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Ch 2: Analyzing the External Environment
of the Firm
Spring 2015
Strategic Analysis1) Introduction, Analyzing Goals and Objectives
2) Analyzing External Environmenti. Focuses on the value managers add when
they have a sense of events outside the company
ii. 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.
3) Analyzing Internal Environment
4) Assessing Intellectual Capital
2
Overview – 3 Sections
I. The environmentally aware organization.o Managers use scanning, monitoring,
and competitive intelligence to develop forecasts
o Role of scenario planning
II. Influence of six segments of general environmento demographic, sociocultural,
political/legal, technological, economic, & global
III. The role of the competitive environment o Porter’s five forces model.
3
Section One
The Environmentally
Aware Organization
4
Creating the Environmentally Aware Organization
5
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
6
Environmental Monitoring
•External Monitoring▫Track evolution of environmental trends,
sequence of events or streams of activities
Scanning Vs MonitoringScanning – future, potentials
Monitoring – historical trends, key industry indices/measures
7
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
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
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Creating the Environmentally Aware Organization
Environmental Forecasting
•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
11
• 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
12
Environmental Forecasting - Examples
•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
13
Environmental Forecasting
SWOT Analysis
Firm’s strategy must:
▫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
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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
Section 2
General Environmen
t
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The General Environment
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Factors external to an industry, usually beyond a firm’s control
Demographic Sociocultural Legal/Political
Technological Economic Global
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.
18
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.
19
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)
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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
21
Economic Segment
• Interest rates•Unemployment•Consumer Price index
▫http://www.bls.gov/cpi/•Trends in GDP•Changes in stock market valuations•Housing market•Oil prices• International…
22
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)▫ http://www.aseansec.org/74.htm ▫ http://www.aseansec.org/64.htm
•Creation of WTO (decreasing tariffs/free trade in services)
•Ease of information access / lack of information access
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Interactions X Industries (Ex 2.3) Segment/Trends and Events
Industry Positive
Neutral
Negative
Demographic
Aging population HealthcareBaby products
XX
Rising affluence Brokerage servicesFast foodsUpscale pets and supplies
X
XX
Sociocultural
More women in the workforce
ClothingBaking products (staples)
XX
Greater concern for health and fitness
Home exercise equipmentMeat products
XX
Political/Legal
Tort reform Legal servicesAuto manufacturing X
X
Americans with Disabilities Act (ADA)
RetailManufacturers of elevators, escalators, and ramps
XX
24
Interactions X Industries (Ex 2.3)
Segment/Trends and Events
Industry Positive
Neutral Negative
Technological
Genetic engineering
PharmaceuticalPublishing
XX
Pollution/global warming
Engineering servicesPetroleum
XX
Economic
Interest rate increases
Residential constructionMost common grocery products
XX
Global
Increasing global trade
ShippingPersonal service
XX
Emergence of China as an economic power
Soft drinksDefense
XX
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Company XYZ
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Demographic
Sociocultural
Legal/Political
Technological
Economic
Global
Section 3
The Competitive Environment
27
The Competitive Environment
•Competitive environment -- factors that pertain to an industry and affect a firm’s strategies
▫Competitors
▫Customers
▫Suppliers
▫Labor Pool (Potential)
28
29
Porter’s Five Forces
Model of Industry
Competition
The Threat of New Entrants
▫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
30
• Profits of established firms in the industry may be eroded by new competitors
• Sources of entry barriers
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
31
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
32
The Bargaining Power of Suppliers
Suppliers can exert power by • threatening to raise
prices or • reduce the quality of
purchased goods and services
33
The Bargaining Power of Suppliers
▫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
34
A supplier group will be powerful when:
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
35
The Intensity of Rivalry among Competitors in an Industry
• Price competition• Advertising battles• Product introductions• Increased customer service or
warranties
36
• Bic• Foray• Pilot• Edge• Parker• National
pens• Paper
mate• Mont
blanc• Lamy
The Intensity of Rivalry among Competitors in an Industry
•Lack of differentiation or switching costs
•Capacity augmented in large increments
•High exit barriers
•Exhibit 2.8 ▫Good summary
Interacting factors lead to intense rivalry
•Numerous or equally balanced competitors
•Slow industry growth
•High fixed or shortage costs
38
Rivalry
Substitutes’ Threat
Buyers’ PowerSuppliers’ Power
Threat of New Entrants
39
How the Internet and Digital Technologies Influences Industry (p.67)
40
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…
41
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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)
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)
44
2.11 World Auto Industry: Strategic Groups
45
High
Price
Low Breadth of Product Line
High
Low
CheryGeelyTata
Motors
Hyundai
Kia
FerrariLamborghin
iPorsche Audi
Mercedes
BMW
ToyotaFord
General MotorsChryslerNissan
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
46
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