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

 The OE involves the factors in the immediate

competitive situation that provide many of the
challenges a particular firm faces in
attempting to attract or acquire needed
resources or in striving to profitably market its
goods and services.
 Also called as competitive or task
environment
Operating Environment-
Competitive position
 Market share
 Product line
 Effective of sales distribution
 Experience
 Raw material cost
 Location & age of facility
 Caliber of personnel
Customer profiles
 Geographic
 Demographic
 Psychographic
 Buyer Behavior
Suppliers & Creditors : Sources
of Resources
Dependable relationship b/w a
firm’s & its suppliers &
creditors are essential to the
co. LT Survival and Growth.
Personnel: Nature of the labor
market
The ability to hold capable employees is
prerequisite for a firms success.
 Reputation- compensation package

 Employment rates
 Availability
13

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
14

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
15

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
16

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
17

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
18

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
19

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
20

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
21

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)
22

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
Porter’s Five Forces Model of
Industry Competition-Definition
A market assessment tool
designed to provide a
business with an idea of
the complexity of a
particular industry.
 Industry analysis involves
reviewing the economic,
political and market factors
that influence the way the
industry develops.
 Major factors can include the
power wielded by suppliers
and buyers, the condition of
competitors, and the
likelihood of new market
entrants.
26

Porter’s Five Forces Model of

Industry Competition

Adapted from Exhibit 2.6 Porter’s Five Forces

Model of Industry Competition
The purpose of
Five-Forces Analysis
 The five forces are environmental forces
that impact on a company’s ability to
compete in a given market.
 The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry Capital Requirements

Switching Costs
Access to Distribution Channels

Cost Disadvantages Independent of

Scale
Government Policy

Expected Retaliation
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining
Power of
Suppliers
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:

Supplier industry is dominated by a

Suppliers exert power
few firms
in the industry by:
Suppliers’ products have few substitutes
* Threatening to raise
prices or to reduce quality Buyer is not an important customer to
supplier
Powerful suppliers
can squeeze industry Suppliers’ product is an important
profitability if firms input to buyers’ product
are unable to recover
cost increases Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases

are large relative to seller’s sales Buyers compete
Purchase accounts for a significant with the supplying
fraction of supplier’s sales industry by:

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

* Playing firms off of
Buyers’ industry earns low profits each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
 Threat of Substitute Products
Keys to evaluate substitute products:

Products Products with improving

with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
 Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
The Five Forces are
Unique to Your Industry
 Five-Forces Analysis is a framework for
analyzing a particular industry.
 Yet, the five forces affect all the other
businesses in that industry.
40

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
41

The Bargaining
Power of Buyers
Buyers threaten an
industry
Force down
prices
Bargain for
higher quality or
more services
Play competitors
against each other
42

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
43

The Bargaining Power of

Suppliers
Suppliers can
exert power by
threatening to
raise prices or
reduce the quality
of purchased
goods and
services
44

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
45

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
46

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
47

The Intensity of Rivalry

among
Competitors
 Jockeying for in an Industry

position
 Price competition
 Advertising
battles
 Product
introductions
 Increased
customer service
48

The Intensity of Rivalry

among
Interacting factors lead to
Competitors
intense 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
49

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
50

The Value Net

Adapted from Exhibit 2.7 The Value Net

51

Evolutionary Trajectories of
Industry Change

Dess Exhibit 2.8.CLP

Adapted from Exhibit 2.8 Four Evolutionary Trajectories of Industry Change

52

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
53

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
54

The World Automobile

Industry:
Strategic Groups

Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups