McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 4
Analyzing the External
Environment
The General Environment
 Segments of the general environment include:
Demographic
Sociocultural
Legal/Political
Technological
Economic
Global
General
Environmen
t
4-3
Demographic Segment
 Aging population
 Rising affluence
 Changes in ethnic composition
 Geographic distribution of population
 Greater disparities in income levels
4-4
Sociocultural Segment
 More women in the workforce
 Increase in temporary workers
 Greater concern for fitness
 Greater concern for environment
 Postponement of family formation
4-5
Political/Legal Segment
 Tort reform
 Americans with Disabilities Act (ADA)
 Repeal of Glass-Steagall Act in 1999
 Deregulation of utility and other industries
 Increases in federally mandated minimum wages
 Taxation at local, state, federal levels
 Legislation on corporate governance reforms
(Sarbanes-Oxley Act)
4-6
Technological Segment
 Genetic engineering
 Emergence of Internet technology
 Computer-aided design/computer-aided
manufacturing systems (CAD/CAM)
 Research in synthetic and exotic materials
 Pollution/global warming
 Miniaturization of computing technologies
 Wireless communication
 Nanotechnology
4-7
Economic Segment
 Interest rates
 Unemployment
 Consumer Price index
 Trends in GDP
 Changes in stock market valuations
4-8
The Competitive Environment
 Segments of the competitive
environment include:
Competitors
Customers
Suppliers
Competitive
Environment
 Sometimes called the task or industry
environment
 Porter’s five forces model
4-9
Porter’s Five Forces Model
of Industry Competition
 Most common analytical tool for examining
competitive environment
 Five basic competitive forces:
Threat of new entrants
Bargaining power of buyers
Bargaining power of suppliers
Threat of substitute products and services
Intensity of rivalry among competitors in an industry
4-10
Porter’s Five Forces Model
of Industry Competition
 Five forces model important because:
Helps decide if firm should remain in or exit an
industry
Provides rationale for increasing or decreasing
resource commitments
Helps assess how to improve firm’s
competitive position with regard to each of
forces
4-11
The Threat of New Entrants
 Profits of established firms in the industry may be
eroded by new competitors
 High entry barriers lead to low threat of new
entries
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
4-12
The Bargaining Power of Buyers
 Buyers threaten an industry
Force down prices
Bargain for higher quality or more services
Play competitors against each other
4-13
The Bargaining Power of Buyers
 A buyer group is powerful when
It is concentrated or purchases large volumes relative
to seller sales
The products 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
4-14
The Bargaining Power of Suppliers
 Suppliers exert power by threatening to raise
prices or reduce the quality goods and services
 A supplier group will be powerful when
It is dominated by a few companies and is more
concentrated than the industry it sells to
It is not obliged to contend with substitute products for
sale to the industry
The industry is not an important customer of the
supplier group
4-15
The Bargaining Power of Suppliers
 A supplier group will be powerful when (cont.)
The supplier’s product is an important input to the
buyer’s business
The supplier group’s products are differentiated or it
has built up switching costs for the buyer
The supplier group poses a credible threat of forward
integration
4-16
The Threat of Substitute
Products and Services
 Substitutes limit the potential returns
of an industry
Ceiling on the prices that firms in that
industry can profitably charge
Price/performance ratio
4-17
The Intensity of Rivalry among
Competitors in an Industry
 Interacting factors lead to intense rivalry
Numerous or equally balanced competitors
Slow industry growth
High fixed or shortage costs
Lack of differentiation or switching costs
Capacity augmented in large increments
High exit barriers
4-18
Using Industry Analysis: A Few Caveats
 Five Forces:
Assumes zero-sum game
Determines how a firm can enhance its position
External forces and strategies of individual firms
are continually changing
Criticized for being a static analysis
Key role is played by complements
4-19
How the Internet and Digital
Technologies Influences Industry
 Threat of New Entrants–Disadvantages the
industry
Lower barriers to entry increases number of new
entrants
Many internet-based capabilities can be easily
imitated
4-20
How the Internet and Digital
Technologies Influences Industry
 Bargaining Power of Buyers
Benefits Industry
Reduces the power of buyer intermediaries in many
distribution channels
Disadvantages Industry
Switching costs decrease
Information availability online empowers ends users
4-21
How the Internet and Digital
Technologies Influences Industry
 Bargaining Power of Suppliers
Benefits Industry
Online procurement methods can increase bargaining
power over suppliers
Disadvantages Industry
The Internet gives suppliers access to more customers
and makes it easer to reach end users
Online procurement practices deter competition and
reduce differentiating features
4-22
How the Internet and Digital
Technologies Influences Industry
 Threats of Substitutes
Benefits Industry
Internet-Based increases in overall efficiency can expand
industry sales
Disadvantages Industry
Internet-Based capabilities create more opportunities for
substitution
 Intensity of Rivalry
Disadvantages Industry
Because location is less important, the number of competitors
increases
Differences among competitors are harder to perceive online
Rivalry tends to focus on price and differentiating features are
minimized
4-23
Strategic Groups within Industries
 Two unassailable assumptions in industry
analysis
No two firms are totally different
No two firms are exactly the same
 Strategic groups
 Cluster of firms that share similar strategies
Breadth of product and geographic scope
Price/quality
Degree of vertical integration
Type of distribution system
4-24
Strategic Groups within Industries
 Value of strategic groups as an analytical tool
Identify barriers to mobility that protect a group from
attacks by other groups
Identify groups whose competitive position may be
marginal or tenuous
Chart the future direction of firms’ strategies
Thinking through the implications of each industry
trend for the strategic group as a whole
4-25