1. Ch 2: Analyzing the External Environment of the Firm
Spring 2015

2. Strategic Analysis
Introduction, Analyzing Goals and Objectives
Analyzing External Environment
Focuses on the value managers add when they have a sense of events outside the company
By focusing on external events, managers are able to stay a step ahead of competitors by accurately anticipating and promptly responding to actions that can impact the organization.
Analyzing Internal Environment
Assessing Intellectual Capital

3. Overview – 3 Sections The environmentally aware organization.
Managers use scanning, monitoring, and competitive intelligence to develop forecasts
Role of scenario planning
Influence of six segments of general environment
demographic, sociocultural, political/legal, technological, economic, & global
The role of the competitive environment
Porter’s five forces model.

4. The Environmentally Aware
Section One
The Environmentally Aware
Organization

5. Creating the Environmentally Aware Organization

6. Environmental Scanning
External Scanning
Surveillance of a firm’s external environment:
Predict environmental changes to come
Detect changes already under way
Proactive mode
Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them

7. Environmental Monitoring
External Monitoring
Track evolution of environmental trends, sequence of events or streams of activities
Scanning Vs Monitoring
Scanning – future, potentials
Monitoring – historical trends, key industry indices/measures
How to spot trends is next slide

8. How to Spot Hot Trends Customers Listen/ Go old school Pay attention
Follow trends online
Exhibit 2.2
Ask your customers questions about
your products and services
and their interests
Read trade publications related to your industry
Add websites like trendhunter.com to your regular surfing
Ask your customers what they think
focus groups, chat rooms, Facebook, etc. 8

9. Competitive Intelligence
Define and understand a firm’s industry
Who are “we” competing against?
Identify rivals’ strengths and weaknesses
Intelligence gathering (data)
Interpretation of intelligence data
Helps a firm avoid surprises

10. Creating the Environmentally Aware Organization

11. Environmental Forecasting
Plausible projections about direction, scope, speed and intensity of environmental change
Caution: Not Black/White
Remember the Grey
Probability
Poor predictions examples
Page 40

12. Environmental Forecasting - Examples
I think there is a world market for maybe five computers. ~ Thomas J. Watson, 1943, Chairman of the Board of IBM
This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.
~ Western Union internal memo, 1876
Who the hell wants to hear actors talk?
~ H. M. Warner, Warner Brothers, 1927
Airplanes are interesting toys, but they have no military value. ~ Marshal Ferdinand Foch in 1911

13. Environmental Forecasting
Scenario analysis
Involves experts’ detailed assessments of societal trends, economics, politics, technology, or other dimensions of the external environment
What if?, Contingencies
High Reliability Organizations

14. SWOT Analysis Firm’s strategy must: Internal - - - - - External
Build on its strengths
Remedy the weaknesses or work around them
Internal
Take advantage of opportunities presented by the environment
Protect the firm from threats in the environment
External

15. Example: Harley-Davidson
Strengths
Strong & adaptable brand image
Weaknesses
Limited ability to develop new non-traditional products
Opportunities
Growing leisure interest in motorcycles worldwide
Threats
Differing foreign policies governing motorcycles

16. Section 2
General Environment

17. The General Environment
Factors external to an industry,
usually beyond a firm’s control
Demographic
Sociocultural
Legal/Political
Technological
Economic
Global

18. Demographic Segment Aging population Rising or declining affluence
Changes in ethnic composition
Geographic distribution of population
Greater disparities in income levels
Can vary by country as well.

19. Sociocultural Segment
More women in the workforce
Dual-income families
Increase in temporary workers
Greater concern for healthy diets and physical fitness
Greater interest in the environment
Postponement of having children
Country differences here too.

20. Political/Legal Segment
Tort reform
Americans with Disabilities Act (ADA)
Repeal of Glass-Steagall Act in 1999 (banks may now offer brokerage services)
Deregulation of utility and other industries
Increases in federally mandated minimum wages
Taxation at local, state, federal levels (& country)
Legislation on corporate governance reforms (Sarbanes- Oxley Act)
Health Insurance Reform
EEOC, OSHA, HR
ICE – CIS (citizenship & immigration services)

21. Technological Segment
Genetic engineering
Emergence of Internet technology
Computer-aided design/computer-aided manufacturing systems (CAD/CAM)
Wireless communication
Nanotechnology
Facebook, Twitter, LinkedIn
Rackspace (hosting)
Cloud (Amazon, Apple, Google)
iphones, ipads, droids, smartphones

22. Economic Segment Interest rates Unemployment Consumer Price index
Trends in GDP
Changes in stock market valuations
Housing market
Oil prices
International…

23. Global Segment Increasing global trade Currency exchange rates
Arbitrage
Emergence of the Indian and Chinese economies
Trade agreements (NAFTA, EU, APEC, ASEAN, Mercosur, CAFTA-DR)
Creation of WTO (decreasing tariffs/free trade in services)
Ease of information access / lack of information access

24. Interactions X Industries (Ex 2.3)
Segment/Trends and Events
Industry
Positive
Neutral
Negative
Demographic
Aging population
Healthcare
Baby products X
Rising affluence
Brokerage services
Fast foods
Upscale pets and supplies
Sociocultural
More women in the workforce
Clothing
Baking products (staples)
Greater concern for health and fitness
Home exercise equipment
Meat products
Political/Legal
Tort reform
Legal services
Auto manufacturing
Americans with Disabilities Act (ADA)
Retail
Manufacturers of elevators, escalators, and ramps

25. Interactions X Industries (Ex 2.3)
Segment/Trends and Events
Industry
Positive
Neutral
Negative
Technological
Genetic engineering
Pharmaceutical
Publishing X
Pollution/global warming
Engineering services
Petroleum
Economic
Interest rate increases
Residential construction
Most common grocery products
Global
Increasing global trade
Shipping
Personal service
Emergence of China as an economic power
Soft drinks
Defense

26. Demographic Sociocultural Legal/Political Technological Economic
Company XYZ
Demographic
Sociocultural
Legal/Political
Technological
Economic
Global

27. The Competitive Environment
Section 3
The Competitive Environment

28. The Competitive Environment
Competitive environment -- factors that pertain to an industry and affect a firm’s strategies
Competitors
Customers
Suppliers
Labor Pool (Potential)

29. Porter’s Five Forces Model of Industry Competition
Each of these forces affects a firm’s ability to compete in a given market.
Together, they determine the profit potential for a particular industry.

30. The Threat of New Entrants
Profits of established firms in the industry may be eroded by new competitors
Sources of entry barriers
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Proprietary products
Favorable access to raw materials
Government subsidies
Favorable government policies

31. The Bargaining Power of Buyers
Buyers threaten an industry by:
Forcing down prices
Bargaining for higher quality or more services
Playing competitors against each other

32. 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

33. The Bargaining Power of Suppliers
Suppliers can exert power by
threatening to raise prices or
reduce the quality of purchased goods and services

34. 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
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 integration

35. 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
GPS (Tom-Tom)
Smartphones

36. The Intensity of Rivalry among Competitors in an Industry
Price competition
Advertising battles
Product introductions
Increased customer service or warranties
Bic
National pens
Foray
Pilot
Paper mate
Edge
Mont blanc
Parker
Lamy

37. The Intensity of Rivalry among Competitors in an Industry
Interacting factors lead to intense rivalry
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
Exhibit 2.8
Good summary

38. Rivalry
Substitutes’ Threat
Buyers’ Power
Suppliers’ Power
Threat of New Entrants

39. How the Internet and Digital Technologies Influences Industry (p.67)

41. Using Industry Analysis: A Few Caveats
Managers must not always avoid low profit industries
Can still yield high returns for players with sound strategies
Implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces
Five Forces analysis is essentially a static analysis…

42. Using Industry Analysis: A Few Caveats (cont.)
Good industry analysis looks rigorously at the structural underpinnings of profitability.
A first step is to understand the time horizon
The point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of profitability.
Help with understanding opportunities and threats.

43. The Value Net Symbiosis View (not Zero-Sum) Value net
Suppliers and customers (the vertical net)
Substitutes and complements (the horizontal net)
Symbiosis View
(not Zero-Sum) 43

44. 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
Type of distribution system
P. 63 (good visual – Auto industry)

45. 2.11 World Auto Industry: Strategic Groups
Ferrari
Lamborghini
Porsche
High
Audi
Mercedes
BMW
Toyota
Ford
General Motors
Chrysler
Nissan
Price
Hyundai
Kia
Chery
Geely
Tata Motors
Low
Low
Breadth of Product Line
High

46. 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