5 Forces Mod

2-1
Chapter two
Analyzing the External

Environment of the Firm
Part 1:
strategic analysis
McGraw-Hill/Irwin
Strategic Management, 3/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
3
Learning Objectives
 After reading this chapter, you should
have a good understanding of:
 The importance of developing forecasts of
the business environment.
 Why environmental scanning, environmental
monitoring, and collecting competitive
intelligence are critical inputs to forecasting.
 Why scenario planning is a useful technique
for firms competing in industries
characterized by unpredictability and
change.
McGraw-Hill/Irwin
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Learning Objectives
 The impact of the general environment on
a firm’s strategies and performance.
 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.
McGraw-Hill/Irwin
5
Learning Objectives
 How trends and events in the general
environment and forces in the competitive
environment are interrelated and affect
performance.
 The concept of strategic groups and their
strategy and performance implications.
McGraw-Hill/Irwin
6
Creating the Environmentally Aware
Organization
Adapted from Exhibit 2.1 Inputs to Forecasting

McGraw-Hill/Irwin
7
Environmental Scanning
Environmental
scanning Surveillance of a firm’s external
environment
 Predict environmental changes to
come
 Detect changes already under way
 Proactive mode
McGraw-Hill/Irwin
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Environmental Monitoring
Environmental Track evolution of
monitoring
 Environmental trends
 Sequences of events
 Streams of activities
McGraw-Hill/Irwin
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Competitive Intelligence
Competitive Define and understand a firm’s
intelligence
industry
Identify rivals’ strengths and
weaknesses
Intelligence gathering (data)
Interpretation of intelligence data
Helps a firm avoid surprises
McGraw-Hill/Irwin
10
What Competitive Intelligence Is and Is Not

Competitive Competitive Intelligence Is
Intelligence Is … Not …
1. Information that has 1. Spying. Spying implies illegal or
been analyzed to the unethical activities. It is a rare
point where you can activity.
make a decision. 2. A crystal ball. Competitive
2. A tool to alert Intelligence is good approximation
management to early of reality; it does not predict the
recognition of both future.
threats and opportunities. 3. Database search. Data by itself is
3. A means to deliver not good intelligence.
reasonable assessments. 4. A job for one smart person.
4. A way of life, a process.
Adapted from Exhibit 2.2 What Competitive Intelligence Is and Is Not
McGraw-Hill/Irwin
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Environmental Forecasting
Forecasts
Plausible projections about
Direction of environmental change
Scope of environmental change
Speed of environmental change
Intensity of environmental change
Scenario analysis
McGraw-Hill/Irwin
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SWOT Analysis
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
McGraw-Hill/Irwin
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The General Environment
General
Environmen
General environmental trends
t and events
Little ability to predict them
Even less ability to control them
Can vary across industries
Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
McGraw-Hill/Irwin
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Demographic Segment
Aging population
General Rising affluence
Environmen Changes in ethnic
t
composition
Geographic distribution of
population
Demographic Greater disparities in income
Sociocultural levels
Political/Legal
Technological
Economic
McGraw-Hill/Irwin
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Sociocultural Segment
More women in the
General workforce
Environmen Increase in temporary
t
workers
Greater concern for fitness
Greater concern for
Demographic environment
Sociocultural Postponement of family
Political/Legal
Technological formation
Economic
Global
McGraw-Hill/Irwin
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Political/Legal Segment
Tort reform
General Americans with Disabilities Act (ADA)
Environmen
t
Repeal of Glass-Steagall Act in 1999
Deregulation of utility and other
industries
Increases in federally mandated
minimum wages
Demographic
Taxation at local, state, federal levels
Sociocultural
Legislation on corporate governance
Political/Legal
Technological reforms (Sarbanes-Oxley Act)
Economic
Global
McGraw-Hill/Irwin
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Technological Segment
Genetic engineering
General Emergence of Internet technology
Environmen Computer-aided design/computer-aided
t
manufacturing systems (CAD/CAM)
Research in synthetic and exotic
materials
Pollution/global warming
Demographic Miniaturization of computing
Sociocultural
technologies
Political/Legal
Wireless communication
Technological
Nanotechnology
Economic
Global
McGraw-Hill/Irwin
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Economic Segment
General Interest rates

Environmen
t Unemployment
Consumer Price index
Trends in GDP
Changes in stock
Demographic
market valuations
Sociocultural
Political/Legal
Technological
Economic
Global
McGraw-Hill/Irwin
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Global Segment
Increasing global trade
Currency exchange
General rates
Environmen Emergence of the
t
Indian and Chinese
economies
Trade agreements
Demographic among regional blocs
Sociocultural (NAFTA, EU, ASEAN)
Political/Legal Creation of WTO
Technological
(decreasing tariffs/free
Economic
Global trade in services)
McGraw-Hill/Irwin
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The Competitive Environment
Sometimes called the task or

Competitive
Environmen industry environment
t Includes
Competitors (existing and
potential)
Customers
Suppliers
Competitors Porter’s Five Forces model
Customers
Suppliers
McGraw-Hill/Irwin
21 Porter’s Five Forces Model of Industry
Competition
Adapted from Exhibit 2.6 Porter’s Five Forces

Model of Industry Competition
McGraw-Hill/Irwin
22
The Threat of New Entrants

 Profits of established firms in the
industry may be eroded by new
competitors
 High entry barriers lead to low
threat of new entries
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of
scale
McGraw-Hill/Irwin
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The Bargaining Power of Buyers

Buyers threaten an
industry
Force down prices
Bargain for higher
quality or more
services
Play competitors
against each other
McGraw-Hill/Irwin
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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
The industry’s product is unimportant
to the quality of the buyer’s products or
services
McGraw-Hill/Irwin
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The Bargaining Power of Suppliers

Suppliers can
exert power by
threatening to
raise prices or
reduce the quality
of purchased
goods and
services
McGraw-Hill/Irwin
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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
McGraw-Hill/Irwin
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 A supplier group will be powerful
when
 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
McGraw-Hill/Irwin
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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
McGraw-Hill/Irwin
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The Intensity of Rivalry among
Competitors in an Industry
 Jockeying for position

 Price competition
 Advertising battles
 Product introductions
 Increased customer
service or warranties
McGraw-Hill/Irwin
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The Intensity of Rivalry among
Competitors in an Industry
Interacting factors lead to
intense rivalry
Numerous or equally balanced
competitors
Slow industry growth
High fixed or shortage costs
Lack of differentiation or
switching costs
Capacity augmented in large
increments
High exit barriers
McGraw-Hill/Irwin
31
Using Industry Analyses: A Few Caveats
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)
McGraw-Hill/Irwin
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The Value Net
Adapted from Exhibit 2.7 The Value Net
McGraw-Hill/Irwin
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Evolutionary Trajectories of Industry Change
Dess Exhibit 2.8.CLP
Adapted from Exhibit 2.8 Four Evolutionary Trajectories of Industry Change
McGraw-Hill/Irwin
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Strategic Groups within Industries

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
McGraw-Hill/Irwin
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Strategic Groups within Industries

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
McGraw-Hill/Irwin
36
The World Automobile Industry:
Strategic Groups
McGraw-Hill/Irwin Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups

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2-1

Analyzing the External

Adapted from Exhibit 2.1 Inputs to Forecasting

What Competitive Intelligence Is and Is Not

The General Environment

General Interest rates

Sometimes called the task or

Adapted from Exhibit 2.6 Porter’s Five Forces

The Threat of New Entrants

The Bargaining Power of Buyers

The Bargaining Power of Buyers

A buyer group is powerful when

The Bargaining Power of Suppliers

The Bargaining Power of Suppliers

The Bargaining Power of Suppliers

 Substitutes limit the

 Jockeying for position

Using Industry Analyses: A Few Caveats

Five Forces analysis implicitly

The Value Net

Adapted from Exhibit 2.7 The Value Net

Evolutionary Trajectories of Industry Change

Dess Exhibit 2.8.CLP

Adapted from Exhibit 2.8 Four Evolutionary Trajectories of Industry Change

Strategic Groups within Industries

Strategic Groups within Industries

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