AB3602

Strategic Management

Session 2 : External Environment Analysis

Dr Kon Sen Choeng,

Nanyang Business School
Nanyang Technological University

1
Lesson Plan
• Intro Strategic Management
• Recap of Last week lesson
• I/O & RBV
• External Environment Analyses
– General Environment analysis
– Porter’s five forces model
2
Recap
• What is the strategic management process?

3
Groups Formation

• Sit in groups formed

• Students not here last week
– Please introduce yourself
– Join groups that have 3 or 4 students
• Finalise groups and send me group members
• Groups assignment
• The strategic management process is the full set of commitments, decisions, and
actions firms take to achieve strategic competitiveness and earn above-average
returns.
• The process involves _____________________________________.
• A firm analyzes the external environment and its internal organization, then
formulates and implements strategies to achieve a desired level of performance.
 The Strategic
Management Process
Recap
• What are strategic competitiveness, strategy,
competitive advantage, above-average returns?

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 Key Terms - Recap

• Strategic competitiveness is achieved when a firm successfully formulates

and implements a v____________________.

• A strategy is an integrated and coordinated set of commitments and actions

designed to exploit c________________ and gain a competitive advantage.

• A c_________________ is achieved when a firm’s current and potential

competitors either are not able to simultaneously formulate and implement
its value-creating strategy, are unable to duplicate the benefits of the
strategy, or find the strategy too costly to imitate. 8
Recap
• What are the characteristics of the current
competitive landscape? What two factors are the
primary drivers of this landscape?
• V________
• Globalization of industries and markets and
• Rapid and significant technological change.

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Strategic Management Framework
(covered in this Course)
Vision, Mission and Values

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 Vision
• Vision is a picture of what the firm wants to be and, in broad terms, what it wants
to achieve.
• A vision statement:
• - Articulates the ideal description of an organization and gives shapes to its
intended future
• - Tends to be relatively short and concise

• What makes an effective vision:

• - Stretches and challenges people
• - Is developed by the CEO and other top-level managers, employees, suppliers,
and customers
 Mission

• A mission specifies the businesses in which the firm intends to compete and the
customers it intends to serve.
• A mission:
• Is more concrete than a firm’s vision
• Should establish a firm’s individuality
• Should be inspiring and relevant to all stakeholders
• Deals more directly with product markets and customers
• Should be developed by the CEO, top-level managers, and other organizational
members
IKEA - Vision, Mission, Values

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15
Which Companies Mission Statements Are These?
Which Company Values are these?
Industrial Organisaion and Resource Based
Perspectives
v I/O Model
v Resource- Based Model

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 Industrial Organisation
I/O Model
Assumptions
1. Environmental pressure and
Constraints determine strategies
2. Firms: Similar resources and
strategies
3. Resources are mobile
4. Decisions are rational

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 Industrial Organizational Model
of Above-Average Returns
v External Environment Analyses General Environment
Analysis to determine
macro trends
To determine the general
environment and industry factors Market/Industry
that impact a firm’s competitive Analyses (Porter’s Five
Forces) to determine
advantage industry forces
Underlying Assumptions of I/O Economics
The I/O Economics challenges firms to find the most attractive industry
in which to compete.
1. The external environment imposes pressures and constraints that
determine the strategies that would result in above-average returns.
2. Most firms competing within an industry or within a segment of that
industry are assumed to control similar strategically relevant
resources and to pursue similar strategies in light of those resources.
3. Firms assume that their resources are highly mobile, meaning that
any resource differences that might develop between firms will be
short-lived.

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Resource Based Model
of Above-Average Returns
v Internal Environment Identify
Resources and Capabilities
Analyses

To determine the firm’s core Conduct

competencies as competitive •Value Chain Analysis
•Resource-based framework
advantages
Determine
core competencies
(Source of competitive
advantage)
 Resource-Based Model

Assumptions
1. Resource uniqueness
2. Capability uniqueness
3. Resource ownership
4. Origins of competitive advantages

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Underlying Assumptions of RBV
As a source of competitive advantage, a capability must not be easily
imitated but also not too complex to understand and manage.
1. Differences in firms’ performances across time are due primarily to
their unique resources and capabilities rather than the industry’s
structural characteristics.
2. Firms acquire different resources and develop unique capabilities
based on how they combine and use the resources.
3. Resources and capabilities are not highly mobile across firms.
4. Differences in resources and capabilities are the basis of competitive
advantage.

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Resources-Based View
v The resource-based model of above-average returns
assumes that each organization is a collection of unique
resources and capabilities.
v The uniqueness of resources and capabilities is the basis
of a firm’s strategy and its ability to earn above-average
returns.

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Resources
v Resources are inputs into a firm’s production process, such as capital
equipment, the skills of individual employees, patents, finances, and
talented managers.
v Firms typically classify resources into three categories:
v Physical capital
v Human capital
v Organizational capital

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Resources, Capability and Core Competencies
v Resources have a greater likelihood of being a
competitive advantage when integrated to form a
capability.
v A capability is a set of resources to perform a task or an
activity in an integrative manner.
v Core competencies are capabilities that serve as a source
of competitive advantage for a firm over its rivals.

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Peer Exercise – 15 mins
-find and share

v Apple Core Competencies - 2

v Amazon Core Competencies -2

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APPLE core competencies

v R&D function

v Superior marketing and retailing experience

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Amazon core competencies
v Distribution function
v Superior IT capabilities

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Three Basic Levels Of Strategies
Corporate Strategy International Strategies
Product Diversification Geographic Diversification Corporate/
• Single Business • Multi-domestic Strategy
• Related Business • Global Strategy Internationa
• Unrelated Business • Transnational Strategy l Level
• International Strategy

Business Strategy
Business
Types of Business Strategies
• Cost Leadership Strategy Level
• Differentiation Strategy
• Focus Strategy
•Integrated Cost and Differentiation Strategy

Functional Strategy Functional /

Based on Business Departmental
Functions Level
• Marketing Strategy
• Finance Strategy
• R&D Strategy
LESSON 2: THE EXTERNAL ENVIRONMENT
- The General, Industry, and Competitor Environments
Lesson 2 ILO
Distinguish and demonstrate how to apply external
environment analytical tools such as
a. General environment analysis
b. Porter’s five-forces model

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Contents of Core Slides
v To explain two main external environment
analytical tools
v General Environment Analysis
v Porter’s Five Forces Model
 The General Environment

• The general environment is composed of dimensions in the broader

society that influence an industry and the firms within it.
• The dimensions are grouped into seven environmental segments:
1. Demographic
2. Economic
3. Political/legal
4. Sociocultural
5. Technological
6. Global
7. Sustainable physical environment
General Environment Analysis
v Demographics
v Population size, age, income distribution, etc.
v Sociocultural
v Societal values, attitudes, and lifestyles
v Political/Legal
v Laws and regulations
v Technological
v New products, processes, materials, etc.
v Economic
v Economic growth, inflation, interest rate, etc.
v Global
v New global markets, existing markets that are changing, important international
political events, etc.
v Sustainable Physical Environment
v Actual and potential changes in the physical environment and business practices
intended to respond to these changes
Rapid changing economic and technological
environment

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Macro environment

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Political and Legal factors
- US and China trade war

39
Economic factor
- low Interest rate, cheap credit

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Sociocultural factors
– capture a society’s culture, norms and values

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The General Environment:
Segments and Elements

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The General Environment:
Segments and Elements

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v The need to scan, monitor, and evaluate the
important external factors and trends that might
impinge on a firm.
v Such factors create both opportunities and
threats.

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Market/Industry Analyses (I):
v Porter’s Five Forces

Prof. Porter’s Explanation

https://www.youtube.com/watch?v=mYF2_FBCv
Xw&feature=youtu.be&t=35
 The Industry Environment

• The industry environment is a set of factors that directly influences a firm and its
competitive actions and responses:
• The threat of new entrants
• The power of suppliers
• The power of buyers
• The threat of product substitutes
• The intensity of rivalry among competing firms
Industry Analysis: Porter’s Five Forces
v The five forces model of competition is an analytical tool firms use to
find the industry that is most attractive.
v An industry’s profitability is a function of interactions among:
v Potential entrants to the industry
v Suppliers
v Buyers
v Product substitutes
v Competitive rivalry among firms currently in the industry

v Firms can earn above-average returns by producing either:

v Standardized products at costs below those of competitors (a cost
leadership strategy)
v Differentiated products for which customers are willing to pay a price
premium (a differentiation strategy)
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The Five Competitive Forces That Shape Strategy

https://www.youtube.com/watch?v=mYF2_FBCvXw

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Attractive Industry Structure

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 Attractive Market/Industry

Low
Substitutes

Weak Buyers High

Low Threat
And Profitability Of Entry
Suppliers Potential

Moderate to
Low
Rivalry
Competitive environment

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Economies of Scale

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v Payroll software systems – High or low switching
costs?
v Why?

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Threat of New Entrants
Expected Retaliation
Barriers to Entry HIGH from Incumbents
Capital requirements

Economies of Scale
Incumbents’ Ability
Cost disadvantages
independent of
scale
LOW Incumbents’ stake
in industry
Product differentiation Threat of New
Entrants
Customer switching
Industry growth
costs
Access to distribution
channels
Government policy
 Bargaining Power of Suppliers

Industry firms’ Suppliers’ Threat of suppliers

dependency upon dependency upon integrating forward
suppliers industry firms

LOW HIGH LOW

•No. of suppliers?
•Availability of •Are industry firms a
substitutes? significant buyer for
•Suppliers’ products suppliers’ products?
are critical? LOW
•Firms’ switching costs Bargaining Power
to another supplier
of Suppliers
group
 Bargaining Power of Buyers
Buyer switching
Is buyer group price-
costs to substitute
sensitive?
NO HIGH products/svcs

•Differentiated products?
•Form a significant
portion of buyers’ costs? LOW
•Important to the quality Bargaining Power
of buyers’ products/svcs?
of Buyers
•Save buyers’ money?

Is buyer group
concentrated or NO LOW Threat of buyer
purchase in large integrating backward
quantities?
Threat of Substitute Products
Substitutes
Price-performance
Buyer switching produced by
ratio offered by
costs to substitutes industries earning
substitutes
high profits?

HIGH HIGH NO

LOW
Threat of
Substitute Products
Intensity of Rivalry
Competitors
•Numerous?
•Equally matched in
size/power?
High Fixed Costs?
•Diversity in competitors’ NO NO
origins or goals?

Product/Service
•Differentiated?
LOW Capacity
•High switching costs? Intensity of augmented in large
YES increments?
•Not perishable? Rivalry NO

High Industry
High exit barriers?
Growth
YES NO
Rules of Thumb
v The stronger the five forces, the lower the
industry’s profit potential
v The weaker the five forces, the greater the
industry’s profit potential – making the industry
more attractive.

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Which are profitable businesses?
v Mercedez-Benz
v Coca-Cola
v Revlon
v Verizon
v Walmart

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