You are on page 1of 44

LP- 2 Wk 2

18 Sep 17

Ch-2

Analyzing the External Environment of the Firm

Learning Objectives

Importance

of

developing

forecasts

of

the

business

environments Critical inputs to forecasting, i.e., scanning, monitoring collecting CI Scenario Planningwhy and how? Impact of Competitive Environment on Profitability Trends and Events of General Environment Strategic Grouping and its impact on business strategies

and

Learning Outcomes

Students would have become aware of importance and criticality of undertaking formal and informal External Analysis so as to remain competitive.

Aug 15, 2015, H e is Mr Sundar Pichai, CEO of Google. A self made man
Aug 15, 2015, H e is Mr Sundar Pichai, CEO of Google. A self made man
Aug 15, 2015, H e is Mr Sundar Pichai, CEO of Google. A self made man
Aug 15, 2015, H e is Mr Sundar Pichai, CEO of Google. A self made man

Aug 15, 2015, He is Mr Sundar Pichai, CEO of Google. A self made man from a very backward and poor family of Chennai India. The 44-year-old head of Google was born in Chennai, Tamil Nadu and pursued education at IIT Kharagpur (B Tech), Stanford (MS) and Wharton (MBA); at Wharton, he was

named a Siebel Scholar and Palmer Scholar. He is responsible for the launch

of the dominant Chrome web browser, and was previously the product head for Android, Chrome, Maps, and other popular Google products.

He is the highest paid employee on earth, drawing a salary of 2 billion rupees in

Pakistani currency and by the way this is his monthly salary. He travelled 30

Kms on foot everyday to attend his school. His father couldn't afford books for

his school, so he borrowed books from classmates. He completed his college

education on charity in India and topped. Then he was selected for Fulbright by Stanford where he mastered in metallurgy. A story to be told to our kids that comforts and advanced gadgets are not the keys to success. It is the

EXAMPLES OF CA / CP

The Standard Chartered Bank. The bank`s clients can now print cheques any time at their own premises,

through its internet based global delivery channel.

Airbus and Boeing both topped 1,000 new jets orders in the first eight months of the year (2014) but

Boeing is far ahead after adjusting for cancellations

KASB Bank posts Rs171m profit. The bank`s total assets amounted over Rs.69 billion. The bank is now

defunct.

WHY ANALYZE EXTERNAL ENVIRONMENT?

Purpose: Forecasting Highlight with examples:

Motorola Case study Lehman Brothers Demise of MECO & NTR in Pakistan Fate of Bicycle Industry in Pakistan Privatization of PTCL Power Generation in Pakistan

Lack of innovation in Auto industry in Pakistan & Tractor Industry in Pakistan

Results of Failure to ANALYZE EXTERNAL ENVIRONMENT

Motorola

Founded in 1930

as

maker of radios, and consumer

electronics

Color TV business sold in 1970 and intensified high tech for commercial, industrial and governments sectors

1980 became leading supplier of cellular telephones

1994 Fortune magazine company

 

rated as

the

most loved

What went wrong?

Failed to notice changes

in

trends switching

from

analog to digital tech and arrival of competitors (Nokia and Ericsson)

Eastman KODAK

George Eastman operations in 1880

(a

High

School

drop

out)

started

1928 - 1 st colored movie 1975 1 st Digital camera 2000 Patents worth $2.2Bn - $2.6Bn 2003 64000 employees

2012 17000 employees and filed for bankruptcy

2011 Share price $1 (only) down from a top price of $94

Questions?

  • 1. Why has Kodak and some other retail outlets in

USA & UK filed for Bankruptcy?

  • 2. Do we have Bankruptcy Laws in Pakistan?

3. How many firms and Orgs have filed for bankruptcy in Pakistan in last 10 years?

LEARNING FROM MISTAKES

Salemi Industries of Massachusetts, USA founded in 2005 and vehemently introduced cell phone with discreet voice system

Sold only 300 units and company became bankrupt soon after-

wards

Mistake

Failed to undertake External Analysis in that it failed to realize emergence of SMS facility:

2001 -------- 500,000 2009 -------- 4 Bn (2010- 3.5 Bn active users)

As of September 2014, global SMS messaging business is said to be worth over USD 100 billion, and SMS accounts for almost 50 percent of all the revenue generated by mobile messaging

Sociocultural

Economic

Focus Forces Internal Environment Culture Resources • Suppliers Task • Shareholders Environment • Employees Industry •
Focus
Forces
Internal Environment
Culture
Resources
Suppliers
Task
Shareholders
Environment
Employees
Industry
Interest Groups
Customers
Creditors
Trade
Societal
Associations
Environment
Competitors
Technological
Forces
Politico-
Legal

Forces

Creating the Environmentally Aware Organization

WHY DO WE DO External Analysis?

We undertake External analysis by going through a process of Scanning, Monitoring and obtaining Competitive Intelligence / Information (CI) so as to

Forecast

events and trends. The trends and events are product of:

Globalization Time to Market Innovating technologies Shifting roles and responsibilities ---- Economic conditions

CREATING ENVIRONMENTALLY AWARE ORG

3 Steps:

1. Institute measures for and inculcate the habit of:

Undertaking Environmental Scanning Uninterrupted Monitoring of business activities and

Obtain Competitive Intelligence (CI) in order to pre-empt the changing trends and events

  • 2. Be aware of the General Environment arising out of:

Demography, Social, Politico-legal, Technology, Economic and

Global environment

(slide-13)

  • 3. Remain abreast of Competitive Environment

– Porter’s Five-Forces (Buyers, Suppliers, Substitutes, Potential Entrants and Mutual rivalry

Ist Step ENVIRONMENTAL SCANNING

Definition

The

process

of

conducting

surveillance

of

firm’s

external environment

to

predict

environmental

changes

to

come

and

detect

changes

already

underway.

Purpose

To become aware of changing trends

To adopt pro-active strategies rather than resorting to reactive strategies / measures to correct the changing

trends and events

ENVIRONMENTAL MONITORING

Definition

It is to track the evolution of environmental trends, sequence of events, or streams of activities, OBTAIN / COLLECT DATA

Purpose

To

undertake

closer

scrutiny

to

become

fully

cognizant of impact of changing trends and events

It

enables

the firms to evaluate how dramatically

environmental trends are changing the CI.

COMPETITIVE INTELLIGENCE (CI)

Definition

 

It

is

an activity which helps

firms define and

understand

their industry and

 

identify their rivals’ strengths and weaknesses.

 

Purpose

 

To collect data for managerial decision making

 

If done properly, it avoids surprises for the firms and companies

 

Means to get information:

 

Slideshare: A Website for publicly sharing PowerPoint presentations. Marketing teams have embraced the platform and often post detail-rich presentations about their firms and products

Quora: A question-and-answer site popular among industry insiders who embrace the free flow of information about technical questions.

Ispionage: A site that reveals the ad words that companies are buying, which can often shed light on new campaigns being launched.

YouTube: Great for finding interviews with executives at trade shows. At times, a firm’s aggressive efforts to gather competitive intelligence

Periodicals / Magazines / Newspapaers etc

 

Is it an ethical issue? Refer to page 39 Exh 2.2

 

ENVIRONMENTAL FORECASTING Definition

Based on Scanning, Monitoring and CI, the process involves the development of plausible projections

about the direction, scope, speed, and intensity of environmental changes.

Purpose

To predict change It answers the questions:

How long would it take to for a new technology to reach the market place ?

Will the present social concern about an issue result in new legislation? Are current lifestyles trends likely to continue?

SCENARIO PLANNING

Definition: A military borrowed concept:

As a result of environmental scanning, monitoring and competitive intelligence, plan a range of scenarios

An in-depth analysis based on range of disciplines, interests, tangible and intangible impacts and effects

emerging out of various conditions of economic, local

and international laws and changing geo-political and politico-military situations

Purpose

Not to miss out any factor To develop range of options (Opportunities)

SCENARIO PLANNING AT SHELL OIL COMPANY

Process involves following steps:

Extensive interviews through open ended questionnaires

Analyzing of interviews and making agenda points

Synthesizing agenda points

Holding series of workshops and deliberating on agenda points and formulating Scenarios that may occur in 10 -15 years time

Testing of Strategic Options (Policy Options/ Strategy) to ascertain robustness of each scenario

Specially formed teams may do this job on continuous basis

2nd Step THE GENERAL ENVIRONMENT

Definition

 

It is composed of 6 factors that can have dramatic affects on the firm’s adopted strategy.

It includes

 
  • 1. Demographic Segmentation

  • 2. Socio-cultural aspect of life

  • 3. Politico / Legal Environment

  • 4. Technological Innovations

  • 5. Economic Conditions

  • 6. Global Environment

Exh 2.2 page 43 and Exh 2.3 page 47

DEMOGRAPHIC SEGMENTATION

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

SOCIO-CULTURAL ASPECT OF LIFE

More women in the workforce Increase in temporary workers Greater concern for fitness Greater concern for environment Postponement of family formation

POLITICO / LEGAL ENVIRONMENT

Tort reform --- Americans with Disabilities Act (ADA) of 1990

Deregulation of utility and other industries

Increases in federally mandated minimum wages

Taxation at local, state, federal levels

Legislation on corporate governance reforms in bookkeeping, stock options, etc. (Sarbanes-Oxley Act of 2002)

Affordable Health Care Act (Obamacare)

In Pakistan

Regulatory authorities SECP Company's Act 2016 SBP Health Card Income / GST Ordinance --- Filer / Non-Filer

TECHNOLOGICAL INNOVATIONS Genetic engineering Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Research in synthetic and exotic materials Pollution/global warming Miniaturization of computing technologies Wireless communication (IT)

ECONOMIC CONDITIONS

Interest rates Unemployment rates Consumer Price Index Trends in GDP Changes in stock market valuations

GLOBAL ENVIRONMENT

Increasing global trade Currency exchange rates

Emergence of the Indian and Chinese economies

Trade agreements among regional blocs (e.g., NAFTA, EU, ASEAN, BRICS etc)

Creation of WTO (leading to decreasing tariffs/free trade in services)

Increased risks associated with terrorists

3rd Step THE COMPETITIVE ENVIRONMENT

Definition. Termed as Task or Industry environment, it includes factors that have direct relationship with the industry or the firm. However, it may not generate as much strategic advantage as the Value net analysis,

They are Porter’s Five Forces:

  • 1. Threat of new entrants (Competitors)

  • 2. Bargaining powers of buyers

  • 3. Rivalry among existing firms

  • 4. Bargaining powers of suppliers

  • 5. Threat of introduction of substitute products or services

Measures required to offset disadvantages of P5F

Follow Checklist given on page 56 as Exhibit 2.5

THREAT OF NEW ENTRANTS (COMPETITORS)

Adopt Economies of Scale

Create Product Differentiations

Acquire large Capital

Reduce Switching Costs

Ensure Easy Access to Distribution Channels

Pursue Cost Disadvantages Independent of Scale

Proprietary product Favorable access to raw materials Government subsidies Favorable government policies

BARGAINING POWERS OF BUYERS

Purchase prices

large

volumes

of

stocks

to offset

Introduce large variety of Products Standard or undifferentiated

Few switching costs will shift to alternatives Earn low profits

Buyers

pose

credible

threat

of

backward

integration Product v/s quality unimportant

ELIMINATING RIVALRY AMONG EXISTING FIRMS

Numerous

or

equally

balanced

competitors

increase

rivalry Slow industry growth increases rivalry

Reduce (High) fixed or storage costs -- excess quantity starts price war

Lack of differentiation or switching costs

----commodity

is perceived for price and availability Capacity augmented in large increments economies of scale can disrupt supply / demand

High Exit Barriers Economic, Strategic and Emotional factors that keep firms competing though they may be earning low or negative returns on their investments

INDUSTRY ANALYSIS- FEW caveats

Customers Transactions
Customers
Transactions
Company
Company
Substitutes
Substitutes
Complements (Nintendo)
Complements
(Nintendo)
Interactions
Interactions
Interactions
Interactions
Transactions suppliers
Transactions
suppliers

12/25/2017

Value Net

30

Bargaining Power of Suppliers

Threat to raise prices or reduce quality of purchased goods and services is omnipotent. The profitability can always be squeezed. The powerful groups can always assert in the following manner:

Dominated by few companies usually affects prices

Not obliged to contend with substitute products for sale to industry

Industry is not an important customer of the supplier group

Suppliers’ product is an important input to the buyers’ business

Products are differentiated or switching costs have been built up

Threat of forward integration is persistent

THREAT OF INTRODUCTION OF SUBSTITUTE PRODUCTS OR SERVICES

Substitutes limit the profitability of industry by placing a

ceiling on the prices (price war)

 

More attractive the price/performance ratio ---- tighter the lid on profitability of industry

Travel

by

executives

v/s

teleconferencing

is

one

example

causing

losses

to

airline,

hotelling

and

automobile industry Discussion forums Twitter, Bloggers etc

 

STRATEGIC GROUPS WITHIN INDUSTRY

A

is

a

in

an

similar business models or similar combinations of strategies.

 

No two firms are totally different AND No two firms are exactly the same

 

What value is the strategic group concept?

 

Strategic groupings help a firm identify barriers to mobility that protects a group by other groups

It helps a firm identify groups whose competitive position may be marginal.

It helps chart future directions of firm’s strategies.

 

Strategic groupings is helpful in thinking through implications of each industry trend for the strategic group as a whole

CARTEL

A

cartel

is

an

organization

created from a formal

agreement between a group of producers of a good or service to regulate supply in an effort to regulate or manipulate prices. In other words, a cartel is a collection of otherwise independent businesses or countries that

act together as if they were a single producer and thus

are able to fix prices for the goods they produce and the services they render without competition.

The largest cartel is OPEC.

 

WORLD AUTOMOBILE INDUSTRY STRATEGIC GROUPS

Ferrari, High Lexus porsch e BMW, Mercedes Toyota Ford, Price GM, Honda, Hyundai, Nissan Kia, Chery
Ferrari,
High
Lexus
porsch
e
BMW,
Mercedes
Toyota
Ford,
Price
GM,
Honda,
Hyundai,
Nissan
Kia,
Chery
Tata Motors
Low
Breadth of product Line
High

IMPACT OF INTERNET AND DIGITAL

TECHNOLOGIES ON P5F

INTERNET TODAY

3 billion Internet users --- May 2015.

Mobile Internet penetration is forecast to reach 71% by 2019.

Usage per device is forecast to more than triple by 2019.

192 countries have active 3G mobile networks, which cover almost 50% of the global population.

Smartphone sales are the majority of mobile handsets sold worldwide; tablet sales will soon exceed total PC sales.

While there are at least five mobile platforms, Android has an 84%

share of smartphones, and 72% of tablets. There are well over 1 million apps available, which have been

downloaded more than 100 billion times. Time spent using apps exceeds time spent on mobile browsers, and

in the US, at least, exceeds time spent on desktop and mobile

E-Commerce

1979

Invented by Michael Aldrich

1981

Thomson Holidays in UK France

Tesco

1994

Netscape ---- 1st on line bank

1996

IndiaMart B2B

2012

US e-commerce online $226Bn

Impact on Five Competitive Forces

The Threat of New Entrants

New entrants are a bigger threat because internet based technologies have lower barriers to entry

Reasons

Relatively inexpensive to make an entry Creation of website is inexpensive

Business created on Internet saves traditional expenses like travel, hotelling, rents, sales force salaries, printing and postage etc

Easy

access

to

distribution

channels,

manufacturers, wholesalers, etc

IMPACT ON FIVE COMPETITIVE FORCES 2.The Bargaining Power of Buyers

Enhances Buyer’s power by providing more information to consumers on internet. Book publishing / sale is the

most usual example.

 

End user’s switching costs are much lower. Loyalty with every new deal is the order of the day.

Bargaining power of distribution channels’ buyers may decrease due internet.

The

more

outlets

from

which

a

product

can

be

purchased, the lower the potential profitability for any

single outlet.

IMPACT ON FIVE COMPETITIVE FORCES

3. The Bargaining Power of Suppliers

The net

effect

of

the

internet on supplier

power will

depend on the nature of competition in a given industry.

Free markets save money by organizing auctions on internet

Internet inhibits the ability of suppliers to offer highly

differentiated or unique products

 

The growth of new Web-based business in general may create more downstream outlets for suppliers to sell.

Suppliers will have greater power to the extent that they

can reach end users directly without intermediaries. Internet is also creating possibilities for re-intermediators in certain cases

IMPACT ON FIVE COMPETITIVE FORCES

4.

The Threat of Substitutes

The primary factor that leads to substitutes is Economic.

Cyber storage initially free has now some cost

Market research is another example --- doing it

on net is almost free

Even test marketing survey is almost free now

IMPACT ON FIVE COMPETITIVE FORCES

Competitive Rivalry

Only those competitors that can use the

 

Web:

 

To give them a distinct image,

Create unique product offerings, or

provide faster, smarter, cheaper services

are likely to capture greater profitability

with the new technology.

HOW INTERNET ADDS VALUE

Search Activities

---

It

gathering

options.

information

refers

to the process

of

and

identifying purchase

Evaluation Activities --- It refers to the process of considering alternatives and comparing the costs and benefits of various options.

Problem-solving

Activities

---

It

refers

to

the

process of

identifying

problems

or needs

and

generating ideas and action plans to address those needs; in other words, educating customers.

Transaction Activities --- It refers to the process of

completing

the

sale,

including

negotiating

and

agreeing

contractually,

making

payments,

and

taking delivery.