1

Analyzing the External

Environment of the Firm

Part 1:
strategic analysis
2

Creating the
Environmentally Aware
Organization

Adapted from Exhibit 2.1 Inputs to Forecasting

3

Environmental
Scanning
Environmental
Surveillance of a firm’s external
environment
scanning
 Predict environmental
changes to come
 Detect changes already
under way
 Proactive mode
4

Environmental
Monitoring
Environmental Track evolution of
monitoring Environmental
trends Sequences
of events Streams
of activities
5

Competitive
Intelligence
Define and understand a
Competitive firm’s industry Identify rivals’
intelligence strengths and weaknesses
Intelligence gathering
(data)
Interpretation of
intelligence data
Helps a firm avoid surprises
6

What Competitive
IntelligenceCompetitive
Is andIntelligence
Is Not
Competitive Intelligence Is
… unethical activities. It is a rare
• Information that has been
analyzed to the point where
you can make a decision.
• A tool to alert management
to early recognition of both
threats and opportunities.
• A means to deliver
reasonable assessments.
• A way of life, a process.
Is
Not …
• Spying. Spying implies illegal or
activity.
• A crystal ball. Competitive
Intelligence is good approximation
of reality; it does not predict the
future.
• Database search. Data by itself is
not good intelligence.
• A job for one smart person.

Adapted from Exhibit 2.2 What Competitive Intelligence Is and Is Not

 Business Firm

Operating
Remote Environment Environment
Area of total
Economic external
environment Competitors
Political impact
Creditors
Social
Customers
Technological
Labor Market
Suppliers
8

Environmental
Forecasting
Plausible (reasonable)
projections about
Forecasts Direction of environmental
change
Scope of environmental
change
Speed of environmental
change
Intensity of environmental
change
Scenario analysis
9

SWOT Analysis
Managers need to analyze
The general environment
The firm’s industry and
competitive environment
SWOT analysis
Strengths
Weaknesses
Opportunities
Threats
Basic technique for
analyzing firm and industry
10

The General
Environment
General environmental
General
Environment trends and events

Little ability to predict them

Demographic
Sociocultural Even less ability to control
Political/Legal them
Technological
Economic Can vary across industries
Global
11

Demographic
Segment
Aging population
General
Environment
Rising affluence
Changes in ethnic
composition
Geographic distribution of
Demographic
Sociocultural
population
Political/Legal Greater disparities in income
Technological
Economic levels
12

Socio cultural
Segment
More women in the
General
Environmen
workforce
t Increase in temporary
workers
Demographic
Greater concern for fitness
Sociocultural Greater concern for
Political/Legal
Technological environment
Economic Postponement of family
Global
formation
13

Political/Legal
Segment
FEMA-
General
Environmen Industrial policy
t Repeal of Glass-Steagall Act in 1999
Deregulation of utility and other
industries
Increases in federally mandated
Demographic
Sociocultural minimum wages
Political/Legal Taxation at local, state, federal levels
Technological Legislation on corporate governance
Economic reforms (Sarbanes-Oxley Act)
Global
14

Technological
Segment
Genetic engineering
General
Emergence of Internet technology
Environmen Computer-aided design/computer-
t
aided manufacturing systems
(CAD/CAM)
Research in synthetic and exotic
Demographic materials
Sociocultural
Political/Legal Pollution/global warming
Technological Miniaturization of computing
Economic
Global technologies
Wireless communication
15

Economic Segment
Interest rates
General
Environmen Unemployment
t
Consumer Price index
Trends in GDP
Demographic
Sociocultural
Changes in stock
Political/Legal
Technological
market valuations
Economic
Global
16

Global Segment
Increasing global trade
General Currency exchange rates
Environmen
t
Emergence of the Indian and
Chinese economies
Trade agreements among
Demographic regional blocs
Sociocultural
Political/Legal Creation of WTO
Technological (decreasing tariffs/free trade
Economic
Global in services)
17

The Competitive
Environment
Compe
titive
Sometimes called the task
Enviro or industry environment
nment Includes
Competitors (existing
and potential)
Customers
Competitors
Customers
Suppliers
Suppliers Porter’s Five Forces
model
18

Porter’s Five Forces Model of

Industry Competition

Adapted from Exhibit 2.6 Porter’s Five Forces

Model of Industry Competition
19

The Threat of New

Entrants
 Profits of established firms in the
industry may be eroded by new
competitors
 High entry barriers lead to low
threat of new entries

 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of
scale
20

The Bargaining
Power
Buyers threaten an of Buyers
industry
Force down
prices
Bargain for
higher quality or
more services
Play competitors
against each other
21

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
22

The Bargaining Power of

Suppliers
Suppliers can
exert power by
threatening to
raise prices or
reduce the quality
of purchased
goods and
services
23

The Bargaining Power of

Suppliers
A supplier group will be powerful
when
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
24

The Bargaining Power

 of Suppliers
A supplier group will be powerful when
 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
25

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
26

The Intensity of Rivalry

among
Competitors in an Industry
Jockeying for position


 Price competition
 Advertising battles
 Product introductions
 Increased customer service or
warranties
27

The Intensity of Rivalry

among
Interacting factors lead to
intense Competitors
rivalry in an Industry
Numerous or equally
balanced competitors
Slow industry growth
High fixed or shortage
costs
Lack of differentiation or
switching costs
Capacity augmented in
large increments
High exit barriers
28

Using Industry Analyses:

A Few Caveats
Five Forces analysis implicitly
assumes a zero-sum game
Five Forces analysis is
essentially a static analysis
Value net
Suppliers and customers
(the vertical net)
Substitutes and
complements (the
horizontal net)
29

The Value Net

Adapted from Exhibit 2.7 The Value Net

30

Evolutionary Trajectories of
Industry Change

Dess Exhibit 2.8.CLP

Adapted from Exhibit 2.8 Four Evolutionary Trajectories of Industry Change

31

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
32

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
33

The World Automobile

Industry:
Strategic Groups

Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups