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Analyzing the External

Environment of the Firm

McGraw-Hill/IrwinStrategic Management, 3/e

Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter two

Part 1:strategic analysis


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Learning Objectives

After reading this chapter, you should

have a good understanding of:

The importance of developing forecasts of

the business environment. Why environmental scanning, environmental

monitoring, and collecting competitiveintelligence are critical inputs to forecasting.

Why scenario planning is a useful technique

for firms competing in industriescharacterized by unpredictability andchange.




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Learning Objectives



The impact of the general environment ona firms strategies and performance.

How forces in the competitiveenvironment can affect profitability andhow a firm can improve its competitiveposition by increasing its power vis--visthese forces.




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Learning Objectives



How trends and events in the general

environment and forces in the competitiveenvironment are interrelated and affectperformance.

The concept of strategic groups and theirstrategy and performance implications.




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Creating the Environmentally Aware

Organization



Adapted from Exhibit 2.1 Inputs to Forecasting


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Environmental Scanning

Surveillance of a firms external

environment

P

redict environmental changes tocome

Detect changes already under way

Proactive mode



Environmental

scanning


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Environmental Monitoring

Track evolution of

Environmental trends

Sequences of events

Streams of activities



Environmental

monitoring


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2-9

Competitive Intelligence



Define and understand a firms

industry

Identify rivals strengths and

weaknessesIntelligence gathering (data)Interpretation of intelligence data

Helps a firm avoid surprises

Competitive

intelligence


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What Competitive Intelligence Is and Is Not



Competitive

Intelligence Is 1. Information that has

been analyzed to the

point where you canmake a decision.

2. A tool to alert

management to early

recognition of both

threats and opportunities.3. A means to deliver

reasonable assessments.

4. A way of life, a process.

Competitive Intelligence Is

Not 1. Spying. Spying implies illegal or

unethical activities. It is a rare

activity.2. A crystal ball. Competitive

Intelligence is good approximation

of reality; it does not predict the

future.

3. Database search. Data by itself isnot good intelligence.

4. A job for one smart person.

Adapted from Exhibit 2.2 What Competitive Intelligence Is and Is Not


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Environmental Forecasting



Plausible projections aboutDirection of environmental changeScope of environmental changeSpeed of environmental change

Intensity of environmental changeScenario analysis

Forecasts


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SWOT Analysis



Managers need to analyzeThe general environmentThe firms industry and competitiveenvironment

SWOT analysisStrengthsWeaknessesOpportunitiesThreats

Basic technique for analyzing firm andindustry conditions


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The General Environment



General environmental trends

and events

Little ability to predict themEven less ability to control themCan vary across industries

General

Environmen

t

DemographicSocioculturalPolitical/LegalTechnologicalEconomicGlobal


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Demographic Segment



Aging population

Rising affluence

Changes in ethnic

compositionGeographic distribution of

population

Greater disparities in income

levels

General

Environmen

t

Demographic

SocioculturalPolitical/LegalTechnologicalEconomic


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Sociocultural Segment



More women in the

workforce

Increase in temporary

workersGreater concern for fitness

Greater concern for

environment

Postponement of familyformation

General

Environmen

t

Demographic

SocioculturalPolitical/LegalTechnologicalEconomicGlobal


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Political/Legal Segment



Tort reform

Americans with Disabilities Act (ADA)

Repeal ofGlass-Steagall Act in 1999

D

eregulation of utility and otherindustries

Increases in federally mandated

minimum wages

Taxation at local, state, federal levels

Legislation on corporate governancereforms (Sarbanes-Oxley Act)

General

Environmen

t



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Technological Segment



Genetic engineering

Emergence of Internet technology

Computer-aided design/computer-aided

manufacturing systems (CAD/CAM)

Research in synthetic and exotic

materials

Pollution/global warming

Miniaturization of computing

technologiesWireless communication

Nanotechnology

General

Environmen

t

DemographicSociocultural

Political/LegalTechnologicalEconomicGlobal


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Economic Segment



Interest rates

Unemployment

ConsumerPrice indexTrends in GDP

Changes in stock

market valuations

General

Environmen

t

DemographicSociocultural

Political/LegalTechnologicalEconomicGlobal


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Global Segment



Increasing global trade

Currency exchange

rates

Emergence of the

Indian and Chinese

economies

Trade agreements

among regional blocs

(NAFTA, EU, ASEAN)

Creation of WTO

(decreasing tariffs/free

trade in services)

General

Environmen

t



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The Competitive Environment

McGraw-Hill/IrwinStrategic Management, 3/eCopyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Sometimes called the task or

industry environment

Includes

Competitors (existing andpotential)CustomersSuppliers

Porters Five Forces model

Competitive

Environmen

t

CustomersSuppliers

Competitors


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2-21 Porters Five Forces Model of Industry

Competition


Adapted from Exhibit 2.6 Porters Five Forces

Model of Industry Competition


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The Threat of New Entrants


Profits of established firms in the

industry may be eroded by new

competitors

High entry barriers lead to lowthreat of new entries Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of

scale


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The BargainingPower of Buyers


Buyers threaten an

industryForce down prices

Bargain for higherquality or moreservicesPlay competitorsagainst each other


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The BargainingPower of Buyers


A buyer group is powerful whenIt is concentrated or purchases largevolumes relative to seller salesThe products it purchases from theindustry are standard or undifferentiatedThe buyer faces few switching costsIt earns low profitsThe buyers pose a credible threat ofbackward integrationThe industrys product is unimportantto the quality of the buyers products orservices


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The BargainingPower of Suppliers


Suppliers can

exert power by

threatening to

raise prices orreduce the quality

of purchased

goods and

services


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A supplier group will be powerful

whenThe supplier group is dominated bya few companies and is more

concentrated than the industry it sellstoThe supplier group is not obliged tocontend with substitute products forsale to the industryThe industry is not an importantcustomer of the supplier group


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A supplier group will be powerful

when

The suppliers product is an

important input to the buyersbusiness

The supplier groups products aredifferentiated or it has built upswitching costs for the buyer

The supplier group poses a crediblethreat of forward integration


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The Threat of Substitute Products and

Services


Substitutes limit the

potential returns of an

industry

Ceiling on the pricesthat firms in thatindustry canprofitably charge

Price/performanceratio


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The Intensity of Rivalry among

Competitors in an Industry


Jockeying for position

Price competition

Advertising battles

Product introductions

Increased customer

service or warranties


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The Intensity of Rivalry among

Competitors in an Industry


Interacting factors lead to

intense rivalryNumerous or equally balancedcompetitorsSlow industry growthHigh fixed or shortage costsLack of differentiation orswitching costs

Capacity augmented in largeincrementsHigh exit barriers


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Using Industry Analyses: A Few Caveats


Five Forces analysis implicitly

assumes a zero-sum game

Five Forces analysis isessentially a static analysisValue net

Suppliers and customers (thevertical net)

Substitutes and complements(the horizontal net)


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The Value Net


Adapted from Exhibit 2.7 The Value Net


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Evolutionary Trajectories of Industry Change


Dess Ex

i

it 2.8.

L

Adapted from Exhibit 2.8 Four EvolutionaryTrajectories of Industry Change


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Strategic Groups within Industries


Two unassailable assumptions in industry

analysisNo two firms are totally differentNo two firms are exactly the same

Strategic groupsCluster of firms that share similar strategies

Breadth of product and geographic scopePrice/quality

Degree of vertical integrationType of distribution system


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Strategic Groups within Industries


Value of strategic groups as an

analytical toolIdentify barriers to mobility thatprotect a group from attacks by othergroupsIdentify groups whose competitiveposition may be marginal or tenuousChart the future direction of firms

strategiesThinking through the implications ofeach industry trend for the strategicgroup as a whole


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The World Automobile Industry:

Strategic Groups



Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups

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