Analyzing the External

Environment of the Firm

Chapter Two

McGraw-Hill/Irwin
 Learning Objectives
LO1 Why environmental scanning, environmental
monitoring, and collecting competitive intelligence
are critical inputs to forecasting.
LO2 The impact of the general environment on a firm’s
strategies and performance.
LO3 How forces in the competitive environment can affect
profitability and how a firm can improve its
competitive position by increasing its power vis-à-vis
these forces.
LO4 The concept of strategic groups and their strategy and
performance implications.

2-2
Creating the Environmentally
Aware Organization

2-3
Environmental Scanning & Monitoring

• External Scanning
 Surveillance 监控 of a firm’s external environment:
 Predict environmental changes to come
 Detect changes already under way
 Proactive mode
• Alerts the firm to critical trends before changes
have developed a discernible pattern and before
competitors recognize them

2-4
Environmental Scanning & Monitoring

• External Monitoring
 Track evolution of environmental trends, sequence of
events or streams of activities

2-5
 Competitive Intelligence
• Competitive Intelligence
 Collecting and interpreting data on competitors
 Define and understand a firm’s industry
 Identify rivals’ strengths and weaknesses
 Intelligence gathering (data)
 Interpretation of intelligence data
 Helps a firm avoid surprises

2-6
 Environmental Forecasting
• Environmental forecasting
 Plausible projections about direction, scope,
speed and intensity of environmental change

2-7
 SWOT Analysis
Strengths and
weaknesses: Internal
conditions of the firm

Opportunities and
threats: environmental
conditions external to
the firm

2-8
 The General Environment
Factors external to an industry, usually beyond a
firm’s control

Demographic Technological
Sociocultural Economic
Legal/Political Global

2-9
 Demographic Segment

• Aging population
• Rising or declining affluence
• Changes in ethnic composition
• Geographic distribution of population
• Greater disparities in income levels·

2-10
 Sociocultural Segment

• More women in the workforce

• Dual-income families
• Increase in temporary workers
• Greater concern for healthy diets and physical
fitness
• Greater interest in the environment
• Postponement of having children

2-11
 Political/Legal Segment

• Tort reform
• Americans with Disabilities Act (ADA)
• Repeal of Glass-Steagall Act in 1999
• Deregulation of utility and other industries
• Increases in federally mandated minimum
wages
• Taxation at local, state, federal levels
• Legislation on corporate governance reforms
(Sarbanes-Oxley Act)

2-12
 Technological Segment

• Genetic engineering
• Emergence of Internet technology
• Computer-aided design/computer-aided
manufacturing systems (CAD/CAM)
• Wireless communication
• Nanotechnology
• Artificial intelligence
• Machine learning

2-13
 Economic Segment

• Interest rates High(shrinking)

• Unemployment
• Consumer Price index
• Trends in GDP
• Changes in stock market valuations

2-14
 Global Segment

• Increasing global trade

• Currency exchange rates
• Emergence of the Indian and Chinese
economies
• Trade agreements (NAFTA, EU, ASEAN)
• Creation of WTO (decreasing
tariffs 减少关税 /free trade in services)

2-15
 Profitability
Profitability of
of US
US Industries
Industries
(selected
(selectedindustries
industriesonly)
only)
Median return on equity (%)

HIGH PROFITABILITY LOW PROFITABILITY

Household & Personal Products 26.0 Motor Vehicles & Parts 9.3
Pharmaceuticals 21.0 Insurance Life & Health 9.1
Petroleum 20.1 Forest & Paper Products 7.3
Tobacco 21.6 Food Production 6.5
Food Consumer Products 19.5 Semiconductors & Electronic 6.2
Components
Securities and Investment Banking 18.4 Network & Communications 5.9
Equipment
Beverages 17.2 Telecommunications 5.8
Medical Products & Equipment 17.2 Entertainment 2.7
Scientific & Photographic Equip. 15.6 Airlines (12.6)
Commercial Banks 14.8
Computer Software 14.0
Aerospace & Defense 13.9
 The Competitive/Task/Industry
Environment
Competitive environment factors that pertain
to an industry and affect a firm’s strategies
Competitors (rivals, new entrants,
substitutes), customers, and suppliers

2-17
Porter’s Five Forces Model
of Industry Competition

2-18
 The Threat of New Entrants

• Profits of established firms in the industry

may be eroded by new competitors
• Sources of entry barriers 进入壁垒
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels 分销渠道
 Cost disadvantages independent of scale

2-19
 QUESTION

If you are considering opening a new pizza

restaurant in your community, what would be the
threat of new entrants? How would you evaluate
Porter’s other forces for this industry? Explain.

2-20
 The Bargaining Power of Buyers
• Buyers threaten an industry by:
 Forcing down prices
 Bargaining for higher quality or more services
 Playing competitors against each other

2-21
 The Bargaining 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
 It earns low profits (
 The buyers pose a credible threat of backward
integration 逆向整合
 The industry’s product is unimportant to the
quality of the buyer’s products or services

2-22
The Bargaining Power of Suppliers
• Suppliers can exert power by threatening
to raise prices or reduce the quality of
purchased goods and services

2-23
 The Bargaining 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

2-24
 The Bargaining Power of Suppliers
• A supplier group will be powerful when (cont.)
 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

2-25
 The Threat of Substitute
Products and Services
• Substitutes limit the potential returns of an
industry
 Ceiling on the prices that firms in that
industry can profitably charge
 Price/performance ratio 性价比

2-26
 The Intensity of Rivalry among
Competitors in an Industry
• Price competition
• Advertising battles
• Product introductions
• Increased customer service or warranties

2-27
 The Intensity of Rivalry among
Competitors in an Industry
Interacting factors lead to intense rivalry
• Numerous or equally • Lack of differentiation or
balanced competitors switching costs

• Slow industry growth • Economies of scale

require capacity be
• High fixed or storage augmented in large
costs increments

• High exit barriers

2-28
The Value Net: An addition to Five
Forces Framework

2-29
 Strategic Groups within Industries

• Two unassailable 不容置疑的 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

2-30
 World Automobile Industry: Strategic Groups
High Ferrari
Lamborghini
Porsche

Mercedes
BMW
Toyota
Ford
Price General Motors
Chrysler
Honda
Hyundai Nissan
Kia
Chery
Geely
Tata Motors
Low
Low Breadth of Product Line High
 Impact of General Environmental Trends on Various
Industries
Segment/Trends & Events Industry Positive Neutral Negative

Demographic: Health care x

-aging population Baby products x
Fast food x

Socialcultural: Home exercise equipment x

-greater concern for health & fitness Fast food x

Political/legal: Manufacturers of elevators x

-Americans with Disabilities act (ADA)

Technological: Petroleum x
-pollution/global warming Skin care products x

Economic: Residential construction x

-interest rate increases Most common grocery x
products
Global: shipping x
-increasing global trade
 Five Forces (1)
• Threat of new entrants is high when:
 Economies of scale are ( )
 Product differentiation is ( )
 Capital requirements are ( )
 Switching costs are ( )
 Incumbent’s control of distribution channels is ( )
 Incumbent’s proprietary knowledge is ( )
 Incumbent’s access to raw materials is ( )
 Incumbent’s access to government subsidies is ( )
 Five Forces (2)
• Power of buyers is high when:
 Concentration of buyers relative to suppliers is ( )
 Switching costs are ( )
 Product differentiation of suppliers is ( )
 Threat of backward integration by buyers is ( )
 Extent of buyer’s profits is ( )
 Importance of the supplier’s input to quality of
buyer’s final product is ( )
 Five Forces (3)
• Power of suppliers is high when:
 Concentration relative to buyer industry is ( )
 Availability of substitute products is ( )
 Importance of customer to the supplier is ( )
 Differentiation of the supplier’s products and
services is ( )
 Switching costs of the buyer are ( )
 Threat of forward integration by the supplier
is ( )
 Five Forces (4)
• Threat of substitute products is high when:
 The differentiation of the substitute product is
( )
 Rate of improvement in price-performance
relationship of substitute product is ( )
 Five Forces (5)
• Intensity of competitive rivalry is high when:
 Number of competitors is ( )
 Industry growth rate is ( )
 Fixed costs are ( )
 Storage costs are ( )
 Product differentiation is ( )
 Switching costs are ( )
 Exit barriers are ( )
 Strategic stakes are ( )