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Chapter Two ANALYZING THE EXTERNAL ENVIRONMENT OF THE FIRM

OBJECTIVES

1. Environmental Forecasting2. Environmental Analysis3. Industry Analysis (5 Forces Model)4. Strategic Group Analysis

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1. ENVIRONMENTAL FORECASTING

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1. ENVIRONMENTAL FORECASTING

ENVIRONMENTAL SCANNING

Surveillance of a firm’s external

environment

Predict environmental changes to come

Detect changes already under way

Proactive mode

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1. ENVIRONMENTAL FORECASTING

ENVIRONMENTAL MONITORING

Track evolution of

Environmental trends

Sequences of events

Streams of activities

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1. ENVIRONMENTAL FORECASTING

COMPETITIVE INTELLIGENCE

Information that has been analyzed to the point where you can make a decision.

Identify rivals’ strengths and weaknesses Helps a firm avoid surprises Plausible projections about

Direction of environmental change

Scope of environmental change

Speed of environmental change

Intensity of environmental change

Scenario analysis

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2. ENVIRONMENTAL ANALSIS

Managers need to analyze

The general environment

The firm’s industry and competitive environment

SWOT analysis Strengths & Weaknesses (SW) Opportunities & Threats (OT) Basic technique for analyzing firm and industry

Conditions

FORMULATING STRATEGY

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2. ENVIRONMENTAL ANALSISSITUATION ANALYSIS

Industry & Competitive Conditions• Industry’s dominant economic traits• Nature of competition & strength of

competitive forces • Drivers of industry change• Competitive position of rivals• Strategic moves of rivals• Key success factors

Industry & Competitive Conditions• Industry’s dominant economic traits• Nature of competition & strength of

competitive forces • Drivers of industry change• Competitive position of rivals• Strategic moves of rivals• Key success factors

Internal Condition• Assessment of company’s present

strategy• Strengths & weaknesses, (SW)• Company’s costs compared to rivals• Strength of competitive position• Strategic issues to be addressed

Internal Condition• Assessment of company’s present

strategy• Strengths & weaknesses, (SW)• Company’s costs compared to rivals• Strength of competitive position• Strategic issues to be addressed

DevelopOptions

DevelopOptions

Select the Best

Strategy

Select the Best

Strategy

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2. ENVIRONMENTAL ANALSIS

ConnectConnectFirm

Industry Environment

Macro Environment

Competitors Suppliers

Substitutes Customers

Demographic

TechnologicalPolitical/Legal

Social

Economic

Global

ENVIRONMENTALCOMPONENTS

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2. ENVIRONMENTAL ANALSISGENERAL ENVIRONMENT: KEY COMPONENTS

Demographic

Aging population

Changes in ethnic composition

Greater income disparities

Sociocultural

More women in the workforce

Postponement of family formation

Political/Legal

Environmental protection

Americans with Disabilities Act

Trade regulations/Protectionism

Technological

Genetic engineering

Emergence of Internet technology

CAD/CAM

Economic

Interest rates

Changes in stock market valuations

Global

Currency exchange rates

Emergence of the Indian and Chinese

economies

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2. ENVIRONMENTAL ANALSISENVIRONMENTAL IMPACTS

Segment/Trends/Events Industry Positive Neutral Negative

Demographic Aging population

Health CareBaby products

Sociocultural More women in the workforce

ClothingBaking Products

Political/legal Tort reform

Legal ServicesAuto Manufacturing

Technological Genetic engineering

PharmaceuticalPublishing

Economic Interest Rate Increases

Residential constructionGrocery products

Global Global Trade

Shipping

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3. INDUSTRY ANALYSIS

5 FORCES MODEL OF INDUSTRY COMPETITION

Threat ofnew entrants

Bargaining power of buyers

Bargaining power of suppliers

Threat ofSubstitute products

and services

Adapted from Exhibit 2.2 Porter’s Five Forces Model of Industry Competition

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Assess strength of each competitive force (Strong? Moderate? Weak?)

Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers

Explain how each force acts to create competitive pressure

Decide whether overall competition is brutal, fierce, strong, normal/moderate, or weak

3. INDUSTRY ANALYSISPORTER’S 5 FORCES MODEL

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Usually the most powerful of the five forces

Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position

Price Quality Performance features offered Customer service Warranties/guarantees Advertising/promotions Dealer networks Product innovation

3. INDUSTRY ANALYSISRIVALRY AMONG COMPETING FIRMS

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Lots of firms, more equal in size and capability. Slow market growth. Industry conditions tempt some firms to go on the

offensive to boost volume and market share. Customers have low costs in switching brands. Costs more to get out of business than to stay in. Firms have diverse strategies, corporate priorities,

resources, and countries of origin.

Dynamic and ever-changing!

3. INDUSTRY ANALYSISWHAT CAUSES RIVALRY TO BE STRONGER?

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Seriousness of threat depends on:

Barriers to entry

Reaction of existing firms to entry

Threat of entry is stronger when:

Entry barriers are low

Sizable pool of entry candidates exists

Incumbents are unwilling or unable to contest a newcomer’s entry efforts

Newcomer can expect to earn attractive profits

3. INDUSTRY ANALYSISTHREAT OF NEW ENTRANTS

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Economies of scale.

Inability to gain access to specialized technology.

Existence of learning/experience curve effects.

Strong brand preferences and customer loyalty.

Capital requirements and/or other specialized resource requirements.

Cost disadvantages independent of size.

Access to distribution channels.

Regulatory policies, tariffs, trade restrictions.

3. INDUSTRY ANALYSISCOMMON BARRIERS TO ENTRY

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3. INDUSTRY ANALYSISTHREAT OF SUBSTITUTE PRODUCTS

Substitutes matter when customers are attracted to the products of firms in other industries.

Examples Newspapers vs. TV vs. Internet Eyeglasses vs. Contact Lens

Sugar vs. Artificial Sweeteners

Plastic vs. Glass vs. Metal

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3. INDUSTRY ANALYSISTHREAT OF SUBSTITUTES IS STRONGER

The competitive threat of substitutes is stronger when they are:

Readily available.

Attractively priced.

Believed to have comparable or better

performance features.

Customer switching costs are low.

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Suppliers are a strong competitive force when:

Item makes up large portion of product costs, is crucial to production process, and/or significantly affects product quality.

It is costly for buyers to switch suppliers.

They have good reputations and growing demand. They do not have to contend with substitutes. The supplier group is dominated

by a few companies.

3. INDUSTRY ANALYSISCOMPETITIVE FORCE OF SUPPLIERS

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Buyers are a strong competitive force when:

They are large and purchase a sizable percentage of industry’s product.

They can integrate backward.

Industry’s product is standardized. Their costs in switching to substitutes

or other brands are low.

They can purchase from several sellers.

3. INDUSTRY ANALYSISCOMPETITIVE FORCE OF BUYERS

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Competitive environment is ideal when:

Rivalry is moderate

Entry barriers are high

Good substitutes do not exist

Suppliers and customers are in a weak bargaining position

Caveat, Five-forces analysis implicitly assumes a zero-sum game.

3. INDUSTRY ANALYSISIMPLICATIONS

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One technique for revealing the different competitive positions of industry rivals is strategic group mapping.

A strategic group consists of those rivals with similar competitive approaches in an industry.

Cluster of firms that share similar strategies

Sell in same price/quality range.

Cover same geographic areas.

Be vertically integrated to same degree.

Have comparable product line breadth.

Emphasize same types of distribution channels.

Offer buyers similar services.

Use identical technological approaches.

4. STRATEGIC GROUP ANALYSIS

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4. STRATEGIC GROUP ANALYSISTHE WORLD AUTOMOBILE INDUSTRY:

STRATEGIC GROUPS

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Value of strategic groups as an analytical tool

Driving forces and competitive pressures often favor some strategic groups and hurt others.

Profit potential of different strategic groups varies due to

strengths and weaknesses in each group’s market position

The closer strategic groups are on map, the stronger the

competitive rivalry among member firms tends to be

Chart the future direction of firms’ strategies.

4. STRATEGIC GROUP ANALYSISINTERPRETING STRATEGIC GROUP MAPS