Discussion Initial Postings: Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s
Discussion Initial Postings: Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding in each assigned textbook chapter.
Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion.
Also, provide a graduate-level response to each of the following questions:
Imagine yourself as the CEO of a large firm in an industry in which you are interested. Please (1) identify major trends in the general environment, (2) analyze their impact on the firm, and (3) identify major sources of information to monitor these trends. (Use Internet and library resources.)
[Your post must be substantive and demonstrate insight gained from the course material. Postings must be in the student’s own words – do not provide quotes!] [Your initial post should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced)
Dess, G., McNamara, G., Eisner, A., & Lee, S. H. (2021). Strategic Management: Creating Competitive Advantages (10th edition). McGraw-Hill Higher Education CHAPTER 2
Analyzing the External Environment of the Firm: Creating Competitive Advantages
Copyright Anatoli Styf/Shutterstock
After reading this chapter, you should have a good understanding of:
2-1 The importance of developing forecasts of the business environment.
2-2 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting.
2-3 Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change.
2-4 The impact of the general environment on a firm’s strategies and performance.
2-5 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.
2-6 The concept of strategic groups and their strategy and performance implications.
The Importance of External Environment
Consider. . .
The best CEOs are always aware of what’s going on outside their company. Their perceptual acuity allows them to sense what’s coming. Detecting early warning signals, keeping pace with changes in the external environment can sustain a competitive advantage.
Recall the struggles of Land’s End in Chapter 1. Perceptual acuity = the ability to sense what is coming before the fog clears.
Enhancing Awareness of the External Environment
Exhibit 2.1 Inputs to Forecasting
So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. Then scenario planning and SWOT analysis can be used to help anticipate major future changes in the external environment, preparing the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment.
Environmental Scanning & Monitoring
Environmental scanning involves surveillance of a firm’s external environment.
Predicts environmental changes to come
Detects changes already under way
Allows firm to be proactive
Environmental monitoring tracks evolution of environmental trends.
Sequences of measurable facts/events
Streams of activities or trends from outside the organization
Environmental scanning = surveillance of a firm’s external environment to predict environmental changes and detect changes already under way. Is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends – what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring = a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Monitor the trends that have the potential to change the competitive landscape – what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process, i.e., Johnson & Johnson tracking percentage of GDP spent on health care, or number of active hospital beds.
Helps firms define & understand their industry
Identifies rivals’ strengths & weaknesses
Collect data on competitors
Interpret intelligence data
Helps firms avoid surprises
Anticipate competitors’ moves
Decrease response time
Potential for unethical behavior while gathering intelligence
Competitive intelligence = a firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses. Be careful – aggressive efforts to gather competitive intelligence may lead to unethical or illegal behaviors. Note: See the Strategy Spotlight on Ethical Guidelines on Competitive Intelligence: United Technologies.
Environmental forecasting predicts change.
Plausible projections about
Direction of environmental change?
Scope of environmental change?
Speed of environmental change?
Intensity of environmental change?
Scenario analysis involves detailed assessments of the ways trends may affect an issue & development of alternative futures based on these assessments.
Environmental forecasting = the development of plausible projections about the direction, scope, speed, and intensity of environmental change. Scenario analysis = an in-depth approach to environmental forecasting that involves experts’ detailed assessments of societal trends, economics, politics. Technology, or other dimensions of the external environment. Asks what would happen if the environment should change dramatically? Addresses the need to consider a wider context than the narrow, traditional markets, laying down guidelines for at least 10 years in the future to anticipate rapid change. See Spotlight 2.2 on PPG Industries’ approach, developing four alternative strategies based on the cost of energy and extent of growth opportunity in emerging markets.
Question (1 of 2)
A danger of forecasting discussed in the text is that
in most cases, the expense of collecting the necessary data exceeds the benefit.
forecasting’s retrospective nature provides little information about the future.
managers may view uncertainty as “black and white” while ignoring important “gray areas.”
it can create legal problems for the firm if regulators discover the company is making forecasts.
Some forecasting issues are much more specific to a particular firm and the industry in which it competes. Consider how important it is for Motel 6 to predict future indicators, such as the number of rooms available vs demand in the budget segment of the industry. If its predictions are low, it will build too many units, creating a surplus of room capacity that would drive down room rates. A danger of forecasting is that managers may view uncertainty as black and white and ignore important gray areas. The problem is that underestimating uncertainty can lead to strategies that neither defend against threats nor take advantage of opportunities.
SWOT analysis is a basic technique for analyzing firm and industry conditions.
Firm or internal conditions = Strengths & Weaknesses
Where the firm excels or where it may be lacking
Environmental or external conditions = Opportunities & Threats
Developments that exist in the general environment
Activities among firms competing for the same customers
Must consider both internal & external factors simultaneously
Once environmental scanning, monitoring, intelligence gathering, and forecasting have been done, the firm must do a more in-depth analysis to see how all this affects its strategy. SWOT analysis = a framework for analyzing a company’s internal and external environment and that stands for strengths, weaknesses, opportunities, and threats. The firm’s strengths come from within, and are where your firm excels; the weaknesses are where your firm is lacking relative to competitors. The opportunities and threats can come from the general environment and/or from the specific industry’s competitive environment. SWOT analysis forces managers to consider both internal & external factors simultaneously, makes firms act proactively, raises awareness about role of strategy. A firm’s strategy must build on its strengths, remedy the weaknesses or work around them, take advantage of the opportunities presented by the environment, and protect the firm from the threats. SWOT’s conceptual simplicity is achieved without sacrificing analytical rigor. (However, see limitations of a SWOT in Chapter 3).
The General Environment
The general environment is composed of factors that are both hard to predict and difficult to control.
General environment = factors external to an industry, and usually beyond a firm’s control, that affect a firm’s strategy. Although the effects of these factors can vary across industries, EVERY industry has to anticipate the affect of each factor on its firm’s long-term strategies. See Exhibit 2.3 for effects of these various trends on certain industries. In addition, there are many reciprocal relationships among the various elements. For instance, the aging of the U.S. population has important implications for the economic segment.
The Demographic Segment
Demographics are easily understandable & quantifiable.
Changes in ethnic composition
Geographic distribution of population
Greater disparities in income levels
Demographic segment of the general environment = genetic and observable characteristics of a population, including the levels and growth of age, density, sex, race, ethnicity, education, geographic region, and income.
The Sociocultural Segment
Sociocultural forces influence the values, beliefs, and lifestyles of a society.
More women in the workforce
Increase in temporary workers
Greater concern for healthy diets & physical fitness (increasing levels of obesity)
Greater concern for the environment
Postponement of marriage & family formation, having children
Sociocultural segment of the general environment = the values, beliefs, and lifestyles of a society. These forces might enhance the sales of products and services in many industries but depress sales in others. For instance, increase of women in the workforce enhances the sale of women’s business attire (see Case: Ascena) but reduces demand for baking products and cooking staples (see Case: Campbell Soup).
The Political/Legal Segment
Political/Legal processes & legislation influence environmental regulations with which industries must comply.
Americans with Disabilities Act (ADA)
Deregulation of utilities & other industries
Increases in minimum wages
Legislation on corporate governance reforms
Affordable Health Care Act, Medicare reimbursements
Political/legal segment of the general environment = how a society creates and exercises power, including rules, laws, and taxation policies. Federal legislation such as Sarbanes-Oxley not only affected how corporations managed their corporate governance processes, but helped create new businesses such as professional accounting services. See Strategy Spotlight 2.2 on how conflict minerals legislation can affect a company’s supply chain. The Affordable Care Act (Obamacare) and changes in how to process Medicare reimbursements will have an effect on health care delivery mechanisms.
The Technological Segment
Technological developments lead to new products & services. They can create new industries & alter existing ones.
Three-dimensional (3D) printing
Computer-aided design/computer-aided manufacturing systems (CAD/CAM)
Research in synthetic & exotic materials
Miniaturization of computing technologies
Big data/data analysis
Technological segment of the general environment = innovation and state of knowledge in industrial arts, engineering, applied sciences, and pure science; and their interaction with society. See, for instance, physiolectics – linking wearable computing devices with data analysis and quantified feedback to improve performance. NOTE: some trends or events can affect multiple segments of the general environment, i.e., data analytics = the process of examining large data sets to uncover hidden patterns, market trends, and customer preferences. Corporations are increasingly collecting and analyzing data on their customers, including data on customer characteristics, purchasing patterns, employee productivity, and physical asset utilization. These efforts, commonly referred to as “Big Data” have the potential to enable firms to better customize their product and service offerings to customers while more efficiently and fully using the resources of the company. See Strategy Spotlight 2.3 for how data analysis can make government more transparent.
The Economic Segment
Economic forces affect all industries.
Consumer Price Index
Trends in GDP & net disposable income
Changes in stock market valuations
Economic segment of the general environment = characteristics of the economy, including national income and monetary conditions. For instance, interest rate increases have a negative impact on the residential home construction industry but a negligible (or neutral) effect on industries that produce consumer necessities such as prescription drugs or common grocery items; likewise when stock market indexes increase, consumers’ discretionary income rises and there is often an increased demand for luxury items such as jewelry and automobiles.
But when stock valuations decrease, demand for these items shrink.
The Global Segment
Global forces offer both opportunities & risks.
Increasing global trade
Currency exchange rates
Emergence of the Indian & Chinese economies
Trade agreements among regional blocs (NAFTA, EU, ASEAN)
Creation of the WTO (leading to decreasing tariffs/free trade in services)
Increased risks associated with terrorism
Global segment of the general environment = influences from foreign countries, including foreign market opportunities, foreign-based competition, and expanded capital markets. Globalization provides both opportunities to access larger potential markets and a broad base of production factors such as raw materials, labor, skilled managers, and technical professionals. (See the Starbucks Case, Heineken Case, Emirates Airline Case, or eBay.) However, such endeavors also carry many political, social, and economic risks. One important trend to track is the rapid rise of the middle class in emerging market countries. Not only does this have implications for consumer growth, but it also increases the need for multinational firms to hire for overseas jobs.
General Environment: Relationships among Elements
Elements of the general environment interact with each other.
Demographic trends have implications for economics.
Greater access to information technology affects both economics and global relationships.
Political/legal trends can have very different effects on different industries.
Digital technology has altered the way business is conducted in nearly every business domain.
Firms must pay attention to factors in the general environment for many reasons. Not only do these elements interact with each other, but also the effects of trends or events in the general environment can vary across industries. See Exhibit 2.3 for how this may play out in different industry sectors. One example of how one technology phenomenon alters the way business is conducted is data analytics = the process of examining large data sets to uncover hidden patterns, market trends, and customer preferences. This activity links technology with globalization, socio-cultural and economic forces, having an effect on nearly every business domain. Companies that are taking the lead in the analytics revolution see it as an important source of competitive differentiation, becoming 26 percent more profitable than their industry peers. See Strategy Spotlight 2.3 for how Open The Books is making government more transparent.
The Competitive Environment
The competitive environment consists of factors in the task or industry environment that are particularly relevant to a firm’s strategy.
Competitors (existing or potential)
Including those considering entry into an entirely new industry
Customers (or buyers)
Including those considering forward integration
In addition to the general environment, within which ALL firms compete, each firm must also pay attention to its competitive environment = factors that pertain to an industry and affect a firm’s strategies. Industry = a group of firms that produce similar goods or services. One interesting concept is forward integration, a form of vertical integration whereby a firm expands activities to include control of the direct distribution of its products, e.g. a farmer sells his/her crops at the local market rather than to a distribution center for eventual sale to a supermarket (This definition is not in the textbook, but comes from http://www.investopedia.com/terms/f/forwardintegration.asp. See more about vertical integration in Chapter 6.)
Porter’s Five Forces Model of Industry Competition
Exhibit 2.4 Porter’s Five Forces Model of Industry Competition
Source: From Michael E. Porter, “The Five Competitive Forces That Shape Strategy,” Special Issue on HBS Centennial.. Harvard Business Review 86, No. 1 (January 2008), 78-93. Reprinted with permission of Michael E. Porter.
Jump to Appendix 1 for long description.
Porter’s five forces model of industry competition = a tool for examining the industry-level competitive environment, especially the ability of firms in that industry to set prices and minimize costs. Includes the threat of new entrants; the bargaining power of buyers; the bargaining power of suppliers; the threat of substitute products and services; the intensity of rivalry among competitors in an industry. Each of these forces affects a firm’s ability to compete in a given market. Together they determine the profit potential for a particular industry.
The Threat of New Entrants
The threat of new entrants – possibility that the profits of established firms in the industry may be eroded by new competitors.
Depends on existing barriers to entry:
Economies of scale
Access to distribution channels
Cost disadvantages independent of scale
Threat of new entrants = the possibility that the profits of established firms in the industry may be eroded by new competitors. Economies of scale = decreases in cost per unit as absolute output per period increases. Forces the new entrant to come in at a large scale and risk strong reaction from existing firms, or come in at a small scale and accept a cost disadvantage. Product differentiation = the degree that a product has strong brand loyalty or customer loyalty. New entrants must spend heavily to overcome existing customer loyalties. Switching cost = one-time costs that a buyer/supplier faces when switching from one supplier/buyer to another. In some industries, large financial resources or access to distribution channels are required in order to set up operations. Other advantages that existing competitors might have include proprietary products; favorable access to raw materials; government subsidies; or favorable government policies. Managers often tend to overestimate barriers of entry in many industries. New entrants can sometimes find innovative ways to enter industries by cleverly mixing and matching existing technologies so state-of-the-art technology does not have to be developed internally.
Question (2 of 2)
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.
Answer: The threat of new entrants in the food industry is very high, which is why a majority of new food restaurants fail within their first year. The minimum requirements to open a pizza shop are an oven and a small amount of capital. The potential number of competitors is unlimited due to these factors. Based on other forces also, this industry is not very attractive: for instance there is no industry growth, and a lack of differentiation among competitor’s products, so competition is based on cost or service, and the industry has low profit margins as it is.
The Bargaining Power of Buyers
Buyers have bargaining power.
Buyers can force down prices, bargain for higher quality or more services, or play competitors against each other.
Buyer groups are powerful.
Purchasing standard products are in large volumes.
Profits are low & switching costs are few.
Backward integration is possible.
Buyer’s product quality is not affected by industry product.
Bargaining power of buyers = the threat that buyers may force down prices, bargain for higher quality or more services, and play competitors against each other. These actions will erode overall industry profitability, forcing all firms to pay attention. Firms therefore need to know who the important buyers are: is there a single buyer, or ones who purchase in high volume? These buyers will have the ability to dictate terms. In addition, if the products needed by buyers are standard or undifferentiated, such as commodity grain products, buyers can play one company against another. Also, if the buyer’s profits are low and it won’t cost much to switch suppliers, this is an incentive for buyers to bargain. Backward integration is always possible – a form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it will result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins and make the firm more competitive. An example of backward integration would be if a bakery business bought a wheat processor and a wheat farm. (Definition is not in the textbook. Comes from http://www.investopedia.com/terms/b/backwardintegration.asp.) NOTE there’s a difference between customers/buyers, and CONSUMERS. Consumers rarely have any “buyer power” – can you negotiate the price of a movie ticket? Yet the chain of “buyers” in the movie industry is multi-layered – from production studio to distributor to theater owner, with each buyer group having different degrees of power.
The Bargaining Power of Suppliers
Suppliers can exert bargaining power by threatening to raise prices or reduce the quality of purchased goods and services.
Supplier groups are powerful.
Only a few firms dominate the industry.
There is no competition from substitute products.
Suppliers sell to several industries.
Buyer quality is affected by industry product.
Products are differentiated & have switching costs.
Forward integration is possible.
Firms need to pay attention to their suppliers because powerful suppliers can squeeze the profitability of firms so far that they can’t recover the costs of raw material inputs. Bargaining power of suppliers = the threat that suppliers may raise prices or reduce the quality of purchased goods and services. Forward integration = a form of vertical integration whereby a firm expands activities to include control of the direct distribution of its products, e.g., a farmer sells his/her crops at the local market rather than to a distribution center for eventual sale to a supermarket, or the example of Delta Pride Catfish cutting out the large agribusiness processing plants by building their own. (This definition is not in the textbook, but comes from http://www.investopedia.com/terms/f/forwardintegration.asp.)
The Threat of Substitute Products & Services
Substitute products & services limit the potential returns of an industry.
Substitutes come from another industry.
Substitutes can perform the same function as the industry’s offerings.
Substitutes place a ceiling on prices that firms in an industry can profitably charge.
The more attractive the price/performance ratio, the more the substitute erodes industry profits.
Threat of substitute products and services = the threat of limiting the potential returns of an industry by placing a ceiling on the prices that firms in that industry can profitably charge without losing too many customers to substitute products. Substitute products and services = products and services outside the industry that serve the same customer needs as the industry’s products and services. Identifying substitute products might involve searching for other products or services that can perform the same function as the industry’s offerings. This may lead a manager into businesses seemingly far removed from the industry. Example is ice cream – an expensive summer time treat. Frozen fruit smoothies are a substitute. See Case Dippin’ Dots vs. Case Jamba Juice.
The Intensity of Rivalry among Competitors in an Industry
Rivalry tactics include price competition, advertising battles, new product introductions, increased customer service or warranties.
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
Intensity of rivalry among competitors in an industry = the threat that customers will switch their business to competitors within the industry. Rivalry between firms is often based solely on price, but it can involve other factors. Rivalry occurs when competitors sense the pressure or act on an opportunity to improve their position. See the example of the intense competition between ride-sharing companies Uber Technologies and Lyft. Rivalry also differs across industries. See Case Global Casino Industry for cutthroat tactics.
How the Internet and Digital Technologies Affect Competitive Forces
Competitive Forces Benefits to Industry Disadvantages to Industry
Threat of New Entrants Lower barriers to entry increases number of new entrants. Many Internet-based capabilities can be easily imitated.
Bargaining Power of Buyers Reduces the power of buyer intermediaries in many distribution channels. Switching costs decrease. Information availability online empowers and users.
Bargaining Power of Suppliers Online procurement methods can increase bargaining power over suppliers. The Internet gives suppliers access to more customers and makes it easier to reach end users. Online procurement practices deter competition and reduce differentiating features.
Threat of Substitutes Internet-based increases in overall efficiency can expand industry sales. Internet-based capabilities create more opportunities for substitution.
Intensity of Rivalry Since location is less important, the number of competitors increases. Differences among competitors are harder to perceive online. Rivalry tends to focus on price and differentiating features are minimized.
Sources: Bodily, S., & Venkataraman, S. 2004. Not walls, windows: Capturing value in the digital age. Journal of Business Strategy. 25(3): 15-25; Lumpkin, G.T. Droege, S.B., & Dess, G.G. 2002. E-commerce strategies: Achieving sustainable competitive advantage and avoiding pitfalls. Organizational Dynamics, 30 (Spring): 1-17.
The Internet and other digital technologies have fundamentally changed the ways businesses interact with each other and with consumers. These changes have affected industry forces in ways that have created many new strategic challenges.
Using Industry Analysis: A Few Caveats
Managers must not always avoid low profit industries; these can still yield high returns for players who pursue sound strategies.
Five forces analysis implicitly assumes a zero-sum game. Yet mutually beneficial relationships can still be established with buyers & suppliers.
Five forces analysis is essentially a static analysis, yet external forces can still change the structure of all industries.
See the value net extension of five forces analysis.
Vertical dimension = suppliers & customers
Horizontal dimension = substitutes & complements
Industry analysis helps a firm evaluate the profit potential of an industry and consider various ways to strengthen its competitive position. However, strategists must be wary – it’s not always simple. Zero-sum game = a situation in which multiple players interact, and winners win only by taking from other players. Complements = products or services that have an impact on the value of a firm’s products or services. For instance, Apple’s iTunes was software that made the iPod hardware such a popular product. See Case Apple.
The Value Net
Exhibit 2.6 The Value Net
Source: Adapted from “The Right Game: Use Game Theory Shape Strategy,” by A. Brandenburger and B.J. Nalebuff, July-August 1995 Harvard Business Review.
Jump to Appendix 2 for long description.
The value net is based on game-theory, and represents all the players in the game, analyzing how their interactions affect a firm’s ability to generate and appropriate value. The …