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STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

 Chapter 2

Analyzing
the External
Environment
of the Firm

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Case of MOTOROLA

STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

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What went wrong with MOTOROLA?

STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

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To be a successful manager, you

must recognize opportunities & threats
in your firm’s external environment. You
must be aware of what’s going on
outside your company. If you
miscalculate the market, opportunities
will be lost – hardly an enviable position
for you or your firm.

STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

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Exhibit 2.1 Inputs to Forecasting

Environmental
Scanning

Environmental Forecasts
Monitoring

Competitive
Intelligence

STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

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ENVIRONMENTAL SCANNING

Involves surveillance of the firm’s

external environment to predict
environmental changes to come & detect
changes already under way. Successful
scanning alerts the organization to critical
trends & events before the changes have
developed a discernible pattern & before
competitors recognize them. Otherwise, the
firm may be forced into a reactive mode
instead of being proactive.
STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
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ENVIRONMENTAL MONITORING

Tracks the evolution of environmental

trends, sequences of events, or streams
of activities. These are often uncovered
during the environmental scanning
process. They may be trends that the
firm came across by accident or were
brought to its attention from outside the
organization.

STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin

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COMPETITIVE INTELLIGENCE

Help firms define & understand their

industry & identify rivals’ strength &
weaknesses. This includes the
intelligence gathering associated with the
collection of data on competitors &
interpretation of such data for managerial
decision making. CI helps a company
avoid surprises by anticipating
competitors’ moves & decreasing
response time.
STRATEGIC MANAGEMENT  CHAPTER 2 Gregory G. Dess and G. T. Lumpkin
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CI is … CI is NOT…

1. Information that has been 1. Spying implies illegal or

analyzed to the point unethical activities.
where you can make a
decision.

2. A tool to alert management 2. A crystal ball. CI gives

to early recognition of company a good
both threats & approximation of reality,
opportunities. short & long term.

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CI is … CI is NOT…

3. A means to deliver 3. Database search.

reasonable assessments.
CI offers approximations
of the market & replace human beings,
competition. Reasonable
assessments are what
modern entrepreneur
needs & want on a regular
basis.
4. A way of life, a process. It is
a process by which critical
information is available to
those who need it.
STRATEGIC MANAGEMENT  CHAPTER 2
Databases offers just that
– data. It certainly don’t
who make decisions by
examining the data.
4. A job for one smart person.
A CEO may appoint one
person as the CI ringmaster,
but one person cannot do it
all.
Gregory G. Dess and G. T. Lumpkin
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General Environment: Key Components

Demographic Technological
Aging population Genetic engineering
Changes in ethnic composition Emergence of Internet technology
Greater income disparities CAD/CAM

Sociocultural
More women in the workforce
Postponement of family formation
Political/Legal
Tort reform
Americans with Disabilities Act
STRATEGIC MANAGEMENT  CHAPTER 2
Economic
Interest rates
Changes in stock market valuations
Global
Currency exchange rates
Emergence of the Indian and Chinese
economies
Gregory G. Dess and G. T. Lumpkin
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Exhibit 2.3 Impact of General Environmental
(adapted)
Trends on Various Industries
Segment/Trends/Events Industry Positive Neutral Negative

Demographic
Aging population Health Care 
Baby products 
Sociocultural
More women in Clothing 
the workforce Baking Products 
Political/legal
Tort reform Legal Services 
Auto Manufacturing 
Technological
Genetic Pharmaceutical 
engineering Publishing 
Economic
Interest Rate Residential construction 
Increases Grocery products 
Global
GlobalMANAGEMENT
STRATEGIC Trade  Shipping
CHAPTER 2  Gregory G. Dess and G. T. Lumpkin
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Exhibit 2.4
Porter’s Five Forces
Model of Industry Competition
POTENTIAL
ENTRANTS
Threat of
new entrants

Bargaining power INDUSTRY Bargaining power

of suppliers of buyers
COMPETITORS
SUPPLIERS BUYERS
Rivalry Among
Existing Firms

Threat of
substitute products
or services
SUBSTITUTES

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.

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THREAT OF THE NEW ENTRANTS
Refers to the possibility that the profits of established firms
in the industry maybe eroded by new competitors.
There are six major sources of entry barriers:

1. economies of scale
2. product differentiation
3. capital requirements
4. switching cost
5. access to distribution channel
6. Cost disadvantages independent of scale

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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. A buyer group is powerful
under the following condition:

1. It is concentrated or purchases large volumes relative to sellers

2. The product it purchases from the industry are standard or
undifferentiated.
3. The buyer faces few switching costs.
4. It earns low profit
5. The buyer pose a credible threat of backward integration
6. The industry’s product is unimportant to the quality of the
buyer’s products or services.

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THE BARGAINING POWER OF SUPPLIERS
1. Suppliers group is dominated by few companies and is more
concentrated (few firms dominate the industry) than the
industry its sells to.
2. The supplier group is not obliged to contend with substitute
product for sale to the industry.
3. The industry is not an important customer of the supplier
group.
4. The supplier’s product is an important input to the buyer’s
business.
5. The supplier group’s products are differentiated or it has built
up switching costs for the buyer.
6. The supplier group possess a credible threat for forward
integration.

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Threat 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

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Competitor 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