1. M A R C U S

2. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-2 2 EXTERNAL ANALYSIS

3. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-3 Chapter Objectives  Understand how to analyze the external environment of the firm.  Being aware that the external environment consists of three elements – the immediate industry environment, the larger macroenvironment, and the environment of groups with a stake in the firm.  Using these three elements to identify opportunities and threats the firm faces.  Using them to construct scenarios of possible futures and repertoires of responses and other moves that the firm might take in the light of divergent contingencies.

4. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-4 Ex. 2.1 Strategic Thinking: Linking the Firm and the External Environment THE EXTERNAL ENVIRONMENT Industry environment Macro-environment Stakeholders STRATEGY THE INTERNAL ENVIRONMENT

5. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-5 External Environment Industry Environment  The immediate context in which the firm operates Macroenvironment  Consisting of forces such as politics and law, technology, demography, society, the economic climate, and the state of the physical environment Stakeholder Groups  Groups that affect and are affected by the firm’s activities

6. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-6 Critical Questions in Developing a Strategy  Is the game good?  What is the company’s position in the game? Michael Porter

7. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-7 Ex. 2.2 Porter’s Five Forces Affecting Industry Attractiveness

8. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-8 Main Entry Barriers  Scale economies  Product differentiation  Capital requirements  Learning-and experience-curve effects  Distribution channels  Government policies

9. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-9 Ex. 2.3 Profitability of U.S. Industries, 1985-1995

10. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-10 Ex. 2.4 10 Best and Worst Performing Industries: Stock Market Performance 2002

11. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-11 The Strategist’s Role in Industry Analysis Industry analysis provides critical information and should always be carried out before a company makes a move. The strategist must examine the structure of an industry and understand the five forces. Each industry is likely to be somewhat different. In each industry, some of the five forces are likely to be more significant than others. For the strategist, it is important to figure out which are the most important forces and what can be done about them. He or she should give greatest attention to the forces that can be most readily influenced in a way that improves a company’s performance.

12. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-12 Ex. 2.5 From Industry Analysis to Analysis of the Macroenvironment

13. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-13 External Environment - Technology Invention is the creation of an item or process, usually in a laboratory Innovation is the process putting an invention into widespread use

14. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-14 Technological Environment – Factors Affecting a Project’s Feasibility  Probable development, production, and marketing costs  The approximate timing of these costs  Probable future income streams  The time these income streams are likely to occur

15. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-15 Ex. 2.8 Promising Technological Developments (Abridged)  Genetic Engineering  Advanced Computing  Telecommunications  Biomedical Engineering  Material Sciences  Energy

16. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-16 Achieving Eco-Efficiency  Reduce the material intensity of goods and services  Reduce the energy intensity of goods and services  Reduce toxic dispersion  Enhance material recyclability  Maximize sustainable use of renewable resources  Increase material durability  Increase the service intensity of goods and services

17. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-17 Questions to Ask in Assessing the Macroenvironment  Which segment is currently most important and is likely to dominate the choices available to the company now?  What are the emerging trends?  Which segment is likely to be most important in the future and dominate the choices available to a company then?

18. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-18 Scenarios A scenario is essentially a story or plot that describes how a particular end point might be reached under certain conditions. Scenarios play out various “what-if” possibilities.

19. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-19 Ex. 2.9 Eco-Efficiency Strategies (Abridged) COPINGINFORMEDPROACTIVE Possible Internal Drivers: Cost Reduction Health and Safety of Employees Productivity Concerns Possible External Drivers: Reduce Liability Regulations/Legislation Financial Performance Possible Internal Drivers: Product Quality Material/Energy Efficien. Standards Possible External Drivers Activities of Ind/Trade Organizations Customer Demands Product, Corp. & Brand Image Possible Internal Drivers: Employee Morale/Rel. Stimulate Innovation L-T Profitability Possible External Drivers: Supplier Act./Demands Gaining Comp. Adv. Establishing New Mkts. L-T Access to Capital/Fin Changing Soc. Attitudes

20. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-20 Ex. 2.11 Value Net – An Alternative to Five Forces? CUSTOMERS SUPPLIERS COMPETITORS COMPANY COMPLEMENTORS

21. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2-21 Ex. 2.12 Stakeholder Map THE CORPORATION Contributors Inducements Contributors Inducements External Stakeholders Customers Suppliers Competitors Governments Scientific/Technical organizations Local Communities The Media General Public Environmental Advocates Internal Stakeholders Shareholders Board Members Managers Scientists/Engineers Employees/Unions