Chapter

Two

Analyzing the External

Environment of the Firm

TRANSPARENCY-12

Learning
Objectives

After studying this chapter, you should have

a good understanding of:
The importance of developing forecasts of the business environment.
Why environmental scanning, monitoring, and collecting competitive intelligence
are critical inputs to forecasting.
Why scenario planning is a useful technique for firms competing in industries
characterized by unpredictability and change.
The impact of the general environment on a firms 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--vis
forces in the competitive environment.
How trends and events in the general environment and forces in the competitive
environment are interrelated and affect performance.
The concept of strategic groups and their strategy and performance implications.

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Exhibit 2.1

Inputs to Forecasting
Environmental
Scanning

Environmental

Forecasts

Monitoring

Competitive
Intelligence

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TRANSPARENCY-14

Exhibit 2.2

General Environment: Key Trends and

Events
Technological
Genetic engineering

Demographic
Aging population

Rising affluence
Changes in ethnic composition
Geographic distribution of population
Greater disparities in income levels

Sociocultural
More women in the workforce

Increase in temporary workers

Greater concern for fitness
Greater concern for environment
Delays in family formation

Political/Legal

Emergence of Internet technology

Computer Aided Design/Computer-Aided
Manufacturing Systems
Research in man-made and exotic materials
Pollution/Global warming
Miniaturization of computing technologies
Wireless communications

Economic
Interest rates

Unemployment
Consumer price Index
Trends in GDP
Changes in stock market valuations

Global
Increasing Global trade
Currency Exchange Rates
Emergence of the Indian and Chinese Economies
Trade Agreements among regional blocs
(e.g. NAFTA, EC, Asian)
GATT Agreement (leading to decreasing tariffs)

Tort reform

ADA (Americans with Disabilities Act)

Repeal of Glass-Stegall Act in 1999 (now
banks may offer brokerage services)
Deregulation of utility and other industries
Increases in Federally-mandated minimum
wages
Taxation at local, state, federal levels

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Gregory G. Dess and G. T. Lum

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TRANSPARENCY-15

Exhibit 2.3

Impact of General Environmental

Trends on Various Industries

Segment/Trends/Events
Demographic
Aging population
Rising affluence

Sociocultural
More women in the
workforce
Greater concern for
health & fitness
Political/legal
Tort reform
ADA (Americans with
Disabilities Act)
Technological
Genetic engineering
Pollution/global
warming
Economic
Interest Rate Increases
Global
Increasing Global Trade
Emergence of China as
an economic power

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Industry

Positive

Health Care
Baby products
Brokerage services
Fast foods
Upscale pets and supplies

Clothing
Baking Products (staples)
Home exercise equipment
Meat products

Residential construction
Most common grocery products
Shipping
Personal service
Soft drinks
Defense

CHAPTER
2

Negative

Legal Services
Auto Manufacturing
Retail
Manufacturers of elevators, escalators & ramps
Pharmaceutical
Publishing
Engineering Services
Petroleum

Neutral

Gregory G. Dess and G. T. Lum

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TRANSPARENCY-16

Exhibit 2.4

Porters Five Forces

Model of Industry Competition
POTENTIAL
ENTRANTS

Bargaining power
of suppliers

Threat of
new entrants

INDUSTRY
INDUSTRY
COMPETITORS
COMPETITORS

SUPPLIERS

Bargaining power
of buyers
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.

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TRANSPARENCY-17

Exhibit 2.5

What Buyers Have Saved on

Freemarkets Auctions

Item

Buyer

Semiconductors,
Delphi
metal stampings, etc. Automotive
Aluminum

$420
(yearly total)

Commonwealth
Of Pennsylvania

Packaging materials, Owens Corning

etc.
Circuit boards

Expected outlay
(in millions)

Actual outlay
(in millions)
$360

Savings
(%)
14

$2.8

$2.5

$129
(yearly total)

$120

$74

$42

43

United
Technologies

Source: Tully, S. 2000. The B2B tool that really is changing the world. Fortune, March 20: 132-145.

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Exhibit 2.6

The World Automobile Industry:

Strategic Groups

High
Ferrari
Lamborghini
Porsche

Mercedes*
BMW

Price

Hyundai
Kia

High

Low
Low

Toyota
Ford
General
Motors
Chrysler*
Honda
Nissan

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.

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Gregory G. Dess and G. T. Lum

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