Ch 2: Analyzing the External Environment

of the Firm

Spring 2015

Strategic Analysis1) Introduction, Analyzing Goals and Objectives

2) Analyzing External Environmenti. Focuses on the value managers add when

they have a sense of events outside the company

ii. By focusing on external events, managers are able to stay a step ahead of competitors by accurately anticipating and promptly responding to actions that can impact the organization.

3) Analyzing Internal Environment

4) Assessing Intellectual Capital

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Overview – 3 Sections

I. The environmentally aware organization.o Managers use scanning, monitoring,

and competitive intelligence to develop forecasts

o Role of scenario planning

II. Influence of six segments of general environmento demographic, sociocultural,

political/legal, technological, economic, & global

III. The role of the competitive environment o Porter’s five forces model.

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Section One

The Environmentally

Aware Organization

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Creating the Environmentally Aware Organization

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Environmental Scanning•External Scanning

▫Surveillance of a firm’s external environment: Predict environmental changes to come Detect changes already under way Proactive mode

•Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them

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Environmental Monitoring

•External Monitoring▫Track evolution of environmental trends,

sequence of events or streams of activities

Scanning Vs MonitoringScanning – future, potentials

Monitoring – historical trends, key industry indices/measures

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How to Spot Hot Trends

• Customers▫ Listen/ Go old school

• Pay attention• Follow trends online

Exhibit 2.2 • Ask your customers questions about

▫ your products and services

▫ and their interests

• Read trade publications related to your industry

• Add websites like trendhunter.com to your regular surfing

• Ask your customers what they think ▫ focus groups, chat rooms, Facebook, etc.

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Competitive Intelligence•Define and understand a firm’s industry

▫Who are “we” competing against?• Identify rivals’ strengths and weaknesses

▫Intelligence gathering (data)▫Interpretation of intelligence data

•Helps a firm avoid surprises

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Creating the Environmentally Aware Organization

Environmental Forecasting

•Environmental forecasting▫Plausible projections about direction, scope,

speed and intensity of environmental change

•Caution: Not Black/White▫Remember the Grey▫Probability

•Poor predictions examples▫Page 40

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• I think there is a world market for maybe five computers. ~ Thomas J. Watson, 1943, Chairman of the Board of IBM

• This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us. ~ Western Union internal memo, 1876

• Who the hell wants to hear actors talk? ~ H. M. Warner, Warner Brothers, 1927

• Airplanes are interesting toys, but they have no military value.~ Marshal Ferdinand Foch in 1911

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Environmental Forecasting - Examples

•Scenario analysis

▫Involves experts’ detailed assessments of societal trends, economics, politics, technology, or other dimensions of the external environment

▫What if?, Contingencies

▫High Reliability Organizations

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Environmental Forecasting

SWOT Analysis

Firm’s strategy must:

▫Build on its strengths▫Remedy the weaknesses or work around them

• Internal- - - - -

▫Take advantage of opportunities presented by the environment

▫Protect the firm from threats in the environment•External

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Example: Harley-Davidson•Strengths

▫Strong & adaptable brand image •Weaknesses

▫Limited ability to develop new non-traditional products

•Opportunities▫Growing leisure interest in motorcycles

worldwide •Threats

▫Differing foreign policies governing motorcycles

Section 2

General Environmen

t

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The General Environment

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Factors external to an industry, usually beyond a firm’s control

Demographic Sociocultural Legal/Political

Technological Economic Global

Demographic Segment

•Aging population•Rising or declining affluence•Changes in ethnic composition•Geographic distribution of population•Greater disparities in income levels

•Can vary by country as well.

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Sociocultural Segment

• More women in the workforce• Dual-income families• Increase in temporary workers• Greater concern for healthy diets and

physical fitness• Greater interest in the environment• Postponement of having children

• Country differences here too.

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Political/Legal Segment• Tort reform• Americans with Disabilities Act (ADA)• Repeal of Glass-Steagall Act in 1999 (banks may

now offer brokerage services)• Deregulation of utility and other industries• Increases in federally mandated minimum

wages• Taxation at local, state, federal levels (&

country)• Legislation on corporate governance reforms

(Sarbanes-Oxley Act)• Health Insurance Reform• EEOC, OSHA, HR• ICE – CIS (citizenship & immigration services)

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Technological Segment• Genetic engineering• Emergence of Internet technology• Computer-aided design/computer-aided

manufacturing systems (CAD/CAM)• Wireless communication• Nanotechnology• Facebook, Twitter, LinkedIn• Rackspace (hosting)• Cloud (Amazon, Apple, Google)• iphones, ipads, droids, smartphones

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Economic Segment

• Interest rates•Unemployment•Consumer Price index

▫http://www.bls.gov/cpi/•Trends in GDP•Changes in stock market valuations•Housing market•Oil prices• International…

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Global Segment

• Increasing global trade•Currency exchange rates

▫Arbitrage•Emergence of the Indian and Chinese

economies•Trade agreements (NAFTA, EU, APEC, ASEAN,

Mercosur, CAFTA-DR)▫ http://www.aseansec.org/74.htm ▫ http://www.aseansec.org/64.htm

•Creation of WTO (decreasing tariffs/free trade in services)

•Ease of information access / lack of information access

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Interactions X Industries (Ex 2.3) Segment/Trends and Events

Industry Positive

Neutral

Negative

Demographic

Aging population HealthcareBaby products

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Rising affluence Brokerage servicesFast foodsUpscale pets and supplies

X

XX

Sociocultural

More women in the workforce

ClothingBaking products (staples)

XX

Greater concern for health and fitness

Home exercise equipmentMeat products

XX

Political/Legal

Tort reform Legal servicesAuto manufacturing X

X

Americans with Disabilities Act (ADA)

RetailManufacturers of elevators, escalators, and ramps

XX

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Interactions X Industries (Ex 2.3)

Segment/Trends and Events

Industry Positive

Neutral Negative

Technological

Genetic engineering

PharmaceuticalPublishing

XX

Pollution/global warming

Engineering servicesPetroleum

XX

Economic

Interest rate increases

Residential constructionMost common grocery products

XX

Global

Increasing global trade

ShippingPersonal service

XX

Emergence of China as an economic power

Soft drinksDefense

XX

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Company XYZ

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Demographic

Sociocultural

Legal/Political

Technological

Economic

Global

Section 3

The Competitive Environment

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The Competitive Environment

•Competitive environment -- factors that pertain to an industry and affect a firm’s strategies

▫Competitors

▫Customers

▫Suppliers

▫Labor Pool (Potential)

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Porter’s Five Forces

Model of Industry

Competition

The Threat of New Entrants

▫Economies of scale

▫Product differentiation

▫Capital requirements

▫Switching costs▫Access to

distribution channels

▫Cost disadvantages independent of scale Proprietary

products Favorable access

to raw materials Government

subsidies Favorable

government policies

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• Profits of established firms in the industry may be eroded by new competitors

• Sources of entry barriers

The Bargaining Power of Buyers•Buyers threaten

an industry by:▫Forcing down

prices▫Bargaining for

higher quality or more services

▫Playing competitors against each other

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The Bargaining Power of Buyers•A buyer group is powerful when:

▫ It is concentrated or purchases large volumes relative to seller sales

▫ The products it purchases from the industry are standard or undifferentiated

▫ The buyer faces few switching costs

▫ It earns low profits

▫ The buyers pose a credible threat of backward integration

▫ The industry’s product is unimportant to the quality of the buyer’s products or services

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The Bargaining Power of Suppliers

Suppliers can exert power by • threatening to raise

prices or • reduce the quality of

purchased goods and services

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The Bargaining Power of Suppliers

▫The supplier group is dominated by a few companies and is more concentrated than the industry it sells to

▫The supplier group is not obliged to contend with substitute products for sale to the industry

▫The industry is not an important customer of the supplier group

▫The supplier’s product is an important input to the buyer’s business

▫The supplier group’s products are differentiated or it has built up switching costs for the buyer

▫The supplier group poses a credible threat of forward integration

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A supplier group will be powerful when:

The Threat of Substitute Products and Services•Substitutes limit the potential returns of

an industry▫Ceiling on the prices that firms in that

industry can profitably charge▫Price/performance ratio

•GPS (Tom-Tom)▫Smartphones

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The Intensity of Rivalry among Competitors in an Industry

• Price competition• Advertising battles• Product introductions• Increased customer service or

warranties

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• Bic• Foray• Pilot• Edge• Parker• National

pens• Paper

mate• Mont

blanc• Lamy

The Intensity of Rivalry among Competitors in an Industry

•Lack of differentiation or switching costs

•Capacity augmented in large increments

•High exit barriers

•Exhibit 2.8 ▫Good summary

Interacting factors lead to intense rivalry

•Numerous or equally balanced competitors

•Slow industry growth

•High fixed or shortage costs

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Rivalry

Substitutes’ Threat

Buyers’ PowerSuppliers’ Power

Threat of New Entrants

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How the Internet and Digital Technologies Influences Industry (p.67)

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Using Industry Analysis: A Few Caveats•Managers must not always avoid low profit industries▫Can still yield high returns for players

with sound strategies•Implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces

•Five Forces analysis is essentially a static analysis…

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Using Industry Analysis: A Few Caveats (cont.)

•Good industry analysis looks rigorously at the structural underpinnings of profitability.

▫A first step is to understand the time horizon

•The point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of profitability.

▫Help with understanding opportunities and threats.

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The Value Net

Symbiosis View(not Zero-Sum)

Strategic Groups within Industries

•Two unassailable assumptions in industry analysis▫No two firms are totally different▫No two firms are exactly the same

•Strategic groups▫Cluster of firms that share similar

strategies Breadth of product and geographic

scope Price/quality Degree of vertical integration Type of distribution system

P. 63 (good visual – Auto industry)

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2.11 World Auto Industry: Strategic Groups

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High

Price

Low Breadth of Product Line

High

Low

CheryGeelyTata

Motors

Hyundai

Kia

FerrariLamborghin

iPorsche Audi

Mercedes

BMW

ToyotaFord

General MotorsChryslerNissan

Strategic Groups within Industries•Value of strategic groups as an analytical tool

▫Identify barriers to mobility that protect a group from attacks by other groups

▫Identify groups whose competitive position may be marginal or tenuous

▫Chart the future direction of firms’ strategies▫Thinking through the implications of each

industry trend for the strategic group as a whole

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