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LP- 2 wk-2 8 Sep14

Ch-2 Analyzing the External Environment of
the Firm
Learning Objectives
Importance of developing forecasts of the business
environ
Critical inputs to forecasting, i.e., scanning,
monitoring and collecting CI
Scenario Planning
Impact of Competitive Environ on Profitability
Trends and Events of General environ
Strategic Grouping and its impact on business Strat

CORPORATE WATCH
Pakistan becomes 5th largest remittances recipient
country
Yamaha to invest $150m in Pakistan auto sector
Pakistan can become world's 18th largest economy by
2050 and Now is the right time to invest in Pakistan
startups----- How? Sit-in caused Rs. 547bn loss to
national economy so far and visit by Chinese President
has been postponed---- delay in $32Bn investment
Pakistani businesses can export over 3,500 items to the
US duty free
Dollar hits six-month high against rupee


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EXAMPLES OF CA / CP
The Standard Chartered Bank. The bank`s clients can now print cheques any time at
their own premises, through its internet based global delivery channel.
European Competition Commissioner is preparing to decide on the case after
spending three years examining whether Google squeezes out rival services in
online search results.
Airbus and Boeing both topped 1,000 new jets orders in the first eight months of
the year, but Boeing is far ahead after adjusting for cancellations. Adjusting for
cancellations, Airbus reported 722 net orders between January and August. That
compares with 941 net orders for Boeing from Jan. 1 to Sept. 2, after accounting for
63 cancellations.
KASB Bank posts Rs171m profit The bank`s total assets amounted over Rs.69
billion.
The Indus Motor Company (IMC) has announced final cash dividend of Rs23.50
per share, in addition to an earlier interim dividend of Rs6 per share. IMC reported
profit-after-tax of Rs3.87 billion during 2013-14, increase of 15 per cent over the
previous year. However, the sales revenue decreased by 11pc to Rs. 57bn from
Rs.64bn in 2012-13.

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WHY ANALYZE EXTERNAL ENVIRONMENT?
Purpose: Forecasting
Highlight with examples:
Motorola case study
Lehman Brothers
MECO & NTR in Pakistan
Bicycle Industry in Pakistan
Privatization of PTCL
Power Generation in Pakistan
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SECTOR Sale proceeds 1991 to August 4, 2014
No.
Amount
(Rs. in million)
Banking 7 41,023
Capital Market Transaction 24 186,689
Energy 14 51,756
Telecom 4 187,024
Automobile 7 1,102
Cement 17 16,177
Chemical 16 1,643
Engineering 7 182
Fertilizers 7 40,281
Ghee Mills 24 842
Rice 8 236
Roti Plants 15 91
Textile 4 370
Newspapers 5 270
Tourism 4 1,805
Others 6 159
Total 169 529, 650
Result of Failure to ANALYZE EXTERNAL
ENVIRONMENT
Motorola
Founded in 1930 as maker of radios, and consumer
electronics
Color TV business sold in 1970 and intensified high tech
for commercial, industrial and governments sectors
1980 became leading supplier of cellular telephones
1994 Fortune magazine rated as the most loved
company
What went wrong?
Failed to notice changes in trends switching from
analog to digital tech and arrival of competitors (Nokia
and Ericsson)




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Questions?
1. Why has Kodak and some other retail outlets in
USA & UK filed for Bankruptcy?
2. Do we have Bankruptcy Law in Pakistan?
3. How many firms and Orgs have filed for
bankruptcy in Pakistan in last 10 years?
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WHY DO WE DO THAT?
We undertake External analysis by Scanning, Monitoring
and obtaining Competitive Intelligence / Information (CI)
so as to
Forecast
events and trends.
The trends and events are product of:
Globalization
Time to Market
Innovating technologies
Shifting roles and responsibilities ---- Economic conditions
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CREATING ENVIRONMENTALLY AWARE ORG
3 Steps:
1. Institute measures for and inculcate the habit of:
Undertaking Environmental Scanning
Uninterrupted Monitoring of business activities and
Obtain Competitive Intelligence (CI) in order to pre-empt the
changing trends and events
2. Be aware of the General Environment arising out of:
Demography, Social, Politico-legal, Technology, Economic and
Global environment (slide-13)
3. Remain abreast of Competitive Environment
Porters Five-Forces (Buyers, Suppliers, Substitutes, Potential
Entrants and Mutual rivalry
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Ist Step ENVIRONMENTAL SCANNING

Definition
The process of conducting surveillance of firms
external environment to predict environmental
changes to come and detect changes already
underway.
Purpose
To become aware of changing trends
To adopt pro-active strategies rather than resorting to
reactive strategies / measures to correct the changing
trends and events
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ENVIRONMENTAL MONITORING
Definition
It is to track the evolution of environmental trends,
sequence of events, or streams of activities
Purpose
To undertake closer scrutiny to become fully
cognizant of impact of changing trends and events
It enables the firms to evaluate how dramatically
environmental trends are changing the CI.
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COMPETITIVE INTELLIGENCE (CI)
Definition
It is an activity which helps firms define and
understand their industry and identify their rivals
strengths and weaknesses.
Purpose
To collect data for managerial decision making
If done properly, it avoids surprises for the firms and
companies
Is it an ethical issue? Refer to page 41 Exh 2.2
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ENVIRONMENTAL FORECASTING
Definition
Based on Scanning, Monitoring and CI, the process
involves the development of plausible projections
about the direction, scope, speed, and intensity of
environmental changes.
Purpose
To predict change
It answers the questions:
How long would it take to for a new technology to reach the
market place ?
Will the present social concern about an issue result in new
legislation?
Are current lifestyles trends likely to continue?
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SCENARIO PLANNING
Definition: A military borrowed concept:
As a result of environmental scanning, monitoring and
competitive intelligence, plan a range of scenarios
An in-depth analysis based on range of disciplines, interests,
tangible and intangible impacts and effects emerging out of
various conditions of economic, local and international laws and
changing geo-political and politico-military situations
Purpose
Not to miss out any factor
To develop range of options (Opportunities)
SCENARIO PLANNING AT SHELL OIL COMPANY
Process involves following steps:
Extensive interviews through open ended questionnaires
Analyzing of interviews and making agenda points
Synthesizing agenda points
Holding series of workshops and deliberating on agenda points
and formulating Scenarios that may occur in 10 -15 years time
Testing of Strategic Options (Policy Options/ Strategy) to
ascertain robustness of each scenario

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Specially formed teams may do this job on continuous basis
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2nd Step THE GENERAL ENVIRONMENT
Definition
It is composed of 6 factors that can have dramatic
affects on the firms adopted strategy.
It includes
1. Demographic Segmentation
2. Socio-cultural aspect of life
3. Politico / Legal Environment
4. Technological Innovations
5. Economic Conditions
6. Global Environment
Discuss Exh 2.3 page 46 and Exh 2.4 page 54
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3rd Step THE COMPETITIVE ENVIRONMENT
Definition. Termed as Task or Industry environment, it includes
factors that have direct relationship with the industry or the firm.
However, it may not generate as much strategic advantage as the
Value net analysis, (S-19)
They are Porters Five Forces:
1. Threat of new entrants (Competitors)
2. Bargaining powers of buyers
3. Rivalry among existing firms
4. Bargaining powers of suppliers
5. Threat of introduction of substitute products or services
Porters Five Forces
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Industry
Competitors
Rivalry among
Existing Firms
Potential
Entrants
Buyers
Substitutes
Suppliers
Threat of new
Entrants
Bargaining powers
of buyers
Threat of
substitute
products or
services
Bargaining powers
of Suppliers
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THREAT OF NEW ENTRANTS (COMPETITORS)

The Measures that reduce threat of new
entrants:
Economies of Scale
Product Differentiations
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Proprietary product
Favorable access to raw materials
Government subsidies
Favorable government policies
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BARGAINING POWERS OF BUYERS

Purchasing large volumes
Products Standard or undifferentiated
Few switching costs
Earns low profits
Buyers pose credible threat of backward
integration
Product v/s quality unimportant

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RIVALRY AMONG EXISTING FIRMS

Numerous or equally balanced competitors
Slow industry growth
High fixed or storage costs
Lack of differentiation or switching costs
Capacity augmented in large increments
economies of scale
High Exit Barriers economic, strategic and emotional
factors that keep firms competing though they may be earning low or
negative returns on their investments
INDUSTRY ANALYSIS- FEW caveats
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Value Net
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Company
Customers
Complements
(Nintendo)
suppliers
Substitutes
Transactions
Interactions
Transactions
Interactions
Bargaining Power of Suppliers
Threat to raise prices or reduce quality of purchased goods and
services is omnipotent. The profitability can always be squeezed.
The powerful groups can always assert in the following manner:
Dominated by few companies
Not obliged to contend with substitute products for sale to industry
Industry is not an important customer of the supplier group
Suppliers product is an important input to the buyers business
Products are differentiated or switching costs have been built up
Threat of forward integration is persistent

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Threat of introduction of substitute products or
services

Substitutes limit the profitability of industry by placing a
ceiling on the prices (price war)
More attractive the price/performance ratio ---- tighter the
lid on profitability of industry
Travel by executives v/s teleconferencing is one
example causing losses to airline, hotelling and
automobile industry
Discussion forums Twitter, Bloggers etc
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STRATEGIC GROUPS WITHIN INDUSTRY
No two firms are totally different
No two firms are exactly the same
What value is the strategic group concept?
Strategic groupings help a firm identify barriers to mobility that
protects a group by other groups
It helps a firm identify groups whose competitive position may be
marginal.
It helps chart future directions of firms strategies.
Strategic groupings is helpful in thinking through implications of
each industry trend for the strategic group as a whole
World Automobile Industry
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Toyota
Ford,
GM,
Honda,
Nissan
BMW,
Mercedes
Ferrari,
Lexus
Hyundai,
Kia,
Suzuki
High
Price
Low
High Breadth of product Line
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Thank you
Quiz-1 ----- next week
Assignment -1
Application questions page 65. submit by
17 Sep 14
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