MGT8200 Chapter 2 Analyzing the External Environment of the Firm

Goals
L01: The importance of developing forecasts of the business environment
Importance of Developing Forecasts of the Business Environment
o Managers must analyze the external environment to minimize or
eliminate threats and exploit opportunities and exploit opportunities
o Involves a continuous process of environmental scanning and
monitoring as well as obtaining competitive intelligence on present and
potential rivals.
L02: Why environmental scanning, environmental monitoring, and collecting
competitive intelligence are critical inputs to forecasting
Environmental Scanning
o Involves surveillance of a firms external environment to predict
environmental changes and detect changes already underway
o Alerts the organization to critical trends and events before the changes
have developed a discernable pattern and before competitors
recognize them, otherwise, the firm may be forced into a reactive
mode
Environmental Monitoring
o Tracks the evolution of environmental trends, sequences of events, or
streams of activities
o Study trends with your own suppliers/integrators in purchasing, project
management, and systems engineering
o Monitoring enables firms to evaluate how dramatically environmental
trends are changing the competitive landscape
Collecting Competitive Intelligence
o Helps firms define and understand their industry and identify rivals
strengths & weaknesses
o Can help a company avoid surprises by anticipating competitors
moves and decreasing response time
o Internet has accelerated the speed at which firms can find competitive
intelligence
o Executives must be careful to avoid spending so much time and effort
tracking the actions of traditional competitors that they ignore new
competitors
o Increasingly, a winning strategy will require information about events
and conditions outside the institution: noncustomers, technologies
other than those currently used by the company and its present
competitors, markets not currently served, and so on
Environmental Forecasting
o Involves the development of plausible projections about the direction,
scope, speed, and intensity of environmental change
o Environmental scanning, monitoring, and competitive intelligence are
important inputs for analyzing the external environment
o A danger of forecasting is that managers may view uncertainty as
black & white and ignore important gray areas
o Problem is that underestimating uncertainty can lead to strategies that
neither defend against threats nor take advantage of opportunities

L03: Why scenario planning is a useful technique for firms competing in industries
characterized by unpredictability and change
Scenario Planning in Industries Characterized by Unpredictability &
Change
o Draws on a range of disciplines and interests, among them economics,
psychology, sociology, and demographics
o Usually begins which societal trends, economics, politics, and
technology may affect the issue under discussion
o Need to lay down guidelines for at least 10 years in the future to
anticipate rapid change
SWOT Analysis
o Must analyze both the general environment and the firms industry and
competitive environment
o Provides a framework for analyzing these four elements of a
companys internal and external environment
Strengths & Weaknesses refers to internal conditions of the firm
where your firm excels and where it may be lacking relative to
competitors
Opportunities and Threats are environmental conditions
external to the firm
o SWOT analysis is hat a firms strategy must:
Build on its strengths, Try to remedy the weaknesses or work
around them, Take advantage of the opportunities presented by
the environment, and Protect the firm from the threats
o 1) It forces managers to consider both internal and external factors
simultaneously
o 2) Emphasis on the identifying opportunities and threats makes firms
act proactively rather than reactively
o 3) Raises awareness about the role of strategy in creating a match
between the environmental conditions and the firms internal strengths
& weaknesses
o 4) Its concept simplicity is achieved without sacrificing analytical rigor
L04: The impact of the general environment on a firms strategies and performance
Impact of the General Environment on Firms Strategies &
Performance
o
o Two types of environments
The General Environment
Demographics
Sociocultural
Aging population
More women in workforce
Rising affluence
Increase in temporary workers
Changes in ethnic composition
Greater concern for fitness
Geographic distribution of
Greater concern for environment
population
Postponement of family formation
Greater disparities in income
levels
Political/Legal
Technological
Tort reform
Genetic engineering

Americans with Disabilities Act of

1990
Deregulation of utility and other
industries
Economic
Interest rates
Unemployment rates
CPI
Trends in GDP
Changes in stock market valuation

Global

Emergence of internet technology

Pollution/Global warming
Nanotechnology
Increasing global trade
Currency exchange rates
Emergence of Asian economies
Creation of WTO
Trade agreements

A trend or event may have a positive impact on some

industries and a negative, neutral, or no impact at all on
others
L05: How forces in the competitive environment can affect profitability, and how a
firm can improve its competitive position by increasing its power vis--vis these
forces
How 5 Forces Affect Profitability in Competitive Environment
o Competitive environment consists of industry-related factors and has a
more direct impact than the general environment
Includes competitors (existing & potential), customers, and
suppliers
Potential competitors may include a supplier considering
forward integration or a firm in an entirely new industry
introducing a similar product that uses a more efficient
technology
o Industry analysis includes the threat of new entrants, buyer power,
supplier power, threat of substitutes, and rivalry among competitors
Intensity of these factors determines, in large part, the average
expected level of profitability in an industry
o Porters Five-Forces Model
Threat of New Entrants Refers to the possibility that profits
may be eroded by new competitors
Six Major Sources of Entry Barriers:
o Economies of scale
o Product differentiation
o Capital requirements
o Switching costs
o Access to distribution channels
o Cost disadvantages independent of scale
Bargaining Power of Buyers Threatens an industry by forcing
down prices, bargaining for higher quality or more services, and
playing competitors against each other
Buyer group is power under the following conditions:
o Concentrated or purchases large volumes relative
to seller sales
o Products it purchases from the industry are
standard or undifferentiated
o Buyer faces few switching costs
o It earns low profits
o Buyers pose a credible threat of backward
integration

Industrys product is unimportant to the quality of

the buyers products or services
Bargaining Power of Suppliers Can exert bargaining power
over participants in an industry by threatening to raise prices or
reduce the quality of purchased goods and services
A supplier group will be powerful in the following
circumstances:
o Dominated by a few companies and is more
concentrated (few firms dominate the industry)
than the industry it sells to
o Not being obliged to contend with substitute
products for sale to the industry
o Industry is not an important customer of the
supplier group
o Suppliers product is an important input to the
buyers business
o Supplier groups products are differentiated or it
has built up switching costs for the buyer
o Poses a credible threat of forward integration
o

Threat of Substitute Products and Services

All firms within an industry compete with industries
producing substitute products and services
Substitutes limit the potential returns of an industry by
placing a ceiling on the prices that firms in that industry
can profitable charge
The more attractive the price/performance ratio of
substitute products, the tighter the lid on an industrys
profits
Renewable energy resources are also a promising
substitute product and are rapidly becoming more
economically competitive with fossil fuels
Intensity of Rivalry Among Competitors in an Industry Takes
the form of jockeying for position
Uses tactics like price competition, advertising battles,
product introductions, and increased customer service or
warranties
Occurs when competitors sense the pressure or act on
an opportunity to improve their position
Intense rivalry is the result of several interacting factors:
o Numerous or equally balanced competitors
o Slow industry growth
o High fixed or storage costs
o Lack of differentiation or switching costs
o Capacity augmented in large increments
o High exit barriers
o Ultimately determines the profit potential for a particular industry
o Helps you decide whether a firm should remain in or exit an industry
o Provides the rationale for increasing/decreasing resource commitments
How a Firm can Improve Competitive Position by Increasing its Power
via Forces

A sound awareness of such factors, both individually and in

combination, is beneficial not only for deciding what industries to enter
but also for assessing how a firm can improve its competitive
assistance
For example: Can use five-forces model insights to create higher
entry barriers that discourage new rivals from competing with
you, or help develop strong relationships with your distribution
channels

L06: How the Internet and digitally based capabilities are affecting the five
competitive forces and industry profitability
Internet & Digital Affecting 5 Forces & Industry Profitability
o Threat of New Entrants
Has increased because digital and Internet-based technologies
lower barriers to entry
Providing new entrants with more efficient and lower cost
methods of accessing customers
o Bargaining Power of Buyers
May increase buyer power by providing consumers with more
information to make buying decisions and by lowering switching
costs
Bargaining power of distribution channel buyers may decrease
are wholesalers, distributors, and retailers who serve as
intermediaries
Bargaining Power of Suppliers
Speeds up and streamline the process of acquiring supplies is
already benefiting many sectors of the economy but depends
on nature of competition
Double-edged sword:
Positive
Negative
Growth of new Web-based
May be hard to hold onto
businesses in general may create
customers because buyers can do
more downstream outlets for
comparative shopping much
suppliers to sell to, arrangements
faster on the Internet
that make purchasing easier
Inhibits the ability of suppliers to
Web-based purchasing
offer highly differentiated
arrangements make purchasing
products or unique services
easier and discourage customers
from switching
Use of proprietary software that
links buyers to a suppliers
Website may create a rapid, lowcost ordering capability that
discourages the buyer from
seeking other sources of supply
Greater power to reach end users
without intermediaries
o Threat of Substitute Products and Services
Heightened because the Internet introduces new ways to
accomplish the same tasks
o

Consumers generally choose a product or service until a

substitute that meets the same need becomes available
at a lower cost
o Intensity of Rivalry Among Competitors in an Industry
Creates more tools and means for competing, rivalry among
competitors is likely to be more intense
Only those competitors that can use digital technologies and
the Web give themselves a distinct image, create unique
product offerings, or provide faster, smarter, cheaper services
are likely to capture greater profitability with the new
technology
More intense when switching costs are low and product or
service differentiation is minimized more commoditized
products
Problem made worse by presence of shopping robots and
infomediaries that search Web for best possible prices
Using Industry Analysis
o 1) Managers must not always avoid low profit industries (or low profit
segments in profitable industries)
o 2) Five-forces analysis implicitly assumes a zero-sum game,
determining how a firm can enhance its position relative to the forces
o 3) The limitations of five-forces analysis include its static nature and its
inability to acknowledge the role of complementors (products/services
impacting on value of firms products/services)
A given environmental trend or event typically has a much
greater impact on some industries than on others.

L07: The concept of strategic groups and their strategy and performance implications
Strategic Groups Clusters of firms that share similar strategies
o No two organizations are completely different nor are they exactly the
same
o Question is how to group firms in an industry on the basis of similarities
in their resources & strategies
Valuable for determining mobility barriers across groups,
identifying groups with marginal competitive positions, charting
the future directions of firm strategies, and assessing the
implications of industry trends for the strategic group as a
whole
o

Value of Strategic Groups Concept as an Analytical Tool and

their Strategy & Performance Implications
1) Strategic groupings help a firm identify barriers to mobility
that protect a group from attacks by other groups

Mobility barriers are factors that deter the movement of

firms from one strategic position to another
2) Helps a firm identify groups whose competitive position may
be marginal or tenuous
May anticipate these competitors may exit the industry
or try to move into another group
3) Help chart the future directions of firms strategies
Arrows from each strategic group can represent the
direction in which the group seems to be moving
If all strategic groups move in similar direction could
indicate a high degree of future volatility and intensity of
competition
4) Helpful in thinking through the implications of each industry
trend for the strategic group as a whole

Key Terms
Environmental Scanning: Surveillance of a firms external environment to
predict environmental changes and detect changes already under way.
Environmental Monitoring: A firms analysis of the external environment
that tracks the evolution of environmental trends, sequences of events, or
streams of activities.
Competitive Intelligence: A firms activities of collecting and interpreting
data on competitors, defining and understanding the industry, and identifying
competitors strengths and weaknesses.
Environmental Forecasting: The development of plausible projections
about the direction, scope, speed, and intensity of environmental changes.
Scenario Analysis: As in-depth approach to environmental forecasting that
involves experts detailed assessments of societal trends, economics, politics,
technology, or other dimensions of the external environment.
SWOT Analysis: A framework for analyzing a companys internal and
external environment and that stands for strengths, weaknesses,
opportunities, and threats.
General Environment: Factors external to an industry, and usually beyond a
firms control, that affects a firms strategy.
Competitive Environment: Factors that pertain to an industry and affect a
firms strategies.
Complements: Products or services that have an impact on the value of a
firms products or services.
Strategic Groups: Clusters of firms that share similar strategies.