
required for marketing
Access to distribution Ample 5 Restricted Hard to find place on key
channels distribution channels
Expected retaliation is on
higher side because of few
Expected retaliation Low 4 High competitors
Differentiated product
could be used because of
Differentiation Low 5 High maturity of product
Brand loyalty is high.
Is labor intensive industry
Brand Loyalty Low 4 High No restriction on joining
industry
Experience Curve
Insignifi 4 Significant
Govt. Action cant High
Low 2

0 2 0 16 15

Average: 33/8= 4.13

Prentice Hall, 2000 Chapter 3 13
 Exit Barriers
• Exit Barriers
Factors HUA MUA Neutral MA HA Comments

Specialized Hi LOW
Assets
Fixed Cost of Hi Low
Exit
Strategic Hi Low
interrelationshi
p
Government
Barriers Hi Low

Prentice Hall, 2000 Chapter 3 14

 Barriers and profitability

low Low, stable Low, risky

returns returns

Entry Barriers

High, stable High, risky

high returns returns

low high
Exit Barriers

Prentice Hall, 2000 Chapter 3 15

 Competitive Rivalry
Factors HUF MUF Neutr MF HFA Commen
A A al A t
Composition of Equal Unequal Size
Competitors Size High
Mkt. Growth rate Slow
Scope of
competition Domestic
Global
Fixed storage
Cost small
Capacity Increase High
Degree of Small
Large
differentiation
Speciality
Commo
Strategic Stake dity
Low
High

Prentice Hall, 2000 Chapter 3 16

 Power Of Buyer
Factors HUFA MUFA N MFA HFA Comment
Number of Few Many
Important
buyers
Threat of High Low
Backward
integration
Product Commodity Specialt
supplied y
Switching Low
cost High
% of buyer’s High
cost Low
Profit earned Low
by buyer High
Importance
to final
quality of Low
buyers Pr. Importan
t

Prentice Hall, 2000 Chapter 3 17

 Power of Supplier
Factors HUFA MUFA N MFA HFA comment
# of important Few Many
Suppliers
Switching cost High Low
Availability of Difficult Many
substitutes
Threat of forward High Low
integration

Importance of
Buyer industry to Buys Buys
suppliers small large
Proportion proportio
n
Suppliers product
an important input Less
to the buyer’s important Highly
business importan
t

Prentice Hall, 2000 Chapter 3 18

Factors H M N M H Comment
U U F F
F F
Number of important suppliers Few 4 Many Suppliers are many

Switching Cost High 4 Low Input product are

easily available

Availability of Substitutes Difficult 4 Many Steel, chrome

plastic

Threat of forward integration High 5 No one is in this

Low position

Importance of Buyer Industry to Buys Small 4 Buys Large Industry is major

suppliers proportion Proportion purchaser

Suppliers product an important Highly 2 Less Main input for

input to buyers business important Important quality output
2 1 5
6
Average = 23/6 = 3.83

Prentice Hall, 2000 Chapter 3 19

 Threat Of Substitute Product

Factors HUFA MUFA N MFA HFA Comment

Threat of Hi Low
Obsolescence of
Industry’s product
Aggressiveness of
substitute products
in promotion Hi Low
Switching Cost
Perceived price/
value Low High

Hi Low

Prentice Hall, 2000 Chapter 3 20

 Overall Industry attractiveness
Factors Unfavorable Neutral Favorable

Entry Barriers
Exit Barriers
Rivalry among existing
firms
Power of buyers
Power of Suppliers
Threat of substitutes

Prentice Hall, 2000 Chapter 3 21

 Overall Industry attractiveness
Factors Unfavorable Neutral Favorable
Entry Barriers 3.5
Exit Barriers 3.25
Rivalry Among existing
firms
3.29
Power of buyers 3.6
Power of suppliers 3.83
Threat of substitutes 2.25 0
Total 2.25 17.47
Average = 19.72 / 6 = 3.29
The overall industry is attractive with points 3.29.
Prentice Hall, 2000 Chapter 3 22
 Discussion Questions

• According to porter, what determines the level of

competitive intensity in industry
• According to porter’s discussion of industry
analysis, is Pepsi – Cola a substitute for Coca-
Cola

Prentice Hall, 2000 Chapter 3 23

 Driving Forces of Change
• Driving forces in an industry are the major underlying causes
of changing industry and competitive conditions
 The internet and new e-commerce opportunities and threats
in the industry
 Increasing Globalization:
1. Where scale economies are so large that rival firms need to
market their products in many country markets to gain
enough volume to drive unit cost down
2. Where low cost production is critical consideration ( making
it imperative to locate manufacturing facilities in countries
where lowest cost could be achieved
3. Where one or more globally ambitious companies are
pushing hard to gain significant competitive position in many
attractive markets

Prentice Hall, 2000 Chapter 3 24

 Driving Forces
 Changes in long-term industry growth rate
1. Upsurge in long-term demand triggers a race for
growth among existing firms and attract new comers
2. A shrinking market heightens competitive pressures
for market share inducing mergers and acquisition
that result in industry consolidation
 Changes in who buys the product and they use it
 Product innovation
 Technological change
 Marketing innovation
 Entry or exit of a major firm

Prentice Hall, 2000 Chapter 3 25

 Drivers of Change

 Diffusion of technical know how across more

companies and countries
 Changes in cost and efficiency
 Growing preference for differentiated products
instead of commodity or vice versa
 Regulatory influences and government policy
changes
 Changing societal concerns, attitudes and life
styles

Prentice Hall, 2000 Chapter 3 26

3.4 Strategic Issues and Strategic Factors

Strategic Issues and

Strategic Factors

Strategic Issues
• Trends likely to affect future environment

Strategic Factors
• Those strategic issues with high probability of
occurrence and high probable impact on
corporation

Prentice Hall, 2000 Chapter 3 27

3.5 Issues Priority Matrix (Fig. 3.2)

Issues Priority Matrix

Probable Impact on Corporation

High Medium Low

High High Medium

High

Priority Priority Priority

Probability of Occurrence

Medium

High Medium Low

Priority Priority Priority

Source: Adapted from L. L.

Lederman, “Foresight Activities in
Medium Low Low
Low

the U.S.A.: Time for a

Priority Priority Priority Reassessment?” Long Range
Planning (June 1984), p. 46.
Copyright © 1984 by Pergamon
Press, Ltd. Reprinted with
Prentice Hall, 2000 Chapter 3 permission. 28
 Discussion Question

• How can a decision maker identify strategic

factors in the corporation’s external international
environment

Prentice Hall, 2000 Chapter 3 29

 Categorizing International
Industries
• Multi-domestic Industries:
 Are specific to each country or group of
countries
 Collection of essentially domestic industries
 Each subsidiary is essentially independent of
the activities of the MNC’s subsidiaries in other
countries
• Global Industries:
 Operate world wide, with MNC making only small
adjustment for country specific circumstances
 MNCs produce products or services in various
locations through out the world and sell them
making only small adjustments for country
requirements
Prentice Hall, 2000 Chapter 3 30
 3.9 Continuum of International Industries (Fig. 3.4)

Continuum of International
Industries

Multidomestic Global

Industry in which companies tailor Industry in which companies

their products to the specific manufacture and sell the same
needs of consumers in a products, with only minor
particular country. adjustments made for individual
countries around the world.
• Retailing
Automobiles
• Insurance
• Tires
• Banking
• Television sets

Prentice Hall, 2000 Chapter 3 31

 Factors that determine
whether industry would be
global or multi-domestic
1. Pressure for coordination within multinational
corporations operating in that industry
2. Pressure for local responsiveness on the part of
individual country markets

Prentice Hall, 2000 Chapter 3 32

 Strategic Groups
• A strategic group is a set of business units or firms that
pursue similar strategies with similar resources
• A firms competitive domain can be identified with the
concept of strategic group
• The strategic group map consists of two sets of
dimensions
I. Business Scope commitment:
(2) The target market segment, (2) types of products
services offered, (3) geographical reach
II. Resource Allocation Commitment: allocation of
resources to functional areas considered central in
achieving competitive advantage

Prentice Hall, 2000 Chapter 3 33

3.10 Mapping Strategic Groups in the U.S. Restaurant Chain Industry (Fig.
3.5)
Mapping Strategic Groups in the U.S.
Restaurant Chain Industry
High
Red Lobster
Olive Garden
ChiChi's

Perkins
International House
of Pancakes

Ponderosa
Price

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
Prentice Hall, 2000 Chapter 3 34
 Implications of Strategic
groups
• The strategic group a firm should consider
entering
• The type and level of entry barriers the firm will
face
• The number and type of entry barriers the firm
will face
• The strategic dimensions that will make the firm
similar to its strategic group members and
different from members of different strategic
groups
• The relative effect of five forces of competition
on its relative profitabivty

Prentice Hall, 2000 Chapter 3 35

3.11 Strategic Types

Strategic Types
• Defenders: companies with limited product line that focus
on improving the effectiveness of their existing
operations. This cost orientation makes them unlikely to
innovate in new areas
• Prospectors: Companies with fairly broad product lines
that focus on product innovation and market
opportunities. This sales orientation makes them
somewhat inefficient. Tend to emphasize creativity over
efficiency
• Analyzers: Operate at-least in 2 different product-market
areas, one stable and one variable. In stable area
efficiency is emphasized, in variable area innovation is
emphasized
• Reactors: lack a consistent strategy-structure-culture
relationship. Their responses to environmental pressure
tend to be piecemeal strategic changes

Prentice Hall, 2000 Chapter 3 36

 Key Success Factors
• Key success factors are those things that most
affect the ability of industry members to prosper
in market place
• On what basis do customers chose between the
competing brands of sellers
• What must seller do to be competitively
successful- what resources and competitive
capabilities does it need
• What does it take for sellers to achieve a
sustainable competitive advantage

Prentice Hall, 2000 Chapter 3 37

 3.12 Industry Matrix (Table 3.3)

Industry Matrix/ Competitive Profile Matrix

( CPM)

Company A Company A Company B Company B

Strategic Factors Weight Rating Weighted Score Rating Weighted Score

1 2 3 4 5 6

Total 1.00

Source: T. L. Wheelen and J. D. Hunger, “Industry Matrix.” Copyright © 1997 by Wheelen and Hunger
Associates. Reprinted by permission.
Prentice Hall, 2000 Chapter 3 38
 3.13 The Role of Forecasting

The Role of Forecasting

Present Forecasting Assumptions

Environmental for Strategic
Trends and Future Trends
Scanning Planning and
Fashions and Fashions
Decision Making

Prentice Hall, 2000 Chapter 3 39

3.14 Popular Forecasting Techniques

Popular Forecasting
Techniques
• Extrapolation
• Brain storming
• Expert opinion
• Statistical modeling
• Scenario writing

Prentice Hall, 2000 Chapter 3 40

 External Factor Analysis Summary( EFAS) /
External Factor Evaluation Matrix ( EFE)
• Column 1( External Factors) list 8-10 most important opportunities and
threats facing the company
• Column 2 ( Weights) assign a weight to each factor. The higher the weight
the more important is this factor to the current and future success of the
company. All weights must sum to 1.0 regardless of the number of factors
• Column 3 (Rating) ,assign a rating to each factor from 4.0 (Company is
aware and taking full action), 3 (Company is aware and taking some
action), 2 ( Company is aware but not taking any action) and 1.0
( Company is neither aware not taking any action) based on
management’s current response to a particular factor
• Column 4 ( weighted score) Multiply the weight in column 2 for each factor
in column 3 to obtain each factor’s weighted score.
• Column 5 ( comments), note why a particular factor was selected and how
its weight and rating were estimated
• Add the individual weighted score for all external factors in column 4 to
determine the total weighted score for that particular company. The
weighted score of 3 = average, 4 = above average, less than 2.5 as below
average

Prentice Hall, 2000 Chapter 3 41

 3.16 External Factor Analysis Summary (EFAS): Blank

External Factor Analysis Summary

(EFAS)
External Weighted
Strategic Factors Weight Rating Score Comments
1 2 3 4 5
Opportunities

Threats

Total Weighted Score 1.00

Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not
Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to
1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply
each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale
used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how
well the company is responding to the strategic factors in its external environment.
Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and
Hunger Associates. Reprinted
Prentice Hall, 2000by permission. Chapter 3 42
 3.17 External Factor Analysis Summary (EFAS): Maytag as Example (Table
3.4)
External Factor Analysis Summary
(EFAS): Maytag as Example
External Weighted
Strategic Factors Weight Rating Score Comments
Opportunities 1 2 3 4 5
• Economic integration of .20 4 .80 Acquisition of
European Community Hoover
• Demographics favor quality .10 5 .50 Maytag quality
appliances
• Economic development of Asia .05 1 .05 Low Maytag presence
• Opening of Eastern Europe .05 2 .10 Will take time
• Trend to “Super Stores” .10 2 .20 Maytag weak in this
Threats channel

• Increasing government regulations .10 4 .40 Well positioned

• Strong U.S. competition .10 4 .40 Well positioned
• Whirlpool and Electrolux strong .15 3 .45 Hoover weak globally
globally
• New product advances .05 1 .05 Questionable
• Japanese appliance companies .10 2 .20 Only Asian presence is
Australia

Total Scores 1.00 3.15

Prentice Hall, 2000 Chapter 3 43