1. Analyzing the External Environment of the Firm Chapter Two McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Inputs to Forecasting 2-2 Exhibit 2.1

3. Environmental Scanning & Monitoring  External Scanning  surveillance of a firm’s external environment to predict environmental changes and detect changes already under way.  Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them 2-3

4. Environmental Scanning & Monitoring  External Monitoring  A firm’s analysis of the external environment that tracks evolution of environmental trends, sequences of events, or streams of activities 2-4

5. How to Spot Hot Trends  Listen  Pay attention  Follow trends online  Go old school 2-5

6. Competitive 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. 2-6

7. Environmental Forecasting  Environmental forecasting  The development of plausible projections about direction, scope, speed and intensity of environmental change 2-7

8. Environmental Forecasting  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 2-8

9. SWOT Analysis Firm’s strategy must:  Build on its strengths  Remedy the weaknesses or work around them  Take advantage of the opportunities presented by the environment  Protect the firm from threats 2-9

10. SWOT Analysis  SWOT analysis  A framework for analyzing a company’s internal and external environment and that stands for strengths, weaknesses, opportunities, and threats. 2-10

11. Example: Harley-Davidson  Strengths  Strong & adaptable brand image  Weaknesses  Limited ability to develop new non-traditional products  Opportunities  Growing leisure interest in motorcycles worldwide  Threats  Differing foreign policies governing motorcycles 2-11

12. The General Environment  Demographic  Sociocultural  Legal/Political  Technological  Economic  Global 2-12 Factors external to an industry, usually beyond a firm’s control

13. Demographic Segment  Aging population  Rising or declining affluence  Changes in ethnic composition  Geographic distribution of population  Greater disparities in income levels 2-13

14. Sociocultural Segment  More women in the workforce  Dual-income families  Increase in temporary workers  Greater concern for healthy diets and physical fitness  Greater interest in the environment  Postponement of having children 2-14

15. Political/Legal Segment  Tort reform  Americans with Disabilities Act (ADA)  Repeal of Glass-Steagall Act in 1999  Deregulation of utility and other industries  Increases in federally mandated minimum wages  Taxation at local, state, federal levels  Legislation on corporate governance reforms (Sarbanes-Oxley Act) 2-15

16. Technological Segment  Genetic engineering  Emergence of Internet technology  Computer-aided design/computer-aided manufacturing systems (CAD/CAM)  Wireless communication  Nanotechnology 2-16

17. Economic Segment  Interest rates  Unemployment  Consumer Price index  Trends in GDP  Changes in stock market valuations 2-17

18. Global Segment  Increasing global trade  Currency exchange rates  Emergence of the Indian and Chinese economies  Trade agreements (NAFTA, EU, ASEAN)  Creation of WTO (decreasing tariffs/free trade in services) 2-18

19. The Competitive Environment  Competitive environment  factors that pertain to an industry and affect a firm’s strategies  Competitors, customers, and suppliers 2-19

20. Porter’s Five Forces Model of Industry Competition 2-20 Exhibit 2.7

21. The Threat of New Entrants  Profits of established firms in the industry may be eroded by new competitors  Sources of entry barriers  Economies of scale  Product differentiation  Capital requirements  Switching costs  Access to distribution channels  Cost disadvantages independent of scale 2-21

22. QUESTION 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. 2-22

23. The Bargaining Power of Buyers  Buyers threaten an industry by:  Forcing down prices  Bargaining for higher quality or more services  Playing competitors against each other 2-23

24. 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 2-24

25. The Bargaining Power of Suppliers  Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services 2-25

26. The Bargaining Power of Suppliers  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 2-26

27. 2-27 The Bargaining Power of Suppliers (cont.)  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

28. The Threat of Substitute Products and Services  The 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. 2-28

29. The Intensity of Rivalry among Competitors in an Industry  Price competition  Advertising battles  Product introductions  Increased customer service or warranties 2-29

30. The Intensity of Rivalry among Competitors in an Industry  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 2-30 Interacting factors lead to intense rivalry