CHAPTER 2 - Analyzing the External Environment of the Firm

Inputs to Forecasting

Environmental scanning

Environmental monitoring FORECASTS

Competitive Intelligence

The Role of Scanning, Monitoring, The following are examples of

Competitive Intelligence, and Forecasting some websites that companies routinely
use for competitive intelligence gathering.
Environmental Scanning: Involves
surveillance of a firm’s external 1. Slideshare. A website for
environment to predict environmental publicly sharing Powerpoint
changes and detect changes already presentations. Marketing teams
underway. This alerts the organization to have embraced the platform and
critical trends and events before changes often post detail - rich
develop discernible pattern and before presentations about their firms
competitors recognize them. and products.
2. Quora. A question-and-answer
Leading firms in an industry can
site popular among industry
also be a key indicator of emerging
insiders who embrace the free
trends.
flow of information about techical
Example: Procter and Gamble questions.
3. Ispionage. A Site that reveals
Environmental Monitoring: tracks the
the ad words that companies are
evolution of environmental trends,
buying, which can often shed light
sequences of events, or streams of
on new campaigns being launced.
activities. Monitoring enables firms to
4. YouTube.Gread for finding
evaluate how dramatically environmental
interviews with executives at
trends are changing the competitive
trade shows.
landscape.

Example: A Johnson & Johnson Environmental Forecasting:

medical products executive Environmental scanning, monitoring, and
competitive intelligence are important
Competitive Intelligence: It helps firms
inputs for analyzing the external
define and understand their industry and
environment. Environmental Forecasting
identify rivals’ strengths and weaknesses.
involves the development of plausible
This includes the intelligence gathering
projections about the direction scope, and
associated with collecting data on
intensity of environment change.
competitors and interpreting such data.
Enhancing Awareness of The External
Examples of competitive analysis
Environment
are evident in daily newspaper and
periodicals.
So how the managers become (weaknesses), opportunities and threats
environmentally aware? Ram Charan, an are environmental conditions external to
adviser to many fortune 500 CEOs, the firm. These could be factors in either
provides some useful insights with his the general the competitive environment.
concept of perceptual acuity. He defines it In the general environment, one might
as the ability to sense what is coming experience developments that are
before the fog is clears. He draws on Ted beneficial for most companies, such as
Turner as an example: Turner saw the improving economic conditions that lower
potential of 24 hour news before anyone borrowing costs, or trend that benefit of
else did. Like Turner, the best CEOs are some companies and harm others.
compulsively turned off the external
The general Idea of SWOT Analysis is that
environment and seem to have a sixth
a firm’s strategy must:
sense that picks up anomalies and detects
early warning signal which may represent  Build on its strengths,
key threats or opportunities.  Remedy the weaknesses or work
around them,
SWOT Analysis
 Take advantage of the
To understand the business environment opportunities presented by the
of a particular firm you need to analyze environment,
both the general environment and the  Protect the firm from the threats.
firm’s industry and competitive
environment.
The General Environment
Generally, firms compete with other firms
in the same industry. An industry is The general environment is composed of
composed of a set of firms that produce factors that can have dramatic strategy.
similar products or services, sell to similar We divide the general environment into
customers and use similar methods of six segments: demographic, socio cultural,
production. Gathering industry political/legal, technological, economic,
information and understanding and global.
competitive dynamics among the
Before addressing each of the six
different companies in your industry is
segments in turn consider Dominic
key to successful strategic management.
Bartons insights in response to a question
One of the most basic techniques for posed to him by an editor of Fortune
analyzing firm and industry conditions. magazine: What are your clients worries
SWOT Analysis. SWOT stands for right now? (Barton is global managing
strengths, weaknesses, opportunities, and director of Mckinsey, the giant consulting
treats. It provides raw materials a basic firm).
listing of conditions both inside and
surrounding your company. The Demographic Segment.

The strength and weaknesses refer to the Are the most easily understand and
internal conditions of the firm where your quantifiable elements of the general
firm excels (strength) and where it may be environment. They are the root of many
lacking relative to competitors changes in society. This helps a company
to create groups exhibiting a similar need ⦁Tort reform
and wants and can be targeted in a much ⦁Americans with Disabilities Act
better way by companies. This also helps (ADA) of 1990
classify a group of people who have ⦁Deregulations of utility and other
similar needs based on various industries
parameters related to demographics ⦁Increases in federally mandated
elements which is minimum wages
⦁Taxation at local, state, federal
 Aging population levels
 Rising affluence ⦁Legislation on corporate
 Changes in ethnic composition governance reforms in
 Geographic distribution of population bookkeeping, stock options, etc.
 Greater disparities in income levels ⦁Affordable Care Act Obamacare

The Sociocultural Segment.

Technological
Sociocultural forces influence the values,
beliefs, and lifestyles of a society. Developments in technology lead to new
Examples include a higher percentage of products and services and improve how
women in the workplace, dual-income they are produced and delivered to the
families, increases in the number of end user. Innovation can create entirely
temporary workers, greater concern for new industries and after the boundaries
healthy diets and physical fitness, a of existing industries. Technological
greater interest in the environment, and developments and trends include genetic
postponement of having children. Such engineering, internet technology,
forces enhance sales of products and computer-aided-manufacturing
services in many industries but depress (CAD0CAM) research in artificial and
sales in others. exotic materials, and on the
downside,pollution and global warning.
⦁More women in the workforce
⦁Increase in temporary workers ⦁Genetic engineering
⦁Greater concern for fitness ⦁Three-dimensional (3D) printing
⦁Greater concern for environment ⦁Computer-aided design/computer-
⦁Postponement of family formation aided manufacturing systems
(CAD/CAM)
Political/legal ⦁Research in synthetic and exotic
materials
Political processes and legislation ⦁Pollution/global warming
influence environment regulations with ⦁Miniaturization of computing
which industries must comply. The legal technologies
segment centers on how the courts ⦁Wireless communications
influence business activity. Examples of ⦁Nanotechnology
important legal factors include ⦁Big Data/Data Analysis
employment laws, health and safety Economic
regulations, discrimination laws, and
antitrust laws
The Economy affects all industries, from ⦁Creation of WTO (leading to
suppliers of raw materials to decreasing tariffs/free trade in services)
manufacturers of finished goods and ⦁Increased risks associated with
service as well us all organizations in the terrorism.
service, wholesale retail government and
nonprofit sectors. Key economic The Competitive Environment
indicators include interest rates,
The competitive environment
unemployment rates, the consumer price
must be considered by managers.
index, the gross domestic product and net
Developments in the competitive
disposable income. Interest rate increases
environment often have a direct impact
have a negative impact on the residential
on the type of competition in an industry,
home construction industry but a
as well as the profitability of a business.
negligible (or neutral) effect on industries
that produce consumer necessities such The competitive environment consists of
as prescription drugs or common grocery many factors that are particularly relevant
items. to firm’s strategy.

⦁Interest rates  competitors (existing or potential)

⦁Unemployment rates  customers, and
⦁Consumer price index  suppliers.
⦁Trends in GDP Gross Domestic
Product A potential competitor may include a
⦁Changes in stock-market valuations supplier considering forward integration
or a firm in a completely new industry
Global introducing a comparable product that
utilizes a more efficient technology.
More firms are expanding their
operations and market reach beyond the Key concepts and analytical techniques
borders of their “home” country. that managers should use to assess their
Globalization provides both opportunities competitive environment
to access larger potential markets and a
First, which we examine Michael Porter’s
broad base of production factors such as
five-forces model and how these forces
raw materials, labor, skilled managers,
may be utilized to explain the profitability
and a broad base of production factors
of an industry.
such as raw materials, labor, skilled
managers and technical professions. Second, we discuss how capabilities of
However, such endeavors also carry many internet technology impact the five
political. Social and economic risks. forces.

⦁Increasing global trade Third, we will address several limits and

⦁Currency exchange rates cautions that manager should be aware of
⦁Emergence of the Indian and while doing the industry analysis.
Chinese economies Finally, we address the notion of strategic
⦁Trade agreements among regional groupings because it is frequently
blocs (e.g., NAFTA, EU, ASEAN) beneficial to organize business based on
strategic commonalities within an
industry. We will see, rivalry among 4. The threat of substitute products and
business within a strategic group is services.
typically more severe than competition
A substitute is another product or
between strategic groups.
service that meets the same underlying
Porter’s Five Forces Model of Industry need the industry’s product meets in a
Competition different way. Customers are more likely
to move to alternative when products on
Michael E. Porter’s “five-forces”
outside of the realm of the common
model has been the most widely utilized
products limits. To find these alternative,
analytic tool for evaluating the
one must search beyond similar products
competitive environment.
with different branding from rivals.
Competitiveness does not only come from
competitors. Rather, the level of 5. The intensity of rivalry among
competition in an industry is determined competitors in an industry.
by five basic forces:
It examines how intense the current
1. The threat of new entrants. competition is in the marketplace, which
is defined by the number of existing
New entrants in an industry bring new
competitors and the capabilities of each
capacity and the desire to gain market
rival. Rivalry is high when there are a lot
share. The ease with which new
of competitors that are roughly equal in
competitors can enter the market if they
size and power, when the industry is
see that you are making good profit.
growing slowly and when consumers can
2. The bargaining power of buyers. easily switch to a competitor offering for a
little cost.
It is described as the market of
output. This force examines the extent to Porter’s five forces is a useful
which customers may put the company technique for determining the forces that
under pressure, which influences the affect the industry competitiveness. It
customers sensitivity to price changes. may also assist you in adjusting your
strategy to your competitive environment
3. The bargaining power of suppliers.
and increasing your potential profit.
It is described as the market of input.
This force examines how much influence
and control a company’s supplier over the
potential to raise prices or degrade the
quality of acquired products or services
and would turn lowering an industry’s
profitability potential. The availability of
substitute supplier and the concentration
of suppliers are the key factors in
determining supplier power. The fewer
there are the more power they have.
Businesses are in a better position when
there is a different supplier.