CHAPTER 2Analyzing the External Environment of the Firm

CHAPTER 2
Analyzing the
External Environment
of the Firm:
Creating Competitive
Advantages
Copyright Anatoli Styf/Shutterstock
1
Learning Objectives
After reading this chapter, you should have a good
understanding of:
2-1 The importance of developing forecasts of the business
environment.
2-2 Why environmental scanning, environmental monitoring,
and collecting competitive intelligence are critical inputs to
forecasting.
2-3 Why scenario planning is a useful technique for firms
competing in industries characterized by unpredictability and
change.
2-4 The impact of the general environment on a firm’s
strategies and performance.
2-5 How forces in the competitive environment can affect
profitability, and how a firm can improve its competitive
position by increasing its power vis-à-vis these forces.
2-6 The concept of strategic groups and their strategy and
performance implications.

©McGraw-Hill Education.
2
The Importance of External Environment
Consider. . .
The best CEOs are always aware of what’s going on outside
their company. Their perceptual acuity allows them to sense
what’s coming. Detecting early warning signals, keeping pace
with changes in the external environment can sustain a
competitive advantage.
Recall the struggles of Land’s End in Chapter 1. Perceptual
acuity = the ability to sense what is coming before the fog
clears.
3
Enhancing Awareness of the External Environment
Exhibit 2.1 Inputs to Forecasting
So how do managers become environmentally aware? By doing
scanning, monitoring, and gathering competitive intelligence,
and using these inputs to develop forecasts. Then scenario
planning and SWOT analysis can be used to help anticipate
major future changes in the external environment, preparing the
firm to do more extensive analysis of the forces in the general
environment and the industry or competitive environment.
4

Environmental Scanning & Monitoring
Environmental scanning involves surveillance of a firm’s
external environment.
Predicts environmental changes to come
Detects changes already under way
Allows firm to be proactive
Environmental monitoring tracks evolution of environmental
trends.
Sequences of measurable facts/events
Streams of activities or trends from outside the organization
Environmental scanning = surveillance of a firm’s external
environment to predict environmental changes and detect
changes already under way. Is a BIG PICTURE viewpoint of the
industry/competition, looking for key indicators of emerging
trends – what catches your eye? Alerts the firm to critical trends
before changes have developed a discernible pattern and before
competitors recognize them. Environmental monitoring = a
firm’s analysis of the external environment that tracks the
evolution of environmental trends, sequences of events, or
streams of activities. Monitor the trends that have the potential
to change the competitive landscape – what do you want to
track? Firms need to CHOOSE the trends identified via the
scanning activity and regularly monitor or track these specific
trends to evaluate the impact of these trends on their strategy
process, i.e., Johnson & Johnson tracking percentage of GDP
spent on health care, or number of active hospital beds.
5
Competitive Intelligence
Competitive intelligence
Helps firms define & understand their industry

Identifies rivals’ strengths & weaknesses
Collect data on competitors
Interpret intelligence data
Helps firms avoid surprises
Anticipate competitors’ moves
Decrease response time
Potential for unethical behavior while gathering intelligence
Competitive intelligence = a firm’s activities of collecting and
interpreting data on competitors, defining and understanding the
industry, and identifying competitors’ strengths and
weaknesses. Be careful – aggressive efforts to gather
competitive intelligence may lead to unethical or illegal
behaviors. Note: See the Strategy Spotlight on Ethical
Guidelines on Competitive Intelligence: United Technologies.
6
Environmental Forecasting
Environmental forecasting predicts change.
Plausible projections about
Direction of environmental change?
Scope of environmental change?
Speed of environmental change?
Intensity of environmental change?
Scenario analysis involves detailed assessments of the ways
trends may affect an issue & development of alternative futures
based on these assessments.
Environmental forecasting = the development of plausible
projections about the direction, scope, speed, and intensity of

environmental change. Scenario analysis = an in-depth approach
to environmental forecasting that involves experts’ detailed
assessments of societal trends, economics, politics. Technology,
or other dimensions of the external environment. Asks what
would happen if the environment should change dramatically?
Addresses the need to consider a wider context than the narrow,
traditional markets, laying down guidelines for at least 10 years
in the future to anticipate rapid change. See Spotlight 2.2 on
PPG Industries’ approach, developing four alternative strategies
based on the cost of energy and extent of growth opportunity in
emerging markets.
7
Question
(1 of 2)
A danger of forecasting discussed in the text is that
in most cases, the expense of collecting the necessary data
exceeds the benefit.
forecasting’s retrospective nature provides little information
about the future.
managers may view uncertainty as “black and white” while
ignoring important “gray areas.”
it can create legal problems for the firm if regulators discover
the company is making forecasts.
Answer: C.
Some forecasting issues are much more specific to a particular
firm and the industry in which it competes. Consider how
important it is for Motel 6 to predict future indicators, such as
the number of rooms available vs demand in the budget segment
of the industry. If its predictions are low, it will build too many
units, creating a surplus of room capacity that would drive down
room rates. A danger of forecasting is that managers may view
uncertainty as black and white and ignore important gray areas.

The problem is that underestimating uncertainty can lead to
strategies that neither defend against threats nor take advantage
of opportunities.
8
SWOT Analysis
SWOT analysis is a basic technique for analyzing firm and
industry conditions.
Firm or internal conditions = Strengths & Weaknesses
Where the firm excels or where it may be lacking
Environmental or external conditions = Opportunities & Threats
Developments that exist in the general environment
Activities among firms competing for the same customers
Must consider both internal & external factors simultaneously
Once environmental scanning, monitoring, intelligence
gathering, and forecasting have been done, the firm must do a
more in-depth analysis to see how all this affects its strategy.
SWOT analysis = a framework for analyzing a company’s
internal and external environment and that stands for strengths,
weaknesses, opportunities, and threats. The firm’s strengths
come from within, and are where your firm excels; the
weaknesses are where your firm is lacking relative to
competitors. The opportunities and threats can come from the
general environment and/or from the specific industry’s
competitive environment. SWOT analysis forces managers to
consider both internal & external factors simultaneously, makes
firms act proactively, raises awareness about role of strategy. A
firm’s strategy must build on its strengths, remedy the
weaknesses or work around them, take advantage of the
opportunities presented by the environment, and protect the firm
from the threats. SWOT’s conceptual simplicity is achieved
without sacrificing analytical rigor. (However, see limitations
of a SWOT in Chapter 3).

9
The General Environment
The general environment is composed of factors that are both
hard to predict and difficult to control.
Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
General environment = factors external to an industry, and
usually beyond a firm’s control, that affect a firm’s strategy.
Although the effects of these factors can vary across industries,
EVERY industry has to anticipate the affect of each factor on
its firm’s long-term strategies. See Exhibit 2.3 for effects of
these various trends on certain industries. In addition, there are
many reciprocal relationships among the various elements. For
instance, the aging of the U.S. population has important
implications for the economic segment.
10
The Demographic Segment
Demographics are easily understandable & quantifiable.
Aging population
Rising affluence
Changes in ethnic composition
Geographic distribution of population
Greater disparities in income levels

Demographic segment of the general environment = genetic and
observable characteristics of a population, including the levels
and growth of age, density, sex, race, ethnicity, education,
geographic region, and income.
11
The Sociocultural Segment
Sociocultural forces influence the values, beliefs, and lifestyles
of a society.
More women in the workforce
Increase in temporary workers
Greater concern for healthy diets & physical fitness (increasing
levels of obesity)
Greater concern for the environment
Postponement of marriage & family formation, having children
Sociocultural segment of the general environment = the values,
beliefs, and lifestyles of a society. These forces might enhance
the sales of products and services in many industries but
depress sales in others. For instance, increase of women in the
workforce enhances the sale of women’s business attire (see
Case: Ascena) but reduces demand for baking products and
cooking staples (see Case: Campbell Soup).
12
The Political/Legal Segment
Political/Legal processes & legislation influence environmental
regulations with which industries must comply.
Tort reform
Americans with Disabilities Act (ADA)
Deregulation of utilities & other industries
Increases in minimum wages
Taxation
Legislation on corporate governance reforms

Affordable Health Care Act, Medicare reimbursements
Political/legal segment of the general environment = how a
society creates and exercises power, including rules, laws, and
taxation policies. Federal legislation such as Sarbanes-Oxley
not only affected how corporations managed their corporate
governance processes, but helped create new businesses such as
professional accounting services. See Strategy Spotlight 2.2 on
how conflict minerals legislation can affect a company’s supply
chain. The Affordable Care Act (Obamacare) and changes in
how to process Medicare reimbursements will have an effect on
health care delivery mechanisms.
13
The Technological Segment
Technological developments lead to new products & services.
They can create new industries & alter existing ones.
Genetic engineering
Three-dimensional (3D) printing
Computer-aided design/computer-aided manufacturing systems
(CAD/CAM)
Research in synthetic & exotic materials
Pollution/global warming
Miniaturization of computing technologies
Wireless communications
Nanotechnology
Big data/data analysis
Technological segment of the general environment = innovation
and state of knowledge in industrial arts, engineering, applied
sciences, and pure science; and their interaction with society.

See, for instance, physiolectics – linking wearable computing
devices with data analysis and quantified feedback to improve
performance. NOTE: some trends or events can affect multiple
segments of the general environment, i.e., data analytics = the
process of examining large data sets to uncover hidden patterns,
market trends, and customer preferences. Corporations are
increasingly collecting and analyzing data on their customers,
including data on customer characteristics, purchasing patterns,
employee productivity, and physical asset utilization. These
efforts, commonly referred to as “Big Data” have the potential
to enable firms to better customize their product and service
offerings to customers while more efficiently and fully using
the resources of the company. See Strategy Spotlight 2.3 for
how data analysis can make government more transparent.
14
The Economic Segment
Economic forces affect all industries.
Interest rates
Unemployment
Consumer Price Index
Trends in GDP & net disposable income
Changes in stock market valuations
Economic segment of the general environment = characteristics
of the economy, including national income and monetary
conditions. For instance, interest rate increases have a negative
impact on the residential home construction industry but a
negligible (or neutral) effect on industries that produce
consumer necessities such as prescription drugs or common
grocery items; likewise when stock market indexes increase,
consumers’ discretionary income rises and there is often an
increased demand for luxury items such as jewelry and
automobiles.

But when stock valuations decrease, demand for these items
shrink.
15
The Global Segment
Global forces offer both opportunities & risks.
Increasing global trade
Currency exchange rates
Emergence of the Indian & Chinese economies
Trade agreements among regional blocs (NAFTA, EU, ASEAN)
Creation of the WTO (leading to decreasing tariffs/free trade in
services)
Increased risks associated with terrorism
Global segment of the general environment = influences from
foreign countries, including foreign market opportunities,
foreign-based competition, and expanded capital markets.
Globalization provides both opportunities to access larger
potential markets and a broad base of production factors such as
raw materials, labor, skilled managers, and technical
professionals. (See the Starbucks Case, Heineken Case,
Emirates Airline Case, or eBay.) However, such endeavors also
carry many political, social, and economic risks. One important
trend to track is the rapid rise of the middle class in emerging
market countries. Not only does this have implications for
consumer growth, but it also increases the need for
multinational firms to hire for overseas jobs.
16
General Environment:
Relationships among Elements
Elements of the general environment interact with each other.
Demographic trends have implications for economics.

Greater access to information technology affects both
economics and global relationships.
Political/legal trends can have very different effects on different
industries.
Digital technology has altered the way business is conducted in
nearly every business domain.
Data analytics
Firms must pay attention to factors in the general environment
for many reasons. Not only do these elements interact with each
other, but also the effects of trends or events in the general
environment can vary across industries. See Exhibit 2.3 for how
this may play out in different industry sectors. One example of
how one technology phenomenon alters the way business is
conducted is data analytics = the process of examining large
data sets to uncover hidden patterns, market trends, and
customer preferences. This activity links technology with
globalization, socio-cultural and economic forces, having an
effect on nearly every business domain. Companies that are
taking the lead in the analytics revolution see it as an important
source of competitive differentiation, becoming 26 percent more
profitable than their industry peers. See Strategy Spotlight 2.3
for how Open The Books is making government more
transparent.
17
The Competitive Environment
The competitive environment consists of factors in the task or
industry environment that are particularly relevant to a firm’s
strategy.
Competitors (existing or potential)
Including those considering entry into an entirely new industry
Customers (or buyers)
Suppliers

Including those considering forward integration
In addition to the general environment, within which ALL firms
compete, each firm must also pay attention to its competitive
environment = factors that pertain to an industry and affect a
firm’s strategies. Industry = a group of firms that produce
similar goods or services. One interesting concept is forward
integration, a form of vertical integration whereby a firm
expands activities to include control of the direct distribution of
its products, e.g. a farmer sells his/her crops at the local market
rather than to a distribution center for eventual sale to a
supermarket (This definition is not in the textbook, but comes
from
http://www.investopedia.com/terms/f/forwardintegration.asp.
See more about vertical integration in Chapter 6.)
18
Porter’s Five Forces Model of Industry Competition
Exhibit 2.4 Porter’s Five Forces Model of Industry Competition
Source: From Michael E. Porter, “The Five Competitive Forces
That Shape Strategy,” Special Issue on HBS Centennial..
Harvard Business Review 86, No. 1 (January 2008), 78-93.
Reprinted with permission of Michael E. Porter.
Jump to Appendix 1 for long description.
Porter’s five forces model of industry competition = a tool for
examining the industry-level competitive environment,
especially the ability of firms in that industry to set prices and
minimize costs. Includes the threat of new entrants; the
bargaining power of buyers; the bargaining power of suppliers;

the threat of substitute products and services; the intensity of
rivalry among competitors in an industry. 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.
19
The Threat of New Entrants
The threat of new entrants – possibility that the profits of
established firms in the industry may be eroded by new
competitors.
Depends on existing barriers to entry:
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Threat of new entrants = the possibility that the profits of
established firms in the industry may be eroded by new
competitors. Economies of scale = decreases in cost per unit as
absolute output per period increases. Forces the new entrant to
come in at a large scale and risk strong reaction from existing
firms, or come in at a small scale and accept a cost
disadvantage. Product differentiation = the degree that a product
has strong brand loyalty or customer loyalty. New entrants must
spend heavily to overcome existing customer loyalties.
Switching cost = one-time costs that a buyer/supplier faces
when switching from one supplier/buyer to another. In some
industries, large financial resources or access to distribution
channels are required in order to set up operations. Other
advantages that existing competitors might have include
proprietary products; favorable access to raw materials;
government subsidies; or favorable government policies.

Managers often tend to overestimate barriers of entry in many
industries. New entrants can sometimes find innovative ways to
enter industries by cleverly mixing and matching existing
technologies so state-of-the-art technology does not have to be
developed internally.
20
Question
(2 of 2)
If you are considering opening a new pizza restaurant in your
community, what would be the threat of new entrants? How
would you evaluate Porter’s other forces for this industry?
Explain.
Answer: The threat of new entrants in the food industry is very
high, which is why a majority of new food restaurants fail
within their first year. The minimum requirements to open a
pizza shop are an oven and a small amount of capital. The
potential number of competitors is unlimited due to these
factors. Based on other forces also, this industry is not very
attractive: for instance there is no industry growth, and a lack of
differentiation among competitor’s products, so competition is
based on cost or service, and the industry has low profit
margins as it is.
21
The Bargaining Power of Buyers
Buyers have bargaining power.
Buyers can force down prices, bargain for higher quality or
more services, or play competitors against each other.
Buyer groups are powerful.
Purchasing standard products are in large volumes.
Profits are low & switching costs are few.
Backward integration is possible.

Buyer’s product quality is not affected by industry product.
Bargaining power of buyers = the threat that buyers may force
down prices, bargain for higher quality or more services, and
play competitors against each other. These actions will erode
overall industry profitability, forcing all firms to pay attention.
Firms therefore need to know who the important buyers are: is
there a single buyer, or ones who purchase in high volume?
These buyers will have the ability to dictate terms. In addition,
if the products needed by buyers are standard or
undifferentiated, such as commodity grain products, buyers can
play one company against another. Also, if the buyer’s profits
are low and it won’t cost much to switch suppliers, this is an
incentive for buyers to bargain. Backward integration is always
possible – a form of vertical integration that involves the
purchase of suppliers. Companies will pursue backward
integration when it will result in improved efficiency and cost
savings. For example, backward integration might cut
transportation costs, improve profit margins and make the firm
more competitive. An example of backward integration would
be if a bakery business bought a wheat processor and a wheat
farm. (Definition is not in the textbook. Comes from
http://www.investopedia.com/terms/b/backwardintegration.asp.)
NOTE there’s a difference between customers/buyers, and
CONSUMERS. Consumers rarely have any “buyer power” – can
you negotiate the price of a movie ticket? Yet the chain of
“buyers” in the movie industry is multi-layered – from
production studio to distributor to theater owner, with each
buyer group having different degrees of power.
22
The Bargaining Power of Suppliers
Suppliers can exert bargaining power by threatening to raise
prices or reduce the quality of purchased goods and services.

Supplier groups are powerful.
Only a few firms dominate the industry.
There is no competition from substitute products.
Suppliers sell to several industries.
Buyer quality is affected by industry product.
Products are differentiated & have switching costs.
Forward integration is possible.
Firms need to pay attention to their suppliers because powerful
suppliers can squeeze the profitability of firms so far that they
can’t recover the costs of raw material inputs. Bargaining power
of suppliers = the threat that suppliers may raise prices or
reduce the quality of purchased goods and services. Forward
integration = a form of vertical integration whereby a firm
expands activities to include control of the direct distribution of
its products, e.g., a farmer sells his/her crops at the local market
rather than to a distribution center for eventual sale to a
supermarket, or the example of Delta Pride Catfish cutting out
the large agribusiness processing plants by building their own.
(This definition is not in the textbook, but comes from
http://www.investopedia.com/terms/f/forwardintegration.asp.)
23
The Threat of Substitute Products & Services
Substitute products & services limit the potential returns of an
industry.
Substitutes come from another industry.
Substitutes can perform the same function as the industry’s
offerings.
Substitutes place a ceiling on prices that firms in an industry
can profitably charge.
The more attractive the price/performance ratio, the more the
substitute erodes industry profits.

Threat of substitute products and services = the threat of
limiting the potential returns of an industry by placing a ceiling
on the prices that firms in that industry can profitably charge
without losing too many customers to substitute products.
Substitute products and services = products and services outside
the industry that serve the same customer needs as the
industry’s products and services. Identifying substitute products
might involve searching for other products or services that can
perform the same function as the industry’s offerings. This may
lead a manager into businesses seemingly far removed from the
industry. Example is ice cream – an expensive summer time
treat. Frozen fruit smoothies are a substitute. See Case Dippin’
Dots vs. Case Jamba Juice.
24
The Intensity of Rivalry among Competitors in an Industry
Rivalry tactics include price competition, advertising battles,
new product introductions, increased customer service or
warranties.
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
Intensity of rivalry among competitors in an industry = the
threat that customers will switch their business to competitors
within the industry. Rivalry between firms is often based solely
on price, but it can involve other factors. Rivalry occurs when
competitors sense the pressure or act on an opportunity to

improve their position. See the example of the intense
competition between ride-sharing companies Uber Technologies
and Lyft. Rivalry also differs across industries. See Case Global
Casino Industry for cutthroat tactics.
25
How the Internet and Digital Technologies Affect Competitive
ForcesCompetitive ForcesBenefits to IndustryDisadvantages to
IndustryThreat of New EntrantsLower barriers to entry
increases number of new entrants.
Many Internet-based capabilities can be easily
imitated.Bargaining Power of BuyersReduces the power of
buyer intermediaries in many distribution channels.Switching
costs decrease.
Information availability online empowers and users.Bargaining
Power of SuppliersOnline procurement methods can increase
bargaining power over suppliers.The Internet gives suppliers
access to more customers and makes it easier to reach end users.
Online procurement practices deter competition and reduce
differentiating features.Threat of SubstitutesInternet-based
increases in overall efficiency can expand industry
sales.Internet-based capabilities create more opportunities for
substitution.Intensity of RivalrySince location is less important,
the number of competitors increases.
Differences among competitors are harder to perceive online.
Rivalry tends to focus on price and differentiating features are
minimized.
Sources: Bodily, S., & Venkataraman, S. 2004. Not walls,
windows: Capturing value in the digital age. Journal of
Business Strategy. 25(3): 15-25; Lumpkin, G.T. Droege, S.B., &
Dess, G.G. 2002. E-commerce strategies: Achieving sustainable
competitive advantage and avoiding pitfalls. Organizational
Dynamics, 30 (Spring): 1-17.

The Internet and other digital technologies have fundament ally
changed the ways businesses interact with each other and with
consumers. These changes have affected industry forces in ways
that have created many new strategic challenges.
26
Using Industry Analysis:
A Few Caveats
Managers must not always avoid low profit industries; these can
still yield high returns for players who pursue sound strategies.
Five forces analysis implicitly assumes a zero-sum game. Yet
mutually beneficial relationships can still be established with
buyers & suppliers.
Five forces analysis is essentially a static analysis, yet external
forces can still change the structure of all industries.
See the value net extension of five forces analysis.
Vertical dimension = suppliers & customers
Horizontal dimension = substitutes & complements
Industry analysis helps a firm evaluate the profit potential of an
industry and consider various ways to strengthen its competitive
position. However, strategists must be wary – it’s not always
simple. Zero-sum game = a situation in which multiple players
interact, and winners win only by taking from other players.
Complements = products or services that have an impact on the
value of a firm’s products or services. For instance, Apple’s
iTunes was software that made the iPod hardware such a
popular product. See Case Apple.
27
The Value Net
Exhibit 2.6 The Value Net
Source: Adapted from “The Right Game: Use Game Theory

Shape Strategy,” by A. Brandenburger and B.J. Nalebuff, July-
August 1995 Harvard Business Review.
The value net is based on game-theory, and represents all the
players in the game, analyzing how their interactions affect a
firm’s ability to generate and appropriate value. The vertical
dimension of the net includes suppliers and customers. The firm
has direct transactions with them. On the horizontal dimension
are substitutes and complements, players with whom a firm
interacts but may not necessarily transact. Yet complements =
products or services that have an impact on the value of a firm’s
products or services. A firm must acknowledge its potential
partnerships here. Substitute products or services serve the same
purpose that the products and services from a chosen industry
serve, thereby accentuating competition, while complements in
essence help to increase the performance and efficiency of
products or services of a particular industry and thus improve
their competitive situation vis-à-vis other products and
substitutes.
28
Doing a Good Industry Analysis
Good industry analysis looks rigorously at the structural
underpinnings & root causes of profitability.
Must choose the appropriate time frame
Consider the industry business life cycle
Average profitability over 3-5 years or longer
Must consider quantitative factors as well as qualitative
Get numbers to quantify five forces factors
Percentages of total cost or sales accounted for by the industry,
actual switching costs

Michael Porter cautions that good industry analysis needs to
yield an understanding of the structural underpinnings and root
causes of profitability within the industry by choosing the
appropriate time frame and doing a rigorous quantification of
the five forces.
29
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 – clusters of firms that share similar strategies:
Breadth of product & geographic scope
Price/quality
Degree of vertical integration
Type of distribution
Some groups of firms are more similar to each other than other
firms. Rivalry will be greater in firms that are alike. Strategic
groups = clusters of firms that share similar strategies.
Dimensions should be considered that reflect the variety of
strategic combinations in an industry.
30
Strategic Groups as an Analytic Tool
Strategic groups can be analytical tools.
Helps identify barriers to mobility that protect a group from
attacks by other groups
Helps identify groups whose competitive position may be
marginal or tenuous
Helps chart the future direction of firms’ strategies
Helps to think through the implications of each industry trend
for the strategic group as a whole

The question is how to group firms in an industry on the basis
of similarities in their resources and strategies. Identifying the
strategic group your organization is in helps to decide where
threats or opportunities may lie.
31
Example: Strategic Groups within Industries
Exhibit 2.7 The World Automobile Industry: Strategic Groups
Note: Members of each strategic group are not exhaustive, only
illustrative.
Here is a strategic grouping of the worldwide auto industry.
Note not all firms are included, only the four major groups:
high-end luxury (those with exclusive clientele, and little
rivalry from other groups), low-price/quality (those with a
narrow market of bargain shoppers who aren’t that concerned
with quality), high-price/quality (with some product-line
breadth), and firms with a broad range of products/multiple
price points (products that compete at both the lower end and
higher end of the market). Consider how Ford (Case) and
General Motors (Case) must monitor trends in this industry. The
movement of the various strategic groups can help predict the
future volatility and intensity of competition. Members of a
strategic group can consider overcoming mobility barriers and
migrate to other groups that they find attractive if they are
willing to commit time and resources. (Also consider the Boston
Beer Company Case – which strategic group does Sam Adams
belong to these days?!)
32

ADA APPENDICES
Description of Images
Appendix 1 Porter’s Five Forces Model of Industry Competition
Return to slide.
The graphic displays the forces that affect a firm's ability to
compete in a given market (the rivalry among existing firms) as
developed by Porter. Potential entrants, the substitute of
products or services, the bargaining power of buyers and
suppliers all have a bearing on a firm.
34
Appendix 2 The Value Net
Return to slide.
All of the players in the game are shown, with the Company in
the middle. The company is dissected with a vertical and a
horizontal axis. The horizontal axis is made of complementors
and substitutors, a firm has indirect interactions with these
players but may not necessarily transact. The vertical axis
includes those that a firm has direct transactions with, suppliers
and customers.
35

Appendix 3 Example: Strategic Groups within Industries
Return to slide.
The graphic’s y axis is Price and the x axis is Breadth of
Product Line, illustrating where world car manufacturers fall
within these two.
The 2017 Ferrari and the California T are in the top left-hand
corner of high-end luxury automakers, with high prices and high
breadth of product line. Mercedes falls just below this group.
In the lower left-hand corner, low price and low breadth of
product line, are Chery, Geely, and Tata Motors. Just above this
strategic group are players, Hyundai and Kia.
The largest group consists of Toyota, Ford, General Motors,
Chrysler, Honda, and Nissan, firms with a broad range of
products and multiple price points.
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The Lottery--Shirley Jackson
"The Lottery" (1948)
by Shirley Jackson
The morning of June 27th was clear and sunny, with the fresh
warmth of a full-summer day; the flowers
were blossoming profusely and the grass was richly green. The
people of the village began to gather in
the square, between the post office and the bank, around ten
o'clock; in some towns there were so many
people that the lottery took two days and had to be started on
June 2th. but in this village, where there

were only about three hundred people, the whole lottery took
less than two hours, so it could begin at ten
o'clock in the morning and still be through in time to allow the
villagers to get home for noon dinner.
The children assembled first, of course. School was recently
over for the summer, and the feeling of
liberty sat uneasily on most of them; they tended to gather
together quietly for a while before they broke
into boisterous play. and their talk was still of the classroom
and the teacher, of books and reprimands.
Bobby Martin had already stuffed his pockets full of stones, and
the other boys soon followed his
example, selecting the smoothest and roundest stones; Bobby
and Harry Jones and Dickie Delacroix-- the
villagers pronounced this name "Dellacroy"--eventually made a
great pile of stones in one corner of the
square and guarded it against the raids of the other boys. The
girls stood aside, talking among themselves,
looking over their shoulders at rolled in the dust or clung to the
hands of their older brothers or sisters.
Soon the men began to gather. surveying their own children,
speaking of planting and rain, tractors and
taxes. They stood together, away from the pile of stones in the
corner, and their jokes were quiet and they
smiled rather than laughed. The women, wearing faded house
dresses and sweaters, came shortly after
their menfolk. They greeted one another and exchanged bits of
gossip as they went to join their husbands.
Soon the women, standing by their husbands, began to call to
their children, and the children came
reluctantly, having to be called four or five times. Bobby Martin
ducked under his mother's grasping hand
and ran, laughing, back to the pile of stones. His father spoke
up sharply, and Bobby came quickly and

took his place between his father and his oldest brother.
The lottery was conducted--as were the square dances, the teen
club, the Halloween program--by Mr.
Summers. who had time and energy to devote to civic activities.
He was a round-faced, jovial man and he
ran the coal business, and people were sorry for him. because he
had no children and his wife was a
scold. When he arrived in the square, carrying the black wooden
box, there was a murmur of
conversation among the villagers, and he waved and called.
"Little late today, folks." The postmaster, Mr.
Graves, followed him, carrying a three- legged stool, and the
stool was put in the center of the square and
Mr. Summers set the black box down on it. The villagers kept
their distance, leaving a space between
themselves and the stool. and when Mr. Summers said, "Some
of you fellows want to give me a hand?"
there was a hesitation before two men. Mr. Martin and his
oldest son, Baxter. came forward to hold the
box steady on the stool while Mr. Summers stirred up the papers
inside it.
The original paraphernalia for the lottery had been lost long
ago, and the black box now resting on the
stool had been put into use even before Old Man Warner, the
oldest man in town, was born. Mr.
Summers spoke frequently to the villagers about making a new
box, but no one liked to upset even as
much tradition as was represented by the black box. There was a
story that the present box had been
made with some pieces of the box that had preceded it, the one
that had been constructed when the first
people settled down to make a village here. Every year, after the
lottery, Mr. Summers began talking
again about a new box, but every year the subject was allowed

to fade off without anything's being done.
file:///Users/carolynsigler/Desktop/lotry.html (1 of 8)1/23/2005
7:58:04 AM
The black box grew shabbier each year: by now it was no longer
completely black but splintered badly
along one side to show the original wood color, and in some
places faded or stained.
Mr. Martin and his oldest son, Baxter, held the black box
securely on the stool until Mr. Summers had
stirred the papers thoroughly with his hand. Because so much of
the ritual had been forgotten or
discarded, Mr. Summers had been successful in having slips of
paper substituted for the chips of wood
that had been used for generations. Chips of wood, Mr.
Summers had argued. had been all very well
when the village was tiny, but now that the population was more
than three hundred and likely to keep on
growing, it was necessary to use something that would fit more
easily into he black box. The night before
the lottery, Mr. Summers and Mr. Graves made up the slips of
paper and put them in the box, and it was
then taken to the safe of Mr. Summers' coal company and locked
up until Mr. Summers was ready to take
it to the square next morning. The rest of the year, the box was
put way, sometimes one place, sometimes
another; it had spent one year in Mr. Graves's barn and another
year underfoot in the post office. and
sometimes it was set on a shelf in the Martin grocery and left
there.

There was a great deal of fussing to be done before Mr.
Summers declared the lottery open. There were
the lists to make up--of heads of families. heads of households
in each family. members of each
household in each family. There was the proper swearing-in of
Mr. Summers by the postmaster, as the
official of the lottery; at one time, some people remembered,
there had been a recital of some sort,
performed by the official of the lottery, a perfunctory. tuneless
chant that had been rattled off duly each
year; some people believed that the official of the lottery used
to stand just so when he said or sang it,
others believed that he was supposed to walk among the people,
but years and years ago this p3rt of the
ritual had been allowed to lapse. There had been, also, a ritual
salute, which the official of the lottery had
had to use in addressing each person who came up to draw from
the box, but this also had changed with
time, until now it was felt necessary only for the official to
speak to each person approaching. Mr.
Summers was very good at all this; in his clean white shirt and
blue jeans. with one hand resting
carelessly on the black box. he seemed very proper and
important as he talked interminably to Mr. Graves
and the Martins.
Just as Mr. Summers finally left off talking and turned to the
assembled villagers, Mrs. Hutchinson came
hurriedly along the path to the square, her sweater thrown over
her shoulders, and slid into place in the
back of the crowd. "Clean forgot what day it was," she said to
Mrs. Delacroix, who stood next to her, and
they both laughed softly. "Thought my old man was out back
stacking wood," Mrs. Hutchinson went on.
"and then I looked out the window and the kids was gone, and

then I remembered it was the twenty-
seventh and came a-running." She dried her hands on her apron,
and Mrs. Delacroix said, "You're in time,
though. They're still talking away up there."
Mrs. Hutchinson craned her neck to see through the crowd and
found her husband and children standing
near the front. She tapped Mrs. Delacroix on the arm as a
farewell and began to make her way through
the crowd. The people separated good-humoredly to let her
through: two or three people said. in voices
just loud enough to be heard across the crowd, "Here comes
your, Missus, Hutchinson," and "Bill, she
made it after all." Mrs. Hutchinson reached her husband, and
Mr. Summers, who had been waiting, said
cheerfully. "Thought we were going to have to get on without
you, Tessie." Mrs. Hutchinson said.
grinning, "Wouldn't have me leave m'dishes in the sink, now,
would you. Joe?," and soft laughter ran
through the crowd as the people stirred back into position after
Mrs. Hutchinson's arrival.
"Well, now." Mr. Summers said soberly, "guess we better get
started, get this over with, so's we can go
back to work. Anybody ain't here?"
7:58:04 AM
"Dunbar." several people said. "Dunbar. Dunbar."
Mr. Summers consulted his list. "Clyde Dunbar." he said.

"That's right. He's broke his leg, hasn't he?
Who's drawing for him?"
"Me. I guess," a woman said. and Mr. Summers turned to look
at her. "Wife draws for her husband." Mr.
Summers said. "Don't you have a grown boy to do it for you,
Janey?" Although Mr. Summers and
everyone else in the village knew the answer perfectly well, it
was the business of the official of the
lottery to ask such questions formally. Mr. Summers waited
with an expression of polite interest while
Mrs. Dunbar answered.
"Horace's not but sixteen vet." Mrs. Dunbar said regretfully.
"Guess I gotta fill in for the old man this
year."
"Right." Sr. Summers said. He made a note on the list he was
holding. Then he asked, "Watson boy
drawing this year?"
A tall boy in the crowd raised his hand. "Here," he said. "I'm
drawing for my mother and me." He blinked
his eyes nervously and ducked his head as several voices in the
crowd said thin#s like "Good fellow,
lack." and "Glad to see your mother's got a man to do it."
"Well," Mr. Summers said, "guess that's everyone. Old Man
Warner make it?"
"Here," a voice said. and Mr. Summers nodded.
A sudden hush fell on the crowd as Mr. Summers cleared his
throat and looked at the list. "All ready?" he
called. "Now, I'll read the names--heads of families first--and
the men come up and take a paper out of

the box. Keep the paper folded in your hand without looking at
it until everyone has had a turn.
Everything clear?"
The people had done it so many times that they only half
listened to the directions: most of them were
quiet. wetting their lips. not looking around. Then Mr. Summers
raised one hand high and said, "Adams."
A man disengaged himself from the crowd and came forward.
"Hi. Steve." Mr. Summers said. and Mr.
Adams said. "Hi. Joe." They grinned at one another humorlessly
and nervously. Then Mr. Adams reached
into the black box and took out a folded paper. He held it firmly
by one corner as he turned and went
hastily back to his place in the crowd. where he stood a little
apart from his family. not looking down at
his hand.
"Allen." Mr. Summers said. "Anderson.... Bentham."
"Seems like there's no time at all between lotteries any more."
Mrs. Delacroix said to Mrs. Graves in the
back row.
"Seems like we got through with the last one only last week."
"Time sure goes fast.-- Mrs. Graves said.
7:58:04 AM
"Clark.... Delacroix"

"There goes my old man." Mrs. Delacroix said. She held her
breath while her husband went forward.
"Dunbar," Mr. Summers said, and Mrs. Dunbar went steadily to
the box while one of the women said.
"Go on. Janey," and another said, "There she goes."
"We're next." Mrs. Graves said. She watched while Mr. Graves
came around from the side of the box,
greeted Mr. Summers gravely and selected a slip of paper from
the box. By now, all through the crowd
there were men holding the small folded papers in their large
hand. turning them over and over nervously
Mrs. Dunbar and her two sons stood together, Mrs. Dunbar
holding the slip of paper.
"Harburt.... Hutchinson."
"Get up there, Bill," Mrs. Hutchinson said. and the people near
her laughed.
"Jones."
"They do say," Mr. Adams said to Old Man Warner, who stood
next to him, "that over in the north
village they're talking of giving up the lottery."
Old Man Warner snorted. "Pack of crazy fools," he said.
"Listening to the young folks, nothing's good
enough for them. Next thing you know, they'll be wanting to go
back to living in caves, nobody work any
more, live hat way for a while. Used to be a saying about
'Lottery in June, corn be heavy soon.' First thing
you know, we'd all be eating stewed chickweed and acorns.
There's always been a lottery," he added

petulantly. "Bad enough to see young Joe Summers up there
joking with everybody."
"Some places have already quit lotteries." Mrs. Adams said.
"Nothing but trouble in that," Old Man Warner said stoutly.
"Pack of young fools."
"Martin." And Bobby Martin watched his father go forward.
"Overdyke.... Percy."
"I wish they'd hurry," Mrs. Dunbar said to her older son. "I wish
they'd hurry."
"They're almost through," her son said.
"You get ready to run tell Dad," Mrs. Dunbar said.
Mr. Summers called his own name and then stepped forward
precisely and selected a slip from the box.
Then he called, "Warner."
"Seventy-seventh year I been in the lottery," Old Man Warner
said as he went through the crowd.
"Seventy-seventh time."
7:58:04 AM
"Watson" The tall boy came awkwardly through the crowd.
Someone said, "Don't be nervous, Jack," and
Mr. Summers said, "Take your time, son."

"Zanini."
After that, there was a long pause, a breathless pause, until Mr.
Summers. holding his slip of paper in the
air, said, "All right, fellows." For a minute, no one moved, and
then all the slips of paper were opened.
Suddenly, all the women began to speak at once, saving. "Who
is it?," "Who's got it?," "Is it the
Dunbars?," "Is it the Watsons?" Then the voices began to say,
"It's Hutchinson. It's Bill," "Bill
Hutchinson's got it."
"Go tell your father," Mrs. Dunbar said to her older son.
People began to look around to see the Hutchinsons. Bill
Hutchinson was standing quiet, staring down at
the paper in his hand. Suddenly. Tessie Hutchinson shouted to
Mr. Summers. "You didn't give him time
enough to take any paper he wanted. I saw you. It wasn't fair!"
"Be a good sport, Tessie." Mrs. Delacroix called, and Mrs.
Graves said, "All of us took the same chance."
"Shut up, Tessie," Bill Hutchinson said.
"Well, everyone," Mr. Summers said, "that was done pretty fast,
and now we've got to be hurrying a little
more to get done in time." He consulted his next list. "Bill," he
said, "you draw for the Hutchinson
family. You got any other households in the Hutchinsons?"
"There's Don and Eva," Mrs. Hutchinson yelled. "Make them
take their chance!"
"Daughters draw with their husbands' families, Tessie," Mr.

Summers said gently. "You know that as
well as anyone else."
"It wasn't fair," Tessie said.
"I guess not, Joe." Bill Hutchinson said regretfully. "My
daughter draws with her husband's family; that's
only fair. And I've got no other family except the kids."
"Then, as far as drawing for families is concerned, it's you," Mr.
Summers said in explanation, "and as far
as drawing for households is concerned, that's you, too. Right?"
"Right," Bill Hutchinson said.
"How many kids, Bill?" Mr. Summers asked formally.
"Three," Bill Hutchinson said.
"There's Bill, Jr., and Nancy, and little Dave. And Tessie and
me."
7:58:04 AM
"All right, then," Mr. Summers said. "Harry, you got their
tickets back?"
Mr. Graves nodded and held up the slips of paper. "Put them in
the box, then," Mr. Summers directed.
"Take Bill's and put it in."

"I think we ought to start over," Mrs. Hutchinson said, as
quietly as she could. "I tell you it wasn't fair.
You didn't give him time enough to choose. Everybody saw
that."
Mr. Graves had selected the five slips and put them in the box.
and he dropped all the papers but those
onto the ground. where the breeze caught them and lifted them
off.
"Listen, everybody," Mrs. Hutchinson was saying to the people
around her.
"Ready, Bill?" Mr. Summers asked. and Bill Hutchinson, with
one quick glance around at his wife and
children. nodded.
"Remember," Mr. Summers said. "take the slips and keep them
folded until each person has taken one.
Harry, you help little Dave." Mr. Graves took the hand of the
little boy, who came willingly with him up
to the box. "Take a paper out of the box, Davy." Mr. Summers
said. Davy put his hand into the box and
laughed. "Take just one paper." Mr. Summers said. "Harry, you
hold it for him." Mr. Graves took the
child's hand and removed the folded paper from the tight fist
and held it while little Dave stood next to
him and looked up at him wonderingly.
"Nancy next," Mr. Summers said. Nancy was twelve, and her
school friends breathed heavily as she went
forward switching her skirt, and took a slip daintily from the
box "Bill, Jr.," Mr. Summers said, and Billy,
his face red and his feet overlarge, near knocked the box over as
he got a paper out. "Tessie," Mr.
Summers said. She hesitated for a minute, looking around

defiantly. and then set her lips and went up to
the box. She snatched a paper out and held it behind her.
"Bill," Mr. Summers said, and Bill Hutchinson reached into the
box and felt around, bringing his hand
out at last with the slip of paper in it.
The crowd was quiet. A girl whispered, "I hope it's not Nancy,"
and the sound of the whisper reached the
edges of the crowd.
"It's not the way it used to be." Old Man Warner said clearly.
"People ain't the way they used to be."
"All right," Mr. Summers said. "Open the papers. Harry, you
open little Dave's."
Mr. Graves opened the slip of paper and there was a general
sigh through the crowd as he held it up and
everyone could see that it was blank. Nancy and Bill. Jr..
opened theirs at the same time. and both
beamed and laughed. turning around to the crowd and holding
their slips of paper above their heads.
"Tessie," Mr. Summers said. There was a pause, and then Mr.
Summers looked at Bill Hutchinson, and
Bill unfolded his paper and showed it. It was blank.
7:58:04 AM
"It's Tessie," Mr. Summers said, and his voice was hushed.

"Show us her paper. Bill."
Bill Hutchinson went over to his wife and forced the slip of
paper out of her hand. It had a black spot on
it, the black spot Mr. Summers had made the night before with
the heavy pencil in the coal company
office. Bill Hutchinson held it up, and there was a stir in the
crowd.
"All right, folks." Mr. Summers said. "Let's finish quickly."
Although the villagers had forgotten the ritual and lost the
original black box, they still remembered to
use stones. The pile of stones the boys had made earlier was
ready; there were stones on the ground with
the blowing scraps of paper that had come out of the box
Delacroix selected a stone so large she had to
pick it up with both hands and turned to Mrs. Dunbar. "Come
on," she said. "Hurry up."
Mr. Dunbar had small stones in both hands, and she said.
gasping for breath. "I can't run at all. You'll
have to go ahead and I'll catch up with you."
The children had stones already. And someone gave little Davy
Hutchinson few pebbles.
Tessie Hutchinson was in the center of a cleared space by now,
and she held her hands out desperately as
the villagers moved in on her. "It isn't fair," she said. A stone
hit her on the side of the head. Old Man
Warner was saying, "Come on, come on, everyone." Steve
Adams was in the front of the crowd of
villagers, with Mrs. Graves beside him.
"It isn't fair, it isn't right," Mrs. Hutchinson screamed, and then

they were upon her.
•••••••••••••••••••••••••••••••••
Discussion Questions:
1. Were you surprised by the ending of the story? If not, at what
point did you know what was going to happen? How does
Jackson start to foreshadow the ending in paragraphs 2 and 3?
Conversely, how does Jackson lull us into thinking that this is
just an ordinary story with an ordinary town?
2. Where does the story take place? In what way does the
setting affect the story? Does it make you more or less likely to
anticipate the ending?
3. In what ways are the characters differentiated from one
another? Looking back at the story, can you see why Tessie
Hutchinson is singled out as the "winner"?
4. What are some examples of irony in this story? For example,
why might the title, "The Lottery," or the opening description
in paragraph one, be considered ironic?
5. Jackson gives interesting names to a number of her
characters. Explain the possible allusions, irony or symbolism
of some
of these:
● Delacroix
● Graves
● Summers
● Bentham
● Hutchinson
7:58:04 AM

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