External Environment

1
External Environment

• Macro environment
• Competitive environment

2
Technological Dimension

• Scientific and technological advancements in
  industry as well as society at large

3
Sociocultural Dimension

• Population geographical distribution
• Population density
• Age
• Education levels

4
Legal - Political Dimension

• Political risk - the risk of loss of assets,
  earning power, or managerial control due to acts
  by host governments that are politically based.
• Political instability - riots, revolution, civil
  disorder

5
Laws and Regulations

• Differ from country to country - some countries
  have policies to
• restrict imports
• promote exports
• restrict foreign investment
• restrict repatriation of profits

6
Economic Environment

• Economic development
• Infrastructure
• Exchange rates

7
Changes in the exchange rate can have major
implications for the profitability of
international operations

• Year 1
• Lexus makes a car in Japan and sells it in the
  U.S.
• Pays wages of 500 yen to autoworker
• Sells car in U.S. for 2
• Exchange rate is 250 yen to the dollar
• So trade the dollars for yen and pay the worker
• No profit / no loss

8

• Year 2
• Lexus makes a car in Japan and sells it in the
  U.S.
• Pays wages of 500 yen to autoworker
• Sells car in U.S. for 2
• Exchange rate is 125 yen to the dollar
• So trade dollars for yen and get only 250 yen
• But have to pay worker 500
• What have the Japanese done about this problem?

9

• The Context of Strategy

10
Environment and Strategy

• Sound and well-crafted strategies
• Begin with a clear and unbiased interpretation of
  conditions in the competitive environment
• Reflect an internally consistent set of
  assumptions about organizational purpose and
  capabilities
• Emphasize the organizational competencies that
  can provide sustainable competitive advantage
• Avoid unwarranted diversification that dilutes
  shareholder values.
• Error-free implementation requires
• Effective mechanisms for coordination and
  integration
• A balanced approach to strategic control
• The guidance and inspiration of an effective
  leader

11
Avoiding the Blind Spots

• Misreading the Environmental Tea Leaves
• Failing to recognize and understand the
  implications of events and changing conditions
  in the competitive environment
• A focus on the strategist's external frame of
  reference
• Customers
• Suppliers
• Current and potential competitors
• Technology
• Stakeholders - owners managers and employees
• Economic, social, cultural, political-legal and
  regulatory factors

12
Misreading the Environmental Tea Leaves

• The case of the A.T. Cross Company
• What happened?
• Did management just take the market for granted?
• Was it complacency, or were they just not paying
  attention?
• Did they focus their attention too narrowly --
  just on ballpoint pens -- and fail to heed the
  entry of a substitute technology into the arena?
• Whatever the cause, the result was
  devastating......
• For the management team (who were replaced)
• For the employees (who lost their jobs)
• For the shareholders (who lost their shirts)

13
Misreading the Environmental Tea Leaves

• The bigger they are, the harder they fall! The
  case of Encyclopedia Britannica
• What happened?
• Were they aware of the new CD Rom technology?
• Did they recognize the threat of a potential
  substitute?
• Did they think that the high-end Britannica and
  the low-end Compton's competed in separate
  markets?
• Were they afraid to alter their long-standing
  formula for success?
• Just like A.T. Cross, they missed, or misread,
  the signs of change that ultimately led to a
  significant erosion of their competitive
  position.

14
Avoiding the Blind Spots

• Spotting the opportunity is just as important as
  avoiding the pitfalls - the case of Kinko's
• A matter of orientation....
• people who spot opportunities are externally
  aware and curious about the world about them -
  and this curiosity is broadly focused.
• By contrast, many managers are "wrapped up in
  their work" with blinders so tight that the see
  or pay attention to very little beyond the
  narrowly defined boundaries of their own
  organization and its immediate competitive
  environment.
• 39 1 40 (Josh Weston, CEO, ADP, retired)

15
Avoiding the Blind Spots

• Some practical guidelines
• Narrow the focus - define what is relevant and
  what is not by defining the boundaries of the
  relevant competitive environment
• Identify the key players - current and potential
  customers, suppliers, strategic alliance
  partners and competitors
• Define what is critical - then prioritize your
  information needs
• Get everyone involved - create a culture of
  environmental awareness
• Ensure the free flow of information throughout
  the organization
• Provide structure and focus to the intelligence
  process

16
Right Strategy - Wrong Problem Avoiding the
Blind Spots

• Right Strategy - Wrong Problem
• Basing strategies on a flawed set of assumptions
  and premises --- or failing to react when
  changing circumstances render the initial
  assumptions and premises invalid.

"We built a great mousetrap --- but there were no
mice" Gary W. Weber, PPG
Industries, Inc.
17
The strategist's internal frame of reference

• A set of interrelated assumptions about the
  organization's environment, its mission, and the
  core competencies needed to accomplish that
  mission, within which strategies are devised and
  evaluated.
• (from Drucker, The Theory of the Business)
• "Every manager carries around in his or her head
  a set of biases, assumptions and presuppositions
  about the structure of the relevant 'industry',
  about how one makes money in the industry, about
  who the competition is.....who the customers are
  .....which technologies are viable and which
  aren't and so on. This frame of reference also
  encompasses beliefs, values and norms about how
  best to motivate people the right balance of
  internal cooperation and competition the
  relative ranking of shareholder, customer and
  employee interests and what behaviors to
  encourage and discourage." (Hamel Prahalad,
  Competing for the Future)

18
A wild ride -- the case of Greyhound Lines, Inc.

• Key assumptions -- the new "theory of the
  business"
• The bus business is like the airlines
  --asset-intensive, high fixed costs, cyclical
  and seasonal revenues -- asset utilization is
  the key to profitability
• The airline business model would work in the bus
  industry
• The big difference between the airlines and
  Greyhound was in marketing and technology -- the
  way the airlines priced their product and
  managed revenue with their reservation and yield
  management systems
• With the right tools and technology, Greyhound
  could be managed more efficiently and marketed
  effectively to attract a broader range of
  customers
• In the short run, experienced employees could be
  replaced with cheaper new hires, and service and
  costs could be cut without impacting revenues

19
Avoiding the Blind Spots

• Sources of assumptions, premises and beliefs.....
• Education, observation and personal experience
• Trade journals, business press, conferences
• Interactions with customers, suppliers, peers and
  competitors
• And how they become institutionalized......
• Socialization and accommodation within an
  industry and an organization tend to produce a
  set of broadly-shared assumptions and beliefs
  about the industry and the firms that compete in
  it.
• This "dominant logic" may become more important
  in guiding management decisions than the
  objective reality it mirrors.
• The dominant logic reinforces certain
  perspectives and excludes others -- bounding or
  "framing" individual or firm perspectives.

20
Strategic Inventory

• Does your organization understand its strategic
  context?
• Customers, non-customers, competitors, suppliers
• Key technologies that will affect your industry -
  now or in the future
• Economic/cultural/political/legal factors
• Relationships with stakeholders
• Is your organization environmentally aware?
• Have you developed a culture of environmental
  awareness?
• Do the key boundary spanners know what to look
  for? What your intelligence priorities are?
• Do the key boundary spanners know that you want
  their help? Are there incentives for them to do
  this critical job?

21
Strategic Inventory

• Does important information flow freely within
  the organization?
• Are effective communications a priority?
• Does important environmental intelligence and
  competitor information gets to the right place
  in a timely fashion?
• Does the intelligence process have structure and
  focus?
• Are information needs and priorities clearly
  defined?
• Is there a designated focal point for the
  collection and interpretation of environmental
  intelligence and competitor information?
• Is the information analyzed and interpreted
  effectively?
• Is environmental intelligence and competitor
  information shared, as appropriate, throughout
  the organization?