ANALYZING THE EXTERNAL

ENVIRONMENT OF THE
FIRM: CREATING
COMPETITIVE ADVANTAGES
CHAPTER 2
Learning Objectives:
1. The importance of developing forecasts of the business
environment.
2. Why environmental scanning, environmental monitoring and
collecting competitive intelligence are critical inputs to
forecasting.
3. Why scenario planning is a useful technique for firms
competing in industries characterized by unpredictability and
change.
4. The impact of the general environment on a firm’s strategies
and performance.
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.
6. How the internet and digitally based capabilities are affecting
the five competitive forces and industry profitability.
7. The concept of strategic groups and their strategic groups and
their strategy and performance implications.
 Creating the Environmentally Aware
Organization
INPUTS OF FORECASTING:

Environmental
Scanning

Environmental
Monitoring Forecasts

Competitive
Intelligence
Environmental Scanning
▪ Surveillance of a firm’s external
environment to predict environmental
changes and detect changes and
detect changes already under way.
▪ This alerts the organization to critical
trends and events before changes
develop 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.
▪ Enables firms to evaluate how
dramatically environmental trends
are changing the competitive
landscape.
Competitive Intelligence
▪ A firm’s activities of collecting and
interpreting data on competitors,
defining and identifying
competitors’ strengths and
weaknesses.
▪ Helps a company avoid surprises
by anticipating competitors’ moves
and decreasing response time.
Basic data collection methodologies
for Market intelligence
1. Surveys - involves a set of questions put together in a concise manner
to gather data from the target market and analyze the same to create
valuable market intelligence. The larger the group of people, the more
reliable are the results. There are various methods in which surveys can
be conducted depending on what information needs to be collected.
2. Online Surveys - These are the best and one of the most economical
methods to get data in a swift manner. Such surveys have been
associated with unreliable data, but with newer tools coming into the
market, this method has become very popular and reliable, to get real-
time data fast.
3. In-Person Surveys - These surveys are one to one interviews which can
be conducted in high traffic locations such as malls to gather required
information. This also allows you to gather customer feedback as you
have the advantage of showcasing a product or comparing products and
gather valuable information.
Basic data collection methodologies
for Market intelligence
4. Telephone Surveys - These surveys are comparatively less expensive
as compared to in-person surveys but are costlier than mail surveys.
Although, a number of companies use telemarketing and hence the
consumer does not respond well due to constant badgering.
5. Mail Surveys - These are one of the cheapest ways to conduct surveys,
especially to a larger audience. Since the advancement in technology,
people have stopped reading paper mails nowadays and hence the
response rates for such a method is only 3-15%.
 Types of Surveys
1. Questionnaires – A questionnaire is a series of questions asked in a
printed or online format to conduct research. They can be used for
qualitative as well as quantitative research and can be used to
gather data from a large set of audience.
2. Polls – Polls are somewhat like surveys, however, in such a method
there is only one question to answer. Since it takes very less time to
answer these, the response rate is extremely high.
3. Forms – Forms are a set of questions asked by a researcher to
collect very specific information required for the task at hand. Such a
method does not include questions that will state opinions or
feedbacks from the respondent.
4. Focus groups – Focus groups are a set of people selected carefully
to represent a target market. Using focus group surveys, a company
can evaluate customer demands and opinions or even take feedback
from the group.
 Types of Surveys
5. Personal Interviews – Interviews are generally an expensive affair
but provide valuable, reliable information. Such a method is used to
understand in-depth about a particular topic or a product.
6. Observation – Sometimes the data gathered through other types will
not give you reliable data or won’t give you insights about the
customer attitudes or buying behavior. In such a case the
observation method provides you with information such as habits of
the customer, buying patterns, customer preferences such as quality
or price, etc.
7. Field trials – Field trials are like conducting experiments in real time.
It involves placing a product in specific stores to understand
customer response to the new product. It can be called a pilot run to
test the product in the market. For example, A chocolate company
wants to test a new product they want to launch.
Environmental Forecasting
▪ The development of plausible
projections about the direction,
scope, speed and intensity of
environmental change.
▪ Its purpose is to predict change.
▪ A danger of forecasting is that
managers may view uncertainty as
black and white and ignore
important gray areas.
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.
▪ Involves the projection of future
possible events. It does not rely on
extrapolation of historical trends.
SWOT Analysis
▪ A framework for analyzing a
company’s internal and external
environments.
▪ SWOT stands for strengths,
weaknesses, opportunities and
threats.
▪ The Strengths and Weaknesses refer
to the internal conditions of the firms.
▪ Opportunities and Threats are
environmental conditions external to
the firm.
The general idea of SWOT analysis
is that a firm’s strategy must:
▪ Build on its strengths
▪ Remedy the weaknesses or
work around them.
▪ Take advantages of the
opportunities presented by the
environment.
▪ Protect the firm from the threats.
The General Environment
Factors external to an
industry and usually beyond a
firm’s control that affect a
firm’s strategy.
 General
Environment: Key
Trends and
Events
 The Demographic Segment
Generic and observable characteristics
of a population, including the levels and
growth of age, density, sex, race,
ethnicity, education, geographic region
and income.
The Demographic Segment
▪ Aging population
▪ Rising affluence
▪ Changes in ethnic composition
▪ Geographic distribution of
population
▪ Greater disparities in income
levels.
The Sociocultural Segment
Influence the values,
beliefs and lifestyles of a
society.
The Sociocultural Segment
▪ More women in the workforce
▪ Increase in temporary workers
▪ Greater concern for fitness
▪ Greater concern for
environment
▪ Postponement of family
formation
The Political/Legal Segment
It is how a society creates
and exercises power, including
rules, laws and taxation
policies.
The Political/Legal Segment
▪ Tort reform
▪ Americans with Disabilities Act (ADA) of
1990
▪ Deregulation of utility and other industries
▪ Increases in federally mandated minimum
wages
▪ Taxation of local, state, federal levels
▪ Legislation on corporate governance
reforms in bookkeeping, stock options,
etc. (Sarbanes –Oxley Act of 2002)
▪ Affordable Care Act (Obamacare)
The Technological Segment
Innovation and state of
knowledge in industrial arts,
engineering, applied science
and pure science and their
interaction with society.
The Technological Segment
▪ Genetic Engineering
▪ Three-dimensional (3D) printing
▪ Computer-aided design or computer-
aided manufacturing system (CAD/CAM)
▪ Research in synthetic and exotic
materials
▪ Pollution/global warming
▪ Miniaturization of computing
technologies
▪ Wireless communications
▪ Nanotechnology
The Economic Segment
Characteristics of the
economy, including national
income and monetary
conditions.
The Economic Segment
▪ Interest rates
▪ Unemployment rates
▪ Consumer price index
▪ Trends in GDP
▪ Changes in stock market
valuations
The Global Segment
Influences form foreign
countries, including foreign market
opportunities, foreign based
competition and expanded capital
markets.
The Global Segment
▪ Increasing global trade
▪ Currency exchange rates
▪ Emergence of Indian and Chinese
economies
▪ Trade agreements among regional
blocs (e.g. NAFTA, EU, ASEAN)
▪ Creation of WTO (leading to decreasing
tariffs/free trade in services)
▪ Increases risks associated with
terrorism
 Crowdsourcing: A
Technology that Affects
Multiple Segments of the
General Environment
Crowdsourcing – practice wherein
the internet is used to tap a broad
range of individuals and groups to
generate ideas and solve
problems.
The Competitive Environment
▪ Consists of many factors that
are particularly relevant to a
firm’s strategy.
▪ These include competitors
(existing or potential),
customers and suppliers.
 Porter’s Five
Forces Model of
Industry
Competition
Porter’s Five Forces analysis is a
framework that helps analyzing the level of
competition within a certain industry. It is
especially useful when starting a new
business or when entering a new industry
sector. According to this framework,
competitiveness does not only come from
competitors. Rather, the state of
competition in an industry depends on five
basic forces: threat of new entrants,
bargaining power of suppliers, bargaining
power of buyers, threat of substitute
products or services, and existing industry
rivalry. The collective strength of these
forces determines the profit potential of an
industry and thus its attractiveness.
 1. The Threats of New Entrants
▪ refers to the possibility that the profits of established firms in
the industry may be eroded by the new competitors.
Economies of Scale
refers to spreading the cost of production over the
number of units produced.
Product Differentiation
creates a barrier to entry by forcing entrants to spend
heavily to overcome existing customers loyalties.
Capital Requirements
the need to invest large financial resources to compete
creates a barrier to entry, especially if the capital is required
for risky or unrecoverable up-front advertising or research and
development
Switching Costs
A barrier to entry is created by the existence of one-time
costs that the buyer faces when switching from one supplier’s
product to service to another.

Access to Distribution Channels

The new entrant’s need to secure distribution for its
product can create a barrier to entry.

Cost Disadvantages Independent of Scale

• Proprietary products
• Favorable access to raw materials
• Government subsidies
• Favorable government policies
2. The Bargaining Power of Buyers

▪ It is concentrated or purchases large volumes

relative to seller sales.
▪ The product 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.
3. The Bargaining Power of Suppliers
Suppliers can exert bargaining power by threatening
to raise prices or reduce the quality of purchased goods and
services.
▪ The supplier group is dominated by a few companies and is
more concentrated than industry it sells to.
▪ The supplier group is not obliged to contend with substitute
products for sales to the industry.
▪ The industry is not an important customer of the supplier
group.
▪ The supplier’s product is an important input to the buyer’s
business.
▪ The products are differentiated, or it has built up switching
costs for the buyer.
▪ Poses a credible threat of forward integration.
4. The threat of Substitute Products
and Services
All firms within an industry compete with
industries producing substitute products and
services. Substitutes limit the potential return of
an industry by placing a ceiling on the prices
that firms in that industry can profitably charge.
5. The intensity of Rivalry among
Competitors in an Industry.
▪Numerous or equally balanced competitors.
▪Slow industry growth.
▪High fixed or storage costs.
▪Lack of differentiation or switching cost.
▪Capacity augmented in large increments.
▪High exit barriers.
How the Internet and Digital Technologies are
Affecting the Five Competitive Forces.
1. The Threats of New Entrants
Increased because digital and internet cased technologies lower
barriers to entry.
2. The Bargaining Power of Buyers
The internet and wireless technologies may increase buyer power
by providing consumers with more information to make buying decisions and
by lowering switching costs.
3. The Bargaining Power of Suppliers
Use the Internet and digital technologies to speed up and streamline
the process of acquiring supplies is already benefiting many sectors of the
economy
4. The threat of Substitute Products and Services
Created new marketplace and a new channel.
5. The intensity of Rivalry among Competitors in an Industry.
Created more tools and more competing rivalry among competitors
is likely to be more intense.