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Chapter Two ANALYZING THE EXTERNAL ENVIRONMENT OF THE FIRM
OBJECTIVES
1. Environmental Forecasting2. Environmental Analysis3. Industry Analysis (5 Forces Model)4. Strategic Group Analysis
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1. ENVIRONMENTAL FORECASTING
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1. ENVIRONMENTAL FORECASTING
ENVIRONMENTAL SCANNING
Surveillance of a firm’s external
environment
Predict environmental changes to come
Detect changes already under way
Proactive mode
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1. ENVIRONMENTAL FORECASTING
ENVIRONMENTAL MONITORING
Track evolution of
Environmental trends
Sequences of events
Streams of activities
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1. ENVIRONMENTAL FORECASTING
COMPETITIVE INTELLIGENCE
Information that has been analyzed to the point where you can make a decision.
Identify rivals’ strengths and weaknesses Helps a firm avoid surprises Plausible projections about
Direction of environmental change
Scope of environmental change
Speed of environmental change
Intensity of environmental change
Scenario analysis
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2. ENVIRONMENTAL ANALSIS
Managers need to analyze
The general environment
The firm’s industry and competitive environment
SWOT analysis Strengths & Weaknesses (SW) Opportunities & Threats (OT) Basic technique for analyzing firm and industry
Conditions
FORMULATING STRATEGY
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2. ENVIRONMENTAL ANALSISSITUATION ANALYSIS
Industry & Competitive Conditions• Industry’s dominant economic traits• Nature of competition & strength of
competitive forces • Drivers of industry change• Competitive position of rivals• Strategic moves of rivals• Key success factors
Industry & Competitive Conditions• Industry’s dominant economic traits• Nature of competition & strength of
competitive forces • Drivers of industry change• Competitive position of rivals• Strategic moves of rivals• Key success factors
Internal Condition• Assessment of company’s present
strategy• Strengths & weaknesses, (SW)• Company’s costs compared to rivals• Strength of competitive position• Strategic issues to be addressed
Internal Condition• Assessment of company’s present
strategy• Strengths & weaknesses, (SW)• Company’s costs compared to rivals• Strength of competitive position• Strategic issues to be addressed
DevelopOptions
DevelopOptions
Select the Best
Strategy
Select the Best
Strategy
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2. ENVIRONMENTAL ANALSIS
ConnectConnectFirm
Industry Environment
Macro Environment
Competitors Suppliers
Substitutes Customers
Demographic
TechnologicalPolitical/Legal
Social
Economic
Global
ENVIRONMENTALCOMPONENTS
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2. ENVIRONMENTAL ANALSISGENERAL ENVIRONMENT: KEY COMPONENTS
Demographic
Aging population
Changes in ethnic composition
Greater income disparities
Sociocultural
More women in the workforce
Postponement of family formation
Political/Legal
Environmental protection
Americans with Disabilities Act
Trade regulations/Protectionism
Technological
Genetic engineering
Emergence of Internet technology
CAD/CAM
Economic
Interest rates
Changes in stock market valuations
Global
Currency exchange rates
Emergence of the Indian and Chinese
economies
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2. ENVIRONMENTAL ANALSISENVIRONMENTAL IMPACTS
Segment/Trends/Events Industry Positive Neutral Negative
Demographic Aging population
Health CareBaby products
Sociocultural More women in the workforce
ClothingBaking Products
Political/legal Tort reform
Legal ServicesAuto Manufacturing
Technological Genetic engineering
PharmaceuticalPublishing
Economic Interest Rate Increases
Residential constructionGrocery products
Global Global Trade
Shipping
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3. INDUSTRY ANALYSIS
5 FORCES MODEL OF INDUSTRY COMPETITION
Threat ofnew entrants
Bargaining power of buyers
Bargaining power of suppliers
Threat ofSubstitute products
and services
Adapted from Exhibit 2.2 Porter’s Five Forces Model of Industry Competition
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Assess strength of each competitive force (Strong? Moderate? Weak?)
Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers
Explain how each force acts to create competitive pressure
Decide whether overall competition is brutal, fierce, strong, normal/moderate, or weak
3. INDUSTRY ANALYSISPORTER’S 5 FORCES MODEL
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Usually the most powerful of the five forces
Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position
Price Quality Performance features offered Customer service Warranties/guarantees Advertising/promotions Dealer networks Product innovation
3. INDUSTRY ANALYSISRIVALRY AMONG COMPETING FIRMS
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Lots of firms, more equal in size and capability. Slow market growth. Industry conditions tempt some firms to go on the
offensive to boost volume and market share. Customers have low costs in switching brands. Costs more to get out of business than to stay in. Firms have diverse strategies, corporate priorities,
resources, and countries of origin.
Dynamic and ever-changing!
3. INDUSTRY ANALYSISWHAT CAUSES RIVALRY TO BE STRONGER?
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Seriousness of threat depends on:
Barriers to entry
Reaction of existing firms to entry
Threat of entry is stronger when:
Entry barriers are low
Sizable pool of entry candidates exists
Incumbents are unwilling or unable to contest a newcomer’s entry efforts
Newcomer can expect to earn attractive profits
3. INDUSTRY ANALYSISTHREAT OF NEW ENTRANTS
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Economies of scale.
Inability to gain access to specialized technology.
Existence of learning/experience curve effects.
Strong brand preferences and customer loyalty.
Capital requirements and/or other specialized resource requirements.
Cost disadvantages independent of size.
Access to distribution channels.
Regulatory policies, tariffs, trade restrictions.
3. INDUSTRY ANALYSISCOMMON BARRIERS TO ENTRY
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3. INDUSTRY ANALYSISTHREAT OF SUBSTITUTE PRODUCTS
Substitutes matter when customers are attracted to the products of firms in other industries.
Examples Newspapers vs. TV vs. Internet Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic vs. Glass vs. Metal
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3. INDUSTRY ANALYSISTHREAT OF SUBSTITUTES IS STRONGER
The competitive threat of substitutes is stronger when they are:
Readily available.
Attractively priced.
Believed to have comparable or better
performance features.
Customer switching costs are low.
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Suppliers are a strong competitive force when:
Item makes up large portion of product costs, is crucial to production process, and/or significantly affects product quality.
It is costly for buyers to switch suppliers.
They have good reputations and growing demand. They do not have to contend with substitutes. The supplier group is dominated
by a few companies.
3. INDUSTRY ANALYSISCOMPETITIVE FORCE OF SUPPLIERS
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Buyers are a strong competitive force when:
They are large and purchase a sizable percentage of industry’s product.
They can integrate backward.
Industry’s product is standardized. Their costs in switching to substitutes
or other brands are low.
They can purchase from several sellers.
3. INDUSTRY ANALYSISCOMPETITIVE FORCE OF BUYERS
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Competitive environment is ideal when:
Rivalry is moderate
Entry barriers are high
Good substitutes do not exist
Suppliers and customers are in a weak bargaining position
Caveat, Five-forces analysis implicitly assumes a zero-sum game.
3. INDUSTRY ANALYSISIMPLICATIONS
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One technique for revealing the different competitive positions of industry rivals is strategic group mapping.
A strategic group consists of those rivals with similar competitive approaches in an industry.
Cluster of firms that share similar strategies
Sell in same price/quality range.
Cover same geographic areas.
Be vertically integrated to same degree.
Have comparable product line breadth.
Emphasize same types of distribution channels.
Offer buyers similar services.
Use identical technological approaches.
4. STRATEGIC GROUP ANALYSIS
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4. STRATEGIC GROUP ANALYSISTHE WORLD AUTOMOBILE INDUSTRY:
STRATEGIC GROUPS
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Value of strategic groups as an analytical tool
Driving forces and competitive pressures often favor some strategic groups and hurt others.
Profit potential of different strategic groups varies due to
strengths and weaknesses in each group’s market position
The closer strategic groups are on map, the stronger the
competitive rivalry among member firms tends to be
Chart the future direction of firms’ strategies.
4. STRATEGIC GROUP ANALYSISINTERPRETING STRATEGIC GROUP MAPS