STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-1

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Analyzing the External

Environment of the Firm

Chapter 2

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-3Learning Objectives

The importance of developing forecasts Why environmental scanning, monitoring, and collecting competitive

intelligence are critical inputs to forecasting Why scenario planning is a useful technique The impact of the general environment on a firm’s strategies and

performance How forces in the competitive environment can affect profitability How a firm can improve its competitive position by increasing its

power vis-à-vis forces in the competitive environment How trends in the general environment and forces in the competitive

environment can affect performance The concept and implications of strategic groups

After studying this chapter, you should have a good understanding of:

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-4 Inputs to Forecasting

Environmental

Scanning

Environmental

Monitoring

Competitive

Intelligence

Forecasts

Exhibit 2.1

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-5 General Environment: Key Components

DemographicAging population

Changes in ethnic composition

Greater income disparities

SocioculturalMore women in the workforce

Postponement of family formation

Political/LegalTort reform

Americans with Disabilities Act

TechnologicalGenetic engineering

Emergence of Internet technology

CAD/CAM

EconomicInterest rates

Changes in stock market valuations

GlobalCurrency exchange rates

Emergence of the Indian and Chinese economies

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-6 Impact of General Environmental Trends on Various Industries

Segment/Trends/Events Industry Positive Neutral Negative

Demographic Aging population

Health CareBaby products

Exhibit 2.3(adapted)

Sociocultural More women in the workforce

ClothingBaking Products

Political/legal Tort reform

Legal ServicesAuto Manufacturing

Technological Genetic engineering

PharmaceuticalPublishing

Economic Interest Rate Increases

Residential constructionGrocery products

Global Global Trade Shipping

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-7 Porter’s Five Forces Model of Industry Competition

Exhibit 2.4

Reprinted with the permission of The Free Press, a division of Simon & Schuster, Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press.

INDUSTRYCOMPETITORS

Rivalry AmongExisting Firms

INDUSTRYCOMPETITORS

Rivalry AmongExisting Firms

POTENTIALENTRANTS

SUBSTITUTES

BUYERSSUPPLIERS

Threat of substitute products

or services

Bargaining powerof buyers

Threat ofnew entrants

Bargaining powerof suppliers

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-8Rivalry Among Competitors: Influences

• Number of competitors

• Industry growth rate

• Fixed costs, scale issues

• Lack of differentiation

• Low switching costs

• High exit barriers (specialized assets, emotional commitment, restrictions)

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-9 Rivalry among Competitors: Outcomes

• Using price competition and price wars

• Staging advertising battles

• Increasing warranties or services

• Making new product introductions

• Jockeying for strategic position

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-10 Threat of New Entrants: Entry Barriers

• Economies of scale• Differentiation/brand loyalty• Capital requirements• Switching costs• Access to distribution channels• Other cost disadvantages:

– Location– Raw materials– Proprietary technology

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-11Bargaining Power of Suppliers and Buyers: Influences

• Their size• Number• Ability to switch• Availability of substitutes• Criticality of product• Ability to vertically integrate

– Suppliers vertically integrate forward– Buyers vertically integrate backward

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-12 Bargaining Power of Suppliers and Buyers: Outcomes

• Outcomes are a function of the relative bargaining power and dependencies of parties

• Bargaining power is evidenced through– Price– Quality– Service

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-13Threat of Substitute Products

• Places an upper limit on prices

• Consists of products with a similar function– Electronic security/security guards– DSL/Cable modem– Coffee/tea/cola– Fax/overnight delivery of documents

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-14Results of Industry Analysis

To one in the industry ---

• Unattractive industry: intense rivalry, low entry barriers, strong suppliers and buyers, strong product substitutes

• Attractive industry: little rivalry, high entry barriers, weak buyers and suppliers, weak product substitutes

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-15Competitor Analysis

• What are the competitor’s capabilities• What is the competitor currently doing and

what is the competitor capable of doing• What are the competitor’s current and future

objectives• What are the competitor’s beliefs about

himself, us, others, the environment• What are the competitor’s beliefs about the

future

STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

2-16 The World Automobile Industry: Strategic Groups

Exhibit 2.6

* Chrysler and Mercedes (part of DiamlerChrysler) are separated for purposes of illustration. Note: Members of each strategic group are only illustrative – not inclusive.

FerrariLamborghini

Porsche ToyotaFord

GeneralMotors

Chrysler*HondaNissan

Mercedes*BMW

High

HyundaiKia

High

Breadth of Product LineLowLow

Price