Analyzing the External Environment of the Firm Chapter 2 Analyzing the External Environment of the Firm McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

After studying this chapter, you should have a good understanding of: Learning Objectives After studying this chapter, you should have a good understanding of: The importance of developing forecasts Why environmental scanning, monitoring, and collecting competitive intelligence are critical inputs to forecasting Why scenario planning is a useful technique 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 in the general environment and forces in the competitive environment can affect performance The concept and implications of strategic groups

Inputs to Forecasting Forecasts Environmental Scanning Environmental Exhibit 2.1 Environmental Scanning Environmental Monitoring Forecasts Competitive Intelligence

General Environment: Key Components Technological Genetic engineering Emergence of Internet technology CAD/CAM Economic Interest rates Changes in stock market valuations Global Currency exchange rates Emergence of the Indian and Chinese economies Demographic Aging population Changes in ethnic composition Greater income disparities Sociocultural More women in the workforce Postponement of family formation Political/Legal Tort reform Americans with Disabilities Act

Impact of General Environmental Trends on Various Industries Exhibit 2.3 (adapted) Segment/Trends/Events Industry Positive Neutral Negative Demographic Aging population Health Care Baby products  Sociocultural More women in the workforce Clothing Baking Products  Political/legal Tort reform Legal Services Auto Manufacturing  Technological Genetic engineering Pharmaceutical Publishing  Economic Interest Rate Increases Residential construction Grocery products  Global Global Trade Shipping

Porter’s Five Forces Model of Industry Competition Exhibit 2.4 INDUSTRY COMPETITORS Rivalry Among Existing Firms POTENTIAL ENTRANTS SUBSTITUTES BUYERS SUPPLIERS Threat of substitute products or services Bargaining power of buyers new entrants of suppliers 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.

Rivalry Among Competitors: Influences Number of competitors Industry growth rate Fixed costs, scale issues Lack of differentiation Low switching costs High exit barriers (specialized assets, emotional commitment, restrictions)

Rivalry among Competitors: Outcomes Using price competition and price wars Staging advertising battles Increasing warranties or services Making new product introductions Jockeying for strategic position

Threat of New Entrants: Entry Barriers Economies of scale Differentiation/brand loyalty Capital requirements Switching costs Access to distribution channels Other cost disadvantages: Location Raw materials Proprietary technology

Bargaining Power of Suppliers and Buyers: Influences Their size Number Ability to switch Availability of substitutes Criticality of product Ability to vertically integrate Suppliers vertically integrate forward Buyers vertically integrate backward

Bargaining Power of Suppliers and Buyers: Outcomes Outcomes are a function of the relative bargaining power and dependencies of parties Bargaining power is evidenced through Price Quality Service

Threat of Substitute Products Places an upper limit on prices Consists of products with a similar function Electronic security/security guards DSL/Cable modem Coffee/tea/cola Fax/overnight delivery of documents

Results of Industry Analysis To one in the industry --- Unattractive industry: intense rivalry, low entry barriers, strong suppliers and buyers, strong product substitutes Attractive industry: little rivalry, high entry barriers, weak buyers and suppliers, weak product substitutes

Competitor Analysis What are the competitor’s capabilities What is the competitor currently doing and what is the competitor capable of doing What are the competitor’s current and future objectives What are the competitor’s beliefs about himself, us, others, the environment What are the competitor’s beliefs about the future

The World Automobile Industry: Strategic Groups Exhibit 2.6 The World Automobile Industry: Strategic Groups High Ferrari Lamborghini Porsche Mercedes* BMW Toyota Ford General Motors Chrysler* Honda Nissan Price Hyundai Kia High Low Low Breadth of Product Line * Chrysler and Mercedes (part of DiamlerChrysler) are separated for purposes of illustration. Note: Members of each strategic group are only illustrative – not inclusive.