2. 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.

3. 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

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

5. 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

6. 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

7. 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.

8. 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)

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.