Analyzing the external environment of the firm

1. Analyzing the external environment of the firm S V Horner 2009

2. Who cares? Overemphasis on internal characteristics Product obsolescence Missed opportunities for new product development Sears� internal operating manual Neglect of external analysis Assumptions about external environment may become outdated S V Horner 2009

3. Creating environmental awareness at organizational level Scanning Monitoring Competitive intelligence Forecasting S V Horner 2009

4. Scanning Surveillance of environment Anticipate future changes and detect changes under way Recognize patterns before competitors Act before changes occur (proactive) rather than responding afterwards (reactive) General top of the mind awareness of societal behaviors and business practices S V Horner 2009

5. Monitoring Tracking movement or changes in specific trends, sequences of events, or streams of activities Watching specific formal and informal indicators of future events Index of economic indicators Shipments by FedEx, UPS, DHL NAPM index S V Horner 2009

6. Competitive intelligence Define and understand industry and identify rivals� strengths and weaknesses Anticipate competitors� moves and decrease own response time S V Horner 2009

7. Competitive intelligence Sources of competitive intelligence Business press Competitor pricing Competitors� management backgrounds Open to seemingly unrelated bits of information that form patterns (Fuld & Co.�s client p. 46) Awareness of technological changes that threaten status quo (e.g., Encyclopaedia Brittanica) Avoid unethical and illegal behavior S V Horner 2009

8. Environmental forecasting �plausible projections about direction, scope, speed, and intensity of environmental change� (p. 42) Scenario analysis: human judgment combined with quantitative analysis S V Horner 2009

9. SWOT analysis Framework for identifying key elements of strategic context External elements Environmental opportunities for value creation Environmental threats to competitive position Internal elements Firm strengths: conditions in which firm excels Firm weaknesses: characteristics which firm may lack in comparison to competitors S V Horner 2009

10. The general environment External factors have profound influence on firm outcomes and entire industries Affects different industries differently Six segments of general environment: demographic, sociocultural, political/legal/, technological, economic, global S V Horner 2009

11. Demographic segment Numerical measurement of characteristics of a population Literally: description of people Age, income, ethnic composition, geographic distribution, etc. S V Horner 2009

12. Sociocultural segment Values, beliefs, attitudes of a society Distinct from, but related to, demographics Examples of values, beliefs, attitudes Concern over greenhouse gases Health consciousness (fitness, diets, etc.) S V Horner 2009

13. Political/legal segment Political processes, elections, legislation, regulation, adjudication Competition among individuals and groups for �voice� in public policy S V Horner 2009

14. Technological segment Growth in knowledge leading to new products and services and improvements in production and distribution Examples of technologies: genetic engineering, information technology, CAD/CAM, artificial intelligence, nanotechnology, mass production, assembly line production S V Horner 2009

15. Economic segment General economic conditions facing a firm and its industry General economic indicators Key economic indicators Stock market indices Other formal and informal indicators Describe effects on firm strategic direction S V Horner 2009

16. Global segment Relevant (and changing) new global markets International political events (e.g., changes in power, fall of Soviet rule, newly industrializing countries, terrorism) Cultural and institutional characteristics of global markets International organizations promote global economic integration (e.g., WTO, Transatlantic Business Dialogue) S V Horner 2009

17. Relationships among segments Segments are not totally distinct Segments are interrelated and mutually influencing S V Horner 2009

18. Competitive environment More direct influence on industry competition and firm profitability than general environment Consists of factors relevant to firm�s strategy � customers, suppliers, and competitors (both existing and potential) S V Horner 2009

19. Porter�s five forces model of industry competition S V Horner 2009

20. Threat of new entrants Expands industry capacity and increases competition for market share May include start ups as well as existing firms expanding into new business Phillip Morris� purchase of Miller Brewing Influenced by barriers to entry and anticipated reactions from existing competitors S V Horner 2009

21. Threat of new entrants High barriers to entry reduce threat 1) Economies of scale 2) Brand identity and product differentiation 3) Capital requirements 4) Switching costs 5) Access to distribution channels 6) Cost disadvantages independent of size 7) Government policy S V Horner 2009

22. Threat of new entrants Expected retaliation of existing competitors Deterrent to new entrants Opportunity for entrepreneurs in underserved niches S V Horner 2009

23. Bargaining power of buyers Bargaining power of buyers of industry output Motivated to negotiate for lower prices, quality, service, etc. Bargaining power of buyer groups a function of: Market situation Relative importance of purchases from the industry compared to its overall business S V Horner 2009

24. Bargaining power of buyers: factors Buyers are concentrated, or each one purchases a significant percentage of total industry sales. The products that the buyers purchase represent a significant percentage of the buyers� costs. The products that the buyers purchase are standard or undifferentiated. Buyers face few switching costs and can freely change suppliers. S V Horner 2009

25. Bargaining power of buyers: factors Buyers earn low profits, creating pressure for them to reduce their purchasing costs. Buyers have the ability to engage in backward integration by becoming their own suppliers. The industry�s product is relatively unimportant to the quality of the buyers� products or services. Buyers have complete information. S V Horner 2009

26. Bargaining power of suppliers Bargaining power of suppliers of industry inputs to charge higher prices, reduce quality of purchased goods/services Factors influencing bargaining of suppliers mirror those of the bargaining power of buyers S V Horner 2009

27. Bargaining power of suppliers : factors The supplying industry is dominated by one or a few companies. There are no substitute products, weakening industry players in relation to their suppliers. The buying industry is not a major customer of the suppliers S V Horner 2009

28. Bargaining power of suppliers : factors The suppliers pose a credible threat of forward integration by �becoming their own customers.� The suppliers� products are differentiated or have built-in switching costs, thereby reducing the buyers� ability to play one supplier against another. S V Horner 2009

29. Intensity of rivalry among existing competitors Jockeying for position among producers of industry output Tactics: Price competition Advertising battles Product introductions Customer service levels or warranties S V Horner 2009

30. Intensity of rivalry: structural factors 1) Numerous or equally balanced competitors 2) High fixed or storage costs 3) Slow industry growth 4) Lack of differentiation or low switching costs 5) Capacity increases in large increments (�clumpy�) 6) Diversity of competitors 7) High strategic stakes 8) High exit barriers S V Horner 2009

31. Threat of substitute products and services Substitutes perform similar or same functions as existing industry products but have different characteristics Sugar producers face threats from producers of high fructose corn syrup Fiberglass producers face threats from producers of cellulose, rock wool, and styrofoam S V Horner 2009

32. Threat of substitute products and services Distinct from economics definition which defines competing products In strategic thinking, Coke and Pepsi are competing products; Coke and Snapple are substitutes S V Horner 2009

33. Limitations of five forces model Industry often difficult to identify. Does not account for the role of strategic alliances/partnerships Some firms, most notably large ones, can often take steps to modify the industry structure Assumes industry factors, not firm resources, comprise the primary determinants of firm profit. Firms compete in many industries and markets and must be concerned with multiple industry structures. S V Horner 2009

34. Strategic groups Two assumptions: No two firms are totally identical No two firms are totally different Firms more similar to each other than to rest of industry may be identified as a strategic group S V Horner 2009

35. Strategic groups Dimensions of similarity Breadth of product line Geographic scope Price/quality Degree of vertical integration Type of distribution (e.g., dealer network, mass merchandisers, private label) Variety of strategic combinations in an industry S V Horner 2009

36. Strategic groups as a tool of industry analysis Identifies barriers to mobility protecting one group from competition from another Barriers to mobility Factors deterring entry of firms from one group into another (e.g., Wal-Mart and Nordstrom�s) Examples: technology, brand image, dealer network S V Horner 2009

37. Strategic groups as a tool of industry analysis Identifies groups whose competitive position may be marginal or tenuous (e.g., JCP and Sears stuck in the middle between Wal-Mart and Nieman Marcus) Helps chart future direction of firm�s strategies S V Horner 2009

38. Strategic groups as a tool of industry analysis Helps managers think through implications of each industry trend for strategic group as a whole e.g., variable effect of interest rates on strategic groups in automobile manufacturing (e.g., Porsche vs. Kia) S V Horner 2009

39. Summary Environmental analysis a necessary component of strategic planning Environmental awareness occurs through scanning, monitoring, competitive intelligence, environmental forecasting Two major components of environment General environment Competitive environment S V Horner 2009

40. Summary General environmental segments: demographic, sociocultural, political/legal, technological, economic, global Competitive environment: Five competitive forces (Porter�s five forces) Threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, intensity of rivalry Strategic groups S V Horner 2009