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 and
collecting CI
– Scenario Planning– why and how?
– Impact of Competitive Environment on Profitability
– Trends and Events of General Environment
– Strategic Grouping and its impact on business strategies
• Learning Outcomes
– Students would have become aware of importance and criticality
of undertaking formal and informal External Analysis so as to
remain competitive.
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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
determination
12/25/2017 in life for a higher goal. Sundar Pichai, Google 2
 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.

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 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

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 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 rated as the most loved
company
• What went wrong?
• Failed to notice changes in trends – switching from
analog to digital tech and arrival of competitors (Nokia
and Ericsson)
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 Eastman KODAK

• George Eastman (a High School drop out) started

operations in 1880
• 1928 - 1st colored movie
• 1975 – 1st 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

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 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?

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 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

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Sociocultural Economic
Focus Forces
Internal Environment
Culture Resources
• Suppliers
Task
• Shareholders Environment
• Employees
Industry
• Interest Groups
• Customers
• Creditors
• Trade
Societal
Associations Environment
• Competitors

Technological
Politico- Forces
Legal
Forces
Creating the Environmentally Aware
Organization
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 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

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 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

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 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

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 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.

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 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
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 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?
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 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)
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 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

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 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

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 DEMOGRAPHIC SEGMENTATION

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

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 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

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 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
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 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)

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 ECONOMIC CONDITIONS

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

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 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

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 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

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 Measures required to offset
disadvantages of P5F
Follow Checklist given on page 56 as Exhibit 2.5

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 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

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 BARGAINING POWERS OF BUYERS

• Purchase large volumes of stocks to offset

prices
• 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

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 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

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 INDUSTRY ANALYSIS- FEW caveats

Customers
Transactions

Complements
Substitutes Interactions Company Interactions
(Nintendo)

Transactions

suppliers

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 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

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 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

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 STRATEGIC GROUPS WITHIN INDUSTRY

• Definition: A strategic group is a concept used in strategic

management that groups companies within an industry that have
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

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 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.

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 WORLD AUTOMOBILE INDUSTRY – STRATEGIC
GROUPS
Ferrari,
High Lexus
porsch
e
BMW,
Mercedes
Toyota
Ford,
Price GM,
Honda,
Hyundai, Nissan
Kia,

Chery
Tata Motors
Low
Breadth of product Line High

12/25/2017 Prepare Pakistani Model ------- 35

 IMPACT OF INTERNET AND DIGITAL
TECHNOLOGIES ON P5F

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 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

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 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

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 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
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 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.

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 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
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 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

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 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.

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 HOW INTERNET ADDS VALUE
• Search Activities --- It refers to the process of
gathering information and identifying purchase
options.
• 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.
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