1. Chapter Two Analyzing the External Environment of the Firm

2. McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 2 Gregory G. Dess and G. T. Lumpkin Learning Objectives  The importance of developing forecasts of the business environment.  Why environmental scanning, monitoring, and collecting competitive intelligence are critical inputs to forecasting.  Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change.  The impact of the general environment on a firm’s strategies and performance.  How forces in the competitive environment can affect profitability.  How a firm can improve its competitive position by increasing its power vis-à-vis forces in the competitive environment.  How trends and events in the general environment and forces in the competitive environment are interrelated and affect performance.  The concept of strategic groups and their strategy and performance implications. After studying this chapter, you should have a good understanding of: TRANSPARENCY-12

3. McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 2 Gregory G. Dess and G. T. Lumpkin Inputs to Forecasting Environmental Scanning Environmental Monitoring Competitive Intelligence Forecasts Exhibit 2.1 TRANSPARENCY-13

4. McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 2 Gregory G. Dess and G. T. Lumpkin General Environment: Key Trends and Events Exhibit 2.2 Demographic – Aging population – Rising affluence – Changes in ethnic composition – Geographic distribution of population – Greater disparities in income levels Sociocultural – More women in the workforce – Increase in temporary workers – Greater concern for fitness – Greater concern for environment – Delays in family formation Political/Legal – Tort reform –ADA (Americans with Disabilities Act) –Repeal of Glass-Stegall Act in 1999 (now banks may offer brokerage services) –Deregulation of utility and other industries –Increases in Federally-mandated minimum wages – Taxation at local, state, federal levels Technological – Genetic engineering – Emergence of Internet technology – Computer Aided Design/Computer-Aided Manufacturing Systems – Research in man-made and exotic materials – Pollution/Global warming – Miniaturization of computing technologies – Wireless communications Economic – Interest rates – Unemployment – Consumer price Index – Trends in GDP – Changes in stock market valuations Global – Increasing Global trade – Currency Exchange Rates – Emergence of the Indian and Chinese Economies – Trade Agreements among regional blocs (e.g. NAFTA, EC, Asian) – GATT Agreement (leading to decreasing tariffs) TRANSPARENCY-14

5. McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 2 Gregory G. Dess and G. T. Lumpkin Impact of General Environmental Trends on Various Industries Segment/Trends/EventsIndustryPositiveNeutralNegative Demographic Aging population Rising affluence Health Care Baby products Brokerage services Fast foods Upscale pets and supplies Exhibit 2.3 Sociocultural More women in the workforce Greater concern for health & fitness Clothing Baking Products (staples) Home exercise equipment Meat products Political/legal Tort reform ADA (Americans with Disabilities Act) Legal Services Auto Manufacturing Retail Manufacturers of elevators, escalators & ramps Technological Genetic engineering Pollution/global warming Pharmaceutical Publishing Engineering Services Petroleum Economic Interest Rate IncreasesResidential construction Most common grocery products Global Increasing Global Trade Emergence of China as an economic power Shipping Personal service Soft drinks Defense TRANSPARENCY-15

6. McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 2 Gregory G. Dess and G. T. Lumpkin Porter’s Five Forces Model of Industry Competition Exhibit 2.4 Reprinted with the permission of The Free Press, a division of Simon & Schuster, Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. INDUSTRY COMPETITORS Rivalry Among Existing Firms INDUSTRY COMPETITORS Rivalry Among Existing Firms POTENTIAL ENTRANTS SUBSTITUTES BUYERS SUPPLIERS Threat of substitute products or services Bargaining power of buyers Threat of new entrants Bargaining power of suppliers TRANSPARENCY-16

7. McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 2 Gregory G. Dess and G. T. Lumpkin What Buyers Have Saved on Freemarkets Auctions Exhibit 2.5 Source: Tully, S. 2000. The B2B tool that really is changing the world. Fortune, March 20: 132-145. Semiconductors, metal stampings, etc. Delphi Automotive $420 (yearly total) $360 14 AluminumCommonwealth Of Pennsylvania $2.8$2.5 9 Packaging materials, etc. Owens Corning$129 (yearly total) $120 7 Circuit boardsUnited Technologies $74$42 43 ItemBuyerExpected outlay (in millions) Actual outlay (in millions) Savings (%) TRANSPARENCY-17

8. McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 2 Gregory G. Dess and G. T. Lumpkin The World Automobile Industry: Strategic Groups Exhibit 2.6 * Chrysler and Mercedes (part of DiamlerChrysler) are separated for purposes of illustration. Note: Members of each strategic group are only illustrative – not inclusive. Ferrari Lamborghini Porsche Toyota Ford General Motors Chrysler* Honda Nissan Mercedes* BMW High Hyundai Kia High Breadth of Product LineLow Price TRANSPARENCY-18