Chapter 2. Analyzing the External Environment of the Firm: Creating Competitive Advantages MGT 401-C University of Miami P. Derayati – Department of Management 1 Introduction Learning from mistakes. • Cell Zone • “...So next time your phone rings, step in to a Cell Zone and indulge in a peaceful conversation with your loved ones. If you thought someone from the detective squad could eavesdrop while you’re in the booth, let me tell you that this novelty is completely sound- resistant, thereby delivering privacy to users. I wonder why such an opportunity was not explored by mobile phone makers in the past. Well, applaud the brain behind this concept…”1 2 https://cellphonebeat.com/the-cell-zone-will-deliver-crisp-phone-conversations.html Introduction Learning from mistakes. • Cell Zone • Detected emerging trend: • Rise of cell phone usage in public places • Potential discomfort to others present nearby • Undetected emerging trends: • Rise of non-voice communication: ▪ Social Media ▪ Text Messaging (including apps) • Other Factors: • Willingness to pay? (3500) • Loss of 650,000$ to date 3 Creating the Environmentally Aware Organization • Perceptual Acuity helps managers adapt with external shifts. • Defined as “the ability to sense what is coming before the fog clears.” ▪ Ted turner realized the potential for 24-hour news tv ▪ Steve Jobs saw the shifting trend of consumer taste in buying music • It is about shaping, as well as adapting • The way of addressing the issue is equally important: ▪ Napster vs. Apple ▪ IoT (Google vs. Amazon) 4 Creating the Environmentally Aware Organization 5 Scanning Monitoring Forecasts Competitive Intelligence Creating the Environmentally Aware Organization • Environmental scanning: involves surveillance of a firm’s external environment ▪ Predicts environmental changes to come ▪ Detects changes already under way ▪ If detected before (most of) competitors notice, 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 • Trends can be revealed through indicators: ▪ A Motel 6 executive. ➢ The number of rooms in the budget segment of the industry in the US ➢ The difference between the average daily room rate and the consumer price index (CPI) (what does it reveal?) 6 Creating the Environmentally Aware Organization ▪ A Pier 1 Imports executive ➢ Net disposable income (NDI) ➢ Consumer confidence index ➢ Housing starts ▪ A Johnson & Johnson medical products executive ➢ Percentage of gross domestic product (GDP) spent on health care ➢ Number of active hospital beds ➢ The size and power of purchasing agents (indicates the concentration of buyers) 7 Creating the Environmentally Aware Organization • Competitive Intelligence: Associated with collecting data on ...

1. Chapter 2.
Analyzing the
External Environment
of the Firm:
Creating Competitive
Advantages
MGT 401-C
University of Miami
P. Derayati – Department of Management
1
Introduction
Learning from mistakes.
• Cell Zone
• “...So next time your phone rings,
step in to a Cell Zone and indulge
in a peaceful conversation with

2. your loved ones. If you thought
someone from the detective squad
could eavesdrop while you’re in the
booth, let me tell you that this
novelty is completely sound-
resistant, thereby delivering privacy
to users. I wonder why such an
opportunity was not explored by
mobile phone makers in the past.
Well, applaud the brain behind this
concept…”1
2
https://cellphonebeat.com/the-cell-zone-will-deliver-crisp-
phone-conversations.html
Introduction
Learning from mistakes.
• Cell Zone

3. • Detected emerging trend:
• Rise of cell phone usage in public places
• Potential discomfort to others present nearby
• Undetected emerging trends:
• Rise of non-voice communication:
▪ Social Media
▪ Text Messaging (including apps)
• Other Factors:
• Willingness to pay? (3500)
• Loss of 650,000$ to date
3
Creating the Environmentally Aware Organization
• Perceptual Acuity helps managers adapt with external shifts.
• Defined as “the ability to sense what is coming before the fog
clears.”
▪ Ted turner realized the potential for 24-hour news tv
▪ Steve Jobs saw the shifting trend of consumer taste in buying

4. music
• It is about shaping, as well as adapting
• The way of addressing the issue is equally important:
▪ Napster vs. Apple
▪ IoT (Google vs. Amazon)
4
Creating the Environmentally Aware Organization
5
Scanning
Monitoring Forecasts
Competitive
Intelligence
Creating the Environmentally Aware Organization
• Environmental scanning: involves surveillance of a firm’s
external
environment
▪ Predicts environmental changes to come

5. ▪ Detects changes already under way
▪ If detected before (most of) competitors notice, 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
• Trends can be revealed through indicators:
▪ A Motel 6 executive.
➢ The number of rooms in the budget segment of the
industry in the US
➢ The difference between the average daily room rate and
the consumer price index (CPI) (what does it reveal?)
6
Creating the Environmentally Aware Organization
▪ A Pier 1 Imports executive
➢ Net disposable income (NDI)

6. ➢ Consumer confidence index
➢ Housing starts
▪ A Johnson & Johnson medical products executive
➢ Percentage of gross domestic product (GDP) spent on health
care
➢ Number of active hospital beds
➢ The size and power of purchasing agents (indicates the
concentration of buyers)
7
Creating the Environmentally Aware Organization
• Competitive Intelligence: Associated with collecting data on
competitors and interpreting such data
• Involves shaping actions with respect to competitors moves
and
responding to them
• Internet and social media (LinkedIn, Facebook, YouTube,
etc.…)
have become important source for readily available information

7. 8
Creating the Environmentally Aware Organization
Environmental forecasting: Predicts change
• Plausible projections about
• Direction, Scope, Speed, and Intensity of environmental
change?
• Questions such as:
• How long will it take a new technology to reach the
marketplace?
• Will the present social concern about an issue result in new
legislation?
• Are current lifestyle trends likely to continue?
Scenario analysis: Involves detailed assessments of the ways
trends
may affect an issue & development of alternative futures based
on
these assessments.
9

8. Creating the Environmentally Aware Organization
SWOT analysis: 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
10
Picture Source: https://articles.bplans.com/how-to-perform-
swot-analysis/
Creating the Environmentally Aware Organization
• Acute sense of environment is important (and cannot be taken
for
granted!):
• Freddie Mac and Fannie Mae are fundamentally sound … I
think they are in good shape going forward.” —Barney Frank

9. (D-Mass.), House Financial Services Committee Chairman,
July 14, 2008. (Two months later, the government forced the
mortgage giants into conservatorships.)
• “I think you guys are just a bunch of hippies selling food to
other hippies.” —a venture capitalist's response to an invitation
to invest in Whole Foods, 1980.
• In a January 2014 survey by The Wall Street Journal, 49
economists expected oil to end 2014 at about $95 a barrel, up
from about $92 at the time of the survey. (Oil ended the year at
about $54 a barrel.)
11
Picture Source: https://articles.bplans.com/how-to-perform-
swot-analysis/
The General
Environment
12
The General Environment

10. The General Environment: Encompasses forces that have the
potential of a meaningful impact on the organization.
• These factors can be hard to predict and are difficult to control
• Can be divided into six categories:
• Demographic
• Sociocultural
• Political/Legal
• Technological
• Economic
• Global
13
The General Environment
Demographic: are easily understandable & quantifiable:
• The distribution of population age and its trend (Elderly care
services, health care, baby products)
• Rising (or declining) affluence (Recreational services,
affordable grocery)

11. • Changes in ethnic composition
• Geographic distribution of population
• Greater (smaller) disparities in income levels
• Not a homogeneous effect:
14
The General Environment
• Compared to younger workers, older workers are less
motivated,
less healthy, resist change, are less trusting, have more trouble
balancing work & family.
• Does it sound reasonable?
• What does the research say, and what implications might this
have
for a firm’s human resource strategy?
15
The General Environment

12. • ACTUALLY, compared to younger workers, older workers can
be
MORE motivated, more willing to implement change, are as
healthy,
as trusting, and do not have issues with work-family imbalance.
• However, older workers ARE less willing to participate in
training &
career development.
• Implications?
• Should we question your assumption biases?
16
Sociocultural
• Sociocultural: Are forces that influence the values, beliefs,
and
lifestyles of a society:
▪ More women in the workforce
▪ Dual-income families
➢ Industries dealing with cooking from the scratch
➢ Child Care industries

13. ➢ Readily available foods
▪ Increase in temporary workers
▪ Greater concern for healthy diets & physical fitness
(increasing
levels of obesity)
➢ Gyms and fitness facilities
➢ Healthy foods industry (grocery stores, pre-made foods)
▪ Greater concern for the environment
▪ Postponement of marriage & family formation, having
children
17
Political/Legal
• Political/Legal: Processes & legislation influence
environmental
regulations with which industries must comply:
• Tort reform
• Americans with Disabilities Act (ADA)
• Deregulation of utilities & other industries

14. • Increases in minimum wages
• Legislation on corporate governance reforms
• Immigration & visa reform
• Affordable Health Care Act, Medicare reimbursements
18
Technological
• Technological: developments lead to new products
developments that
lead to new products & services; can create new industries &
alter
existing ones:
▪ Genetic engineering Uber & Lyft
▪ Airbnb
▪ Napster & iTunes
▪ Netflix (Hulu, etc…)
• Disruptive innovation (Clayton M. Christensen): technologies
that ruin an
old industry (CAD/CAM sometimes completely) and establish
new ones

15. by introducing ground-breaking products
• PCs: affected typewriters, communication, audio and video
processing devices
• Emails: why post offices did not go out of business? What is a
likely
avenue to invest in for post offices?
• Smartphones: affected EVERY industry. Business apps.
Segments
from portable audio players, cameras, even flash lights!
• Most of the time, industries are partly disrupted, but not
affected in
other areas (movie producers, professional DJs, miner).
19
Technological (continued)
• Big corporations usually exploit the current state of the art
technology very efficiently and place mechanisms to continue to
do
so, but are not strong when it comes to employing an emerging
disruptive innovation (Christensen)

16. • Common among them to dismiss the value and the potential of
the
emerging technological trends:
• “There is no chance that the iPhone is going to get any
significant market share.” —Steve Ballmer, former CEO of
Microsoft, in 2007
• Why?
20
Technological (continued)
• Other emerging trends:
• Genetic engineering
• Computer-aided design/computer-aided manufacturing
systems (CAD/CAM)Research in synthetic & exotic materials
• Pollution/global warming
• Nanotechnology & physiolectics
• Digital technology can affect multiple segments of the General
Environment
21

17. Economic
• Economic forces affect all industries (more or less):
• Interest rates:
• Higher pays for debts
• Lesser discretionary income on average
• Cut in non-essential purchases
• Medical expenses? Luxury fashion?
• Unemployment
• Low-cost providers: rise of demand, decrease in
requested wage
• How did Walmart do in 2008 financial crisis?
• Consumer Price Index
• Trends in GDP & net disposable income
• Changes in stock market valuations
22
Global

18. • Global: forces offer both opportunities & risks:
• Currency exchange rates:
➢ Effects on procurement
➢ Effects on loans
• Increasing global trade
• Emergence of the Chinese economy:
➢ More discretionary income for low-income segment
➢ A threat for employment rates
• Trade agreements among regional blocs (NAFTA, EU,
ASEAN)
➢ Effects on working class (outsourcing, lower wages)
➢ Lower grocery prices
➢ Lower oil prices
• General Agreement of Tariffs & Trade (GATT) – leading to
decreasing tariffs/free trade in services
• Rapid rise of the middle class in emerging countries
23

19. 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
• The Internet & digital technology has altered the way business
is conducted in nearly every business domain
24
The Competitive
Environment
25
The Competitive Environment
• The competitive environment: Consists of factors in the task
or

20. industry environment that are particularly relevant to a firm’s
strategy:
• Competitors
• Existing competitors
• Potential Competitors: Those considering entry into the
industry
• Potential Competitors: Those satisfying the same need in
another industry
• Customers (or buyers)
• Suppliers
• Including those considering forward integration
26
The Competitive Environment
27
Rivalry among
Existing Firms
New Entrants

21. Substitutes
BuyersSuppliers
Bargaining power
of buyers
Bargaining power
of suppliers
Threat of new
entrants
Threat of
substitute
products or
services
The Threat of New Entrants
• 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.

22. • Depends on existing barriers to entry:
• Economies of scale: Reduction in cost per unit produced as
volume
increases. (Why?) – Automobile manufacturers
• Economies of scope: Reduction in cost per unit produced as
scope
of products increases. (Why?) – P&G
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels (retail shelf spaces)
• Cost disadvantages independent of scale:
• Proprietary products
• Favorable access to raw materials
• Government subsidies
• Favorable government policies
28
The Bargaining Power of Buyers

23. • The Bargaining Power of Buyers:
• Can force prices down, or demand higher qualities or service
levels
• Buyers are not necessarily the final customers
• Buyers have bargaining power when:
• Purchasing standard products in large volumes
• Profits are low & switching costs are few
• Backward integration is possible
• Buyer’s product quality is not affected by industry product
(Input from supplier is not critical)
• Only a few buyers available in the market
29
The Bargaining Power of Suppliers
• The Bargaining Power of Suppliers:
• Suppliers can exert threat by:
• Raise prices
• Reduce the quality of purchased goods and services
• Limit the availability

24. • Supplier groups are powerful when:
• Only a few firms dominate the industry
• No competition from substitute products
• Suppliers sell to several industries
• Buyer quality is affected by industry product (Input is
considered important by buyers)
• Products are differentiated & have switching costs
• Forward integration is possible
30
The Threat of Substitute Products & Services
• Substitute products & services limit the potential returns of an
industry by moving revenues to another industry
• Substitutes come from another industry
• Respond to the same need
• Raise the competition with possibility of price damages
• The more attractive the price/performance ratio, the more the
substitute erodes industry profits.

25. • Examples:
• Internet vs. airlines?
• Casinos vs theaters
• Pre-made foods vs. resturaunts
31
The Intensity of Rivalry Among Competitors in an
Industry
• Rivalry tactics include price competition, advertising battles,
new
product introductions, increased customer service or warranties
• 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:
• Barriers that keep from existing an industry even though

26. they lose money
• Specialized fixed assets
• Long term contracts
• Strategic relationship with other SBUs (Inputs,
Technology, Image)
32
How the Internet and Digital Technologies Affect
Competitive Forces
33
Using Industry Analysis: A Few Caveats
• Industry structure does not determine everything
• Five forces analysis implicitly assumes a zero-sum game – yet
mutually beneficial relationships can still be established with
buyers
& suppliers (common in car manufacturing)
• Five forces analysis is essentially a static analysis – yet
external

27. forces can still change the structure of all industries
• Take time horizon into consideration. For most industries 3 to
5
years is appropriate. It means average profitability over that
period,
not in any particular year.
• Do not to declare the industry universally attractive or
unattractive!
The goal is rather to understand specific competitive factors and
assess them in the light of the firm’s strengths and capabilities
34
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

28. • Degree of vertical integration
• Type of distribution
35
Strategic Groups Within Industries
• Strategic groups as an analytical tool
• 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
36
Strategic Groups Within Industries
37