Analyzing the
External
Environment
of the Firm:
Creating
Competitive
Advantages
chapter 2
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
.
Creating the Environmentally
Aware Organization
2-2
Exhibit 2.1 Inputs to Forecasting
Environmental Scanning &
Monitoring
2-3

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
 Hard
trends – measurable facts/events
 Soft trends – estimated, probable events
Competitive Intelligence
2-4

Competitive intelligence
 Helps
firms define & understand their industry
 Identify rivals’ strengths & weaknesses
 Collect
data on competitors
 Interpret intelligence data
 Helps
firms avoid surprises
 Anticipate
competitors’ moves
 Decrease response time
 Beware
of the potential for unethical behavior
while gathering intelligence
Environmental Forecasting
2-5

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
SWOT Analysis
2-6

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
The General Environment
2-7
The general environment is composed of
factors that are both hard to predict and
difficult to control:
Demographic
 Sociocultural
 Political/Legal

Technological
 Economic
 Global

The Competitive Environment
2-8

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)
 Suppliers
 Including
those considering forward integration
Porter’s Five-Forces Model of
Industry Competition
2-9
Exhibit 2.4 Porter’s Five-Forces Model of Industry Competition
Source: Adapted and reprinted with permission of The Free Press, a division of Simon & Schuster Adult Publishing
Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter.
Copyright © 1980, 1998 by The Free Press. All rights reserved.
How the Internet and Digital
Technologies Affect Competitive Forces
2-10
Using Industry Analysis: A Few
Caveats
2-11



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 zerosum 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
Vertical dimension = suppliers & customers
 Horizontal dimension = substitutes & complements

The Value Net
2-12
Exhibit 2.6 The Value Net
Source: reprinted by permission of Harvard Business Review. Exhibit from “The Right Game: Use Game Theory to
Shape Strategy,” by A. Brandenburger and B.J. Nalebuff, July-August 1995. Copyright © 1995 by the Harvard
Business School Publishing Corporation. All rights reserved.
Strategic Groups Within Industries
2-13

Two unassailable assumptions in industry
analysis:
 No
two firms are totally different
 No two firms are exactly the same

Strategic groups – clusters of firms that
share similar strategies:
 Breadth
of product & geographic scope
 Price/quality
 Degree of vertical integration
 Type of distribution
Strategic Groups Within Industries
2-14
Exhibit 2.7 The World Automobile Industry: Strategic Groups
Note: Members of each strategic group are not exhaustive, only illustrative.
Strategic Groups Within Industries
2-15

Strategic groups as an analytical tool
 Helps
identify barriers to mobility that
protect a group from attacks by other groups
 Helps identify groups whose competitive
position may be marginal or tenuous
 Helps chart the future direction of firms’
strategies
 Helps to think through the implications of
each industry trend for the strategic group as
a whole