2-1

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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Learning After studying this chapter, you should have
Objectives a good understanding of:
 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

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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General Environment: Key Components
Demographic
Aging population
Changes in ethnic composition
Greater income disparities
Sociocultural
More women in the workforce
Postponement of family formation
Political/Legal
Tort reform
Americans with Disabilities Act
STRATEGIC MANAGEMENT  CHAPTER 2
Technological
Genetic engineering
Emergence of Internet technology
CAD/CAM
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  CHAPTER 2
Shipping  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 INDUSTRY of buyers
COMPETITORS
COMPETITORS
SUPPLIERS BUYERS

Rivalry
RivalryAmong
Among
Existing
ExistingFirms
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.

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

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Rivalry 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

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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

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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

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Bargaining 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

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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

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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

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

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Results 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

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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

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Exhibit 2.6 The World Automobile Industry:
Strategic Groups
High
Ferrari
Lamborghini
Mercedes*
Porsche
BMW Toyota
Ford
General
Price
Motors
Chrysler*
Honda
Nissan
Hyundai
Kia
High
Low
Low Breadth of Product Line

* Chrysler and Mercedes (part of DiamlerChrysler) are separated for purposes of illustration. Note: Members of each strategic group are only illustrative – not inclusive.

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