Analyzing the external environment of the firm

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Analyzing the external environment of the firm
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Who cares?

• Overemphasis on internal characteristics
• Product obsolescence
• Missed opportunities for new product development
• Sears internal operating manual
• Neglect of external analysis
• Assumptions about external environment may become
  outdated

3
Creating environmental awareness at
organizational level

• Scanning
• Monitoring
• Competitive intelligence
• Forecasting

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Scanning

• Surveillance of environment
• Anticipate future changes and detect changes
  under way
• Recognize patterns before competitors
• Act before changes occur (proactive) rather than
  responding afterwards (reactive)
• General top of the mind awareness of societal
  behaviors and business practices

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Monitoring

• Tracking movement or changes in specific trends,
  sequences of events, or streams of activities
• Watching specific formal and informal indicators
  of future events
• Index of economic indicators
• Shipments by FedEx, UPS, DHL
• NAPM index

6
Competitive intelligence

• Define and understand industry and identify
  rivals strengths and weaknesses
• Anticipate competitors moves and decrease own
  response time

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Competitive intelligence

• Sources of competitive intelligence
• Business press
• Competitor pricing
• Competitors management backgrounds
• Open to seemingly unrelated bits of information
  that form patterns (Fuld Co.s client p. 46)
• Awareness of technological changes that threaten
  status quo (e.g., Encyclopaedia Brittanica)
• Avoid unethical and illegal behavior

8
Environmental forecasting

• plausible projections about direction, scope,
  speed, and intensity of environmental change (p.
  42)
• Scenario analysis human judgment combined with
  quantitative analysis

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SWOT analysis

• Framework for identifying key elements of
  strategic context
• External elements
• Environmental opportunities for value creation
• Environmental threats to competitive position
• Internal elements
• Firm strengths conditions in which firm excels
• Firm weaknesses characteristics which firm may
  lack in comparison to competitors

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The general environment

• External factors have profound influence on firm
  outcomes and entire industries
• Affects different industries differently
• Six segments of general environment demographic,
  sociocultural, political/legal/, technological,
  economic, global

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Demographic segment

• Numerical measurement of characteristics of a
  population
• Literally description of people
• Age, income, ethnic composition, geographic
  distribution, etc.

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Sociocultural segment

• Values, beliefs, attitudes of a society
• Distinct from, but related to, demographics
• Examples of values, beliefs, attitudes
• Concern over greenhouse gases
• Health consciousness (fitness, diets, etc.)

13
Political/legal segment

• Political processes, elections, legislation,
  regulation, adjudication
• Competition among individuals and groups for
  voice in public policy

14
Technological segment

• Growth in knowledge leading to new products and
  services and improvements in production and
  distribution
• Examples of technologies genetic engineering,
  information technology, CAD/CAM, artificial
  intelligence, nanotechnology, mass production,
  assembly line production

15
Economic segment

• General economic conditions facing a firm and its
  industry
• General economic indicators
• Key economic indicators
• Stock market indices
• Other formal and informal indicators
• Describe effects on firm strategic direction

16
Global segment

• Relevant (and changing) new global markets
• International political events (e.g., changes in
  power, fall of Soviet rule, newly industrializing
  countries, terrorism)
• Cultural and institutional characteristics of
  global markets
• International organizations promote global
  economic integration (e.g., WTO, Transatlantic
  Business Dialogue)

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Relationships among segments

• Segments are not totally distinct
• Segments are interrelated and mutually influencing

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Competitive environment

• More direct influence on industry competition and
  firm profitability than general environment
• Consists of factors relevant to firms strategy
  customers, suppliers, and competitors (both
  existing and potential)

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Porters five forces model of industry competition
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Threat of new entrants

• Expands industry capacity and increases
  competition for market share
• May include start ups as well as existing firms
  expanding into new business
• Phillip Morris purchase of Miller Brewing
• Influenced by barriers to entry and anticipated
  reactions from existing competitors

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Threat of new entrants

• High barriers to entry reduce threat
• 1) Economies of scale
• 2) Brand identity and product differentiation
• 3) Capital requirements
• 4) Switching costs
• 5) Access to distribution channels
• 6) Cost disadvantages independent of size
• 7) Government policy

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Threat of new entrants

• Expected retaliation of existing competitors
• Deterrent to new entrants
• Opportunity for entrepreneurs in underserved
  niches

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Bargaining power of buyers

• Bargaining power of buyers of industry output
• Motivated to negotiate for lower prices, quality,
  service, etc.
• Bargaining power of buyer groups a function of
• Market situation
• Relative importance of purchases from the
  industry compared to its overall business

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Bargaining power of buyers factors

• Buyers are concentrated, or each one purchases a
  significant percentage of total industry sales.
• The products that the buyers purchase represent a
  significant percentage of the buyers costs.
• The products that the buyers purchase are
  standard or undifferentiated.
• Buyers face few switching costs and can freely
  change suppliers.

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Bargaining power of buyers factors

• Buyers earn low profits, creating pressure for
  them to reduce their purchasing costs.
• Buyers have the ability to engage in backward
  integration by becoming their own suppliers.
• The industrys product is relatively unimportant
  to the quality of the buyers products or
  services.
• Buyers have complete information.

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Bargaining power of suppliers

• Bargaining power of suppliers of industry inputs
  to charge higher prices, reduce quality of
  purchased goods/services
• Factors influencing bargaining of suppliers
  mirror those of the bargaining power of buyers

27
Bargaining power of suppliers factors

• The supplying industry is dominated by one or a
  few companies.
• There are no substitute products, weakening
  industry players in relation to their suppliers.
• The buying industry is not a major customer of
  the suppliers

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Bargaining power of suppliers factors

• The suppliers pose a credible threat of forward
  integration by becoming their own customers.
• The suppliers products are differentiated or
  have built-in switching costs, thereby reducing
  the buyers ability to play one supplier against
  another.

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Intensity of rivalry among existing competitors

• Jockeying for position among producers of
  industry output
• Tactics
• Price competition
• Advertising battles
• Product introductions
• Customer service levels or warranties

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Intensity of rivalry structural factors

• 1) Numerous or equally balanced competitors
• 2) High fixed or storage costs
• 3) Slow industry growth
• 4) Lack of differentiation or low switching
  costs
• 5) Capacity increases in large increments
  (clumpy)
• 6) Diversity of competitors
• 7) High strategic stakes
• 8) High exit barriers

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Threat of substitute products and services

• Substitutes perform similar or same functions as
  existing industry products but have different
  characteristics
• Sugar producers face threats from producers of
  high fructose corn syrup
• Fiberglass producers face threats from producers
  of cellulose, rock wool, and styrofoam

32
Threat of substitute products and services

• Distinct from economics definition which defines
  competing products
• In strategic thinking, Coke and Pepsi are
  competing products Coke and Snapple are
  substitutes

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Limitations of five forces model

• Industry often difficult to identify.
• Does not account for the role of strategic
  alliances/partnerships
• Some firms, most notably large ones, can often
  take steps to modify the industry structure
• Assumes industry factors, not firm resources,
  comprise the primary determinants of firm profit.
• Firms compete in many industries and markets and
  must be concerned with multiple industry
  structures.

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Strategic groups

• Two assumptions
• No two firms are totally identical
• No two firms are totally different
• Firms more similar to each other than to rest of
  industry may be identified as a strategic group

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Strategic groups

• Dimensions of similarity
• Breadth of product line
• Geographic scope
• Price/quality
• Degree of vertical integration
• Type of distribution (e.g., dealer network, mass
  merchandisers, private label)
• Variety of strategic combinations in an industry

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Strategic groups as a tool of industry analysis

• Identifies barriers to mobility protecting one
  group from competition from another
• Barriers to mobility
• Factors deterring entry of firms from one group
  into another (e.g., Wal-Mart and Nordstroms)
• Examples technology, brand image, dealer network

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Strategic groups as a tool of industry analysis

• Identifies groups whose competitive position may
  be marginal or tenuous (e.g., JCP and Sears stuck
  in the middle between Wal-Mart and Nieman Marcus)
• Helps chart future direction of firms strategies

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Strategic groups as a tool of industry analysis

• Helps managers think through implications of each
  industry trend for strategic group as a whole
• e.g., variable effect of interest rates on
  strategic groups in automobile manufacturing
  (e.g., Porsche vs. Kia)

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Summary

• Environmental analysis a necessary component of
  strategic planning
• Environmental awareness occurs through scanning,
  monitoring, competitive intelligence,
  environmental forecasting
• Two major components of environment
• General environment
• Competitive environment

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Summary

• General environmental segments demographic,
  sociocultural, political/legal, technological,
  economic, global
• Competitive environment
• Five competitive forces (Porters five forces)
• Threat of new entrants, bargaining power of
  buyers, bargaining power of suppliers, threat of
  substitutes, intensity of rivalry
• Strategic groups