Analyzing the External Environment of the Firm

1. Chapter 2 Analyzing the External Environment of the Firm

2. Learning Objectives 1. The importance of developing forecasts of the business environment. 2. The impact of the general environment on a firm�s strategies and performance. 3. Understand the 5 forces model in detail 4. Be aware of the concept of strategic groups and their strategy and performance implications.

3. Forecasting Process

4. Forecasting Cont. �Freddie Mac and Fannie Mae are fundamentally sound. . . . I think they are in good shape going forward.��Barney Frank (D-Mass.), House Financial Services Committee Chairman, July 14, 2008. �Existing home sales to trend up in 2008��Headline of a National Association of Realtors press release, December 9, 2007. �I think you�ll see $150 a barrel [of oil] by the end of the year.��T. Boone Pickens, June 20, 2008. (Oil was then around $135 a barrel. By late December it was around $40.) �I expect there will be some failures. . . . I don�t anticipate any serious problems of that sort among the large internationally active banks.��Ben Bernanke, Federal Reserve Chairman, February 28, 2008. ( �In today�s regulatory environment, it�s virtually impossible to violate rules.��-Bernard Madoff, money manager, October 20, 2007. (

5. Scanning & Monitoring Environmental Scanning - Surveillance of a firm�s external Environment Predict environmental changes to come Detect changes already under way Proactive mode Environmental Monitoring - Track evolution of Environmental trends Sequences of events Streams of activities

6. Competitive Intelligence Define and understand a firm�s industry Identify rivals� strengths and weaknesses Helps a firm avoid surprises Examples: CEO interviews Information on message boards Job postings Talking to employees of competing firms

7. Forecasting Plausible projections about Direction of environmental change Scope of environmental change Speed of environmental change Intensity of environmental change

8. SWOT Managers need to analyze The general environment The firm�s industry and competitive environment SWOT analysis Strengths & Weaknesses Opportunities & Threats Basic technique for analyzing firm and industry conditions

9. Discussion Question #1 Do a quick SWOT analysis for the text book companies producing undergraduate management texts for this and other related courses? For example: Will the Dess and Lumpkin model be effective in 10 years? Why? Why not?

10. The General Environment Trends and Events which effect strategy Little ability to predict them Even less ability to control them Can vary across industries Six Segments Demographic Sociocultural, Political/legal Technological Economic Global

11. Demographic Easily understood and quantifiable elements of the GE Aging population Rising affluence Changes in ethnic composition Geographic distribution of population Greater disparities in income levels More disabled people in the workforce

12. Sociocultural Influence the values, beliefs, and lifestyle of a society More women in the workforce Increase in temporary workers Greater concern for fitness Greater concern for environment Postponement of family formation Retirement plans of the baby boom generation

13. Political/Legal Laws and Regulations that help one industry nearly always will hurt another industry. Tort reform Americans with Disabilities Act (ADA) Deregulation of utility and other industries Increases in minimum wages Taxation at local, state, federal levels Immigration laws

14. Technological Developments in technology lead to new products and services and improve how they are produced and delivered to the end user Genetic engineering Emergence of Internet technology Alternative energy technologies Nanotechnology Downsides Ethics Pollution and global warming

15. Economic Economic trends influence all industries, but not with the same intensity Interest rates Unemployment Consumer Price index Trends in GDP Changes in stock market valuations Can the Government effect the economy?

16. Global Globalization is here and companies must adjust to deal with it to survive. Increasing global trade Currency exchange rates Emergence of the Indian and Chinese economies Trade agreements

17. The Competitive Environment Sometimes called the task or industry environment Includes Competitors (existing and potential) Customers Suppliers Porter�s Five Forces model

18. Porter�s 5 Forces

19. Discussion Topic #2 Think about the parcel delivery industry. As we discuss the theory behind the five forces model, we will analyze the strength of each of the 5 forces in the parcel delivery industry. Specific focus: UPS & FedEx

20. New Entrants High entry barriers lead to low threat of new entries The main entry barriers Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale

21. Power of Buyers A buyer group is powerful when It is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry are standard or undifferentiated The buyer faces few switching costs The buyer earns low profits The buyers pose a credible threat of backward integration The industry�s product is unimportant to the quality of the buyer�s products or services

22. Power of Suppliers A supplier group will be powerful when The supplier group is dominated by a few companies and is more concentrated than the industry it sells to The supplier group is not obliged to contend with substitute products for sale to the industry The industry is not an important customer of the supplier group The supplier�s product is an important input to the buyer�s business The supplier group�s products are differentiated or it has built up switching costs for the buyer The supplier group poses a credible threat of forward integration

23. Threat of Substitutes Substitute - Other products or services that can perform the same function as the industry�s offerings. Substitutes limit the potential returns of an industry Ceiling on the prices that firms in that industry can profitably charge Price/performance ratio

24. Competitive Rivalry Interacting factors lead to intense rivalry Numerous or equally balanced competitors Slow industry growth High fixed or Storage costs Lack of differentiation or switching costs Capacity augmented in large increments High exit barriers

25. Limitations of industry Analysis Tendency to avoid low profit industries and low profit segments of profitable industries Five Forces analysis implicitly assumes a zero-sum game Five Forces analysis is essentially a static analysis Value net Suppliers and customers (the vertical net) Substitutes and complements (the horizontal net)

26. The Value Net

27. Strategic Groups Two unassailable assumptions in industry analysis No two firms are totally different No two firms are exactly the same Strategic groups Cluster of firms that share similar strategies Breadth of product and geographic scope Price/quality Degree of vertical integration Type of distribution system

28. Strategic Groups Cont. Value of strategic groups as an analytical tool Identify barriers to mobility that protect a group from attacks by other groups Identify groups whose competitive position may be marginal or tenuous Chart the future direction of firms� strategies Thinking through the implications of each industry trend for the strategic group as a whole

29. Strategic Groups Cont.

30. Objectives 1. The importance of developing forecasts of the business environment. 2. The impact of the general environment on a firm�s strategies and performance. 3. Understand the 5 forces model in detail 4. Be aware of the concept of strategic groups and their strategy and performance implications.