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A firm’s external environment consists of three interrelated sets of factors that play a principal
role in determining the opportunities, threats, and constraints that the firm faces. This chapter
describes the complex necessities involved in formulating strategies that optimize a firm’s market
opportunities. The remote environment comprises factors originating beyond, and usually
irrespective of, any single firm’s operating situation—economic, social, political, technological,
and ecological factors. Factors that more directly influence a firm’s prospects originate in the
environment of its industry, including entry barriers, competitive rivalry, the availability of
substitutes, and the bargaining power of buyers and suppliers. The operating environment
comprises factors that influence a firm’s immediate competitive situation—competitive position,
customer profiles, suppliers, creditors, and the labor market. These three sets of factors provide
many of the challenges that a particular firm faces in its attempts to attract or acquire needed
resources and to profitably market its goods and services. Environmental assessment is more
complicated for multinational corporations (MNCs) than for domestic firms because
multinationals must evaluate several environments simultaneously.
The design of business strategies is based on the conviction that a firm able to anticipate future
business conditions will improve its performance and profitability. Despite the uncertainty and
dynamic nature of the business environment, an assessment process that narrows, even if it does
not precisely define, future expectations is of substantial value to strategic managers.
0Learning Objectives
1. Describe the three tiers of environmental factors that affect the performance of a
firm.
2. List and explain the five factors in the remote environment.
3. Give examples of the economic, social, political, technological, and ecological
influences on a business.
4. Explain the five forces model of industry analysis and give examples of each
force.
5. Give examples of the influences of entry barriers, supplier power, buyer power,
substitute availability, and competitive rivalry on a business.
6. List and explain the five factors in the operating environment.
7. Give examples of the influences of competitors, creditors, customers, labor, and
direct suppliers on a business.
0Lecture Outline
A0. A host of external factors influence a firm’s choice of direction and action and,
ultimately, its organizational structure and internal processes.
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10. These factors, which constitute the external environment, can be divided into
three interrelated subcategories: factors in the remote environment, factors in
the industry environment, and factors in the operating environment.
3. In combination, these factors form the basis of the opportunities and threats that
a firm faces in its competitive environment.
A. The remote environment comprises factors that originate beyond, and usually irrespective
of, any single firm’s operating situation: (1) economic, (2) social, (3) political, (4)
technological, and (5) ecological factors.
1. That environment presents firms with opportunities, threats, and constraints, but
rarely does a single firm exert any meaningful reciprocal influence.
B. Economic Factors
1. Economic factors concern the nature and direction of the economy in which a
firm operates.
2. The emergence of new international power brokers has changed the focus of
economic environmental forecasting.
a) Among the most prominent of these power brokers are the European
Economic Community (EEC, or Common Market), the Organization of
Petroleum Exporting Countries (OPEC), and coalitions of developing
countries.
b) The EEC, whose members include most of the West European countries,
eliminated quotas and established a tariff-free trade area for industrial
products among its members.
c) By fostering intra-European economic cooperation, it has helped its
member countries compete more effectively in non-European
international markets.
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C. Social Factors
1. The social factors that affect a firm involve the beliefs, values, attitudes,
opinions, and lifestyles of persons in the firm’s external environment, as
developed from cultural, ecological, demographic, religious, educational, and
ethnic conditioning.
a) As social attitudes change, so too does the demand for various types of
clothing, books, leisure activities, and so on.
b) Social forces are dynamic, with constant change resulting from the
efforts of individuals to satisfy their desires and needs by controlling
and adapting to environmental factors.
2. The increasing awareness of the market power of Hispanics in the U.S. has
reached almost every business sector.
a) Exhibit 4.2, Strategy in Action, provides a few of the details that drive
many businesses’ interest in attracting Hispanics as customers.
b) Exhibit 4.3, Top Strategist, tells about the executive who led the
initiative for Univision, which purchased Hispanic Broadcasting in
2004.
3. One of the most profound social changes in recent years has been the entry of
large numbers of women into the labor market.
a) This has not only affected hiring and compensation policies and the
resource capabilities of their employers; it has also created or greatly
expanded the demand for a wide range of products and services
necessitated by their absence from the home.
b) Firms that anticipated or reacted quickly to this social change offered
such products and services as convenience foods, microwave ovens, and
day care centers.
5. A third profound social change has been the shift in the age distribution of the
population.
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b) This trend will have an increasingly unfavorable effect on most
producers of predominantly youth-oriented goods and will necessitate a
shift in their long-range marketing strategies.
c) Producers of hair and skin care preparations have already begun to
adjust their research and development to reflect anticipated changes in
demand.
d) A consequence has been a sharp increase in the demands made by a
growing number of senior citizens.
e) Constrained by fixed incomes, senior citizens have demanded that
arbitrary and rigid policies on retirement age be modified and have
successfully lobbied for tax exemptions and increases in Social Security
benefits.
f) Such changes have significantly altered the opportunity-risk equations of
many firms—often to the benefit of firms that anticipated the changes.
a) The fast-food industry has been the target of a great deal of public
concern.
b) Americans are concerned over the relationship between obesity and
health.
c) Health experts blamed the fast food industry for the rise in obesity,
claiming that companies like McDonald’s create an environment that
encourage overeating and discourage physical activity.
d) McDonald’s responded aggressively and successfully, establishing
themselves as an innovator in healthy food options.
D. Political Factors
1. The direction and stability of political factors are a major consideration for
managers on formulating company strategy.
a) Political factors define the legal and regulatory parameters within which
firms must operate.
b) Political constraints are placed on firms through fair-trade decisions,
antitrust laws, tax programs, minimum wage legislation, pollution and
pricing policies, administrative jawboning, and many other actions
aimed at protecting employees, consumers, the general public, and the
environment.
c) Because such laws and regulations are most commonly restrictive, they
tend to reduce the potential profits of firms.
d) Some political actions are designed to benefit and protect firms.
e) Political factors, then, may either limit or benefit the firms they
influence.
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2. The direction and stability of political factors are a major consideration when
evaluating the remote environment.
a) Supplier Function
b) Customer Function
(1) Government demand for products and services can create, sustain,
enhance, or eliminate many market opportunities.
(2) Note examples in the text from the Kennedy, Carter, Reagan,
Clinton, and Bush administrations, which spurred investment in
various policy-related technologies, skills, and products.
E. Technological Factors
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(3) The key to beneficial forecasting of technological advancement lies
in accurately predicting future technological capabilities and their
probable impacts.
F. Ecological Factors
1. The most prominent factor in the remote environment is often the reciprocal
relationship between business and the ecology.
a) The term ecology refers to the relationships among human beings and
other living things and the air, soil, and water that supports them.
b) Threats to our life-supporting ecology caused principally by human
activities in an industrial society are commonly referred to as pollution.
2. The global climate has been changing for ages; however, it is now evident
that humanity’s activities are accelerating this tremendously.
a) Acid rain, which can destroy aquatic and plant life, is believed to result
from coal-burning factories in 70 percent of all cases.
b) A health-threatening “thermal blanket” is created when the atmosphere
traps carbon dioxide emitted from smokestacks in factories burning
fossil fuels.
c) This is called the “greenhouse effect” and can disastrous consequences.
5. Water pollution occurs principally when industrial toxic wastes are dumped
or leak into the nation’s waterways.
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6. Land pollution is caused by the need to dispose of ever-increasing amounts of
waste.
9. Despite cleanup efforts to date, the job of protecting the ecology will continue
to be a top strategic priority.
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that produce more-useful goods and services while continuously reducing
resource consumption and pollution.
(1) Eco-efficient firms are proactive, not reactive. Policy is initiated and
promoted by business because it is in their own interests and the
interest of their customers, not because it is imposed by one or more
external forces.
(2) Eco-efficiency is designed in, not added on. This implies that the
optimization of eco-efficiency requires every business effort
regarding the product and process to internalize the strategy.
(3) Flexibility is imperative for eco-efficient strategy implementation.
Continuous attention must be paid to technological innovation and
market evolution.
(4) Eco-efficiency is encompassing, not insular. In the modern global
business environment, efforts must cross not only industrial sectors
but national and cultural boundaries as well.
B. While the importance of factors will differ, the same set of considerations can be used
for each country.
C. Exhibit 4.5, Global Strategy in Action, lists economic, political, legal, and social
factors used to assess international environments.
D. One complication to this process is that the interplay among international markets
must be considered.
A0. Harvard professor Michael E. Porter propelled the concept of industry environment
into the foreground of strategic thought and business planning.
10. The cornerstone of Porter’s work first appeared in the Harvard Business Review,
in which he explains the five forces that shape competition in an industry.
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1. While we sometimes hear executives complaining to the contrary, intense
competition in an industry is neither coincidence nor bad luck.
2. Moreover, in the fight for market share, competition is not manifested only in
the other players.
a) This kind of industry structure, of course, offers the worst prospect for
long-run profitability.
b) The weaker the forces collectively, however, the greater the opportunity
for superior performance.
5. The corporate strategists’ goal is to find a position in the industry where his
or her company can best defend itself against these forces or can influence
them in its favor.
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2. Every industry has an underlying structure, or a set of fundamental economic
and technical characteristics, that gives rise to these competitive forces.
3. The strategist, wanting to position the company to cope best with its industry
environment influence that environment in the company’s favor, must learn
what makes the environment tick.
B. Threat of Entry
1. New entrants to an industry bring new capacity, the desire to gain market
share, and often substantial resources.
2. Economies of Scale
3. Product Differentiation
4. Capital Requirements
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a) Entrenched companies may have cost advantages not available to
potential rivals, no matter what their size and attainable economies of
scale.
b) These advantages can stem from the effects of the learning curve (and
the experience curve), proprietary technology, access to the best raw
materials sources, assets purchased at preinflation prices, government
subsidies, or favorable locations.
c) Sometimes cost advantages are enforceable legally, as with patents.
d) For analysis of the much-discussed experience curve as a barrier to
entry, see Exhibit 4.7, Strategy in Action.
a) The new boy or girl on the block must, of course, secure distribution of
his or her product or service.
b) The more limited the wholesale or retail channels are and the more that
existing competitors have these tied up, obviously the tougher that entry
into that industry will be.
c) Sometimes this barrier is so high that, to surmount it, a new contestant
must create its own distribution channels.
7. Government Policy
C. Powerful Suppliers
3. The power of each important supplier (or buyer) group depends on a number
of characteristics of its market situation and on the relative importance of its
sales or purchases to the industry compared with its overall business.
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a) A supplier group is powerful if:
D. Powerful Buyers
1. Customers can force down prices, demand higher quality or more service, and
play competitors off against each other—all at the expense of industry profits.
E. Substitute Products
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1. By placing a ceiling on the prices it can charge, substitute products or
services limit the potential of an industry.
2. Substitutes not only limit profits in normal times but also reduce the bonanza
an industry can reap in boom times.
3. Substitute products that deserve the most attention strategically are those that
are (a) subject to trends improving their price-performance trade-off with the
industry’s product or (b) produced by industries earning high profits.
1. Rivalry among existing competitors takes the familiar form of jockeying for
position—using tactics like price competition, product introduction, and
advertising slug fests.
5. While a company must live with many of these factors—because they are
built into the industry economics—it may have some latitude for improving
matters through strategic shifts.
A. Industry Boundaries
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a) A definition of industry boundaries is important because it helps
executives determine the arena in which the firm is competing.
b) It is also important because this definition focuses attention on the
firm’s competitors and producers of substitute products.
c) Third, a definition of industry boundaries helps executives determine
key factors for success.
d) Finally, a definition of industry boundaries gives executives another
basis on which to evaluate their firm’s goals.
(1) The evolution of industries over time creates new opportunities and
threats.
(2) Industrial evolution creates industries within industries.
(3) Industries are becoming global in scope.
B. Industry Structure
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1. Defining an industry’s boundaries is incomplete without an understanding of
its structural attributes.
2. Concentration
3. Economies of Scale
(1) Firms that enjoy such economies can charge lower prices than their
competitors.
(2) They also can create barriers to entry by reducing their prices
temporarily or permanently to deter new firms from entering the
industry.
4. Product Differentiation
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customers that their products differ significantly from competing
products.
(2) Marketing strategies provide the vehicles through which this is
done.
(3) Real and perceived differentiations often intensify competition
among existing firms.
(4) On the other hand, successful differentiation poses a competitive
disadvantage for firms that attempt to enter an industry.
5. Barriers to Entry
C. Competitive Analysis
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(3) Overlooking potential international competitors.
(4) Assuming that competitors will continue to behave in the same way
they have behaved in the past.
(5) Misreading signals that may indicate a shift in the focus of
competitors or a refinement of their present strategies or tactics.
(6) Overemphasizing competitors’ financial resources, market position,
and strategies while ignoring their intangible assets, such as a top-
management team.
(7) Assuming that all of the firms in the industry are subject to the
same constraints or are open to the same opportunities.
(8) Believing that the purpose of strategy is to outsmart the
competition, rather than to satisfy customer needs and expectations.
1. Among the most important of these factors are a firm’s competitive position,
the composition of its customers, its reputation among suppliers and creditors,
and its ability to attract capable employees.
3. This allows firms to be much more proactive in dealing with the operating
environment than in dealing with the remote environment.
B. Competitive Position
a) Market share
b) Breadth of product line
c) Effectiveness of sales distribution
d) Proprietary and key account advantages
e) Price competitiveness
f) Advertising and promotion effectiveness
g) Location and age of facility
h) Capacity and productivity
i) Experience
j) Raw materials costs
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k) Financial position
l) Relative product quality
m) R&D advantages position
n) Caliber of personnel
o) General images
p) Customer profile
q) Patents and copyrights
r) Union relations
s) Technological position
t) Community reputation
4. Once appropriate criteria have been selected, they are weighted to reflect their
importance to a firm’s success.
5. Exhibit 4.9, Competitor Profile, shows how the weights and ratings
characterize the firm.
7. Comparing the firm’s profile with those of its competitors can aid its
managers in identifying factors that might make the competitors vulnerable to
the strategies the firm might choose to implement.
C. Customer Profiles
2. Geographic
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3. Demographic
4. Psychographic
5. Buyer Behavior
D. Suppliers
1. Dependable relationships between a firm and its suppliers are essential to the
firm’s long-term survival and growth.
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a) Many suppliers provide their customers a type of loan by allowing them
to defer payments if they pay an interest charge.
b) An example of this practice, and of the power that it can create for
suppliers, is provided in Exhibit 4.10, Strategy in Action, which
describes GE’s loans to members of the airline industry.
E. Creditors
1. Because the quantity, quality, price, and accessibility of financial, human, and
material resources are rarely ideal, assessment of suppliers and creditors is
critical to an accurate evaluation of a firm’s operating environment.
2. With regard to its competitive position with its creditors, among the most
important questions that the firm should address are the following:
a) Do the creditors fairly value and willingly accept the firm’s stock as
collateral?
b) Do the creditors perceive the firm as having an acceptable record of past
payment?
c) A strong working capital position? Little or no leverage?
d) Are the creditors’ loan terms compatible with the firm’s profitability
objectives?
e) Are the creditors able to extend the necessary lines of credit?
3. The answers to these and related questions help a firm forecast the
availability of the resources it will need to implement and sustain its
competitive strategies.
2. Reputation
3. Employment Rates
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a) The readily available supply of skilled and experienced personnel may
vary considerably with the stage of a community’s growth.
b) A new manufacturing firm would find it far more difficult to obtain
skilled employees in a vigorous industrialized community than in an
economically depressed community in which smaller firms had recently
cut back operations.
4. Availability
5. Labor Unions
A. The forces in the external environment are so dynamic and interactive that the impact
of any single element cannot be wholly disassociated from the effect of other
elements.
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c) This leads many managers, particularly in less powerful or smaller
firms, to minimize long-term planning, which requires a commitment of
resources.
d) Instead, they favor allowing managers to adapt to new pressures from
the environment.
e) There is an associated trade-off, namely that absence of a strong
resources and psychological commitment to a proactive strategy
effectively bars a firm from assuming a leadership role in its competitive
environment.
B. Assessing the potential impact of changes in the external environment offers a real
advantage.
1. It enables decision makers to narrow the range of the available options and to
eliminate options that are clearly inconsistent with the forecast opportunities.
2. Environmental assessment seldom identifies the best strategy, but it generally
leads to the elimination of all but the most promising options.
3. Exhibit 4.12, Strategic Forecasting Issues, provides a set of key strategic
forecasting issues for each level of environmental assessment—remote,
industry, and opening.
4. Chapter 4 Appendix, Sources for Environmental Forecasting, is provided
to help identify valuable sources of data and information from which answers
and subsequent forecasts can be constructed.
10. Briefly describe two important recent changes in the remote environment of U.S. business
in each of the following areas:
a. Economic.
b. Social.
c. Political.
d. Technological.
e. Ecological
Various sources can be used to identify changes in the above mentioned areas.
Magazines such as BusinessWeek and Fortune, newspapers such as The New York Times
and The Wall Street Journal, and various Internet sites are good sources.
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a. The slow recovery in the U.S. economy is an economic trend worth investigating.
Companies are reluctant to make new investments until the economy gets back on
track. A second trend is the increase in outsourcing to Asian countries such as China
and India. Many U.S. companies are manufacturing their goods in China and moving
their back office and customer call centers to India. This means loss of jobs in the
U.S.
b. Fortune, in a recent issue, described some implications of the aging of America. Baby
Boomers are becoming senior citizens, and represent the largest demographic block
in the country. This social trend has important implications for companies in various
areas: elder care, medical care, prescriptions, food, etc. Similarly, another social trend
is the strident demand to recognize same sex marriages as legitimate and include such
couples in an organization’s benefits program.
c. A recent political trend relates to an economic trend cited above. As more and more
jobs are moving offshore, political leaders are getting into the act in an effort to
assuage their local constituencies. Some states are contemplating enacting laws
against moving jobs overseas. Similarly, the U.S. government is backing U.S.
businesses in their fight against European businesses through political lobbying and
protectionist policies.
e. Changes in the weather worldwide are a major ecological trend. The changes are
caused primarily by pollution. Weather patterns are becoming less predictable and
serious changes are increasingly presenting challenges to society and businesses. The
increasing need to lower the emissions of gas-powered vehicles is helping the push
toward hybrid-powered vehicles.
2. Describe two major environmental changes that you expect to have a major impact on the
wholesale food industry in the next 10 years.
The wholesale food industry is likely to be affected by two major trends. Technology has
changed the order process by shortening the cycle between order and delivery. A
wholesale business has to be prepared to be electronically linked to its customers and
conduct a majority of its transactions electronically. This development is also likely to
reduce the time between order and delivery. A move toward healthier eating is a social
trend that could affect the wholesale food industry. Also, obesity is a major problem in
America which could lead to a change in both eating habits and lifestyle. The result is
that the wholesale food industry has to react to this trend by changing its products mix.
3. Develop a competitor profile for your college and for the college geographically closest
to yours.
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The discussion on page 106 provides a good template to prepare the competitive profile
of the two colleges. Of course, from the list of 20 items given on page 106, some things
have to be modified (for example, raw material costs, R&D advantages position) to suit
an educational institution. The competitor profile thus developed can help in preparing a
plan of action to improve the competitive position of the weaker college.
4. Assume the invention of a competitively priced synthetic fuel that could supply 25
percent of U.S. energy needs within 20 years. In what major ways might this change the
external environment of U.S. businesses?
The invention of a competitively priced synthetic fuel would have profound effect on the
external environment of U.S. businesses. It would:
• Threaten U.S. oil companies such as ExxonMobil if they are not part of the
synthetic fuel industry. Synthetic fuel would directly compete with
ExxonMobil’s refined oil.
• Have a cascading effect in the downstream oil industry – gas stations, for
example would be affected.
• Depending on how effective synthetic oil is in controlling pollution, this
product’s ecological impact may be substantial.
• Politically, this would help the U.S. because it would make the U.S. less
dependent on foreign oil. In turn, the U.S. government may have greater leverage
in international negotiations conducted on behalf of American businesses.
Students can identify a wide variety of impacts of this new product. The instructor can
require the students to come up with various scenarios to gauge the impact of synthetic
fuel.
5. With your instructor’s help, identify a local firm that has enjoyed great growth in recent
years. To what degree and in what ways do you think this firm’s success resulted from
taking advantage of favorable conditions in its remote, industry, and operating
environments?
It is likely that students will determine that the selected firm’s success can be attributed
to all three environments. This is an interesting exercise that forces students to study a
firm closely and see how the external environment impacts it.
6. Choose a specific industry and, relying solely on your impressions, evaluate the impact of
the five forces that drive competition in that industry.
• fast food
• athletic footwear
• retailing
They are likely to have strong impressions of each of these industries, primarily as
customers, and secondarily as employees. Their five-forces analysis is likely to make
them look at the industry in an entirely different way than in the past. Discussing their
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findings with the rest of the class is where real learning is likely to take place as each
student confirms or challenges the others’ findings.
7. Choose an industry in which you would like to compete. Use the five-forces method of
analysis to explain why you find that industry attractive.
The instructor may have to help the students get started by forcing them to think of
products they want to make and sell, or services they want to offer because students may
start out with very vague ideas that may derail the discussion. Simple areas like lawn
mowing, baby sitting, delivery service, etc. can be good for discussion because of student
familiarity.
8. Many firms neglect industry analysis. When does this hurt them? When does it not?
The section titled “Industry Analysis and Competitive Analysis” on pages 101-103 helps
in answering this question. According to the text, there are four reasons why industry
analysis is important. First, industry analysis helps in determining the competitive arena.
It would hurt the company if the competitive arena is not defined because the company
would not really know who its customers are and be able to evaluate relevant trends.
Second, industry analysis helps in defining a firm’s competitors. Neglecting industry
analysis may lead to ignoring important competitors and substitutes. Third, industry
analysis helps identify the key success factors in the industry and measures how the firm
stacks up on these factors. Finally, industry analysis helps executives evaluate the firm’s
goals.
While the above four are typically reasons why identifying firm boundaries is important,
it also holds good for industry analysis in general. Neglecting industry analysis may not
hurt a firm in those rare cases when a particular industry is very stable with very few
changes either in products, customers, or competitors.
9. The model below depicts industry analysis as a funnel that focuses on remote-factor
analysis to better understand the impact of factors in the operating environment. Do you
find this model satisfactory? If not, how would you improve it?
Firms are affected by factors in the external environment. The chapter identifies three
subcategories of the external environment: remote, industry, and operating. The industry
environment, as indicated in the model in this question, acts as the funnel to connect the
other two categories of the external environment. The funnel metaphor is apt because it is
the industry that acts as the lens through which opportunities and threats can be identified
from the remote environment and applied to the operating environment. For example, a
trend in the technological environment may be a threat or an opportunity, depending upon
the industry in question. In other words, the same trend can be viewed differently through
the lens of the industry environment.
10. Who in a firm should be responsible for industry analysis? Assume that the firm does not
have a strategic planning department.
Typically, it should be the responsibility of the CEO or the top management team. Only
they are likely to have the broad enough perspective to define the industry correctly and
provide a model to gather trends and determine their impact. Of course, input from lower
level managers (particularly managers from the manufacturing and marketing functions)
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is vital because they act as boundary spanners for the firm and may have access to key
data.
Case Summary
This case discusses Lakshmi Mittal, who stands at the helm of the world’s No. 1 steel company,
Mittal Steel Co., with annual shipments of 52 million metric tons, $32 billion in annual sales, and
2004 pro forma profits in excess of $6.8 billion. Mittal has a vision for the steel industry, namely,
consolidation. Steel companies have long been among the worst performing businesses. For
decades, steel has been fragmented, financially weak, and plagued by oversupply. Suppliers of
coal and iron ore and customers such as carmakers were far stronger than steelmakers and
dictated terms. A series of downturns sent waves of companies out of business.
Many steel execs thought Mittal was deluded as they watched him snap up distressed mills in
more than a dozen countries. Mittal was patient, however, and perfected his techniques of
reviving plants, taking on debt and providing fresh capital for company investments. Particularly
effective is his way of dispatching emergency teams of managers to stabilize factories. He may
not contribute fresh ways to making steel—the workers in the plants do that—but he can
contribute excellent management skills and achieve great efficiencies by applying proven
business practices with which he has been successful.
Questions linger about the long-term viability of Mittal’s strategy, which depends on success in
the U.S. and on the group’s ability to thrive even in a downturn. Mittal’s net worth is around $22
billion right now. He is ready to make his name in the U.S. His idea there is to integrate his 8
U.S. mills to mine regional economies of scale, a formula he’s applying in Eastern Europe as
well. In all of his companies, there is a policy whereby there can be no noncash transactions
permitted without the CFO’s signature. This can help sway corruption, inefficiency from
middlemen, and unproductive deals that yield no cash.
One of Mittal’s biggest challenges is to make the empire work together. A key part of meeting the
challenge is Mittal himself. He is determined and has a very hands-on approach to managing his
businesses. Mittal knows how to pool knowledge and resources all over the world, and can divert
supplies from one factory to another as regional needs shift. While Mittal has low costs, big
capital commitments could be a stretch during a downturn. Mittal figures that consolidation and a
focus on profits rather than volume in the industry will head off supply gluts in the next crunch.
Others think the next downturn could be vicious. Still, even competitors concede that compared
with just four years ago, Mittal now has a broader based group with margins that are the envy of
the industry.
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• This case can help to demonstrate how competition helps define an industry, and how it in
turn affects strategic planning and formulation. Please refer to the section titled “How
Competitive Forces Shape Strategy” on pages 93-101.
• Define the level of concentration in particular industries. Please refer to the section titled
“Industry Structure” on pages 103-105.
1. Describe the structure of the steel industry. What trend is Mittal hoping will continue
with regard to industry structure?
Please refer to the section titled “Industry Structure” on pages 103-105, which will help
with discussion of this question. Right now the steel industry can be characterized
according to four variables comprising the industry. The first is concentration. Recently,
the steel industry has been highly fragmented and firms have been highly competitive
with each other. Suppliers and buyers both hold serious power over the firms. Currently,
the industry seems to be moving more toward consolidation. Either firms are being wiped
out in downturns, or business moguls like Mittal are snapping up companies under one
holding group. Mittal’s holdings are spread across 14 different countries. (Please read the
case, page 115, paragraph 6, which describes Mittal’s efforts.) This consolidation effort is
aimed at returning some pricing power to the firms, giving them greater efficiencies
through economies of scale, and erecting barriers to entry for new companies entering the
steel industry.
The second factor is economies of scale. This refers to the long-range average cost of a
unit produced declining due to volume increases in production. The larger the firm, the
greater the economies of scale generally, and the better that firm can allocate its
resources to meet changing needs or consumer demand. One important nontechnological
source of economies of scale for Mittal’s group is his access to better managerial
coordination of production facilities, functions, and processes across the globe. (Please
refer to case page 117, paragraph 17.)
Product differentiation is another factor characterizing the structure of the steel industry.
Right now, Mittal is focusing his efforts on achieving greater profits and not necessarily
larger product volume. He is doing this by specializing some production facilities in
higher-margin products that enjoy higher levels of real and perceived differentiation.
(Please read the case, page 116, paragraphs 11 and 12.)
Lastly, barriers to entry are the obstacles that a firm must overcome to enter an industry.
Entering the steel industry requires large capital commitments, access to resources, and
technological know-how. Mittal comes from a family background in steel, and he has
grown his company from a small minimill under his father to the incredible holding
group he has established today. Having overcome barriers to entry, Mittal hopes that the
industry trend will continue toward consolidation, thereby helping to erect barriers for
potential entrants.
20. What are some common mistakes in identifying competitors that Mittal should be
particularly aware to avoid?
The text section titled “Competitive Analysis” (page 105) will help with this discussion,
as will “Competitive Position” (page 106). The first lists and explains the various ways to
identify competitors. Important here are the scope of the market, the similarity among
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products offered, and the other firms’ commitment to the industry, which can give insight
to potential resource commitments. The section on common mistakes in identifying
competitors lists eight examples that can prove costly to decision-making executives.
Particularly detrimental to Mittal would be giving inadequate attention to potential
entrants, or particularly the potential of other competitors who may have success similar
to his own. Another example would be overlooking potential international competitors,
which is similar to the last one. Others include misreading signals that may indicate a
shift in the focus of competitors, overemphasizing competitors’ financial resources while
failing to consider their intangible assets, or assuming without verification that the firms
in the industry all are subject to the same constraints or are open to the same
opportunities.
Mittal’s best way of doing a competitive analysis will avoid these common mistakes.
That he has been so successful in a vastly underperforming industry on an international
scale indicates that he likely avoids these mistakes as a rule. For instance, he would not
underestimate other firms’ managerial or other intangible assets, as managerial talent is
his own company’s strongest asset comparatively. (Again, note the case, page 117,
paragraph 17.) Mittal is leading the consolidation effort in his industry, but he cannot
assume that other deft business people will forego new opportunities in steel based on the
effects of Mittal’s own efforts.
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