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Analyzing the external environment of the firm S V Horner 2009
Who cares? <ul><li>Overemphasis on internal characteristics </li></ul><ul><ul><li>Product obsolescence </li></ul></ul><ul>...
Creating environmental awareness at organizational level <ul><li>Scanning </li></ul><ul><li>Monitoring </li></ul><ul><li>C...
Scanning <ul><li>Surveillance of environment </li></ul><ul><ul><li>Anticipate future changes and detect changes under way ...
Monitoring <ul><li>Tracking movement or changes in specific trends, sequences of events, or streams of activities </li></u...
Competitive intelligence <ul><li>Define and understand industry and identify rivals’ strengths and weaknesses </li></ul><u...
Competitive intelligence <ul><li>Sources of competitive intelligence </li></ul><ul><ul><li>Business press </li></ul></ul><...
Environmental forecasting <ul><li>“ plausible projections about direction, scope, speed, and intensity of environmental ch...
SWOT analysis <ul><li>Framework for identifying key elements of strategic context </li></ul><ul><ul><li>External elements ...
The general environment <ul><li>External factors have profound influence on firm outcomes and entire industries </li></ul>...
Demographic segment <ul><li>Numerical measurement of characteristics of a population </li></ul><ul><li>Literally: descript...
Sociocultural segment <ul><li>Values, beliefs, attitudes of a society </li></ul><ul><li>Distinct from, but related to, dem...
Political/legal segment <ul><li>Political processes, elections, legislation, regulation, adjudication </li></ul><ul><li>Co...
Technological segment <ul><li>Growth in knowledge leading to new products and services and improvements in production and ...
Economic segment <ul><li>General economic conditions facing a firm and its industry </li></ul><ul><li>General economic ind...
Global segment <ul><li>Relevant (and changing) new global markets </li></ul><ul><li>International political events (e.g., ...
Relationships among segments <ul><li>Segments are not totally distinct </li></ul><ul><li>Segments are interrelated and mut...
Competitive environment <ul><li>More direct influence on industry competition and firm profitability than general environm...
Porter’s five forces model of industry competition S V Horner 2009
Threat of new entrants <ul><li>Expands industry capacity and increases competition for market share </li></ul><ul><li>May ...
Threat of new entrants <ul><li>High barriers to entry reduce threat </li></ul><ul><ul><li>1) Economies of scale </li></ul>...
Threat of new entrants <ul><li>Expected retaliation of existing competitors </li></ul><ul><ul><li>Deterrent to new entrant...
Bargaining power of buyers <ul><li>Bargaining power of  buyers of industry output  </li></ul><ul><li>Motivated to negotiat...
Bargaining power of buyers: factors <ul><li>Buyers are concentrated, or each one purchases a significant percentage of tot...
Bargaining power of buyers: factors <ul><li>Buyers earn low profits, creating pressure for them to reduce their purchasing...
Bargaining power of suppliers <ul><li>Bargaining power of  suppliers of industry inputs  to charge higher prices, reduce q...
Bargaining power of suppliers : factors <ul><li>The supplying industry is dominated by one or a few companies.  </li></ul>...
Bargaining power of suppliers : factors <ul><li>The suppliers pose a credible threat of forward integration by “becoming t...
Intensity of rivalry among existing competitors <ul><li>Jockeying for position among  producers  of industry output </li><...
Intensity of rivalry: structural factors <ul><ul><li>1) Numerous or equally balanced competitors </li></ul></ul><ul><ul><l...
Threat of substitute products and services <ul><li>Substitutes  perform similar or same functions as existing industry pro...
Threat of substitute products and services <ul><li>Distinct from economics definition which defines  competing  products <...
Limitations of five forces model <ul><li>Industry often difficult to identify. </li></ul><ul><li>Does not account for the ...
Strategic groups <ul><li>Two assumptions: </li></ul><ul><ul><li>No two firms are totally identical </li></ul></ul><ul><ul>...
Strategic groups <ul><li>Dimensions of similarity </li></ul><ul><ul><li>Breadth of product line </li></ul></ul><ul><ul><li...
Strategic groups as a tool of industry analysis <ul><li>Identifies barriers to mobility protecting one group from competit...
Strategic groups as a tool of industry analysis <ul><li>Identifies groups whose competitive position may be marginal or te...
Strategic groups as a tool of industry analysis <ul><li>Helps managers think through implications of each industry trend f...
Summary <ul><li>Environmental analysis a necessary component of strategic planning </li></ul><ul><li>Environmental awarene...
Summary <ul><li>General environmental segments: demographic, sociocultural, political/legal, technological, economic, glob...
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Dess chapter02

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  1. 1. Analyzing the external environment of the firm S V Horner 2009
  2. 2. Who cares? <ul><li>Overemphasis on internal characteristics </li></ul><ul><ul><li>Product obsolescence </li></ul></ul><ul><ul><li>Missed opportunities for new product development </li></ul></ul><ul><ul><li>Sears’ internal operating manual </li></ul></ul><ul><li>Neglect of external analysis </li></ul><ul><ul><li>Assumptions about external environment may become outdated </li></ul></ul>S V Horner 2009
  3. 3. Creating environmental awareness at organizational level <ul><li>Scanning </li></ul><ul><li>Monitoring </li></ul><ul><li>Competitive intelligence </li></ul><ul><li>Forecasting </li></ul>S V Horner 2009
  4. 4. Scanning <ul><li>Surveillance of environment </li></ul><ul><ul><li>Anticipate future changes and detect changes under way </li></ul></ul><ul><ul><li>Recognize patterns before competitors </li></ul></ul><ul><ul><li>Act before changes occur (proactive) rather than responding afterwards (reactive) </li></ul></ul><ul><ul><li>General top of the mind awareness of societal behaviors and business practices </li></ul></ul>S V Horner 2009
  5. 5. Monitoring <ul><li>Tracking movement or changes in specific trends, sequences of events, or streams of activities </li></ul><ul><li>Watching specific formal and informal indicators of future events </li></ul><ul><ul><li>Index of economic indicators </li></ul></ul><ul><ul><li>Shipments by FedEx, UPS, DHL </li></ul></ul><ul><ul><li>NAPM index </li></ul></ul>S V Horner 2009
  6. 6. Competitive intelligence <ul><li>Define and understand industry and identify rivals’ strengths and weaknesses </li></ul><ul><li>Anticipate competitors’ moves and decrease own response time </li></ul>S V Horner 2009
  7. 7. Competitive intelligence <ul><li>Sources of competitive intelligence </li></ul><ul><ul><li>Business press </li></ul></ul><ul><ul><li>Competitor pricing </li></ul></ul><ul><ul><li>Competitors’ management backgrounds </li></ul></ul><ul><ul><li>Open to seemingly unrelated bits of information that form patterns (Fuld & Co.’s client p. 46) </li></ul></ul><ul><ul><li>Awareness of technological changes that threaten status quo (e.g., Encyclopaedia Brittanica) </li></ul></ul><ul><li>Avoid unethical and illegal behavior </li></ul>S V Horner 2009
  8. 8. Environmental forecasting <ul><li>“ plausible projections about direction, scope, speed, and intensity of environmental change” (p. 42) </li></ul><ul><li>Scenario analysis: human judgment combined with quantitative analysis </li></ul>S V Horner 2009
  9. 9. SWOT analysis <ul><li>Framework for identifying key elements of strategic context </li></ul><ul><ul><li>External elements </li></ul></ul><ul><ul><ul><li>Environmental opportunities for value creation </li></ul></ul></ul><ul><ul><ul><li>Environmental threats to competitive position </li></ul></ul></ul><ul><ul><li>Internal elements </li></ul></ul><ul><ul><ul><li>Firm strengths: conditions in which firm excels </li></ul></ul></ul><ul><ul><ul><li>Firm weaknesses: characteristics which firm may lack in comparison to competitors </li></ul></ul></ul>S V Horner 2009
  10. 10. The general environment <ul><li>External factors have profound influence on firm outcomes and entire industries </li></ul><ul><li>Affects different industries differently </li></ul><ul><li>Six segments of general environment: demographic, sociocultural, political/legal/, technological, economic, global </li></ul>S V Horner 2009
  11. 11. Demographic segment <ul><li>Numerical measurement of characteristics of a population </li></ul><ul><li>Literally: description of people </li></ul><ul><li>Age, income, ethnic composition, geographic distribution, etc. </li></ul>S V Horner 2009
  12. 12. Sociocultural segment <ul><li>Values, beliefs, attitudes of a society </li></ul><ul><li>Distinct from, but related to, demographics </li></ul><ul><li>Examples of values, beliefs, attitudes </li></ul><ul><ul><li>Concern over greenhouse gases </li></ul></ul><ul><ul><li>Health consciousness (fitness, diets, etc.) </li></ul></ul>S V Horner 2009
  13. 13. Political/legal segment <ul><li>Political processes, elections, legislation, regulation, adjudication </li></ul><ul><li>Competition among individuals and groups for “voice” in public policy </li></ul>S V Horner 2009
  14. 14. Technological segment <ul><li>Growth in knowledge leading to new products and services and improvements in production and distribution </li></ul><ul><li>Examples of technologies: genetic engineering, information technology, CAD/CAM, artificial intelligence, nanotechnology, mass production, assembly line production </li></ul>S V Horner 2009
  15. 15. Economic segment <ul><li>General economic conditions facing a firm and its industry </li></ul><ul><li>General economic indicators </li></ul><ul><ul><li>Key economic indicators </li></ul></ul><ul><ul><li>Stock market indices </li></ul></ul><ul><ul><li>Other formal and informal indicators </li></ul></ul><ul><li>Describe effects on firm strategic direction </li></ul>S V Horner 2009
  16. 16. Global segment <ul><li>Relevant (and changing) new global markets </li></ul><ul><li>International political events (e.g., changes in power, fall of Soviet rule, newly industrializing countries, terrorism) </li></ul><ul><li>Cultural and institutional characteristics of global markets </li></ul><ul><li>International organizations promote global economic integration (e.g., WTO, Transatlantic Business Dialogue) </li></ul>S V Horner 2009
  17. 17. Relationships among segments <ul><li>Segments are not totally distinct </li></ul><ul><li>Segments are interrelated and mutually influencing </li></ul>S V Horner 2009
  18. 18. Competitive environment <ul><li>More direct influence on industry competition and firm profitability than general environment </li></ul><ul><li>Consists of factors relevant to firm’s strategy – customers, suppliers, and competitors (both existing and potential) </li></ul>S V Horner 2009
  19. 19. Porter’s five forces model of industry competition S V Horner 2009
  20. 20. Threat of new entrants <ul><li>Expands industry capacity and increases competition for market share </li></ul><ul><li>May include start ups as well as existing firms expanding into new business </li></ul><ul><ul><li>Phillip Morris’ purchase of Miller Brewing </li></ul></ul><ul><li>Influenced by barriers to entry and anticipated reactions from existing competitors </li></ul>S V Horner 2009
  21. 21. Threat of new entrants <ul><li>High barriers to entry reduce threat </li></ul><ul><ul><li>1) Economies of scale </li></ul></ul><ul><ul><li>2) Brand identity and product differentiation </li></ul></ul><ul><ul><li>3) Capital requirements </li></ul></ul><ul><ul><li>4) Switching costs </li></ul></ul><ul><ul><li>5) Access to distribution channels </li></ul></ul><ul><ul><li>6) Cost disadvantages independent of size </li></ul></ul><ul><ul><li>7) Government policy </li></ul></ul>S V Horner 2009
  22. 22. Threat of new entrants <ul><li>Expected retaliation of existing competitors </li></ul><ul><ul><li>Deterrent to new entrants </li></ul></ul><ul><ul><li>Opportunity for entrepreneurs in underserved niches </li></ul></ul>S V Horner 2009
  23. 23. Bargaining power of buyers <ul><li>Bargaining power of buyers of industry output </li></ul><ul><li>Motivated to negotiate for lower prices, quality, service, etc. </li></ul><ul><li>Bargaining power of buyer groups a function of: </li></ul><ul><ul><li>Market situation </li></ul></ul><ul><ul><li>Relative importance of purchases from the industry compared to its overall business </li></ul></ul>S V Horner 2009
  24. 24. Bargaining power of buyers: factors <ul><li>Buyers are concentrated, or each one purchases a significant percentage of total industry sales. </li></ul><ul><li>The products that the buyers purchase represent a significant percentage of the buyers’ costs. </li></ul><ul><li>The products that the buyers purchase are standard or undifferentiated. </li></ul><ul><li>Buyers face few switching costs and can freely change suppliers. </li></ul>S V Horner 2009
  25. 25. Bargaining power of buyers: factors <ul><li>Buyers earn low profits, creating pressure for them to reduce their purchasing costs. </li></ul><ul><li>Buyers have the ability to engage in backward integration by becoming their own suppliers. </li></ul><ul><li>The industry’s product is relatively unimportant to the quality of the buyers’ products or services. </li></ul><ul><li>Buyers have complete information. </li></ul>S V Horner 2009
  26. 26. Bargaining power of suppliers <ul><li>Bargaining power of suppliers of industry inputs to charge higher prices, reduce quality of purchased goods/services </li></ul><ul><li>Factors influencing bargaining of suppliers mirror those of the bargaining power of buyers </li></ul>S V Horner 2009
  27. 27. Bargaining power of suppliers : factors <ul><li>The supplying industry is dominated by one or a few companies. </li></ul><ul><li>There are no substitute products, weakening industry players in relation to their suppliers. </li></ul><ul><li>The buying industry is not a major customer of the suppliers </li></ul>S V Horner 2009
  28. 28. Bargaining power of suppliers : factors <ul><li>The suppliers pose a credible threat of forward integration by “becoming their own customers.” </li></ul><ul><li>The suppliers’ products are differentiated or have built-in switching costs, thereby reducing the buyers’ ability to play one supplier against another. </li></ul>S V Horner 2009
  29. 29. Intensity of rivalry among existing competitors <ul><li>Jockeying for position among producers of industry output </li></ul><ul><li>Tactics: </li></ul><ul><ul><li>Price competition </li></ul></ul><ul><ul><li>Advertising battles </li></ul></ul><ul><ul><li>Product introductions </li></ul></ul><ul><ul><li>Customer service levels or warranties </li></ul></ul>S V Horner 2009
  30. 30. Intensity of rivalry: structural factors <ul><ul><li>1) Numerous or equally balanced competitors </li></ul></ul><ul><ul><li>2) High fixed or storage costs </li></ul></ul><ul><ul><li>3) Slow industry growth </li></ul></ul><ul><ul><li>4) Lack of differentiation or low switching costs </li></ul></ul><ul><ul><li>5) Capacity increases in large increments (“clumpy”) </li></ul></ul><ul><ul><li>6) Diversity of competitors </li></ul></ul><ul><ul><li>7) High strategic stakes </li></ul></ul><ul><ul><li>8) High exit barriers </li></ul></ul>S V Horner 2009
  31. 31. Threat of substitute products and services <ul><li>Substitutes perform similar or same functions as existing industry products but have different characteristics </li></ul><ul><ul><li>Sugar producers face threats from producers of high fructose corn syrup </li></ul></ul><ul><ul><li>Fiberglass producers face threats from producers of cellulose, rock wool, and styrofoam </li></ul></ul>S V Horner 2009
  32. 32. Threat of substitute products and services <ul><li>Distinct from economics definition which defines competing products </li></ul><ul><ul><li>In strategic thinking, Coke and Pepsi are competing products; Coke and Snapple are substitutes </li></ul></ul>S V Horner 2009
  33. 33. Limitations of five forces model <ul><li>Industry often difficult to identify. </li></ul><ul><li>Does not account for the role of strategic alliances/partnerships </li></ul><ul><li>Some firms, most notably large ones, can often take steps to modify the industry structure </li></ul><ul><li>Assumes industry factors, not firm resources, comprise the primary determinants of firm profit. </li></ul><ul><li>Firms compete in many industries and markets and must be concerned with multiple industry structures. </li></ul>S V Horner 2009
  34. 34. Strategic groups <ul><li>Two assumptions: </li></ul><ul><ul><li>No two firms are totally identical </li></ul></ul><ul><ul><li>No two firms are totally different </li></ul></ul><ul><li>Firms more similar to each other than to rest of industry may be identified as a strategic group </li></ul>S V Horner 2009
  35. 35. Strategic groups <ul><li>Dimensions of similarity </li></ul><ul><ul><li>Breadth of product line </li></ul></ul><ul><ul><li>Geographic scope </li></ul></ul><ul><ul><li>Price/quality </li></ul></ul><ul><ul><li>Degree of vertical integration </li></ul></ul><ul><ul><li>Type of distribution (e.g., dealer network, mass merchandisers, private label) </li></ul></ul><ul><ul><li>Variety of strategic combinations in an industry </li></ul></ul>S V Horner 2009
  36. 36. Strategic groups as a tool of industry analysis <ul><li>Identifies barriers to mobility protecting one group from competition from another </li></ul><ul><ul><li>Barriers to mobility </li></ul></ul><ul><ul><ul><li>Factors deterring entry of firms from one group into another (e.g., Wal-Mart and Nordstrom’s) </li></ul></ul></ul><ul><ul><ul><li>Examples: technology, brand image, dealer network </li></ul></ul></ul>S V Horner 2009
  37. 37. Strategic groups as a tool of industry analysis <ul><li>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) </li></ul><ul><li>Helps chart future direction of firm’s strategies </li></ul>S V Horner 2009
  38. 38. Strategic groups as a tool of industry analysis <ul><li>Helps managers think through implications of each industry trend for strategic group as a whole </li></ul><ul><ul><li>e.g., variable effect of interest rates on strategic groups in automobile manufacturing (e.g., Porsche vs. Kia) </li></ul></ul>S V Horner 2009
  39. 39. Summary <ul><li>Environmental analysis a necessary component of strategic planning </li></ul><ul><li>Environmental awareness occurs through scanning, monitoring, competitive intelligence, environmental forecasting </li></ul><ul><li>Two major components of environment </li></ul><ul><ul><li>General environment </li></ul></ul><ul><ul><li>Competitive environment </li></ul></ul>S V Horner 2009
  40. 40. Summary <ul><li>General environmental segments: demographic, sociocultural, political/legal, technological, economic, global </li></ul><ul><li>Competitive environment: </li></ul><ul><ul><li>Five competitive forces (Porter’s five forces) </li></ul></ul><ul><ul><ul><li>Threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, intensity of rivalry </li></ul></ul></ul><ul><ul><ul><li>Strategic groups </li></ul></ul></ul>S V Horner 2009
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