Ch 3 Review Notes.pptx reviiew notebests

Expert knowledge in strategic management

1. STRATEGIC MANAGEMENT Ch. 3 – THE EXTERNAL ASSESSMENT The sources cited in this lesson follows the fair dealing provision in the Copyright Act permits use of a copyright-protected work without permission from the copyright owner or the payment of copyright royalties. In which teachers, instructors, professors, and staff members in non-profit educational institutions may communicate and reproduce, in paper or electronic form, short excerpts from a copyright-protected work for the purposes of research, private study, criticism, review, news reporting, education, satire, and parody. If you have any problem with the sources cited, please contact me at [email protected].

2. Strategic Management Process 1 3 2

3. Ch. 3 - External Environment

4. External Environment Consists of External Conditions and Forces that can influence an organization General (Macro) Environment Trends and events in society that affect all organizations Political, Economic, Social, Technological, Environmental, Legal Industry (Competitive) Environment Multiple organizations collectively compete with each other providing goods/ services. Organizations can influence and be influenced by environment

5. Why is it Important for Firms to understand the External Environment … External Environment Assessment (Audit) What does External Assessment provide … Understanding of O pportunities and Threats to growth and profitability that an organization faces at a macro and industry level. External Environment Resources: Environment provides the resources needed by organizations Change: Environment is dynamic - changes are a source of opportunity/ threats to the organization Pro-active (Adapting): Organizations can’t control most environmental factors or events. They need to adapt their strategies to these factors

6. 1) PESTEL Analysis – Macro Environment How to Examine the External Environment 2) Five Forces Analysis – Industry Environment 3) Strategic Group Mapping – Close Competitors External Assessment helps organizations determine how to best use limited resources to achieve long-term goals

7. Limited Control/ Influence No Control / Influence THE EXTERNAL ENVIRONMENT What factors do firms have some control / no control over? Analysis of factors outside of the firm Firms may have Limited to No control over External Assessment Market prices Inflation Social trends Degree of competition Climate change Interest rates Industry capacity Availability of materials Demographic changes Technological advancements

8. Limited Control/ Influence No Control / Influence Market prices Interest rates Degree of competition Inflation Availability of materials Social trends Industry capacity Demographic changes Technological advancements Climate change What factors do firms have some control / no control over? Analysis of factors outside of the firm Firms may have Limited to No control over External Assessment Market prices Inflation Social trends Degree of competition Climate change Interest rates Industry capacity Availability of materials Demographic changes Technological advancements THE EXTERNAL ENVIRONMENT

9. Relationships Between Key External Forces - Organization David, Fred R., Forest David. Strategic Management, 16th Edition. Pearson Macro Industry

10. PESTEL Analysis

11. Factors imposed that affect all organizations Factors include political, economic, social, technological, ecological and legal factors ( PESTEL Analysis ) Examples: Interest rates Inflation Demographic changes (Birth/ Aging population) Climate change PESTEL Model: Analysis of Macro-Environment Note: 1 Way Direction of Macro Factors PESTEL Analysis Video https://www.google.com/search?q=you+tube+pestel+analysis

12. Question Answer 1) What does PESTEL acronym mean? 2) List 3 situations where a company would use PESTEL? 3) What is the difference between the Macro & Industry environments? Macro – Industry – 4) What are the most important PESTEL factors affecting each of the following industries? PESTEL Model Q & A Industry P E S T E L Oil and Gas Bio-tech Automotive Software Fashion 1) 2) 3)

13. P – How Government Interacts (Policy) with Business PESTEL Forces

14. L – How Legal System (Legislation) Interacts with Business PESTEL Forces

15. PESTEL forces vary in Intensity by Region. PESTEL Analysis is Essential for Global firms Consider a multi-national firm with Geographically dispersed supply chain - suppliers, production, distribution Looking to enter new markets Costa Rica Factor Rating P Political E Economic S Social T Technological E Environmental L Legal Brazil Factor Rating P Political E Economic S Social T Technological E Environmental L Legal PESTEL Analysis helps identify key factors affecting your Success in New Markets - Compare entry into Brazil vs. Costa Rica is Positive Factor / X Negative Factor PESTEL Force Intensity (Effect) Varies by Region

16. Costa Rica Factor Rating P Political E Economic S Social T Technological X E Environmental X L Legal Brazil Factor Rating P Political E Economic S Social T Technological E Environmental X L Legal PESTEL forces vary in Intensity by Region. PESTEL Analysis is Essential for Global firms Consider a multi-national firm with Geographically dispersed supply chain - suppliers, production, distribution Looking to enter new markets PESTEL Analysis helps identify key factors affecting your Success in New Markets - Compare entry into Brazil vs. Costa Rica is Positive Factor / X Negative Factor PESTEL Force Intensity (Effect) by Region (Geography)

17. Certain PESTEL factors may Be Less Important or More Relevant to some firms PESTEL Factor Change / Trend Industry Positive Neutral Negative Political Increased Tariffs on Imports Domestic Manufacturing Retail Regional conflicts Oil and Gas Retail Beverage Economic Rising Interest Rate Construction Financial Real Estate Drug/ Pharma Sociocultural Aging Population Baby Products Healthcare Fashion Travel Healthy Lifestyle Fast Food Group Exercise Determine how PESTEL Factor affects Industries PESTEL Force Intensity (Effect) Varies by Industry

18. Political Economic Socio-Cultural Technology Environmental Legal 1. Green Party 2. GDP 3. 5G 4. Employment standards 5. Patent laws 6. Demographics 7. Recycling 8 Interest rates 9. Workplace Safety Regulations 10. Employment rates 11. Climate change 12. Healthy lifestyle trend 13. Birthrates 14. Consumer activism 15. R&D spending 16.Susidies 17. Mobile technology 18.Inflation 19. Currency rates 20. Carbon tax 21. Tariffs 22. Employment levels 23. Government policy 24. Fuel costs Group Exercise: Match # with PESTEL Category Match Factors with PESTEL Category

19. PESTEL Analysis Force Intensity (L, M, H) Factors with POSITIVE IMPACT Factors with NEGATIVE IMPACT Political Economic Social Technological Environmental Legal Conclusion: Are trends and changes in the General Environment favourable to the firm? PESTEL Analysis: Identify Key Factors that impact the Firm. Note – not all PESTEL factors are important/ relevant to the firm Indicate how each Force has a Positive or Negative impact and its Intensity Conclusion – overall do PESTEL Forces have a Positive/ Negative effect on firm? PESTEL Analysis Template

20. PESTEL Analysis Force Intensity (L, M, H) Factors with POSITIVE IMPACT Factors with NEGATIVE IMPACT Political Economic Social Technological Environmental Legal Conclusion: Are trends and changes in the General Environment favourable to the firm? PESTEL Analysis Template Group Exercise: What are the Key Macro Factors affecting your company? Company: ___________________ Company Industry Macro Factor #1 Macro Factor #2 Arvind Textiles ASOS Fashion Retail Lululemon Fashion Retail Magna Automotive NXP Semiconductor XPO Transportation

21. Political Economic Sociocultural Technology Environmental Legal Tax Policy Inflation Work-Life Balance R&D Spending Environmental Law Employment Law Protectionism Interest rates Healthy Lifestyle Date Breaches Climate Change Tax Law Government Stability Employment Levels Demographic Changes Internet/ Telecom Infrastructure Natural Disasters Discrimination Law Immigration Policy GDP Levels Education Levels Robotics Pollution Antitrust Law Tariffs & Subsidies Money Supply Social Trends Software/ Hardware Advances Triple Bottom Line/ Sustainability Health & Safety Laws Foreign Trade Policies Disposable Income Consumer Activism Artificial Intelligence Environmental Fines Intellectual Property Rights Regional Conflicts Debt Levels Cultural Trends Weather Patterns Immigration Law Regulation / Deregulation Recession Expansion Population Growth Recycling Consumer Protection Act Industry Incentives Global Economy Work From Home Carbon Footprint Copyright and Patent Laws Currency Rates Birth Rate Summary: PESTEL Forces and Factors

22. 5 Forces Analysis

23. What is an “Industry” An Industry is a grouping of businesses based on the products/ services they provide and the markets/consumers they cater to. Computer Industry Education Industry Pharmaceutical Industry Hospitality Industry News Media Industry Music Industry What is the Goal for a Business in a Competitive Industry? Not to Beat the Competition, but to Make Profits

24. Porter’s 5 Forces Model Used to describe the Attractiveness (Profitability) of industries and markets. Model that examines the Factors affecting firms within a specific industry (auto industry) Firms are subject to these forces but they can also be the source and exert pressure on other firms in an industry. 5 Forces Model – Industry Environment https://www.youtube.com/watch?v=_IaBZmB09RE 5 Forces Video How Firms Can Exert Pressure: Discounting, price changes Shortages (resource or supply constraints) Standardization or customization of product/ service

25. Question Answer 1) What are the 5 Forces? 2) What is the purpose of completing a 5 Forces Analysis? 3) What is the Threat of Substitutes in the 5 Forces Model, and what is an example of a substitute ? 4) What are the most important 5 Forces factors affecting each of the following industries? 5 Forces Model Q & A Industry Rivals New Co. Subs Buyers Suppliers Oil and Gas Bio-tech Automotive Software Fashion Threat of Substitutes - Example:

26. How to Use the 5 Forces Model 1. Identify Relevant Factors and the Intensity of the 5 Forces affecting a firm in an industry. 2. Evaluate the effect of each Force on the Firm’s Profit Potential ( 5 Forces Intensity Increases , the Profit Potential or Attractiveness of the industry decreases ) 3. Determine the Overall Effect of the 5 Forces on the Company Traditional business thinking was that the Degree of Competition within an industry determined the Profit Potential. Porter’s Model demonstrated that Other Forces affect a Firm’s Profitability 5 Forces Analysis – Industry Environment 4 3 5 1 1 2

27. Explanation of the 5 Forces 5 Forces As Competitive Pressures Increase Profitability Decreases Rivalry Among Existing Firms The degree of competition that exists between firms already established in an industry. Power of Suppliers Suppliers provide the raw materials and inputs to a company’s products/ services. Increases to the cost of inputs applies downward pressure on company margins. Threat of New Entrants New Entrants increase competitive pressures as they pursue growth in market share. Results in increased pressure on sales prices, costs, and the rate of investment required by the existing companies. Power of Buyers Customer buying decisions directly affect sales and profitability levels. Buyer’s sensitivity to price changes and their ability to purchase from another competitor puts pressure on pricing and profitability. Threat of Substitutes Competitive pressure arising from an alternative product or service that fulfills the same fundamental customer need.

28. 5 Forces Analysis Group Exercise (+ / - Evaluation) Evaluate how 5 Forces Effect Company’s Competitive Position + / - 2) Supplier Factors Limited # of Suppliers Substitute resources available Supplier control over resources + / - 3) New Entrants Factors Low capital requirements Regulated industry Limited access to distribution + / - 5) Substitute Factors Disruptive technology Similar products at lower cost Unsatisfactory alternatives + / 4) Buyer Factors Limited # buyers Low switching costs Low order value + / - 1) Rivalry Factors Differentiated products Excess capacity Fragmented market – many firms

29. 5 Forces Analysis + / - 2) Supplier Factors - Limited # of Suppliers + Substitute resources available - Supplier control over resources + / - 3) New Entrants Factors - Low capital requirements + Regulated industry + Limited access to distribution + / - 5) Substitute Factors - Disruptive technology - Similar products at lower cost + Unsatisfactory alternatives + / - 4) Buyer Factors - Limited # buyers - Low switching costs + Low order value + / - 1) Rival Factors + Differentiated products - Excess capacity - Fragmented market – many firms Group Exercise (+ / - Evaluation) Evaluate how 5 Forces Effect Company’s Competitive Position

30. 5 Forces Model: 5 Forces Assessment Strong Force Conditions Weak Force Conditions Rivalry Among Existing Firms Strong Force = Lower Profit Potential Weak Force = Higher Profit Potential Power of Suppliers Threat of New Entrants Power of Buyers Threat of Substitutes

31. 5 Forces Model: 5 Forces Assessment Strong Force Conditions Weak Force Conditions Rivalry Among Existing Firms Strong Force = Lower Profits Weak Force = Higher Profits Fragmented market (high # firms) Declining sales; Excess capacity Standard products Low # rival firms Growing demand Differentiated products Power of Suppliers Low # suppliers Control over resources Essential resources High # suppliers High availability of resources Substitute resources Threat of New Entrants Low entry barriers Low capital requirements Standard products Highly regulated industry Specialized knowledge Distribution channels Power of Buyers Limited # buyers Large order value Low switching costs High # buyers Small order value High switching costs Threat of Substitutes Alternatives exist Disruptive technology Similar features at a lower cost No known substitutes Unsatisfactory options Higher substitute cost

32. Stronger Industry Forces Reduce Margins and Profits Downward pressure on Prices while Increasing Costs (Marketing, Service Levels) Strong Force Weak Force Revenues Downward pressure on Prices Limited/ Not affecting Prices Costs Increased Cost pressure Limited/ Not affecting Costs Profit Decreased Profits Limited/ Not affecting Profits 5 Forces Affect on Profitability

33. 5 Forces Analysis Template 5 Forces Analysis Force Assessment (L, M, H) Factors with POSITIVE IMPACT Factors with NEGATIVE IMPACT Rivalry among Competing Firms Bargaining power of Suppliers Threat of New Entrants Bargaining power of Buyers Threat of Substitute products Conclusion: What is the Overall 5 Forces Effect on the Profit Potential of the firm ? 5 Forces Analysis: Identify Key Industry Factors that impact the Firm. Note – not all Industry factors are important/ relevant to the firm Indicate how each Force has a Positive or Negative impact and its Intensity Conclusion – do 5 Forces exert a Positive/ Negative effect on firm’s Profitability?

34. 5 Forces Template 5 Forces Analysis Force Assessment (L, M, H) Factors with POSITIVE IMPACT Factors with NEGATIVE IMPACT Rivalry among Competing Firms Potential entry of New Competitors Potential development of Substitute Products Bargaining power of Suppliers Bargaining power of Buyers Conclusion: What is the Overall 5 Forces Effect on the Profit Potential of the firm ? Company: _________________________ How do the 5 Forces affect your company? Company Industry Industry Factor #1 (+ /-) Industry Factor #2 (+/-) Arvind Textiles ASOS Fashion Retail Lululemon Fashion Retail Magna Automotive NXP Semiconductor XPO Transportation

35. High Rivalry Results when Large # firms (fragmented industry) of similar size Firms have similar capabilities Low Entrance and High Exit Barriers Standard product/ service Declining sales prices, consumer demand Low switching costs for consumers 5 Forces Model Rivalry = Increased Competitive Pressures

36. Need to gain economies of scale quickly Need to gain technology and specialized know-how Lack of experience Strong customer loyalty Strong brand preferences Large capital requirements (startup costs) Lack of adequate distribution channels Government regulatory policies (utilities and banking) Tariffs Lack of access to raw materials Possession of patents Undesirable locations Counterattack by entrenched firms Potential saturation of the market High Barriers (see examples below), reduce the likelihood that new Firms will enter an Industry Threat of New Entrants (Low Barriers to Entry) = Increased Competitive Pressures As more Firms enter an industry competition levels increase and put greater downward pressure on sales prices as firms work to retain their customers 5 Forces Model

37. Availability of Substitute Products = Increased Competitive Pressure Substitute is a suitable alternative to existing product/ service Prices of substitutes are decreasing Low or declining Consumers ' switching costs Bargaining Power of Suppliers increases = Increased Competitive Pressure Increases when there are only a few suppliers Reduced or limited supply of Resources Few substitutes exist Costs of switching raw materials (supplier inputs) is high As the Power of Suppliers increases, Suppliers can increase prices which reduces the profit margins of the firms competing in an industry As more low cost Substitutes become available firms will resort to price reductions or increased advertising to retain clients 5 Forces Model

38. Bargaining Power of Buyers increases = Increased Competitive Pressure Customers are concentrated or buy in large volumes (increases intensity of competition …could be a B2B situation) Consumer power is higher where products are standard or undifferentiated Bargaining Power of Consumers – when wer Increases it results in declining sales prices Conditions Where Consumers Gain Bargaining Power If products are standard If buyers are particularly important (Fewer # of Buyers making larger purchases) Buyers can inexpensively switch to another brand If sellers are struggling in the face of falling consumer demand If buyers are informed about sellers ' products, prices, and costs If buyers have discretion in whether and when they purchase the product 5 Forces Model

39. Strategic Groups What are Strategic Groups Sets of firms that follow similar strategies to one another in an industry These firms have similar characteristics but differ in important ways from the members of other groups in an industry Strategic Groups help to understand Rivals: - Who are the close rivals (critical to understand strategic moves of direct rivals) 2) New Strategies: - Strategies by firms in other strategic groups may provide alternative paths to success. Borrowing an idea from another strategic group to drive new growth/ profits. Ex: R estaurants offering coupons and meal combinations that fast food businesses offer . 3) Gaps: - Strategic groups can reveal gaps in the industry - untapped business opportunities. Ex: L a ck of culturally diversity in menu offerings at dine in restaurants

40. Strategic Groups https://www.youtube.com/watch?v=CcF3ZMgXQrA

41. Strategic Groups How to Create a Strategic Group Map Identify competitive characteristics that differentiate firms in an industry. ( Price, Menu options ) Plot firms in industry on 2 axis (variable) chart (map) Assign firms into a similar space and strategic group (limited to full menu groups) Represent the group’s respective market share on map (greater market share = larger circle) Low Price High

42. Strategic Groups Interpreting Strategic Group Map Firms within the strategic groups are Direct Competitors ( A: McDonalds and Burger King) Close Proximity of strategic groups on map show Greater Cross-Group C ompetitive R ivalry ( A to B and B to A - McDonalds and KFC) Gaps in the strategic map may indicate business opportunities – untapped market potential ( C: New business or offerings)