Analyzing the External Environment of the Firm

Chapter 2

Topics
The importance of developing forecasts of the business environment. Environmental scanning monitoring and competitive intelligence as critical inputs to forecasting. !cenario planning as a useful techni"ue in industries characterized by unpredictability and change.

2-2

Topics
#eneral environment $Tas% Environment Five forces analysis !trategic groups

2-3

Creating the Environmentally A&are 'rganization

2-4

Environmental !canning
!urveillance of a firm(s external environment
)redict environmental changes to come *etect changes already under &ay )roactive mode

2-5

Environmental +onitoring
Trac% evolution of
Environmental trends !e"uences of events !treams of activities

2-6

Competitive ,ntelligence
*efine and understand a firm(s industry ,dentify rivals( strengths and &ea%nesses
,ntelligence gathering -data. ,nterpretation of intelligence data

/elps a firm avoid surprises

2-7

0hat Competitive ,ntelligence ,s and ,s 1ot

Competitive Intelligence Is 1. Information that has been analyzed to the point &here you can ma%e 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. !pying implies illegal or unethical activities. ,t is a rare activity. A crystal ball. C, is good approximation of reality it does not predict the future. Database search. *ata by itself is not good intelligence. A ob for one smart person.

2.

3. 4.

2-8

Environmental Forecasting
)lausible pro2ections about
*irection of environmental change !cope of environmental change !peed of environmental change ,ntensity of environmental change

!cenario analysis

2-9

!0'T Analysis
+anagers need to analyze
The general environment The firm(s industry and competitive environment

!0'T analysis
!trengths 0ea%nesses 'pportunities Threats 3asic techni"ue for analyzing firm and industry conditions
2-10

The #eneral Environment

!eneral "nvironmen t

#eneral environmental trends and events

4ittle ability to predict them Even less ability to control them Can vary across industries

Demographic Socioc#lt#ral $olitical%&egal 'echnological "conomic !lobal

2-11

*emographic !egment
Aging population
!eneral "nvironmen t

5ising affluence Changes in ethnic composition #eographic distribution of population #reater disparities in income levels

Demographic Socioc#lt#ral $olitical%&egal 'echnological "conomic !lobal

2-12

!ociocultural !egment
+ore &omen in the &or%force
!eneral "nvironmen t

,ncrease in temporary &or%ers #reater concern for fitness #reater concern for environment )ostponement of family formation

Demographic Socioc#lt#ral $olitical%&egal 'echnological "conomic !lobal

2-13

)olitical$4egal !egment
Tort reform
!eneral "nvironmen t

Americans &ith *isabilities Act -A*A. 5epeal of #lass6!teagall Act in 7888 *eregulation of utility and other industries

Demographic Socioc#lt#ral $olitical%&egal 'echnological "conomic !lobal

,ncreases in federally mandated minimum &ages Taxation at local state federal levels 4egislation on corporate governance reforms -!arbanes6'xley Act.

2-14

Technological !egment
#enetic engineering
!eneral "nvironmen t

Emergence of ,nternet technology Computer6aided design$computer6 aided manufacturing systems -CA*$CA+. 5esearch in synthetic and exotic materials )ollution$global &arming +iniaturization of computing technologies 0ireless technology
2-15

Demographic Socioc#lt#ral $olitical%&egal 'echnological "conomic !lobal

Economic !egment
,nterest rates
!eneral "nvironmen t

9nemployment Consumer )rice index Trends in #*) Changes in stoc% mar%et valuations

Demographic Socioc#lt#ral $olitical%&egal 'echnological "conomic !lobal

2-16

#lobal !egment
,ncreasing global trade
!eneral "nvironmen t

Currency exchange rates Emergence of the ,ndian and Chinese economies Trade agreements among regional blocs -1AFTA E9 A!EA1. Creation of 0T' -decreasing tariffs$free trade in services.

Demographic Socioc#lt#ral $olitical%&egal 'echnological "conomic !lobal

2-17

The Competitive Environment

(ompetitive "nvironmen t

!ometimes called the tas% or industry environment ,ncludes

Competitors -existing and potential. Customers !uppliers

(ompetitors (#stomers S#ppliers

)orter(s five6forces model

2-18

)orter(s Five Forces +odel of ,ndustry Competition

Threat of ne& entrants 3argaining po&er of suppliers 3argaining po&er of buyers

Threat of !ubstitute products and services

Adapted from Exhibit 2.2 Porters Five Forces Model of Industry Competition 2-19

The Threat of 1e& Entrants

)rofits of established firms in the industry may be eroded by ne& competitors /igh entry barriers lead to lo& threat of ne& entries
Economies of scale )roduct differentiation Capital re"uirements !&itching costs Access to distribution channels Cost disadvantages independent of scale
2-20

The 3argaining )o&er of 3uyers

3uyers threaten an industry
Force do&n prices 3argain for higher "uality or more services )lay competitors against each other

2-21

The 3argaining )o&er of 3uyers

A buyer group is po&erful &hen
,t is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry are standard or undifferentiated The buyer faces fe& s&itching costs ,t earns lo& profits The buyers pose a credible threat of bac%&ard integration The industry(s product is unimportant to the "uality of the buyer(s products or services
2-22

The 3argaining )o&er of !uppliers

!uppliers can exert po&er by threatening to raise prices or reduce the "uality of purchased goods and services

2-23

The 3argaining )o&er of !uppliers

A supplier group &ill be po&erful &hen
The supplier group is dominated by a fe& companies and is more concentrated than the industry it sells to The supplier group is not obliged to contend &ith substitute products for sale to the industry The industry is not an important customer of the supplier group

2-24

The 3argaining )o&er of !uppliers

A supplier group &ill be po&erful &hen
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 s&itching costs for the buyer The supplier group poses a credible threat of for&ard integration

2-25

The Threat of !ubstitute )roducts and !ervices

!ubstitutes limit the potential returns of an industry
Ceiling on the prices that firms in that industry can profitably charge )rice$performance ratio

2-26

The ,ntensity of 5ivalry among Competitors in an ,ndustry

:oc%eying for position )rice competition Advertising battles )roduct introductions ,ncreased customer service or &arranties

2-27

The ,ntensity of 5ivalry among Competitors in an ,ndustry

,nteracting factors lead to intense rivalry
1umerous or e"ually balanced competitors !lo& industry gro&th /igh fixed or storage costs 4ac% of differentiation or s&itching costs Capacity augmented in large increments /igh exit barriers
2-28

9sing ,ndustry Analyses; A Fe& Caveats Five6forces analysis implicitly assumes a zero6sum game Five6forces analysis is essentially a static analysis
<alue net
!uppliers and customers -the vertical net. !ubstitutes and complements -the horizontal net.

2-29

The <alue 1et

Transactions ,nteractions ,nteractions

Transactions

Adapted from Exhibit 2. !he "alue #et 2-30

!trategic #roups &ithin ,ndustries

T&o unassailable assumptions in industry analysis
1o t&o firms are totally different 1o t&o firms are exactly the same

!trategic groups
Cluster of firms that share similar strategies

3readth of product and geographic scope )rice$"uality *egree of vertical integration Type of distribution system

2-31

!trategic #roups &ithin ,ndustries

<alue of strategic groups as an analytical tool
,dentify barriers to mobility that protect a group from attac%s by other groups ,dentify groups &hose competitive position may be marginal or tenuous Chart the future direction of firms( strategies Thin%ing through the implications of each industry trend for the strategic group as a &hole

2-32

The 0orld Automobile ,ndustry; !trategic #roups

Adapted from Exhibit 2.$ !he %orld Automobile Industry& 'trate(ic )roups 2-33