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Chapter 2Chapter 2Analyzing the
External
Environment of theFirm
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Topics
The importance of developing forecasts of
the business environment.
Environmental scanning monitoring and
competitive intelligence as critical inputs toforecasting.
!cenario planning as a useful techni"ue in
industries characterized by unpredictabilityand change.
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Topics
#eneral environment $Tas% Environment
Five forces analysis
!trategic groups
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Creating the Environmentally A&are
'rganization
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Environmental !canning
!urveillance of a firm(s
external environment
)redict environmental changes
to come
*etect changes already under
&ay
)roactive mode
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Environmental +onitoring
Trac% evolution of
Environmental trends
!e"uences of events !treams of activities
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Competitive ,ntelligence
*efine and understand afirm(s industry
,dentify rivals( strengths and
&ea%nesses ,ntelligence gathering -data
,nterpretation of intelligence
data
/elps a firm avoid surprises
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0hat Competitive ,ntelligence ,s and ,s
1ot
Competitive Intelligence Is
1. Informationthat has been
analyzed to the point &here
you can ma%e a decision.
2. A toolto alert management toearly recognition of both
threats and opportunities.
3. A means to deliver
reasonable assessments.
4. A way of life, a process.
Competitive Intelligence Is Not
1. Spying. !pying implies illegal
or unethical activities. ,t is a
rare activity.
2. A crystal ball. C, is goodapproximation of reality it
does not predict the future.
3. Database search. *ata by
itself is not good intelligence.
4. A ob for one smart person.
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Environmental Forecasting
)lausible proections about
*irection of environmental change
!cope of environmental change
!peed of environmental change
,ntensity of environmental change
!cenario analysis
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!0'T Analysis
+anagers need to analyze
The general environment
The firm(s industry and competitive environment
!0'T analysis !trengths
0ea%nesses
'pportunities Threats
3asic techni"ue for analyzing firm and industryconditions
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The #eneral Environment
#eneral environmental
trends and events
4ittle ability to predict them
Even less ability to control
them
Can vary across industries
!eneral
"nvironmen
t
DemographicSocioc#lt#ral$olitical%&egal'echnological
"conomic!lobal
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*emographic !egment
Aging population
5ising affluence
Changes in ethnic composition
#eographic distribution of population
#reater disparities in income levels
!eneral
"nvironmen
t
DemographicSocioc#lt#ral$olitical%&egal'echnological
"conomic!lobal
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!ociocultural !egment
+ore &omen in the &or%force
,ncrease in temporary &or%ers
#reater concern for fitness
#reater concern for environment
)ostponement of family formation
!eneral
"nvironmen
t
DemographicSocioc#lt#ral$olitical%&egal'echnological
"conomic!lobal
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)olitical$4egal !egment
Tort reform
Americans &ith *isabilities Act -A*A
5epeal of #lass6!teagall Act in 7888
*eregulation of utility and otherindustries
,ncreases in federally mandatedminimum &ages
Taxation at local state federal levels 4egislation on corporate governance
reforms -!arbanes6'xley Act
!eneral
"nvironmen
t
DemographicSocioc#lt#ral$olitical%&egal'echnological
"conomic!lobal
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Technological !egment
#enetic engineering
Emergence of ,nternet technology
Computer6aided design$computer6aided manufacturing systems-CA*$CA+
5esearch in synthetic and exoticmaterials
)ollution$global &arming
+iniaturization of computingtechnologies
0ireless technology
!eneral
"nvironmen
t
DemographicSocioc#lt#ral$olitical%&egal'echnological
"conomic!lobal
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Economic !egment
,nterest rates
9nemployment
Consumer )rice index
Trends in #*)
Changes in stoc% mar%et valuations
!eneral
"nvironmen
t
DemographicSocioc#lt#ral$olitical%&egal'echnological
"conomic!lobal
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#lobal !egment
,ncreasing global trade
Currency exchange rates
Emergence of the ,ndian and Chinese
economies Trade agreements among regional
blocs -1AFTA E9 A!EA1
Creation of 0T' -decreasing
tariffs$free trade in services
!eneral
"nvironmen
t
DemographicSocioc#lt#ral$olitical%&egal'echnological
"conomic!lobal
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The Competitive Environment
!ometimes called the tas%or industry environment
,ncludes
Competitors -existing andpotential
Customers
!uppliers
)orter(s five6forces model
(ompetitive
"nvironmen
t
(ompetitors(#stomersS#ppliers
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)orter(s Five Forces +odel of ,ndustry
Competition
Threat of
ne& entrants
3argaining
po&er of buyers3argaining po&er
of suppliers
Threat of
!ubstitute products
and services
Adapted from Exhibit 2.2 Porters Five Forces Model of Industry Competition
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The Threat of 1e& Entrants
)rofits of established firms in theindustry may be eroded by ne&competitors
/igh entry barriers lead to lo&threat of ne& entries
Economies of scale
)roduct differentiation
Capital re"uirements
!&itching costs
Access to distribution channels
Cost disadvantages independent of scale
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The 3argaining )o&er of 3uyers
3uyers threaten an industry
Force do&n prices
3argain for higher "uality or more
services
)lay competitors against each
other
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The 3argaining )o&er of 3uyers
A buyer group is po&erful &hen
,t is concentrated or purchaseslarge volumes relative to seller sales
The products it purchases from theindustry are standard or undifferentiated
The buyer faces fe& s&itching costs
,t earns lo& profits
The buyers pose a credible threat of bac%&ardintegration
The industry(s product is unimportant to the "uality ofthe buyer(s products or services
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The 3argaining )o&er of !uppliers
!uppliers can exert po&er by
threatening to raise prices or
reduce the "uality of purchased
goods and services
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The 3argaining )o&er of !uppliers
A supplier group &ill be po&erful
&hen
The supplier(s product is an
important input to the buyer(sbusiness
The supplier group(s products are differentiated or it
has built up s&itching costs for the buyer
The supplier group poses a credible threat offor&ard integration
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The Threat of !ubstitute )roducts and
!ervices
!ubstitutes limit the potential
returns of an industry
Ceiling on the prices that firms
in that industry can profitably charge )rice$performance ratio
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The ,ntensity of 5ivalry among Competitors
in an ,ndustry
:oc%eying for position
)rice competition
Advertising battles
)roduct introductions
,ncreased customer service or &arranties
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The ,ntensity of 5ivalry among Competitors
in an ,ndustry
,nteracting factors lead to
intense rivalry
1umerous or e"ually balanced
competitors !lo& industry gro&th
/igh fixed or storage costs
4ac% of differentiation or s&itching costs
Capacity augmented in large increments
/igh exit barriers
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9sing ,ndustry Analyses; A Fe& Caveats
Five6forces analysis implicitly assumes a
zero6sum game
Five6forces analysis is essentially a static
analysis
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The
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!trategic #roups &ithin ,ndustries
T&o unassailable assumptions in industryanalysis
1o t&o firms are totally different
1o t&o firms are exactly the same !trategic groups
Cluster of firms that share similar strategies 3readth of product and geographic scope
)rice$"uality *egree of vertical integration Type of distribution system
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!trategic #roups &ithin ,ndustries
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The 0orld Automobile ,ndustry; !trategic
#roups
Adapted from Exhibit 2 $ !he %orld Automobile Industry& 'trate(ic )roups
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