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STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-1
McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Analyzing the External
Environment of the Firm
Chapter 2
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-3Learning Objectives
The importance of developing forecasts Why environmental scanning, monitoring, and collecting competitive
intelligence are critical inputs to forecasting Why scenario planning is a useful technique The impact of the general environment on a firm’s strategies and
performance How forces in the competitive environment can affect profitability How a firm can improve its competitive position by increasing its
power vis-à-vis forces in the competitive environment How trends in the general environment and forces in the competitive
environment can affect performance The concept and implications of strategic groups
After studying this chapter, you should have a good understanding of:
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-4 Inputs to Forecasting
Environmental
Scanning
Environmental
Monitoring
Competitive
Intelligence
Forecasts
Exhibit 2.1
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-5 General Environment: Key Components
DemographicAging population
Changes in ethnic composition
Greater income disparities
SocioculturalMore women in the workforce
Postponement of family formation
Political/LegalTort reform
Americans with Disabilities Act
TechnologicalGenetic engineering
Emergence of Internet technology
CAD/CAM
EconomicInterest rates
Changes in stock market valuations
GlobalCurrency exchange rates
Emergence of the Indian and Chinese economies
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-6 Impact of General Environmental Trends on Various Industries
Segment/Trends/Events Industry Positive Neutral Negative
Demographic Aging population
Health CareBaby products
Exhibit 2.3(adapted)
Sociocultural More women in the workforce
ClothingBaking Products
Political/legal Tort reform
Legal ServicesAuto Manufacturing
Technological Genetic engineering
PharmaceuticalPublishing
Economic Interest Rate Increases
Residential constructionGrocery products
Global Global Trade Shipping
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-7 Porter’s Five Forces Model of Industry Competition
Exhibit 2.4
Reprinted with the permission of The Free Press, a division of Simon & Schuster, Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press.
INDUSTRYCOMPETITORS
Rivalry AmongExisting Firms
INDUSTRYCOMPETITORS
Rivalry AmongExisting Firms
POTENTIALENTRANTS
SUBSTITUTES
BUYERSSUPPLIERS
Threat of substitute products
or services
Bargaining powerof buyers
Threat ofnew entrants
Bargaining powerof suppliers
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-8Rivalry Among Competitors: Influences
• Number of competitors
• Industry growth rate
• Fixed costs, scale issues
• Lack of differentiation
• Low switching costs
• High exit barriers (specialized assets, emotional commitment, restrictions)
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-9 Rivalry among Competitors: Outcomes
• Using price competition and price wars
• Staging advertising battles
• Increasing warranties or services
• Making new product introductions
• Jockeying for strategic position
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-10 Threat of New Entrants: Entry Barriers
• Economies of scale• Differentiation/brand loyalty• Capital requirements• Switching costs• Access to distribution channels• Other cost disadvantages:
– Location– Raw materials– Proprietary technology
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-11Bargaining Power of Suppliers and Buyers: Influences
• Their size• Number• Ability to switch• Availability of substitutes• Criticality of product• Ability to vertically integrate
– Suppliers vertically integrate forward– Buyers vertically integrate backward
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-12 Bargaining Power of Suppliers and Buyers: Outcomes
• Outcomes are a function of the relative bargaining power and dependencies of parties
• Bargaining power is evidenced through– Price– Quality– Service
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-13Threat of Substitute Products
• Places an upper limit on prices
• Consists of products with a similar function– Electronic security/security guards– DSL/Cable modem– Coffee/tea/cola– Fax/overnight delivery of documents
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-14Results of Industry Analysis
To one in the industry ---
• Unattractive industry: intense rivalry, low entry barriers, strong suppliers and buyers, strong product substitutes
• Attractive industry: little rivalry, high entry barriers, weak buyers and suppliers, weak product substitutes
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-15Competitor Analysis
• What are the competitor’s capabilities• What is the competitor currently doing and
what is the competitor capable of doing• What are the competitor’s current and future
objectives• What are the competitor’s beliefs about
himself, us, others, the environment• What are the competitor’s beliefs about the
future
STRATEGIC MANAGEMENT CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
2-16 The World Automobile Industry: Strategic Groups
Exhibit 2.6
* Chrysler and Mercedes (part of DiamlerChrysler) are separated for purposes of illustration. Note: Members of each strategic group are only illustrative – not inclusive.
FerrariLamborghini
Porsche ToyotaFord
GeneralMotors
Chrysler*HondaNissan
Mercedes*BMW
High
HyundaiKia
High
Breadth of Product LineLowLow
Price