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
