Studying this chapter should provide you with the strategic management knowledge needed to

1 Explain the importance of analyzing and understanding the fi rmrsquos external environment

2 Defi ne and describe the general environment and the industry environment

3 Discuss the four activities of the external environmental analysis process

4 Name and describe the general environmentrsquos seven segments

5 Identify the fi ve competitive forces and explain how they determine an industryrsquos profi t potential

6 Defi ne strategic groups and describe their infl uence on the fi rm

7 Describe what fi rms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them

Studying this chapter should provide you with the strategic management knowledge needed to

Explain the importance of analyzing and understanding the fi rmrsquosexternal environment

Defi ne and describe the general environment and the industryenvironment

Discuss the four activities of the external environmental analysisprocess

C H A P T E R 2

The External Environment Opportunities Threats

Industry Competition and Competitor Analysis

Employing over 75000 people Philip Morris International (PMI) is the leading international tobacco company in terms of market share The fi rmrsquos product line features seven of the worldrsquos top 15 brands including Marlboro

which is the top-selling cigarette brand on a worldwide basis (In 2008 PMI sold 3107 billion Marlboro cigarettes Altria Group Inc which spun-off PMI from its operations in March 2008 sells the Marlboro brand in the United States) PMI sells products in over 160 countries holds about a 16 percent share of the total international cigarette market outside the United States and has the largest market share in 11 of the top 30 cigarette markets excluding the US market PMI continues to innovate across its brand portfolio to serve different needs of various customers and as a means of stimulating sales of its products

As is true for all fi rms the strategic actions (see Figure 11) PMI is taking today and will take in the future are infl uenced by conditions in its external environment The challenge for a fi rmrsquos strategic leaders (including those at PMI) is to understand what the external environmentrsquos effects are on the fi rm today and to predict (with as high a degree of accuracy as possible) what those effects will be on the fi rmrsquos strategic actions in the future

The regulations that are a part of the politicallegal segment of PMIrsquos general environment (the general environment and all of its segments are discussed in this chapter) affect how PMI conducts its business In general the regulations regarding the selling of tobacco products are less restrictive in global markets than in the US market Nonetheless PMI must be aware of how the regulations might change in the markets it does serve as well as those it may desire to serve in the future and must prepare to deal with these changes Aware of the possible effects of the politicallegal environment on its operations in the future PMI has made the following public pronouncement ldquoWe are proactively working with governments and other stakeholders to advocate for a comprehensive consistent and cohesive regulatory framework that applies to all to tobacco products and is based on the principle of harm reductionrdquo (Encouraging all companies competing in the tobacco industry to develop products with the potential to reduce the risk of tobacco-related diseases is part of the harm reduction principle)

The global segment of the general environment also affects PMIrsquos strategic actions To pursue what it believes are opportunities to sell additional quantities of its products PMI recently acquired companies in Colombia Indonesia and Serbia to establish a stronger foothold in emerging markets The facts that taxes on tobacco products are lower in many emerging markets compared to developed markets and that the consumption of tobacco products is increasing in these markets are conditions in the external environment infl uencing the choices PMI makes as it seeks growth These conditions differ from those in the US market where cigarette consumption is declining by approximately 3 to 4 percent annually and where in mid-2009 the US Congress passed legislation (which President Obama then signed into law) that empowered the Food and Drug Administration to regulate ldquocigarettes and other forms of tobacco for the fi rst timerdquo

While cigarette consumption is increasing in some of its markets PMI predicts that this will not always be the case In this respect PMI anticipates that changes will occur in the sociocultural segment of the general environment such that fewer people will be willing to risk disease by consuming tobacco products Anticipating this possibility PMI recently

PHILIP MORRIS INTERNATIONAL THE

EFFECTS OF ITS EXTERNAL ENVIRONMENT

Cat

herin

e K

arno

wC

ORB

IS

Advertising such as this Marlboro Man billboard is more highly restricted in the United States than in many global markets

Qwerty on KAT for More

36

formed a joint venture with Swedish Match AB to market smokeless tobacco worldwide This collaborative arrangement unites the worldrsquos largest seller of smokeless tobacco (Swedish Match) with a marketing powerhouse that has a strong global presence across mul-tiple markets (PMI) Because it is less dangerous than cigarettes in terms of disease smoke-less tobacco is seen as a product with long-term growth potential PMI will likely remain committed to the importance of its social performance as it pursues this joint venture As a measure of the effects of the physical environment segment of the external environment PMI says that it is strongly committed to the ldquopromotion of sustainable tobacco farming the effi cient use of natural resources the reduction of waste in (its) manufacturing processes eliminating child labor and giving back to the communities in which (it) operatesrdquo

Sources 2009 Altria Group Inc Standard amp Poorrsquos Stock Report httpstandardandpoorscom April 25 2009 Philip Morris International home page httpwwwphilipinternationalcom May 15 N Byrnes amp F Balfour Philip Morrisrsquo global race BusinessWeek Online httpwwwbusinessweekcom April 23 K Helliker 2009 Smoke-less tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4 A Pressman 2009 Philip Morris unbound BusinessWeek May 4 66 D Wilson 2009 Senate votes to allow FDA to regulate tobacco Wall Street Journal Online httpwwwwsjcom June 12

As described in the Opening Case and suggested by research the external environment affects a firmrsquos strategic actions1 For example Philip Morris International (PMI) seeks to grow through a joint venture with Swedish Match AB to distribute smokeless tobacco in multiple global markets2 Because it is less dangerous than cigarettes in terms of contributing to disease smokeless tobacco is thought to have growth potential in many markets3 In addi-tion to this health-related influence that is a part of the sociocultural segment of PMIrsquos exter-nal environment the firmrsquos strategic actions are affected by conditions in other segments of its general environment such as the politicallegal and the physical environment segments As we explain in this chapter a firmrsquos external environment creates both opportunities (eg the opportunity for PMI to enter the smokeless tobacco market) and threats (eg the pos-sibility that additional regulations in its markets will reduce consumption of PMIrsquos tobacco products) Collectively opportunities and threats affect a firmrsquos strategic actions4

Regardless of the industry in which they compete the external environment influences firms as they seek strategic competitiveness and the earning of above-average returns This chapter focuses on how firms analyze their external environment The understanding about conditions in its external environment that the firm gains by analyzing that environment is matched with knowledge about its internal organization (discussed in the next chapter) as the foundation for forming the firmrsquos vision developing its mission and identifying and implementing strategic actions (see Figure 11)

As noted in Chapter 1 the environmental conditions in the current global economy differ from historical conditions For example technological changes and the continuing growth of information gathering and processing capabilities increase the need for firms to develop effective competitive actions on a timely basis5 (In slightly different words firms have little time to correct errors when implementing their competitive actions) The rapid sociological changes occurring in many countries affect labor practices and the nature of products demanded by increasingly diverse consumers Governmental policies and laws also affect where and how firms choose to compete6 In addition changes to nationsrsquo financial regulatory systems that were enacted in 2009 and beyond are expected to increase the complexity of organizationsrsquo financial transactions7

Viewed in their totality the conditions that affect firms today indicate that for most organizations their external environment is filled with uncertainty8 To successfully deal with this uncertainty and to achieve strategic competitiveness and thrive firms must be aware of and fully understand the different segments of the external environment

Firms understand the external environment by acquiring information about competitors customers and other stakeholders to build their own base of knowledge and capabilities9 On the basis of the new information firms take actions such as building new capabilities and core competencies in hopes of buffering themselves

36Pa

rt 1

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ateg

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Employing over 75000 people Philip Morris International (PMI) is the leading international tobacco company in terms of market share The fi rmrsquos product line features seven of the worldrsquos top 15 brands including Marlboro

which is the top-selling cigarette brand on a worldwide basis (In 2008 PMI sold 3107 billion Marlboro cigarettes Altria Group Inc which spun-off PMI from its operations in March 2008 sells the Marlboro brand in the United States) PMI sells products in over 160 countries holds about a 16 percent share of the total international cigarette market outside the United States and has the largest market share in 11 of the top 30 cigarette markets excluding the US market PMI continues to innovate across its brand portfolio to serve different needs of various customers and as a means of stimulating sales of its products

As is true for all fi rms the strategic actions (see Figure 11) PMI is taking today and will take in the future are infl uenced by conditions in its external environment The challenge for a fi rmrsquos strategic leaders (including those at PMI) is to understand what the external environmentrsquos effects are on the fi rm today and to predict (with as high a degree of accuracy as possible) what those effects will be on the fi rmrsquos strategic actions in the future

The regulations that are a part of the politicallegal segment of PMIrsquos general environment (the general environment and all of its segments are discussed in this chapter) affect how PMI conducts its business In general the regulations regarding the selling of tobacco products are less restrictive in global markets than in the US market Nonetheless PMI must be aware of how the regulations might change in the markets it does serve as well as those it may desire to serve in the future and must prepare to deal with these changes Aware of the possible effects of the politicallegal environment on its operations in the future PMI has made the following public pronouncement ldquoWe are proactively working with governments and other stakeholders to advocate for a comprehensive consistent and cohesive regulatory framework that applies to all to tobacco products and is based on the principle of harm reductionrdquo (Encouraging all companies competing in the tobacco industry to develop products with the potential to reduce the risk of tobacco-related diseases is part of the harm reduction principle)

The global segment of the general environment also affects PMIrsquos strategic actions To pursue what it believes are opportunities to sell additional quantities of its products PMI recently acquired companies in Colombia Indonesia and Serbia to establish a stronger foothold in emerging markets The facts that taxes on tobacco products are lower in many emerging markets compared to developed markets and that the consumption of tobacco products is increasing in these markets are conditions in the external environment infl uencing the choices PMI makes as it seeks growth These conditions differ from those in the US market where cigarette consumption is declining by approximately 3 to 4 percent annually and where in mid-2009 the US Congress passed legislation (which President Obama then signed into law) that empowered the Food and Drug Administration to regulate ldquocigarettes and other forms of tobacco for the fi rst timerdquo

While cigarette consumption is increasing in some of its markets PMI predicts that this will not always be the case In this respect PMI anticipates that changes will occur in the sociocultural segment of the general environment such that fewer people will be willing to risk disease by consuming tobacco products Anticipating this possibility PMI recently

PHILIP MORRIS INTERNATIONAL THE

EFFECTS OF ITS EXTERNAL ENVIRONMENT

Cat

herin

e K

arno

wC

ORB

IS

Advertising such as this Marlboro Man billboard is more highly restricted in the United States than in many global markets

Qwerty on KAT for More

36

formed a joint venture with Swedish Match AB to market smokeless tobacco worldwide This collaborative arrangement unites the worldrsquos largest seller of smokeless tobacco (Swedish Match) with a marketing powerhouse that has a strong global presence across mul-tiple markets (PMI) Because it is less dangerous than cigarettes in terms of disease smoke-less tobacco is seen as a product with long-term growth potential PMI will likely remain committed to the importance of its social performance as it pursues this joint venture As a measure of the effects of the physical environment segment of the external environment PMI says that it is strongly committed to the ldquopromotion of sustainable tobacco farming the effi cient use of natural resources the reduction of waste in (its) manufacturing processes eliminating child labor and giving back to the communities in which (it) operatesrdquo

Sources 2009 Altria Group Inc Standard amp Poorrsquos Stock Report httpstandardandpoorscom April 25 2009 Philip Morris International home page httpwwwphilipinternationalcom May 15 N Byrnes amp F Balfour Philip Morrisrsquo global race BusinessWeek Online httpwwwbusinessweekcom April 23 K Helliker 2009 Smoke-less tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4 A Pressman 2009 Philip Morris unbound BusinessWeek May 4 66 D Wilson 2009 Senate votes to allow FDA to regulate tobacco Wall Street Journal Online httpwwwwsjcom June 12

As described in the Opening Case and suggested by research the external environment affects a firmrsquos strategic actions1 For example Philip Morris International (PMI) seeks to grow through a joint venture with Swedish Match AB to distribute smokeless tobacco in multiple global markets2 Because it is less dangerous than cigarettes in terms of contributing to disease smokeless tobacco is thought to have growth potential in many markets3 In addi-tion to this health-related influence that is a part of the sociocultural segment of PMIrsquos exter-nal environment the firmrsquos strategic actions are affected by conditions in other segments of its general environment such as the politicallegal and the physical environment segments As we explain in this chapter a firmrsquos external environment creates both opportunities (eg the opportunity for PMI to enter the smokeless tobacco market) and threats (eg the pos-sibility that additional regulations in its markets will reduce consumption of PMIrsquos tobacco products) Collectively opportunities and threats affect a firmrsquos strategic actions4

Regardless of the industry in which they compete the external environment influences firms as they seek strategic competitiveness and the earning of above-average returns This chapter focuses on how firms analyze their external environment The understanding about conditions in its external environment that the firm gains by analyzing that environment is matched with knowledge about its internal organization (discussed in the next chapter) as the foundation for forming the firmrsquos vision developing its mission and identifying and implementing strategic actions (see Figure 11)

As noted in Chapter 1 the environmental conditions in the current global economy differ from historical conditions For example technological changes and the continuing growth of information gathering and processing capabilities increase the need for firms to develop effective competitive actions on a timely basis5 (In slightly different words firms have little time to correct errors when implementing their competitive actions) The rapid sociological changes occurring in many countries affect labor practices and the nature of products demanded by increasingly diverse consumers Governmental policies and laws also affect where and how firms choose to compete6 In addition changes to nationsrsquo financial regulatory systems that were enacted in 2009 and beyond are expected to increase the complexity of organizationsrsquo financial transactions7

Viewed in their totality the conditions that affect firms today indicate that for most organizations their external environment is filled with uncertainty8 To successfully deal with this uncertainty and to achieve strategic competitiveness and thrive firms must be aware of and fully understand the different segments of the external environment

Firms understand the external environment by acquiring information about competitors customers and other stakeholders to build their own base of knowledge and capabilities9 On the basis of the new information firms take actions such as building new capabilities and core competencies in hopes of buffering themselves

36Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s

Qwerty on KAT for More

36

formed a joint venture with Swedish Match AB to market smokeless tobacco worldwide This collaborative arrangement unites the worldrsquos largest seller of smokeless tobacco (Swedish Match) with a marketing powerhouse that has a strong global presence across mul-tiple markets (PMI) Because it is less dangerous than cigarettes in terms of disease smoke-less tobacco is seen as a product with long-term growth potential PMI will likely remain committed to the importance of its social performance as it pursues this joint venture As a measure of the effects of the physical environment segment of the external environment PMI says that it is strongly committed to the ldquopromotion of sustainable tobacco farming the effi cient use of natural resources the reduction of waste in (its) manufacturing processes eliminating child labor and giving back to the communities in which (it) operatesrdquo

Sources 2009 Altria Group Inc Standard amp Poorrsquos Stock Report httpstandardandpoorscom April 25 2009 Philip Morris International home page httpwwwphilipinternationalcom May 15 N Byrnes amp F Balfour Philip Morrisrsquo global race BusinessWeek Online httpwwwbusinessweekcom April 23 K Helliker 2009 Smoke-less tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4 A Pressman 2009 Philip Morris unbound BusinessWeek May 4 66 D Wilson 2009 Senate votes to allow FDA to regulate tobacco Wall Street Journal Online httpwwwwsjcom June 12

As described in the Opening Case and suggested by research the external environment affects a firmrsquos strategic actions1 For example Philip Morris International (PMI) seeks to grow through a joint venture with Swedish Match AB to distribute smokeless tobacco in multiple global markets2 Because it is less dangerous than cigarettes in terms of contributing to disease smokeless tobacco is thought to have growth potential in many markets3 In addi-tion to this health-related influence that is a part of the sociocultural segment of PMIrsquos exter-nal environment the firmrsquos strategic actions are affected by conditions in other segments of its general environment such as the politicallegal and the physical environment segments As we explain in this chapter a firmrsquos external environment creates both opportunities (eg the opportunity for PMI to enter the smokeless tobacco market) and threats (eg the pos-sibility that additional regulations in its markets will reduce consumption of PMIrsquos tobacco products) Collectively opportunities and threats affect a firmrsquos strategic actions4

Regardless of the industry in which they compete the external environment influences firms as they seek strategic competitiveness and the earning of above-average returns This chapter focuses on how firms analyze their external environment The understanding about conditions in its external environment that the firm gains by analyzing that environment is matched with knowledge about its internal organization (discussed in the next chapter) as the foundation for forming the firmrsquos vision developing its mission and identifying and implementing strategic actions (see Figure 11)

As noted in Chapter 1 the environmental conditions in the current global economy differ from historical conditions For example technological changes and the continuing growth of information gathering and processing capabilities increase the need for firms to develop effective competitive actions on a timely basis5 (In slightly different words firms have little time to correct errors when implementing their competitive actions) The rapid sociological changes occurring in many countries affect labor practices and the nature of products demanded by increasingly diverse consumers Governmental policies and laws also affect where and how firms choose to compete6 In addition changes to nationsrsquo financial regulatory systems that were enacted in 2009 and beyond are expected to increase the complexity of organizationsrsquo financial transactions7

Viewed in their totality the conditions that affect firms today indicate that for most organizations their external environment is filled with uncertainty8 To successfully deal with this uncertainty and to achieve strategic competitiveness and thrive firms must be aware of and fully understand the different segments of the external environment

Firms understand the external environment by acquiring information about competitors customers and other stakeholders to build their own base of knowledge and capabilities9 On the basis of the new information firms take actions such as building new capabilities and core competencies in hopes of buffering themselves

36Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s

Qwerty on KAT for More

37C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

from any negative environmental effects and to pursue opportunities as the basis for better serv-ing their stakeholdersrsquo needs10 A firmrsquos strategic actions are influenced by the conditions in the three parts (the general industry and competi-tor) of its external environment (see Figure 21)

The General Industry and Competitor EnvironmentsThe general environment is composed of dimensions in the broader society that influence an industry and the firms within it11 We group these dimensions into seven environmental segments demographic economic politicallegal sociocultural technological global and physical Examples of elements analyzed in each of these segments are shown in Table 21

Firms cannot directly control the general environmentrsquos segments The recent bankruptcy filings by General Motors and Chrysler Corporation highlight this fact These firms could not directly control various parts of their external environment including the economic and politicallegal segments however these segments are influencing the actions the firms are taking now including the forming of Chryslerrsquos alliance with Fiat12 Because firms cannot directly control the segments of their external environment successful ones learn how to gather the information needed to understand all segments and their implications for selecting and implementing the firmrsquos strategies

The general environment is composed of dimensions in the broader society that infl uence an industry and the fi rms within it

Figure 21 The External Environment

GeneralEnvironment

Economic

Technological

Sociocultural

Physical

PoliticalLegal

Demographic

IndustryEnvironment

Threat of New EntrantsPower of Suppliers

Power of BuyersProduct SubstitutesIntensity of Rivalry

CompetitorEnvironment

Global

AP

Phot

oSe

th W

enig

A woman bearing Chrysler paperwork waits to enter US Bankruptcy Court for the Chrysler bankruptcy case in New York Monday May 4 2009 Aspects of the external environment both contributed to Chryslerrsquos bankruptcy filing as well as influenced the terms under which it quickly re-emerged

38Pa

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ateg

ic M

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emen

t In

put

s

The industry environment is the set of factors that directly influences a firm and its competitive actions and responses13 the threat of new entrants the power of suppliers the power of buyers the threat of product substitutes and the intensity of rivalry among competitors In total the interactions among these five factors determine an industryrsquos profit potential in turn the industryrsquos profit potential influences the choices each firm makes about its strategic actions The challenge for a firm is to locate a position within an industry where it can favorably influence the five factors or where it can successfully defend against their influence The greater a firmrsquos capacity to favorably influence its industry environment the greater the likelihood that the firm will earn above-average returns

How companies gather and interpret information about their competitors is called competitor analysis Understanding the firmrsquos competitor environment complements the insights provided by studying the general and industry environments14 This means for example that Philip Morris International wants to learn as much as it can about its two

Demographic Segment Population size bull

Age structure bull

Geographic distribution bull

Ethnic mix bull

Income distribution bull

Economic Segment Inflation rates bull

Interest rates bull

Trade deficits or surpluses bull

Budget deficits or surpluses bull

Personal savings rate bull

Business savings rates bull

Gross domestic product bull

PoliticalLegal Segment Antitrust laws bull

Taxation laws bull

Deregulation philosophies bull

Labor training laws bull

Educational philosophies bull

and policies

Sociocultural Segment Women in the workforce bull

Workforce diversity bull

Attitudes about the quality bull

of work life

Shifts in work and career bull

preferencesShifts in preferences bull

regarding product and service characteristics

Technological Segment Product innovations bull

Applications of knowledge bull

Focus of private and bull

government-supported RampD expendituresNew communication bull

technologies

Global Segment Important political events bull

Critical global markets bull

Newly industrialized bull

countriesDifferent cultural and bull

institutional attributes

Physical Environment Segment

Energy consumption bull

Practices used to develop bull

energy sourcesRenewable energy efforts bull

Minimizing a firmrsquos bull

environmental footprint

Availability of water as a bull

resourceProducing environmentally bull

friendly products

Table 21 The General Environment Segments and Elements

The industry environment is the set of factors that directly infl uences a fi rm and its competitive actions and competitive responses the threat of new entrants the power of suppliers the power of buyers the threat of product substitutes and the intensity of rivalry among competitors

39

major competitorsmdashBritish American Tobacco and Japan Tobacco Internationalmdashwhile also learning about its general and industry environments

Analysis of the general environment is focused on environmental trends while an analysis of the industry environment is focused on the factors and conditions influenc-ing an industryrsquos profitability potential and an analysis of competitors is focused on predicting competitorsrsquo actions responses and intentions In combination the results of these three analyses influence the firmrsquos vision mission and strategic actions Although we discuss each analysis separately performance improves when the firm integrates the insights provided by analyses of the general environment the industry environment and the competitor environment

External Environmental AnalysisMost firms face external environments that are highly turbulent complex and globalmdash conditions that make interpreting those environments difficult15 To cope with often ambiguous and incomplete environmental data and to increase understanding of the general environment firms engage in external environmental analysis This analysis has four parts scanning monitoring forecasting and assessing (see Table 22) Analyzing the external environment is a difficult yet significant activity16

Identifying opportunities and threats is an important objective of studying the gen-eral environment An opportunity is a condition in the general environment that if exploited effectively helps a company achieve strategic competitiveness For example recent market research results suggested to Procter amp Gamble (PampG) that an increasing number of men across the globe are interested in fragrances and skin care products To take advantage of this opportunity PampG is reorienting ldquohellip its beauty business by gen-der lsquoto better serve him and herrsquo rather than its typical organization around product categoriesrdquo17

A threat is a condition in the general environment that may hinder a companyrsquos efforts to achieve strategic competitiveness18 The once-revered firm Polaroid can attest to the seriousness of external threats Polaroid was a leader in its industry and con-sidered one of the top 50 firms in the United States When its competitors developed photographic equipment using digital technology Polaroid was unprepared and never responded effectively It filed for bankruptcy in 2001 In 2002 the former Polaroid Corp was sold to Bank Onersquos OEP Imaging unit which promptly changed its own name to Polaroid Corp Jacques Nasser a former CEO at Ford took over as CEO at Polaroid and found that the brand had continued life Nasser used the brand in a partnership with Petters Group to put the Polaroid name on ldquoTVs and DVDs made in Asian factories and sell them through Wal-Mart and Targetrdquo19 Polaroid went public again and was later

Scanning Identifying early signals of environmental changes and trends bull

Monitoring Detecting meaning through ongoing observations of bull

environmental changes and trends

Forecasting Developing projections of anticipated outcomes based on bull

monitored changes and trends

Assessing Determining the timing and importance of environmental bull

changes and trends for firmsrsquo strategies and their management

Table 22 Components of the External Environmental Analysis

An opportunity is a condition in the general environment that if exploited effectively helps a company achieve strategic competitiveness

A threat is a condition in the general environment that may hinder a companyrsquos efforts to achieve strategic competitiveness

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

Qwerty on KAT for More

40Pa

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Str

ateg

ic M

anag

emen

t In

put

s sold to Petters Group in 2005 However the firm then failed again resulting in another bankruptcy filing in December 2008 On April 16 2009 Polaroid was sold to a joint venture of Hilco Consumer Capital LP of Toronto and Gordon Brothers Brands LLC of Boston At the time the only assets remaining were the firmrsquos name its intellectual property and its photography collection20 Thus not responding to threats in its external environment resulted in the failure of the once highly successful Polaroid Corp

Firms use several sources to analyze the general environment including a wide variety of printed materials (such as trade publications newspapers business publications and the results of academic research and public polls) trade shows and suppliers customers and employees of public-sector organizations People in boundary-spanning positions can obtain a great deal of this type of information Salespersons purchasing managers public relations directors and customer service representatives each of whom interacts with external constituents are examples of boundary-spanning positions

ScanningScanning entails the study of all segments in the general environment Through scanning firms identify early signals of potential changes in the general environment and detect changes that are already under way21 Scanning often reveals ambiguous incomplete or unconnected data and information Thus environmental scanning is challenging but critically important for firms especially those competing in highly volatile environ-ments22 In addition scanning activities must be aligned with the organizational context a scanning system designed for a volatile environment is inappropriate for a firm in a stable environment23

Many firms use special software to help them identify events that are taking place in the environment and that are announced in public sources For example news event detection uses information-based systems to categorize text and reduce the trade-off between an important missed event and false alarm rates24 The Internet provides significant opportunities for scanning Amazoncom for example records significant information about individuals visiting its Web site particularly if a pur-chase is made Amazon then welcomes these customers by name when they visit the Web site again The firm sends messages to customers about specials and new prod-ucts similar to those they purchased in previous visits A number of other companies such as Netflix also collect demographic data about their customers in an attempt to identify their unique preferences (demographics is one of the segments in the general environment)

Philip Morris International continuously scans segments of its external environment to detect current conditions and to anticipate changes that might take place in different segments For example PMI always studies various nationsrsquo tax policies on cigarettes (these policies are part of the politicallegal segment) The reason for this is that raising cigarette taxes might reduce sales while lowering these taxes might increase sales

MonitoringWhen monitoring analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning25 Critical to successful monitoring is the firmrsquos ability to detect meaning in different environmental events and trends For example the buying power of Hispanics is projected to increase to $13 trillion by 2013 (up from $984 billion in 2008) Particularly in the southwestern part of the United States grocers believe that this growing population will increase its purchases of ethnic-oriented food products26 The recent financial crisis found companies carefully monitoring the emerging trend of customers deciding to ldquogo back to basicsrdquo when purchasing prod-ucts A reduction in brand loyalty may be an outcome of this trend Companies selling carefully branded products should monitor this trend to determine its meaningmdashboth in the short and long term27

41C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Effective monitoring requires the firm to identify important stakeholders as the foundation for serving their unique needs28 (Stakeholdersrsquo unique needs are described in Chapter 1) Scanning and monitoring are particularly important when a firm com-petes in an industry with high technological uncertainty29 Scanning and monitoring can provide the firm with information they also serve as a means of importing knowledge about markets and about how to successfully commercialize new technologies the firm has developed30

ForecastingScanning and monitoring are concerned with events and trends in the general environ-ment at a point in time When forecasting analysts develop feasible projections of what might happen and how quickly as a result of the changes and trends detected through scanning and monitoring31 For example analysts might forecast the time that will be required for a new technology to reach the marketplace the length of time before differ-ent corporate training procedures are required to deal with anticipated changes in the composition of the workforce or how much time will elapse before changes in govern-mental taxation policies affect consumersrsquo purchasing patterns

Forecasting events and outcomes accurately is challenging Already in place the trend of firms outsourcing call center work and logisticsrsquo activities to companies specializing in these activities appeared to accelerate as a result of the recent global crisis Having noticed (through scanning) and monitoring these outsourcing trends for some time logistics companies such as FedEx and United Parcel Service and call center provider Convergys are developing forecasts about possible increases in their business and how long the increasing trend of using their services might continue32 On the other hand Procter amp Gamble (PampG) and Colgate-Palmolive two firms selling carefully branded consumer products are now forecasting the effects of the trend for retailers to ldquohellip tout their lower-priced private-label goods and pressure their suppliers for lower pricesrdquo Thus PampG and Colgate are forecasting the effects of the twin issues of the decisions by the retailers to whom they sell products to manufacture and sell their own consumer products while simultaneously seeking lower prices on the products they do buy from them33

AssessingThe objective of assessing is to determine the timing and significance of the effects of environmental changes and trends that have been identified34 Through scanning moni-toring and forecasting analysts are able to understand the general environment Going a step further the intent of assessment is to specify the implications of that understanding Without assessment the firm is left with data that may be interesting but are of unknown competitive relevance Even if formal assessment is inadequate the appropriate interpre-tation of that information is important ldquoResearch found that how accurate senior execu-tives are about their competitive environments is indeed less important for strategy and corresponding organizational changes than the way in which they interpret information about their environmentsrdquo35 Thus although gathering and organizing information is important appropriately interpreting that intelligence to determine if an identified trend in the external environment is an opportunity or threat is equally important

As previously noted through forecasting PampG and Colgate have identified a trend among many of the retailers to whom they sell their carefully branded prod-ucts Essentially the trend is for these retailers to pressure firms such as PampG Colgate H J Heinz and Kelloggrsquosmdashto name a fewmdashto reduce the prices at which they sell their products to the retailers The ability of these retailers to produce and sell their own private-label merchandise supports their efforts to receive lower prices from branding giants such as those mentioned

In addition firms with well-known brands have detected a trend among consumers to receive more ldquovaluerdquo when purchasing branded products Having forecasted that this

In Chapter 3 we note that value is measured by a productrsquos performance characteristics and by its attributes for which customers are willing to pay A number of companies producing brand-name products believe that the recent

global crisis is producing a trend in which what customers value is changing In slightly different words through monitoring and scanning companies are forecasting that the performance characteristics and product attributes for which todayrsquos customers are willing to pay are changing as a result of the recent global crisis In addition through assessment companies producing name-brand products believe that changes in how customers define value are significant and may be long-lasting In response some firms are changing some of the performance characteristics and attributes of their products to create more value for customers A comment from an analyst about this trend is ldquohellip companies are having to consider their lsquovaluersquo equation to try to serve the millions of consumers who either canrsquot afford premium experiences or just donrsquot want them anymorerdquo

Letrsquos consider some examples of ldquodifferentrdquo value that companies are now providing to customers The desire for smaller homes is a trend spotted by builders of premium-priced homes The fact that the average size of a new home built in the United States declined in 2008 for the first time in 35 years is an indicator of this trend Builders of premium homes are using better designs to improve space utilization and traffic flow and increases in energy

efficiency to create more value for customers Facilitating these buildersrsquo efforts are changes appliance manufacturers are making to the performance characteristics of their products also in attempts to create more value for their customers General Electric for example is offering a hybrid electric water heater that is estimated to save consumers $250 annually The value created by this product is twofoldmdashreduced cost to the consumer and a reduction to energy consumption as a benefit to society as a whole Kohler is offering energy-efficient faucets toilets and showerheads at virtually the same price as its less energy-efficient products Thus these products also create customer value in the form of reduced cost while being environmentally friendly Other appliance firms such as Whirlpool are producing products with similar performance characteristics to create customer value

Other types of companies are also redefining the value their products provide to customers Believing that ldquohellip value is not just cost itrsquos also taste nutrition and qualityrdquo Del Monte Foodsrsquos advertising campaigns now emphasize that compared to some frozen and even fresh items canned foods can offer better value when the customer combines cost with nutritional benefits Frito-Lay (a division of PepsiCo) is increasing customer

value by adding 20 percent more product to selected bags of Cheetos Fritos and Tostitos without increasing prices Michaels a large chain of craft outlets now emphasizes that when customers purchase their goods as raw materials for making various items they are becoming more sustainable in that they are ldquomaking stuffrdquo rather than simply ldquobuying more stuffrdquo

CONSUMERSrsquo DESIRE TO RECEIVE ADDITIONAL

VALUE WHEN PURCHASING BRAND-NAME PRODUCTS

Elm

und

Sum

ner

Phot

olib

rary

The attributes desired by buyers of premium homes are changing and home builders are responding by delivering value in the form of greater energy efficiency and more modern designs Would a smaller more environmentally efficient home be of more value to you than a larger less efficient one

As these examples suggest all types of companies (and especially those selling brand-name products) are trying to create a different type of value for customers in response to trends they are observing in their general environment Regardless of the good or service a firm offers it seems that the following words from an analyst capture the challenge facing todayrsquos companies ldquoSo herersquos a call to all companies evaluate everything you are offering consumers to see how you can infuse the value of good value into your brandrdquo

Sources A Athavaley 2009 Eco-friendlymdashand frugal Wall Street Journal Online httpwwwwsjcom February 11 S Elliott 2009 Food brands compete to stretch a dollar New York Times Online httpwwwnytimescom May 10 D Kaplan 2009 Value-oriented chains thrive amid recession Houston Chronicle Online httpwwwchroncom April 24 M Penn 2009 Value is the new green Wall Street Journal Online httpwwwwsjcom March 13 C C Miller 2008 For craft sales the recession is a help New York Times Online httpwwwnytimescom December 23

trend toward ldquowanting more valuerdquo may last beyond the current global recession many of these firms are taking actions in response to their assessment of the significance of what may be a long-lasting trend toward value purchases In the Strategic Focus we describe actions some firms with well-known brands are taking in response to an assess-ment that this trend may have significant effects on their operations at least in the short run if not longer term as well

Segments of the General EnvironmentThe general environment is composed of segments that are external to the firm (see Table 21) Although the degree of impact varies these environmental segments affect all industries and the firms competing in them The challenge to each firm is to scan monitor forecast and assess the elements in each segment to determine their effects on the firm Effective scanning monitoring forecasting and assessing are vital to the firmrsquos efforts to recognize and evaluate opportunities and threats

The Demographic SegmentThe demographic segment is concerned with a populationrsquos size age structure geo-graphic distribution ethnic mix and income distribution36 Demographic segments are commonly analyzed on a global basis because of their potential effects across countriesrsquo borders and because many firms compete in global markets

Population SizeThe worldrsquos population doubled (from 3 billion to 6 billion) in the roughly 40-year period between 1959 and 1999 Current projects suggest that population growth will continue in the twenty-first century but at a slower pace The US Census Bureau projects that the worldrsquos population will be 9 billion by 204037 By 2050 India is expected to be the most populous nation in the world (with over 18 billion people) China the United States Indonesia and Pakistan are predicted to be the next four largest nations by population count in 2050 Firms seeking to find growing markets in which to sell their goods and services want to recognize the market potential that may exist for them in these five nations

While observing the population of different nations and regions of the world firms also want to study changes occurring within different populations to assess their strategic implications For example in 2006 20 percent of Japanrsquos citizens were 65 or older while the United States and China will not reach this level until 203638 Aging populations are a significant problem for countries because of the need for workers and the burden of

The demographic segment is concerned with a populationrsquos size age structure geographic distribution ethnic mix and income distribution

38Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s

The industry environment is the set of factors that directly influences a firm and its competitive actions and responses13 the threat of new entrants the power of suppliers the power of buyers the threat of product substitutes and the intensity of rivalry among competitors In total the interactions among these five factors determine an industryrsquos profit potential in turn the industryrsquos profit potential influences the choices each firm makes about its strategic actions The challenge for a firm is to locate a position within an industry where it can favorably influence the five factors or where it can successfully defend against their influence The greater a firmrsquos capacity to favorably influence its industry environment the greater the likelihood that the firm will earn above-average returns

How companies gather and interpret information about their competitors is called competitor analysis Understanding the firmrsquos competitor environment complements the insights provided by studying the general and industry environments14 This means for example that Philip Morris International wants to learn as much as it can about its two

Demographic Segment Population size bull

Age structure bull

Geographic distribution bull

Ethnic mix bull

Income distribution bull

Economic Segment Inflation rates bull

Interest rates bull

Trade deficits or surpluses bull

Budget deficits or surpluses bull

Personal savings rate bull

Business savings rates bull

Gross domestic product bull

PoliticalLegal Segment Antitrust laws bull

Taxation laws bull

Deregulation philosophies bull

Labor training laws bull

Educational philosophies bull

and policies

Sociocultural Segment Women in the workforce bull

Workforce diversity bull

Attitudes about the quality bull

of work life

Shifts in work and career bull

preferencesShifts in preferences bull

regarding product and service characteristics

Technological Segment Product innovations bull

Applications of knowledge bull

Focus of private and bull

government-supported RampD expendituresNew communication bull

technologies

Global Segment Important political events bull

Critical global markets bull

Newly industrialized bull

countriesDifferent cultural and bull

institutional attributes

Physical Environment Segment

Energy consumption bull

Practices used to develop bull

energy sourcesRenewable energy efforts bull

Minimizing a firmrsquos bull

environmental footprint

Availability of water as a bull

resourceProducing environmentally bull

friendly products

Table 21 The General Environment Segments and Elements

The industry environment is the set of factors that directly infl uences a fi rm and its competitive actions and competitive responses the threat of new entrants the power of suppliers the power of buyers the threat of product substitutes and the intensity of rivalry among competitors

39

major competitorsmdashBritish American Tobacco and Japan Tobacco Internationalmdashwhile also learning about its general and industry environments

Analysis of the general environment is focused on environmental trends while an analysis of the industry environment is focused on the factors and conditions influenc-ing an industryrsquos profitability potential and an analysis of competitors is focused on predicting competitorsrsquo actions responses and intentions In combination the results of these three analyses influence the firmrsquos vision mission and strategic actions Although we discuss each analysis separately performance improves when the firm integrates the insights provided by analyses of the general environment the industry environment and the competitor environment

External Environmental AnalysisMost firms face external environments that are highly turbulent complex and globalmdash conditions that make interpreting those environments difficult15 To cope with often ambiguous and incomplete environmental data and to increase understanding of the general environment firms engage in external environmental analysis This analysis has four parts scanning monitoring forecasting and assessing (see Table 22) Analyzing the external environment is a difficult yet significant activity16

Identifying opportunities and threats is an important objective of studying the gen-eral environment An opportunity is a condition in the general environment that if exploited effectively helps a company achieve strategic competitiveness For example recent market research results suggested to Procter amp Gamble (PampG) that an increasing number of men across the globe are interested in fragrances and skin care products To take advantage of this opportunity PampG is reorienting ldquohellip its beauty business by gen-der lsquoto better serve him and herrsquo rather than its typical organization around product categoriesrdquo17

A threat is a condition in the general environment that may hinder a companyrsquos efforts to achieve strategic competitiveness18 The once-revered firm Polaroid can attest to the seriousness of external threats Polaroid was a leader in its industry and con-sidered one of the top 50 firms in the United States When its competitors developed photographic equipment using digital technology Polaroid was unprepared and never responded effectively It filed for bankruptcy in 2001 In 2002 the former Polaroid Corp was sold to Bank Onersquos OEP Imaging unit which promptly changed its own name to Polaroid Corp Jacques Nasser a former CEO at Ford took over as CEO at Polaroid and found that the brand had continued life Nasser used the brand in a partnership with Petters Group to put the Polaroid name on ldquoTVs and DVDs made in Asian factories and sell them through Wal-Mart and Targetrdquo19 Polaroid went public again and was later

Scanning Identifying early signals of environmental changes and trends bull

Monitoring Detecting meaning through ongoing observations of bull

environmental changes and trends

Forecasting Developing projections of anticipated outcomes based on bull

monitored changes and trends

Assessing Determining the timing and importance of environmental bull

changes and trends for firmsrsquo strategies and their management

Table 22 Components of the External Environmental Analysis

An opportunity is a condition in the general environment that if exploited effectively helps a company achieve strategic competitiveness

A threat is a condition in the general environment that may hinder a companyrsquos efforts to achieve strategic competitiveness

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

Qwerty on KAT for More

40Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s sold to Petters Group in 2005 However the firm then failed again resulting in another bankruptcy filing in December 2008 On April 16 2009 Polaroid was sold to a joint venture of Hilco Consumer Capital LP of Toronto and Gordon Brothers Brands LLC of Boston At the time the only assets remaining were the firmrsquos name its intellectual property and its photography collection20 Thus not responding to threats in its external environment resulted in the failure of the once highly successful Polaroid Corp

Firms use several sources to analyze the general environment including a wide variety of printed materials (such as trade publications newspapers business publications and the results of academic research and public polls) trade shows and suppliers customers and employees of public-sector organizations People in boundary-spanning positions can obtain a great deal of this type of information Salespersons purchasing managers public relations directors and customer service representatives each of whom interacts with external constituents are examples of boundary-spanning positions

ScanningScanning entails the study of all segments in the general environment Through scanning firms identify early signals of potential changes in the general environment and detect changes that are already under way21 Scanning often reveals ambiguous incomplete or unconnected data and information Thus environmental scanning is challenging but critically important for firms especially those competing in highly volatile environ-ments22 In addition scanning activities must be aligned with the organizational context a scanning system designed for a volatile environment is inappropriate for a firm in a stable environment23

Many firms use special software to help them identify events that are taking place in the environment and that are announced in public sources For example news event detection uses information-based systems to categorize text and reduce the trade-off between an important missed event and false alarm rates24 The Internet provides significant opportunities for scanning Amazoncom for example records significant information about individuals visiting its Web site particularly if a pur-chase is made Amazon then welcomes these customers by name when they visit the Web site again The firm sends messages to customers about specials and new prod-ucts similar to those they purchased in previous visits A number of other companies such as Netflix also collect demographic data about their customers in an attempt to identify their unique preferences (demographics is one of the segments in the general environment)

Philip Morris International continuously scans segments of its external environment to detect current conditions and to anticipate changes that might take place in different segments For example PMI always studies various nationsrsquo tax policies on cigarettes (these policies are part of the politicallegal segment) The reason for this is that raising cigarette taxes might reduce sales while lowering these taxes might increase sales

MonitoringWhen monitoring analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning25 Critical to successful monitoring is the firmrsquos ability to detect meaning in different environmental events and trends For example the buying power of Hispanics is projected to increase to $13 trillion by 2013 (up from $984 billion in 2008) Particularly in the southwestern part of the United States grocers believe that this growing population will increase its purchases of ethnic-oriented food products26 The recent financial crisis found companies carefully monitoring the emerging trend of customers deciding to ldquogo back to basicsrdquo when purchasing prod-ucts A reduction in brand loyalty may be an outcome of this trend Companies selling carefully branded products should monitor this trend to determine its meaningmdashboth in the short and long term27

41C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Effective monitoring requires the firm to identify important stakeholders as the foundation for serving their unique needs28 (Stakeholdersrsquo unique needs are described in Chapter 1) Scanning and monitoring are particularly important when a firm com-petes in an industry with high technological uncertainty29 Scanning and monitoring can provide the firm with information they also serve as a means of importing knowledge about markets and about how to successfully commercialize new technologies the firm has developed30

ForecastingScanning and monitoring are concerned with events and trends in the general environ-ment at a point in time When forecasting analysts develop feasible projections of what might happen and how quickly as a result of the changes and trends detected through scanning and monitoring31 For example analysts might forecast the time that will be required for a new technology to reach the marketplace the length of time before differ-ent corporate training procedures are required to deal with anticipated changes in the composition of the workforce or how much time will elapse before changes in govern-mental taxation policies affect consumersrsquo purchasing patterns

Forecasting events and outcomes accurately is challenging Already in place the trend of firms outsourcing call center work and logisticsrsquo activities to companies specializing in these activities appeared to accelerate as a result of the recent global crisis Having noticed (through scanning) and monitoring these outsourcing trends for some time logistics companies such as FedEx and United Parcel Service and call center provider Convergys are developing forecasts about possible increases in their business and how long the increasing trend of using their services might continue32 On the other hand Procter amp Gamble (PampG) and Colgate-Palmolive two firms selling carefully branded consumer products are now forecasting the effects of the trend for retailers to ldquohellip tout their lower-priced private-label goods and pressure their suppliers for lower pricesrdquo Thus PampG and Colgate are forecasting the effects of the twin issues of the decisions by the retailers to whom they sell products to manufacture and sell their own consumer products while simultaneously seeking lower prices on the products they do buy from them33

AssessingThe objective of assessing is to determine the timing and significance of the effects of environmental changes and trends that have been identified34 Through scanning moni-toring and forecasting analysts are able to understand the general environment Going a step further the intent of assessment is to specify the implications of that understanding Without assessment the firm is left with data that may be interesting but are of unknown competitive relevance Even if formal assessment is inadequate the appropriate interpre-tation of that information is important ldquoResearch found that how accurate senior execu-tives are about their competitive environments is indeed less important for strategy and corresponding organizational changes than the way in which they interpret information about their environmentsrdquo35 Thus although gathering and organizing information is important appropriately interpreting that intelligence to determine if an identified trend in the external environment is an opportunity or threat is equally important

As previously noted through forecasting PampG and Colgate have identified a trend among many of the retailers to whom they sell their carefully branded prod-ucts Essentially the trend is for these retailers to pressure firms such as PampG Colgate H J Heinz and Kelloggrsquosmdashto name a fewmdashto reduce the prices at which they sell their products to the retailers The ability of these retailers to produce and sell their own private-label merchandise supports their efforts to receive lower prices from branding giants such as those mentioned

In addition firms with well-known brands have detected a trend among consumers to receive more ldquovaluerdquo when purchasing branded products Having forecasted that this

In Chapter 3 we note that value is measured by a productrsquos performance characteristics and by its attributes for which customers are willing to pay A number of companies producing brand-name products believe that the recent

global crisis is producing a trend in which what customers value is changing In slightly different words through monitoring and scanning companies are forecasting that the performance characteristics and product attributes for which todayrsquos customers are willing to pay are changing as a result of the recent global crisis In addition through assessment companies producing name-brand products believe that changes in how customers define value are significant and may be long-lasting In response some firms are changing some of the performance characteristics and attributes of their products to create more value for customers A comment from an analyst about this trend is ldquohellip companies are having to consider their lsquovaluersquo equation to try to serve the millions of consumers who either canrsquot afford premium experiences or just donrsquot want them anymorerdquo

Letrsquos consider some examples of ldquodifferentrdquo value that companies are now providing to customers The desire for smaller homes is a trend spotted by builders of premium-priced homes The fact that the average size of a new home built in the United States declined in 2008 for the first time in 35 years is an indicator of this trend Builders of premium homes are using better designs to improve space utilization and traffic flow and increases in energy

efficiency to create more value for customers Facilitating these buildersrsquo efforts are changes appliance manufacturers are making to the performance characteristics of their products also in attempts to create more value for their customers General Electric for example is offering a hybrid electric water heater that is estimated to save consumers $250 annually The value created by this product is twofoldmdashreduced cost to the consumer and a reduction to energy consumption as a benefit to society as a whole Kohler is offering energy-efficient faucets toilets and showerheads at virtually the same price as its less energy-efficient products Thus these products also create customer value in the form of reduced cost while being environmentally friendly Other appliance firms such as Whirlpool are producing products with similar performance characteristics to create customer value

Other types of companies are also redefining the value their products provide to customers Believing that ldquohellip value is not just cost itrsquos also taste nutrition and qualityrdquo Del Monte Foodsrsquos advertising campaigns now emphasize that compared to some frozen and even fresh items canned foods can offer better value when the customer combines cost with nutritional benefits Frito-Lay (a division of PepsiCo) is increasing customer

value by adding 20 percent more product to selected bags of Cheetos Fritos and Tostitos without increasing prices Michaels a large chain of craft outlets now emphasizes that when customers purchase their goods as raw materials for making various items they are becoming more sustainable in that they are ldquomaking stuffrdquo rather than simply ldquobuying more stuffrdquo

CONSUMERSrsquo DESIRE TO RECEIVE ADDITIONAL

VALUE WHEN PURCHASING BRAND-NAME PRODUCTS

Elm

und

Sum

ner

Phot

olib

rary

The attributes desired by buyers of premium homes are changing and home builders are responding by delivering value in the form of greater energy efficiency and more modern designs Would a smaller more environmentally efficient home be of more value to you than a larger less efficient one

As these examples suggest all types of companies (and especially those selling brand-name products) are trying to create a different type of value for customers in response to trends they are observing in their general environment Regardless of the good or service a firm offers it seems that the following words from an analyst capture the challenge facing todayrsquos companies ldquoSo herersquos a call to all companies evaluate everything you are offering consumers to see how you can infuse the value of good value into your brandrdquo

Sources A Athavaley 2009 Eco-friendlymdashand frugal Wall Street Journal Online httpwwwwsjcom February 11 S Elliott 2009 Food brands compete to stretch a dollar New York Times Online httpwwwnytimescom May 10 D Kaplan 2009 Value-oriented chains thrive amid recession Houston Chronicle Online httpwwwchroncom April 24 M Penn 2009 Value is the new green Wall Street Journal Online httpwwwwsjcom March 13 C C Miller 2008 For craft sales the recession is a help New York Times Online httpwwwnytimescom December 23

trend toward ldquowanting more valuerdquo may last beyond the current global recession many of these firms are taking actions in response to their assessment of the significance of what may be a long-lasting trend toward value purchases In the Strategic Focus we describe actions some firms with well-known brands are taking in response to an assess-ment that this trend may have significant effects on their operations at least in the short run if not longer term as well

Segments of the General EnvironmentThe general environment is composed of segments that are external to the firm (see Table 21) Although the degree of impact varies these environmental segments affect all industries and the firms competing in them The challenge to each firm is to scan monitor forecast and assess the elements in each segment to determine their effects on the firm Effective scanning monitoring forecasting and assessing are vital to the firmrsquos efforts to recognize and evaluate opportunities and threats

The Demographic SegmentThe demographic segment is concerned with a populationrsquos size age structure geo-graphic distribution ethnic mix and income distribution36 Demographic segments are commonly analyzed on a global basis because of their potential effects across countriesrsquo borders and because many firms compete in global markets

Population SizeThe worldrsquos population doubled (from 3 billion to 6 billion) in the roughly 40-year period between 1959 and 1999 Current projects suggest that population growth will continue in the twenty-first century but at a slower pace The US Census Bureau projects that the worldrsquos population will be 9 billion by 204037 By 2050 India is expected to be the most populous nation in the world (with over 18 billion people) China the United States Indonesia and Pakistan are predicted to be the next four largest nations by population count in 2050 Firms seeking to find growing markets in which to sell their goods and services want to recognize the market potential that may exist for them in these five nations

While observing the population of different nations and regions of the world firms also want to study changes occurring within different populations to assess their strategic implications For example in 2006 20 percent of Japanrsquos citizens were 65 or older while the United States and China will not reach this level until 203638 Aging populations are a significant problem for countries because of the need for workers and the burden of

The demographic segment is concerned with a populationrsquos size age structure geographic distribution ethnic mix and income distribution

39

major competitorsmdashBritish American Tobacco and Japan Tobacco Internationalmdashwhile also learning about its general and industry environments

Analysis of the general environment is focused on environmental trends while an analysis of the industry environment is focused on the factors and conditions influenc-ing an industryrsquos profitability potential and an analysis of competitors is focused on predicting competitorsrsquo actions responses and intentions In combination the results of these three analyses influence the firmrsquos vision mission and strategic actions Although we discuss each analysis separately performance improves when the firm integrates the insights provided by analyses of the general environment the industry environment and the competitor environment

External Environmental AnalysisMost firms face external environments that are highly turbulent complex and globalmdash conditions that make interpreting those environments difficult15 To cope with often ambiguous and incomplete environmental data and to increase understanding of the general environment firms engage in external environmental analysis This analysis has four parts scanning monitoring forecasting and assessing (see Table 22) Analyzing the external environment is a difficult yet significant activity16

Identifying opportunities and threats is an important objective of studying the gen-eral environment An opportunity is a condition in the general environment that if exploited effectively helps a company achieve strategic competitiveness For example recent market research results suggested to Procter amp Gamble (PampG) that an increasing number of men across the globe are interested in fragrances and skin care products To take advantage of this opportunity PampG is reorienting ldquohellip its beauty business by gen-der lsquoto better serve him and herrsquo rather than its typical organization around product categoriesrdquo17

A threat is a condition in the general environment that may hinder a companyrsquos efforts to achieve strategic competitiveness18 The once-revered firm Polaroid can attest to the seriousness of external threats Polaroid was a leader in its industry and con-sidered one of the top 50 firms in the United States When its competitors developed photographic equipment using digital technology Polaroid was unprepared and never responded effectively It filed for bankruptcy in 2001 In 2002 the former Polaroid Corp was sold to Bank Onersquos OEP Imaging unit which promptly changed its own name to Polaroid Corp Jacques Nasser a former CEO at Ford took over as CEO at Polaroid and found that the brand had continued life Nasser used the brand in a partnership with Petters Group to put the Polaroid name on ldquoTVs and DVDs made in Asian factories and sell them through Wal-Mart and Targetrdquo19 Polaroid went public again and was later

Scanning Identifying early signals of environmental changes and trends bull

Monitoring Detecting meaning through ongoing observations of bull

environmental changes and trends

Forecasting Developing projections of anticipated outcomes based on bull

monitored changes and trends

Assessing Determining the timing and importance of environmental bull

changes and trends for firmsrsquo strategies and their management

Table 22 Components of the External Environmental Analysis

An opportunity is a condition in the general environment that if exploited effectively helps a company achieve strategic competitiveness

A threat is a condition in the general environment that may hinder a companyrsquos efforts to achieve strategic competitiveness

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

Qwerty on KAT for More

40Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s sold to Petters Group in 2005 However the firm then failed again resulting in another bankruptcy filing in December 2008 On April 16 2009 Polaroid was sold to a joint venture of Hilco Consumer Capital LP of Toronto and Gordon Brothers Brands LLC of Boston At the time the only assets remaining were the firmrsquos name its intellectual property and its photography collection20 Thus not responding to threats in its external environment resulted in the failure of the once highly successful Polaroid Corp

Firms use several sources to analyze the general environment including a wide variety of printed materials (such as trade publications newspapers business publications and the results of academic research and public polls) trade shows and suppliers customers and employees of public-sector organizations People in boundary-spanning positions can obtain a great deal of this type of information Salespersons purchasing managers public relations directors and customer service representatives each of whom interacts with external constituents are examples of boundary-spanning positions

ScanningScanning entails the study of all segments in the general environment Through scanning firms identify early signals of potential changes in the general environment and detect changes that are already under way21 Scanning often reveals ambiguous incomplete or unconnected data and information Thus environmental scanning is challenging but critically important for firms especially those competing in highly volatile environ-ments22 In addition scanning activities must be aligned with the organizational context a scanning system designed for a volatile environment is inappropriate for a firm in a stable environment23

Many firms use special software to help them identify events that are taking place in the environment and that are announced in public sources For example news event detection uses information-based systems to categorize text and reduce the trade-off between an important missed event and false alarm rates24 The Internet provides significant opportunities for scanning Amazoncom for example records significant information about individuals visiting its Web site particularly if a pur-chase is made Amazon then welcomes these customers by name when they visit the Web site again The firm sends messages to customers about specials and new prod-ucts similar to those they purchased in previous visits A number of other companies such as Netflix also collect demographic data about their customers in an attempt to identify their unique preferences (demographics is one of the segments in the general environment)

Philip Morris International continuously scans segments of its external environment to detect current conditions and to anticipate changes that might take place in different segments For example PMI always studies various nationsrsquo tax policies on cigarettes (these policies are part of the politicallegal segment) The reason for this is that raising cigarette taxes might reduce sales while lowering these taxes might increase sales

MonitoringWhen monitoring analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning25 Critical to successful monitoring is the firmrsquos ability to detect meaning in different environmental events and trends For example the buying power of Hispanics is projected to increase to $13 trillion by 2013 (up from $984 billion in 2008) Particularly in the southwestern part of the United States grocers believe that this growing population will increase its purchases of ethnic-oriented food products26 The recent financial crisis found companies carefully monitoring the emerging trend of customers deciding to ldquogo back to basicsrdquo when purchasing prod-ucts A reduction in brand loyalty may be an outcome of this trend Companies selling carefully branded products should monitor this trend to determine its meaningmdashboth in the short and long term27

41C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Effective monitoring requires the firm to identify important stakeholders as the foundation for serving their unique needs28 (Stakeholdersrsquo unique needs are described in Chapter 1) Scanning and monitoring are particularly important when a firm com-petes in an industry with high technological uncertainty29 Scanning and monitoring can provide the firm with information they also serve as a means of importing knowledge about markets and about how to successfully commercialize new technologies the firm has developed30

ForecastingScanning and monitoring are concerned with events and trends in the general environ-ment at a point in time When forecasting analysts develop feasible projections of what might happen and how quickly as a result of the changes and trends detected through scanning and monitoring31 For example analysts might forecast the time that will be required for a new technology to reach the marketplace the length of time before differ-ent corporate training procedures are required to deal with anticipated changes in the composition of the workforce or how much time will elapse before changes in govern-mental taxation policies affect consumersrsquo purchasing patterns

Forecasting events and outcomes accurately is challenging Already in place the trend of firms outsourcing call center work and logisticsrsquo activities to companies specializing in these activities appeared to accelerate as a result of the recent global crisis Having noticed (through scanning) and monitoring these outsourcing trends for some time logistics companies such as FedEx and United Parcel Service and call center provider Convergys are developing forecasts about possible increases in their business and how long the increasing trend of using their services might continue32 On the other hand Procter amp Gamble (PampG) and Colgate-Palmolive two firms selling carefully branded consumer products are now forecasting the effects of the trend for retailers to ldquohellip tout their lower-priced private-label goods and pressure their suppliers for lower pricesrdquo Thus PampG and Colgate are forecasting the effects of the twin issues of the decisions by the retailers to whom they sell products to manufacture and sell their own consumer products while simultaneously seeking lower prices on the products they do buy from them33

AssessingThe objective of assessing is to determine the timing and significance of the effects of environmental changes and trends that have been identified34 Through scanning moni-toring and forecasting analysts are able to understand the general environment Going a step further the intent of assessment is to specify the implications of that understanding Without assessment the firm is left with data that may be interesting but are of unknown competitive relevance Even if formal assessment is inadequate the appropriate interpre-tation of that information is important ldquoResearch found that how accurate senior execu-tives are about their competitive environments is indeed less important for strategy and corresponding organizational changes than the way in which they interpret information about their environmentsrdquo35 Thus although gathering and organizing information is important appropriately interpreting that intelligence to determine if an identified trend in the external environment is an opportunity or threat is equally important

As previously noted through forecasting PampG and Colgate have identified a trend among many of the retailers to whom they sell their carefully branded prod-ucts Essentially the trend is for these retailers to pressure firms such as PampG Colgate H J Heinz and Kelloggrsquosmdashto name a fewmdashto reduce the prices at which they sell their products to the retailers The ability of these retailers to produce and sell their own private-label merchandise supports their efforts to receive lower prices from branding giants such as those mentioned

In addition firms with well-known brands have detected a trend among consumers to receive more ldquovaluerdquo when purchasing branded products Having forecasted that this

In Chapter 3 we note that value is measured by a productrsquos performance characteristics and by its attributes for which customers are willing to pay A number of companies producing brand-name products believe that the recent

global crisis is producing a trend in which what customers value is changing In slightly different words through monitoring and scanning companies are forecasting that the performance characteristics and product attributes for which todayrsquos customers are willing to pay are changing as a result of the recent global crisis In addition through assessment companies producing name-brand products believe that changes in how customers define value are significant and may be long-lasting In response some firms are changing some of the performance characteristics and attributes of their products to create more value for customers A comment from an analyst about this trend is ldquohellip companies are having to consider their lsquovaluersquo equation to try to serve the millions of consumers who either canrsquot afford premium experiences or just donrsquot want them anymorerdquo

Letrsquos consider some examples of ldquodifferentrdquo value that companies are now providing to customers The desire for smaller homes is a trend spotted by builders of premium-priced homes The fact that the average size of a new home built in the United States declined in 2008 for the first time in 35 years is an indicator of this trend Builders of premium homes are using better designs to improve space utilization and traffic flow and increases in energy

efficiency to create more value for customers Facilitating these buildersrsquo efforts are changes appliance manufacturers are making to the performance characteristics of their products also in attempts to create more value for their customers General Electric for example is offering a hybrid electric water heater that is estimated to save consumers $250 annually The value created by this product is twofoldmdashreduced cost to the consumer and a reduction to energy consumption as a benefit to society as a whole Kohler is offering energy-efficient faucets toilets and showerheads at virtually the same price as its less energy-efficient products Thus these products also create customer value in the form of reduced cost while being environmentally friendly Other appliance firms such as Whirlpool are producing products with similar performance characteristics to create customer value

Other types of companies are also redefining the value their products provide to customers Believing that ldquohellip value is not just cost itrsquos also taste nutrition and qualityrdquo Del Monte Foodsrsquos advertising campaigns now emphasize that compared to some frozen and even fresh items canned foods can offer better value when the customer combines cost with nutritional benefits Frito-Lay (a division of PepsiCo) is increasing customer

value by adding 20 percent more product to selected bags of Cheetos Fritos and Tostitos without increasing prices Michaels a large chain of craft outlets now emphasizes that when customers purchase their goods as raw materials for making various items they are becoming more sustainable in that they are ldquomaking stuffrdquo rather than simply ldquobuying more stuffrdquo

CONSUMERSrsquo DESIRE TO RECEIVE ADDITIONAL

VALUE WHEN PURCHASING BRAND-NAME PRODUCTS

Elm

und

Sum

ner

Phot

olib

rary

The attributes desired by buyers of premium homes are changing and home builders are responding by delivering value in the form of greater energy efficiency and more modern designs Would a smaller more environmentally efficient home be of more value to you than a larger less efficient one

As these examples suggest all types of companies (and especially those selling brand-name products) are trying to create a different type of value for customers in response to trends they are observing in their general environment Regardless of the good or service a firm offers it seems that the following words from an analyst capture the challenge facing todayrsquos companies ldquoSo herersquos a call to all companies evaluate everything you are offering consumers to see how you can infuse the value of good value into your brandrdquo

Sources A Athavaley 2009 Eco-friendlymdashand frugal Wall Street Journal Online httpwwwwsjcom February 11 S Elliott 2009 Food brands compete to stretch a dollar New York Times Online httpwwwnytimescom May 10 D Kaplan 2009 Value-oriented chains thrive amid recession Houston Chronicle Online httpwwwchroncom April 24 M Penn 2009 Value is the new green Wall Street Journal Online httpwwwwsjcom March 13 C C Miller 2008 For craft sales the recession is a help New York Times Online httpwwwnytimescom December 23

trend toward ldquowanting more valuerdquo may last beyond the current global recession many of these firms are taking actions in response to their assessment of the significance of what may be a long-lasting trend toward value purchases In the Strategic Focus we describe actions some firms with well-known brands are taking in response to an assess-ment that this trend may have significant effects on their operations at least in the short run if not longer term as well

Segments of the General EnvironmentThe general environment is composed of segments that are external to the firm (see Table 21) Although the degree of impact varies these environmental segments affect all industries and the firms competing in them The challenge to each firm is to scan monitor forecast and assess the elements in each segment to determine their effects on the firm Effective scanning monitoring forecasting and assessing are vital to the firmrsquos efforts to recognize and evaluate opportunities and threats

The Demographic SegmentThe demographic segment is concerned with a populationrsquos size age structure geo-graphic distribution ethnic mix and income distribution36 Demographic segments are commonly analyzed on a global basis because of their potential effects across countriesrsquo borders and because many firms compete in global markets

Population SizeThe worldrsquos population doubled (from 3 billion to 6 billion) in the roughly 40-year period between 1959 and 1999 Current projects suggest that population growth will continue in the twenty-first century but at a slower pace The US Census Bureau projects that the worldrsquos population will be 9 billion by 204037 By 2050 India is expected to be the most populous nation in the world (with over 18 billion people) China the United States Indonesia and Pakistan are predicted to be the next four largest nations by population count in 2050 Firms seeking to find growing markets in which to sell their goods and services want to recognize the market potential that may exist for them in these five nations

While observing the population of different nations and regions of the world firms also want to study changes occurring within different populations to assess their strategic implications For example in 2006 20 percent of Japanrsquos citizens were 65 or older while the United States and China will not reach this level until 203638 Aging populations are a significant problem for countries because of the need for workers and the burden of

The demographic segment is concerned with a populationrsquos size age structure geographic distribution ethnic mix and income distribution

40Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s sold to Petters Group in 2005 However the firm then failed again resulting in another bankruptcy filing in December 2008 On April 16 2009 Polaroid was sold to a joint venture of Hilco Consumer Capital LP of Toronto and Gordon Brothers Brands LLC of Boston At the time the only assets remaining were the firmrsquos name its intellectual property and its photography collection20 Thus not responding to threats in its external environment resulted in the failure of the once highly successful Polaroid Corp

Firms use several sources to analyze the general environment including a wide variety of printed materials (such as trade publications newspapers business publications and the results of academic research and public polls) trade shows and suppliers customers and employees of public-sector organizations People in boundary-spanning positions can obtain a great deal of this type of information Salespersons purchasing managers public relations directors and customer service representatives each of whom interacts with external constituents are examples of boundary-spanning positions

ScanningScanning entails the study of all segments in the general environment Through scanning firms identify early signals of potential changes in the general environment and detect changes that are already under way21 Scanning often reveals ambiguous incomplete or unconnected data and information Thus environmental scanning is challenging but critically important for firms especially those competing in highly volatile environ-ments22 In addition scanning activities must be aligned with the organizational context a scanning system designed for a volatile environment is inappropriate for a firm in a stable environment23

Many firms use special software to help them identify events that are taking place in the environment and that are announced in public sources For example news event detection uses information-based systems to categorize text and reduce the trade-off between an important missed event and false alarm rates24 The Internet provides significant opportunities for scanning Amazoncom for example records significant information about individuals visiting its Web site particularly if a pur-chase is made Amazon then welcomes these customers by name when they visit the Web site again The firm sends messages to customers about specials and new prod-ucts similar to those they purchased in previous visits A number of other companies such as Netflix also collect demographic data about their customers in an attempt to identify their unique preferences (demographics is one of the segments in the general environment)

Philip Morris International continuously scans segments of its external environment to detect current conditions and to anticipate changes that might take place in different segments For example PMI always studies various nationsrsquo tax policies on cigarettes (these policies are part of the politicallegal segment) The reason for this is that raising cigarette taxes might reduce sales while lowering these taxes might increase sales

MonitoringWhen monitoring analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning25 Critical to successful monitoring is the firmrsquos ability to detect meaning in different environmental events and trends For example the buying power of Hispanics is projected to increase to $13 trillion by 2013 (up from $984 billion in 2008) Particularly in the southwestern part of the United States grocers believe that this growing population will increase its purchases of ethnic-oriented food products26 The recent financial crisis found companies carefully monitoring the emerging trend of customers deciding to ldquogo back to basicsrdquo when purchasing prod-ucts A reduction in brand loyalty may be an outcome of this trend Companies selling carefully branded products should monitor this trend to determine its meaningmdashboth in the short and long term27

41C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Effective monitoring requires the firm to identify important stakeholders as the foundation for serving their unique needs28 (Stakeholdersrsquo unique needs are described in Chapter 1) Scanning and monitoring are particularly important when a firm com-petes in an industry with high technological uncertainty29 Scanning and monitoring can provide the firm with information they also serve as a means of importing knowledge about markets and about how to successfully commercialize new technologies the firm has developed30

ForecastingScanning and monitoring are concerned with events and trends in the general environ-ment at a point in time When forecasting analysts develop feasible projections of what might happen and how quickly as a result of the changes and trends detected through scanning and monitoring31 For example analysts might forecast the time that will be required for a new technology to reach the marketplace the length of time before differ-ent corporate training procedures are required to deal with anticipated changes in the composition of the workforce or how much time will elapse before changes in govern-mental taxation policies affect consumersrsquo purchasing patterns

Forecasting events and outcomes accurately is challenging Already in place the trend of firms outsourcing call center work and logisticsrsquo activities to companies specializing in these activities appeared to accelerate as a result of the recent global crisis Having noticed (through scanning) and monitoring these outsourcing trends for some time logistics companies such as FedEx and United Parcel Service and call center provider Convergys are developing forecasts about possible increases in their business and how long the increasing trend of using their services might continue32 On the other hand Procter amp Gamble (PampG) and Colgate-Palmolive two firms selling carefully branded consumer products are now forecasting the effects of the trend for retailers to ldquohellip tout their lower-priced private-label goods and pressure their suppliers for lower pricesrdquo Thus PampG and Colgate are forecasting the effects of the twin issues of the decisions by the retailers to whom they sell products to manufacture and sell their own consumer products while simultaneously seeking lower prices on the products they do buy from them33

AssessingThe objective of assessing is to determine the timing and significance of the effects of environmental changes and trends that have been identified34 Through scanning moni-toring and forecasting analysts are able to understand the general environment Going a step further the intent of assessment is to specify the implications of that understanding Without assessment the firm is left with data that may be interesting but are of unknown competitive relevance Even if formal assessment is inadequate the appropriate interpre-tation of that information is important ldquoResearch found that how accurate senior execu-tives are about their competitive environments is indeed less important for strategy and corresponding organizational changes than the way in which they interpret information about their environmentsrdquo35 Thus although gathering and organizing information is important appropriately interpreting that intelligence to determine if an identified trend in the external environment is an opportunity or threat is equally important

As previously noted through forecasting PampG and Colgate have identified a trend among many of the retailers to whom they sell their carefully branded prod-ucts Essentially the trend is for these retailers to pressure firms such as PampG Colgate H J Heinz and Kelloggrsquosmdashto name a fewmdashto reduce the prices at which they sell their products to the retailers The ability of these retailers to produce and sell their own private-label merchandise supports their efforts to receive lower prices from branding giants such as those mentioned

In addition firms with well-known brands have detected a trend among consumers to receive more ldquovaluerdquo when purchasing branded products Having forecasted that this

In Chapter 3 we note that value is measured by a productrsquos performance characteristics and by its attributes for which customers are willing to pay A number of companies producing brand-name products believe that the recent

global crisis is producing a trend in which what customers value is changing In slightly different words through monitoring and scanning companies are forecasting that the performance characteristics and product attributes for which todayrsquos customers are willing to pay are changing as a result of the recent global crisis In addition through assessment companies producing name-brand products believe that changes in how customers define value are significant and may be long-lasting In response some firms are changing some of the performance characteristics and attributes of their products to create more value for customers A comment from an analyst about this trend is ldquohellip companies are having to consider their lsquovaluersquo equation to try to serve the millions of consumers who either canrsquot afford premium experiences or just donrsquot want them anymorerdquo

Letrsquos consider some examples of ldquodifferentrdquo value that companies are now providing to customers The desire for smaller homes is a trend spotted by builders of premium-priced homes The fact that the average size of a new home built in the United States declined in 2008 for the first time in 35 years is an indicator of this trend Builders of premium homes are using better designs to improve space utilization and traffic flow and increases in energy

efficiency to create more value for customers Facilitating these buildersrsquo efforts are changes appliance manufacturers are making to the performance characteristics of their products also in attempts to create more value for their customers General Electric for example is offering a hybrid electric water heater that is estimated to save consumers $250 annually The value created by this product is twofoldmdashreduced cost to the consumer and a reduction to energy consumption as a benefit to society as a whole Kohler is offering energy-efficient faucets toilets and showerheads at virtually the same price as its less energy-efficient products Thus these products also create customer value in the form of reduced cost while being environmentally friendly Other appliance firms such as Whirlpool are producing products with similar performance characteristics to create customer value

Other types of companies are also redefining the value their products provide to customers Believing that ldquohellip value is not just cost itrsquos also taste nutrition and qualityrdquo Del Monte Foodsrsquos advertising campaigns now emphasize that compared to some frozen and even fresh items canned foods can offer better value when the customer combines cost with nutritional benefits Frito-Lay (a division of PepsiCo) is increasing customer

value by adding 20 percent more product to selected bags of Cheetos Fritos and Tostitos without increasing prices Michaels a large chain of craft outlets now emphasizes that when customers purchase their goods as raw materials for making various items they are becoming more sustainable in that they are ldquomaking stuffrdquo rather than simply ldquobuying more stuffrdquo

CONSUMERSrsquo DESIRE TO RECEIVE ADDITIONAL

VALUE WHEN PURCHASING BRAND-NAME PRODUCTS

Elm

und

Sum

ner

Phot

olib

rary

The attributes desired by buyers of premium homes are changing and home builders are responding by delivering value in the form of greater energy efficiency and more modern designs Would a smaller more environmentally efficient home be of more value to you than a larger less efficient one

As these examples suggest all types of companies (and especially those selling brand-name products) are trying to create a different type of value for customers in response to trends they are observing in their general environment Regardless of the good or service a firm offers it seems that the following words from an analyst capture the challenge facing todayrsquos companies ldquoSo herersquos a call to all companies evaluate everything you are offering consumers to see how you can infuse the value of good value into your brandrdquo

Sources A Athavaley 2009 Eco-friendlymdashand frugal Wall Street Journal Online httpwwwwsjcom February 11 S Elliott 2009 Food brands compete to stretch a dollar New York Times Online httpwwwnytimescom May 10 D Kaplan 2009 Value-oriented chains thrive amid recession Houston Chronicle Online httpwwwchroncom April 24 M Penn 2009 Value is the new green Wall Street Journal Online httpwwwwsjcom March 13 C C Miller 2008 For craft sales the recession is a help New York Times Online httpwwwnytimescom December 23

trend toward ldquowanting more valuerdquo may last beyond the current global recession many of these firms are taking actions in response to their assessment of the significance of what may be a long-lasting trend toward value purchases In the Strategic Focus we describe actions some firms with well-known brands are taking in response to an assess-ment that this trend may have significant effects on their operations at least in the short run if not longer term as well

Segments of the General EnvironmentThe general environment is composed of segments that are external to the firm (see Table 21) Although the degree of impact varies these environmental segments affect all industries and the firms competing in them The challenge to each firm is to scan monitor forecast and assess the elements in each segment to determine their effects on the firm Effective scanning monitoring forecasting and assessing are vital to the firmrsquos efforts to recognize and evaluate opportunities and threats

The Demographic SegmentThe demographic segment is concerned with a populationrsquos size age structure geo-graphic distribution ethnic mix and income distribution36 Demographic segments are commonly analyzed on a global basis because of their potential effects across countriesrsquo borders and because many firms compete in global markets

Population SizeThe worldrsquos population doubled (from 3 billion to 6 billion) in the roughly 40-year period between 1959 and 1999 Current projects suggest that population growth will continue in the twenty-first century but at a slower pace The US Census Bureau projects that the worldrsquos population will be 9 billion by 204037 By 2050 India is expected to be the most populous nation in the world (with over 18 billion people) China the United States Indonesia and Pakistan are predicted to be the next four largest nations by population count in 2050 Firms seeking to find growing markets in which to sell their goods and services want to recognize the market potential that may exist for them in these five nations

While observing the population of different nations and regions of the world firms also want to study changes occurring within different populations to assess their strategic implications For example in 2006 20 percent of Japanrsquos citizens were 65 or older while the United States and China will not reach this level until 203638 Aging populations are a significant problem for countries because of the need for workers and the burden of

The demographic segment is concerned with a populationrsquos size age structure geographic distribution ethnic mix and income distribution

41C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Effective monitoring requires the firm to identify important stakeholders as the foundation for serving their unique needs28 (Stakeholdersrsquo unique needs are described in Chapter 1) Scanning and monitoring are particularly important when a firm com-petes in an industry with high technological uncertainty29 Scanning and monitoring can provide the firm with information they also serve as a means of importing knowledge about markets and about how to successfully commercialize new technologies the firm has developed30

ForecastingScanning and monitoring are concerned with events and trends in the general environ-ment at a point in time When forecasting analysts develop feasible projections of what might happen and how quickly as a result of the changes and trends detected through scanning and monitoring31 For example analysts might forecast the time that will be required for a new technology to reach the marketplace the length of time before differ-ent corporate training procedures are required to deal with anticipated changes in the composition of the workforce or how much time will elapse before changes in govern-mental taxation policies affect consumersrsquo purchasing patterns

Forecasting events and outcomes accurately is challenging Already in place the trend of firms outsourcing call center work and logisticsrsquo activities to companies specializing in these activities appeared to accelerate as a result of the recent global crisis Having noticed (through scanning) and monitoring these outsourcing trends for some time logistics companies such as FedEx and United Parcel Service and call center provider Convergys are developing forecasts about possible increases in their business and how long the increasing trend of using their services might continue32 On the other hand Procter amp Gamble (PampG) and Colgate-Palmolive two firms selling carefully branded consumer products are now forecasting the effects of the trend for retailers to ldquohellip tout their lower-priced private-label goods and pressure their suppliers for lower pricesrdquo Thus PampG and Colgate are forecasting the effects of the twin issues of the decisions by the retailers to whom they sell products to manufacture and sell their own consumer products while simultaneously seeking lower prices on the products they do buy from them33

AssessingThe objective of assessing is to determine the timing and significance of the effects of environmental changes and trends that have been identified34 Through scanning moni-toring and forecasting analysts are able to understand the general environment Going a step further the intent of assessment is to specify the implications of that understanding Without assessment the firm is left with data that may be interesting but are of unknown competitive relevance Even if formal assessment is inadequate the appropriate interpre-tation of that information is important ldquoResearch found that how accurate senior execu-tives are about their competitive environments is indeed less important for strategy and corresponding organizational changes than the way in which they interpret information about their environmentsrdquo35 Thus although gathering and organizing information is important appropriately interpreting that intelligence to determine if an identified trend in the external environment is an opportunity or threat is equally important

As previously noted through forecasting PampG and Colgate have identified a trend among many of the retailers to whom they sell their carefully branded prod-ucts Essentially the trend is for these retailers to pressure firms such as PampG Colgate H J Heinz and Kelloggrsquosmdashto name a fewmdashto reduce the prices at which they sell their products to the retailers The ability of these retailers to produce and sell their own private-label merchandise supports their efforts to receive lower prices from branding giants such as those mentioned

In addition firms with well-known brands have detected a trend among consumers to receive more ldquovaluerdquo when purchasing branded products Having forecasted that this

In Chapter 3 we note that value is measured by a productrsquos performance characteristics and by its attributes for which customers are willing to pay A number of companies producing brand-name products believe that the recent

global crisis is producing a trend in which what customers value is changing In slightly different words through monitoring and scanning companies are forecasting that the performance characteristics and product attributes for which todayrsquos customers are willing to pay are changing as a result of the recent global crisis In addition through assessment companies producing name-brand products believe that changes in how customers define value are significant and may be long-lasting In response some firms are changing some of the performance characteristics and attributes of their products to create more value for customers A comment from an analyst about this trend is ldquohellip companies are having to consider their lsquovaluersquo equation to try to serve the millions of consumers who either canrsquot afford premium experiences or just donrsquot want them anymorerdquo

Letrsquos consider some examples of ldquodifferentrdquo value that companies are now providing to customers The desire for smaller homes is a trend spotted by builders of premium-priced homes The fact that the average size of a new home built in the United States declined in 2008 for the first time in 35 years is an indicator of this trend Builders of premium homes are using better designs to improve space utilization and traffic flow and increases in energy

efficiency to create more value for customers Facilitating these buildersrsquo efforts are changes appliance manufacturers are making to the performance characteristics of their products also in attempts to create more value for their customers General Electric for example is offering a hybrid electric water heater that is estimated to save consumers $250 annually The value created by this product is twofoldmdashreduced cost to the consumer and a reduction to energy consumption as a benefit to society as a whole Kohler is offering energy-efficient faucets toilets and showerheads at virtually the same price as its less energy-efficient products Thus these products also create customer value in the form of reduced cost while being environmentally friendly Other appliance firms such as Whirlpool are producing products with similar performance characteristics to create customer value

Other types of companies are also redefining the value their products provide to customers Believing that ldquohellip value is not just cost itrsquos also taste nutrition and qualityrdquo Del Monte Foodsrsquos advertising campaigns now emphasize that compared to some frozen and even fresh items canned foods can offer better value when the customer combines cost with nutritional benefits Frito-Lay (a division of PepsiCo) is increasing customer

value by adding 20 percent more product to selected bags of Cheetos Fritos and Tostitos without increasing prices Michaels a large chain of craft outlets now emphasizes that when customers purchase their goods as raw materials for making various items they are becoming more sustainable in that they are ldquomaking stuffrdquo rather than simply ldquobuying more stuffrdquo

CONSUMERSrsquo DESIRE TO RECEIVE ADDITIONAL

VALUE WHEN PURCHASING BRAND-NAME PRODUCTS

Elm

und

Sum

ner

Phot

olib

rary

The attributes desired by buyers of premium homes are changing and home builders are responding by delivering value in the form of greater energy efficiency and more modern designs Would a smaller more environmentally efficient home be of more value to you than a larger less efficient one

As these examples suggest all types of companies (and especially those selling brand-name products) are trying to create a different type of value for customers in response to trends they are observing in their general environment Regardless of the good or service a firm offers it seems that the following words from an analyst capture the challenge facing todayrsquos companies ldquoSo herersquos a call to all companies evaluate everything you are offering consumers to see how you can infuse the value of good value into your brandrdquo

Sources A Athavaley 2009 Eco-friendlymdashand frugal Wall Street Journal Online httpwwwwsjcom February 11 S Elliott 2009 Food brands compete to stretch a dollar New York Times Online httpwwwnytimescom May 10 D Kaplan 2009 Value-oriented chains thrive amid recession Houston Chronicle Online httpwwwchroncom April 24 M Penn 2009 Value is the new green Wall Street Journal Online httpwwwwsjcom March 13 C C Miller 2008 For craft sales the recession is a help New York Times Online httpwwwnytimescom December 23

trend toward ldquowanting more valuerdquo may last beyond the current global recession many of these firms are taking actions in response to their assessment of the significance of what may be a long-lasting trend toward value purchases In the Strategic Focus we describe actions some firms with well-known brands are taking in response to an assess-ment that this trend may have significant effects on their operations at least in the short run if not longer term as well

Segments of the General EnvironmentThe general environment is composed of segments that are external to the firm (see Table 21) Although the degree of impact varies these environmental segments affect all industries and the firms competing in them The challenge to each firm is to scan monitor forecast and assess the elements in each segment to determine their effects on the firm Effective scanning monitoring forecasting and assessing are vital to the firmrsquos efforts to recognize and evaluate opportunities and threats

The Demographic SegmentThe demographic segment is concerned with a populationrsquos size age structure geo-graphic distribution ethnic mix and income distribution36 Demographic segments are commonly analyzed on a global basis because of their potential effects across countriesrsquo borders and because many firms compete in global markets

Population SizeThe worldrsquos population doubled (from 3 billion to 6 billion) in the roughly 40-year period between 1959 and 1999 Current projects suggest that population growth will continue in the twenty-first century but at a slower pace The US Census Bureau projects that the worldrsquos population will be 9 billion by 204037 By 2050 India is expected to be the most populous nation in the world (with over 18 billion people) China the United States Indonesia and Pakistan are predicted to be the next four largest nations by population count in 2050 Firms seeking to find growing markets in which to sell their goods and services want to recognize the market potential that may exist for them in these five nations

While observing the population of different nations and regions of the world firms also want to study changes occurring within different populations to assess their strategic implications For example in 2006 20 percent of Japanrsquos citizens were 65 or older while the United States and China will not reach this level until 203638 Aging populations are a significant problem for countries because of the need for workers and the burden of

The demographic segment is concerned with a populationrsquos size age structure geographic distribution ethnic mix and income distribution

In Chapter 3 we note that value is measured by a productrsquos performance characteristics and by its attributes for which customers are willing to pay A number of companies producing brand-name products believe that the recent

global crisis is producing a trend in which what customers value is changing In slightly different words through monitoring and scanning companies are forecasting that the performance characteristics and product attributes for which todayrsquos customers are willing to pay are changing as a result of the recent global crisis In addition through assessment companies producing name-brand products believe that changes in how customers define value are significant and may be long-lasting In response some firms are changing some of the performance characteristics and attributes of their products to create more value for customers A comment from an analyst about this trend is ldquohellip companies are having to consider their lsquovaluersquo equation to try to serve the millions of consumers who either canrsquot afford premium experiences or just donrsquot want them anymorerdquo

Letrsquos consider some examples of ldquodifferentrdquo value that companies are now providing to customers The desire for smaller homes is a trend spotted by builders of premium-priced homes The fact that the average size of a new home built in the United States declined in 2008 for the first time in 35 years is an indicator of this trend Builders of premium homes are using better designs to improve space utilization and traffic flow and increases in energy

efficiency to create more value for customers Facilitating these buildersrsquo efforts are changes appliance manufacturers are making to the performance characteristics of their products also in attempts to create more value for their customers General Electric for example is offering a hybrid electric water heater that is estimated to save consumers $250 annually The value created by this product is twofoldmdashreduced cost to the consumer and a reduction to energy consumption as a benefit to society as a whole Kohler is offering energy-efficient faucets toilets and showerheads at virtually the same price as its less energy-efficient products Thus these products also create customer value in the form of reduced cost while being environmentally friendly Other appliance firms such as Whirlpool are producing products with similar performance characteristics to create customer value

Other types of companies are also redefining the value their products provide to customers Believing that ldquohellip value is not just cost itrsquos also taste nutrition and qualityrdquo Del Monte Foodsrsquos advertising campaigns now emphasize that compared to some frozen and even fresh items canned foods can offer better value when the customer combines cost with nutritional benefits Frito-Lay (a division of PepsiCo) is increasing customer

value by adding 20 percent more product to selected bags of Cheetos Fritos and Tostitos without increasing prices Michaels a large chain of craft outlets now emphasizes that when customers purchase their goods as raw materials for making various items they are becoming more sustainable in that they are ldquomaking stuffrdquo rather than simply ldquobuying more stuffrdquo

CONSUMERSrsquo DESIRE TO RECEIVE ADDITIONAL

VALUE WHEN PURCHASING BRAND-NAME PRODUCTS

Elm

und

Sum

ner

Phot

olib

rary

The attributes desired by buyers of premium homes are changing and home builders are responding by delivering value in the form of greater energy efficiency and more modern designs Would a smaller more environmentally efficient home be of more value to you than a larger less efficient one

As these examples suggest all types of companies (and especially those selling brand-name products) are trying to create a different type of value for customers in response to trends they are observing in their general environment Regardless of the good or service a firm offers it seems that the following words from an analyst capture the challenge facing todayrsquos companies ldquoSo herersquos a call to all companies evaluate everything you are offering consumers to see how you can infuse the value of good value into your brandrdquo

Sources A Athavaley 2009 Eco-friendlymdashand frugal Wall Street Journal Online httpwwwwsjcom February 11 S Elliott 2009 Food brands compete to stretch a dollar New York Times Online httpwwwnytimescom May 10 D Kaplan 2009 Value-oriented chains thrive amid recession Houston Chronicle Online httpwwwchroncom April 24 M Penn 2009 Value is the new green Wall Street Journal Online httpwwwwsjcom March 13 C C Miller 2008 For craft sales the recession is a help New York Times Online httpwwwnytimescom December 23

trend toward ldquowanting more valuerdquo may last beyond the current global recession many of these firms are taking actions in response to their assessment of the significance of what may be a long-lasting trend toward value purchases In the Strategic Focus we describe actions some firms with well-known brands are taking in response to an assess-ment that this trend may have significant effects on their operations at least in the short run if not longer term as well

Segments of the General EnvironmentThe general environment is composed of segments that are external to the firm (see Table 21) Although the degree of impact varies these environmental segments affect all industries and the firms competing in them The challenge to each firm is to scan monitor forecast and assess the elements in each segment to determine their effects on the firm Effective scanning monitoring forecasting and assessing are vital to the firmrsquos efforts to recognize and evaluate opportunities and threats

The Demographic SegmentThe demographic segment is concerned with a populationrsquos size age structure geo-graphic distribution ethnic mix and income distribution36 Demographic segments are commonly analyzed on a global basis because of their potential effects across countriesrsquo borders and because many firms compete in global markets

Population SizeThe worldrsquos population doubled (from 3 billion to 6 billion) in the roughly 40-year period between 1959 and 1999 Current projects suggest that population growth will continue in the twenty-first century but at a slower pace The US Census Bureau projects that the worldrsquos population will be 9 billion by 204037 By 2050 India is expected to be the most populous nation in the world (with over 18 billion people) China the United States Indonesia and Pakistan are predicted to be the next four largest nations by population count in 2050 Firms seeking to find growing markets in which to sell their goods and services want to recognize the market potential that may exist for them in these five nations

While observing the population of different nations and regions of the world firms also want to study changes occurring within different populations to assess their strategic implications For example in 2006 20 percent of Japanrsquos citizens were 65 or older while the United States and China will not reach this level until 203638 Aging populations are a significant problem for countries because of the need for workers and the burden of

The demographic segment is concerned with a populationrsquos size age structure geographic distribution ethnic mix and income distribution

As these examples suggest all types of companies (and especially those selling brand-name products) are trying to create a different type of value for customers in response to trends they are observing in their general environment Regardless of the good or service a firm offers it seems that the following words from an analyst capture the challenge facing todayrsquos companies ldquoSo herersquos a call to all companies evaluate everything you are offering consumers to see how you can infuse the value of good value into your brandrdquo

Sources A Athavaley 2009 Eco-friendlymdashand frugal Wall Street Journal Online httpwwwwsjcom February 11 S Elliott 2009 Food brands compete to stretch a dollar New York Times Online httpwwwnytimescom May 10 D Kaplan 2009 Value-oriented chains thrive amid recession Houston Chronicle Online httpwwwchroncom April 24 M Penn 2009 Value is the new green Wall Street Journal Online httpwwwwsjcom March 13 C C Miller 2008 For craft sales the recession is a help New York Times Online httpwwwnytimescom December 23

trend toward ldquowanting more valuerdquo may last beyond the current global recession many of these firms are taking actions in response to their assessment of the significance of what may be a long-lasting trend toward value purchases In the Strategic Focus we describe actions some firms with well-known brands are taking in response to an assess-ment that this trend may have significant effects on their operations at least in the short run if not longer term as well

Segments of the General EnvironmentThe general environment is composed of segments that are external to the firm (see Table 21) Although the degree of impact varies these environmental segments affect all industries and the firms competing in them The challenge to each firm is to scan monitor forecast and assess the elements in each segment to determine their effects on the firm Effective scanning monitoring forecasting and assessing are vital to the firmrsquos efforts to recognize and evaluate opportunities and threats

The Demographic SegmentThe demographic segment is concerned with a populationrsquos size age structure geo-graphic distribution ethnic mix and income distribution36 Demographic segments are commonly analyzed on a global basis because of their potential effects across countriesrsquo borders and because many firms compete in global markets

Population SizeThe worldrsquos population doubled (from 3 billion to 6 billion) in the roughly 40-year period between 1959 and 1999 Current projects suggest that population growth will continue in the twenty-first century but at a slower pace The US Census Bureau projects that the worldrsquos population will be 9 billion by 204037 By 2050 India is expected to be the most populous nation in the world (with over 18 billion people) China the United States Indonesia and Pakistan are predicted to be the next four largest nations by population count in 2050 Firms seeking to find growing markets in which to sell their goods and services want to recognize the market potential that may exist for them in these five nations

While observing the population of different nations and regions of the world firms also want to study changes occurring within different populations to assess their strategic implications For example in 2006 20 percent of Japanrsquos citizens were 65 or older while the United States and China will not reach this level until 203638 Aging populations are a significant problem for countries because of the need for workers and the burden of

The demographic segment is concerned with a populationrsquos size age structure geographic distribution ethnic mix and income distribution

44Pa

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ateg

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put

s funding retirement programs In Japan and other countries employees are urged to work longer to overcome these problems Interestingly the United States has a higher birthrate and significant immigration placing it in a better position than Japan and other European nations

Age StructureAs noted earlier in Japan and other countries the worldrsquos population is rapidly aging In North America and Europe millions of baby boomers are approaching retirement However even in developing countries with large numbers of people under the age of 35 birth rates have been declining sharply In China for example by 2040 there will be more than 400 million people over the age of 60 The more than 90 million baby boom-ers in North America may postpone retirement given the recent financial crisis In fact data now suggest that baby boomers (those born between 1946 and 1965) are struggling to meet their retirement goals and are uncertain if they will actually be able to retire as originally expected This is partly because of declines in the value of their homes as well as declines in their other retirement investments 39mdasha number of baby boomers experienced at least a 20 percent decline in their retirement assets between 2007 and 2008 The pos-sibility of future declines is creating uncertainty for baby boomers about how to invest and when they might be able to retire40 On the other hand delayed retirements by baby boomers with value-creating skills may facilitate firmsrsquo efforts to successfully implement their strategies Moreover delayed retirements may allow companies to think of creative ways for skilled long-time employees to impart their accumulated knowledge to younger employees as they work a bit longer than originally anticipated

Geographic DistributionFor decades the US population has been shifting from the north and east to the west and south Firms should consider the effects of this shift in demographics as well For example Florida is the US state with the largest percentage of its population (176 percent) 65 years or older41 Thus companies providing goods and services that are targeted to senior citizens might pay close attention to this grouprsquos geographic preference for states in the south (such as Florida) and the southwest (such as Texas) Similarly the trend of relocating from metropolitan to nonmetropolitan areas continues in the United States These trends are changing local and state governmentsrsquo tax bases In turn business firmsrsquo decisions regarding location are influenced by the degree of support that different taxing agencies offer as well as the rates at which these agencies tax businesses

Geographic distribution patterns are not identical throughout the world For exam-ple in China 60 percent of the population lives in rural areas however the growth is in urban communities such as Shanghai (with a current population in excess of 13 million) and Beijing (over 122 million) These data suggest that firms seeking to sell their products in China should recognize the growth in metropolitan areas rather than in rural areas42

Ethnic MixThe ethnic mix of countriesrsquo populations continues to change For example with a population in excess of 40 million Hispanics are now the largest ethnic minority in the United States In fact the US Hispanic market is the third largest ldquoLatin Americanrdquo economy behind Brazil and Mexico Spanish is now the dominant language in parts of US states such as Texas California Florida and New Mexico43 Given these facts some firms might want to assess the degree to which their goods or services could be adapted to serve the unique needs of Hispanic consumers This is particularly appropriate for companies competing in consumer sectors such as grocery stores movie studios financial services and clothing stores

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Changes in the ethnic mix also affect a workforcersquos composition44 In the United States for example the population and labor force will continue to diversify as immigra-tion accounts for a sizable part of growth Projections are that the combined Latino and Asian population shares will increase to more than 20 percent of the total US popula-tion by 201445 Interestingly much of this immigrant workforce is bypassing high-cost coastal cities and settling in smaller rural towns Many of these workers are in low-wage labor-intensive industries such as construction food service lodging and landscaping46

For this reason if border security is tightened these industries will likely face labor shortages

Income DistributionUnderstanding how income is distributed within and across populations informs firms of different groupsrsquo purchasing power and discretionary income Studies of income distri-butions suggest that although living standards have improved over time variations exist within and between nations47 Of interest to firms are the average incomes of households and individuals For instance the increase in dual-career couples has had a notable effect on average incomes Although real income has been declining in general in some nations the household income of dual-career couples has increased especially in the United States These figures yield strategically relevant information for firms For instance research indi-cates that whether an employee is part of a dual-career couple can strongly influence the willingness of the employee to accept an international assignment48

The assessment by some that in 2005 about 55 percent of the worldrsquos population could be defined as ldquomiddle classrdquo generates interesting possibilities for many firms (For the purpose of this survey middle class was defined as people with one third of their income left for discretionary spending after providing for basic food and shelter) The size of this market may have ldquohellip immense implications for companies selling their products and services on a global scalerdquo49 Of course the recent global financial crisis may affect the size of the worldrsquos ldquomiddle classrdquo

The Economic SegmentThe economic environment refers to the nature and direction of the economy in which a firm competes or may compete50 In general firms seek to compete in relatively stable economies with strong growth potential Because nations are interconnected as a result of the global economy firms must scan monitor forecast and assess the health of their host nation and the health of the economies outside their host nation

As firms prepare to compete during the second decade of the twenty-first century the worldrsquos economic environment is quite uncertain Some businesspeople were even beginning to question the ability of economists to provide valid and reliable predictions about trends to anticipate in the worldrsquos economic environment51 The lack of confidence in predictions from those specializing in providing such predictions complicates firmsrsquo efforts to understand the conditions they might face during future competitive battles

In terms of specific economic environments companies competing in Japan or desiring to do so might carefully evaluate the meaning of the position recently taken by some that this nationrsquos economy has ingrained flaws such as ldquohellip unwieldy corporate structures dogged loyalty to increasingly commoditized business lines and a history of punting problems into the futurerdquo52 Because of its acknowledged growth potential a number of companies are evaluating the possibility of entering Russia to compete or for those already competing in that nation to expand the scope of their operations However statements by analysts in mid-2009 that ldquothe banking crisis in Russia is in its very beginningrdquo53 warrant careful attention If this prediction comes true the Russian economy could become destabilized In contrast Vietnamrsquos economy was expanding during late 2009 and being recognized as one in which opportunities might exist for companies from across the globe to pursue54

The economic environment refers to the nature and direction of the economy in which a fi rm competes or may compete

46Pa

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Str

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s The PoliticalLegal SegmentThe politicallegal segment is the arena in which organizations and interest groups compete for attention resources and a voice in overseeing the body of laws and regu-lations guiding interactions among nations as well as between firms and various local governmental agencies55 Essentially this segment represents how organizations try to influence governments and how they try to understand the influences (current and pro-jected) of those governments on their strategic actions

When regulations are formed in response to new laws that are legislated (eg the Sarbanes-Oxley Act dealing with corporate governancemdashsee Chapter 10 for more infor-mation) they often influence a firmrsquos strategic actions For example less-restrictive regu-lations on firmsrsquo actions are a product of the recent global trend toward privatization of government-owned or government-regulated firms Some believe that the transforma-tion from state-owned to private firms occurring in multiple nations has substantial implications for the competitive landscapes in a number of countries and across multiple industries56 In the United States the 2009 allocation by the federal government of $13 billion to high-speed train travel is expected to provide a critical boost to the nationrsquos efforts to reduce traffic congestion and cut pollution57 For global firms manufacturing high-speed rail equipment this political support in the United States of systems requiring their products is a trend to forecast and assess

Firms must carefully analyze a new political administrationrsquos business-related poli-cies and philosophies Antitrust laws taxation laws industries chosen for deregulation labor training laws and the degree of commitment to educational institutions are areas in which an administrationrsquos policies can affect the operations and profitability of indus-tries and individual firms across the globe For example early signals from President Obamarsquos administration that policies might be formed with the intention of reducing the amount of work US companies outsource to firms in other nations seemingly could affect information technology outsourcing firms based in countries such as India58 The introduction of legislation in the US Congress during the early tenure of the Obama administration suggested at least some support for these stated intentions59 Thus these companies might want to carefully examine the newly elected US administrationrsquos intentions to understand their potential effects

To deal with issues such as those we are describing firms develop a political strategy to influence governmental policies that might affect them Some argue that developing an effective political strategy is essential to the newly formed General Motorsrsquo efforts to achieve strategic competitiveness60 In addition the effects of global governmental policies (eg those related to firms in India that are engaging in IT outsourcing work) on a firmrsquos competitive position increase the need for firms to form an effective political strategy61

Firms competing in the global economy encounter an interesting array of politicallegal questions and issues For example in mid-2009 leaders from South Korea and the European Union remained committed to developing a free trade agreement between the relevant parties At the time the two parties had worked for over two years to develop an agreement that many thought would benefit both by creating a host of opportunities for firms to sell their goods and services in what would be a new market for them The key political challenge affecting the partiesrsquo efforts was the European Unionrsquos decision notto permit ldquohellip refunds South Korea pays to local companies who import parts from third countries before exporting finished goodsrdquo62 Both South Korea and European Union firms are monitoring the progress of these talks in order to be able to forecast the effects of a possible trade agreement on their strategic actions

The Sociocultural SegmentThe sociocultural segment is concerned with a societyrsquos attitudes and cultural values Because attitudes and values form the cornerstone of a society they often drive demo-graphic economic politicallegal and technological conditions and changes

The politicallegal segment is the arena in which organizations and interest groups compete for attention resources and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between fi rms and various local governmental agencies

The sociocultural segment is concerned with a societyrsquos attitudes and cultural values

47C

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xternal Enviro

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ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Societiesrsquo attitudes and cultural values appear to be undergoing possible changes at the start of the second decade of the twenty-first century This seems to be the case in the United States and other nations as well Attitudes and values about health care in the United States is an area where sociocultural changes might occur Statistics are a driving force for these potential changes For example while the United States ldquohellip has the high-est overall health care expenditure as well as the highest expenditure per capital of any country in the worldrdquo63 millions of the nationrsquos citizens lack health insurance Some feel that effective health care reform in the United States requires securing coverage for all citizens and lowering the cost of services64 Changes to the nature of health care policies and their delivery would likely affect business firms meaning that they must carefully monitor this possibility and future trends regarding health care in order to anticipate the effects on their operations

As the US labor force has increased it has also become more diverse as significantly more women and minorities from a variety of cultures entered In 1993 the total US workforce was slightly less than 130 million in 2005 it was slightly greater than 148 million It is predicted to grow to more than 192 million by 2050 In the same year 2050 the US workforce is forecasted to be composed of 48 percent female workers 11 percent Asian American workers 14 percent African American workers and 24 percent Hispanic workers65 The growing gender ethnic and cultural diversity in this workforce creates challenges and opportunities including combining the best of both menrsquos and womenrsquos traditional leadership styles Although diversity in the workforce has the poten-tial to improve performance research indicates that management of diversity initiatives is required in order to reap these organizational benefits Human resource practitioners are trained to successfully manage diversity issues to enhance positive outcomes66

Another manifestation of changing attitudes toward work is the continuing growth of contingency workers (part-time temporary and contract employees) throughout the global economy This trend is significant in several parts of the world including Canada Japan Latin America Western Europe and the United States In the United States the fastest growing group of contingency workers is those with 15 to 20 years of work experi-ence The layoffs resulting from the recent global crisis and the loss of retirement income of many ldquobaby boomersrdquomdashmany of whom feel they must work longer to recover losses to their retirement portfoliosmdashare a key reason for this Companies interested in hiring on a temporary basis may benefit by gaining access to the long-term work experiences of these newly available workers67

Although the lifestyle and workforce changes referenced previously reflect the val-ues of the US population each country and culture has unique values and trends As suggested earlier national cultural values affect behavior in organizations and thus also influence organizational outcomes68 For example the importance of collectivism and social relations in Chinese and Russian cultures lead to the open sharing of information and knowledge among members of an organization69 Knowledge sharing is important for defusing new knowledge in organizations and increasing the speed in implementing innovations Personal relationships are especially important in China as guanxi (personal connections) has become a way of doing business within the country and for individuals to advance their careers in what is becoming a more open market society70 Understanding the importance of guanxi is critical for foreign firms doing business in China

The Technological SegmentPervasive and diversified in scope technological changes affect many parts of societies These effects occur primarily through new products processes and materials The techno-logical segment includes the institutions and activities involved with creating new knowl-edge and translating that knowledge into new outputs products processes and materials

Given the rapid pace of technological change it is vital for firms to thoroughly study the technological segment71 The importance of these efforts is suggested by the find-ing that early adopters of new technology often achieve higher market shares and earn

The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs products processes and materials

Read what one leading marketing consultant says about changing consumer attitudes and how companyrsquos should be adapting

wwwcengagecommanagementhitt

STRATEGYRIGHT NOW

45C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Changes in the ethnic mix also affect a workforcersquos composition44 In the United States for example the population and labor force will continue to diversify as immigra-tion accounts for a sizable part of growth Projections are that the combined Latino and Asian population shares will increase to more than 20 percent of the total US popula-tion by 201445 Interestingly much of this immigrant workforce is bypassing high-cost coastal cities and settling in smaller rural towns Many of these workers are in low-wage labor-intensive industries such as construction food service lodging and landscaping46

For this reason if border security is tightened these industries will likely face labor shortages

Income DistributionUnderstanding how income is distributed within and across populations informs firms of different groupsrsquo purchasing power and discretionary income Studies of income distri-butions suggest that although living standards have improved over time variations exist within and between nations47 Of interest to firms are the average incomes of households and individuals For instance the increase in dual-career couples has had a notable effect on average incomes Although real income has been declining in general in some nations the household income of dual-career couples has increased especially in the United States These figures yield strategically relevant information for firms For instance research indi-cates that whether an employee is part of a dual-career couple can strongly influence the willingness of the employee to accept an international assignment48

The assessment by some that in 2005 about 55 percent of the worldrsquos population could be defined as ldquomiddle classrdquo generates interesting possibilities for many firms (For the purpose of this survey middle class was defined as people with one third of their income left for discretionary spending after providing for basic food and shelter) The size of this market may have ldquohellip immense implications for companies selling their products and services on a global scalerdquo49 Of course the recent global financial crisis may affect the size of the worldrsquos ldquomiddle classrdquo

The Economic SegmentThe economic environment refers to the nature and direction of the economy in which a firm competes or may compete50 In general firms seek to compete in relatively stable economies with strong growth potential Because nations are interconnected as a result of the global economy firms must scan monitor forecast and assess the health of their host nation and the health of the economies outside their host nation

As firms prepare to compete during the second decade of the twenty-first century the worldrsquos economic environment is quite uncertain Some businesspeople were even beginning to question the ability of economists to provide valid and reliable predictions about trends to anticipate in the worldrsquos economic environment51 The lack of confidence in predictions from those specializing in providing such predictions complicates firmsrsquo efforts to understand the conditions they might face during future competitive battles

In terms of specific economic environments companies competing in Japan or desiring to do so might carefully evaluate the meaning of the position recently taken by some that this nationrsquos economy has ingrained flaws such as ldquohellip unwieldy corporate structures dogged loyalty to increasingly commoditized business lines and a history of punting problems into the futurerdquo52 Because of its acknowledged growth potential a number of companies are evaluating the possibility of entering Russia to compete or for those already competing in that nation to expand the scope of their operations However statements by analysts in mid-2009 that ldquothe banking crisis in Russia is in its very beginningrdquo53 warrant careful attention If this prediction comes true the Russian economy could become destabilized In contrast Vietnamrsquos economy was expanding during late 2009 and being recognized as one in which opportunities might exist for companies from across the globe to pursue54

The economic environment refers to the nature and direction of the economy in which a fi rm competes or may compete

46Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s The PoliticalLegal SegmentThe politicallegal segment is the arena in which organizations and interest groups compete for attention resources and a voice in overseeing the body of laws and regu-lations guiding interactions among nations as well as between firms and various local governmental agencies55 Essentially this segment represents how organizations try to influence governments and how they try to understand the influences (current and pro-jected) of those governments on their strategic actions

When regulations are formed in response to new laws that are legislated (eg the Sarbanes-Oxley Act dealing with corporate governancemdashsee Chapter 10 for more infor-mation) they often influence a firmrsquos strategic actions For example less-restrictive regu-lations on firmsrsquo actions are a product of the recent global trend toward privatization of government-owned or government-regulated firms Some believe that the transforma-tion from state-owned to private firms occurring in multiple nations has substantial implications for the competitive landscapes in a number of countries and across multiple industries56 In the United States the 2009 allocation by the federal government of $13 billion to high-speed train travel is expected to provide a critical boost to the nationrsquos efforts to reduce traffic congestion and cut pollution57 For global firms manufacturing high-speed rail equipment this political support in the United States of systems requiring their products is a trend to forecast and assess

Firms must carefully analyze a new political administrationrsquos business-related poli-cies and philosophies Antitrust laws taxation laws industries chosen for deregulation labor training laws and the degree of commitment to educational institutions are areas in which an administrationrsquos policies can affect the operations and profitability of indus-tries and individual firms across the globe For example early signals from President Obamarsquos administration that policies might be formed with the intention of reducing the amount of work US companies outsource to firms in other nations seemingly could affect information technology outsourcing firms based in countries such as India58 The introduction of legislation in the US Congress during the early tenure of the Obama administration suggested at least some support for these stated intentions59 Thus these companies might want to carefully examine the newly elected US administrationrsquos intentions to understand their potential effects

To deal with issues such as those we are describing firms develop a political strategy to influence governmental policies that might affect them Some argue that developing an effective political strategy is essential to the newly formed General Motorsrsquo efforts to achieve strategic competitiveness60 In addition the effects of global governmental policies (eg those related to firms in India that are engaging in IT outsourcing work) on a firmrsquos competitive position increase the need for firms to form an effective political strategy61

Firms competing in the global economy encounter an interesting array of politicallegal questions and issues For example in mid-2009 leaders from South Korea and the European Union remained committed to developing a free trade agreement between the relevant parties At the time the two parties had worked for over two years to develop an agreement that many thought would benefit both by creating a host of opportunities for firms to sell their goods and services in what would be a new market for them The key political challenge affecting the partiesrsquo efforts was the European Unionrsquos decision notto permit ldquohellip refunds South Korea pays to local companies who import parts from third countries before exporting finished goodsrdquo62 Both South Korea and European Union firms are monitoring the progress of these talks in order to be able to forecast the effects of a possible trade agreement on their strategic actions

The Sociocultural SegmentThe sociocultural segment is concerned with a societyrsquos attitudes and cultural values Because attitudes and values form the cornerstone of a society they often drive demo-graphic economic politicallegal and technological conditions and changes

The politicallegal segment is the arena in which organizations and interest groups compete for attention resources and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between fi rms and various local governmental agencies

The sociocultural segment is concerned with a societyrsquos attitudes and cultural values

47C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Societiesrsquo attitudes and cultural values appear to be undergoing possible changes at the start of the second decade of the twenty-first century This seems to be the case in the United States and other nations as well Attitudes and values about health care in the United States is an area where sociocultural changes might occur Statistics are a driving force for these potential changes For example while the United States ldquohellip has the high-est overall health care expenditure as well as the highest expenditure per capital of any country in the worldrdquo63 millions of the nationrsquos citizens lack health insurance Some feel that effective health care reform in the United States requires securing coverage for all citizens and lowering the cost of services64 Changes to the nature of health care policies and their delivery would likely affect business firms meaning that they must carefully monitor this possibility and future trends regarding health care in order to anticipate the effects on their operations

As the US labor force has increased it has also become more diverse as significantly more women and minorities from a variety of cultures entered In 1993 the total US workforce was slightly less than 130 million in 2005 it was slightly greater than 148 million It is predicted to grow to more than 192 million by 2050 In the same year 2050 the US workforce is forecasted to be composed of 48 percent female workers 11 percent Asian American workers 14 percent African American workers and 24 percent Hispanic workers65 The growing gender ethnic and cultural diversity in this workforce creates challenges and opportunities including combining the best of both menrsquos and womenrsquos traditional leadership styles Although diversity in the workforce has the poten-tial to improve performance research indicates that management of diversity initiatives is required in order to reap these organizational benefits Human resource practitioners are trained to successfully manage diversity issues to enhance positive outcomes66

Another manifestation of changing attitudes toward work is the continuing growth of contingency workers (part-time temporary and contract employees) throughout the global economy This trend is significant in several parts of the world including Canada Japan Latin America Western Europe and the United States In the United States the fastest growing group of contingency workers is those with 15 to 20 years of work experi-ence The layoffs resulting from the recent global crisis and the loss of retirement income of many ldquobaby boomersrdquomdashmany of whom feel they must work longer to recover losses to their retirement portfoliosmdashare a key reason for this Companies interested in hiring on a temporary basis may benefit by gaining access to the long-term work experiences of these newly available workers67

Although the lifestyle and workforce changes referenced previously reflect the val-ues of the US population each country and culture has unique values and trends As suggested earlier national cultural values affect behavior in organizations and thus also influence organizational outcomes68 For example the importance of collectivism and social relations in Chinese and Russian cultures lead to the open sharing of information and knowledge among members of an organization69 Knowledge sharing is important for defusing new knowledge in organizations and increasing the speed in implementing innovations Personal relationships are especially important in China as guanxi (personal connections) has become a way of doing business within the country and for individuals to advance their careers in what is becoming a more open market society70 Understanding the importance of guanxi is critical for foreign firms doing business in China

The Technological SegmentPervasive and diversified in scope technological changes affect many parts of societies These effects occur primarily through new products processes and materials The techno-logical segment includes the institutions and activities involved with creating new knowl-edge and translating that knowledge into new outputs products processes and materials

Given the rapid pace of technological change it is vital for firms to thoroughly study the technological segment71 The importance of these efforts is suggested by the find-ing that early adopters of new technology often achieve higher market shares and earn

The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs products processes and materials

Read what one leading marketing consultant says about changing consumer attitudes and how companyrsquos should be adapting

wwwcengagecommanagementhitt

STRATEGYRIGHT NOW

46Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s The PoliticalLegal SegmentThe politicallegal segment is the arena in which organizations and interest groups compete for attention resources and a voice in overseeing the body of laws and regu-lations guiding interactions among nations as well as between firms and various local governmental agencies55 Essentially this segment represents how organizations try to influence governments and how they try to understand the influences (current and pro-jected) of those governments on their strategic actions

When regulations are formed in response to new laws that are legislated (eg the Sarbanes-Oxley Act dealing with corporate governancemdashsee Chapter 10 for more infor-mation) they often influence a firmrsquos strategic actions For example less-restrictive regu-lations on firmsrsquo actions are a product of the recent global trend toward privatization of government-owned or government-regulated firms Some believe that the transforma-tion from state-owned to private firms occurring in multiple nations has substantial implications for the competitive landscapes in a number of countries and across multiple industries56 In the United States the 2009 allocation by the federal government of $13 billion to high-speed train travel is expected to provide a critical boost to the nationrsquos efforts to reduce traffic congestion and cut pollution57 For global firms manufacturing high-speed rail equipment this political support in the United States of systems requiring their products is a trend to forecast and assess

Firms must carefully analyze a new political administrationrsquos business-related poli-cies and philosophies Antitrust laws taxation laws industries chosen for deregulation labor training laws and the degree of commitment to educational institutions are areas in which an administrationrsquos policies can affect the operations and profitability of indus-tries and individual firms across the globe For example early signals from President Obamarsquos administration that policies might be formed with the intention of reducing the amount of work US companies outsource to firms in other nations seemingly could affect information technology outsourcing firms based in countries such as India58 The introduction of legislation in the US Congress during the early tenure of the Obama administration suggested at least some support for these stated intentions59 Thus these companies might want to carefully examine the newly elected US administrationrsquos intentions to understand their potential effects

To deal with issues such as those we are describing firms develop a political strategy to influence governmental policies that might affect them Some argue that developing an effective political strategy is essential to the newly formed General Motorsrsquo efforts to achieve strategic competitiveness60 In addition the effects of global governmental policies (eg those related to firms in India that are engaging in IT outsourcing work) on a firmrsquos competitive position increase the need for firms to form an effective political strategy61

Firms competing in the global economy encounter an interesting array of politicallegal questions and issues For example in mid-2009 leaders from South Korea and the European Union remained committed to developing a free trade agreement between the relevant parties At the time the two parties had worked for over two years to develop an agreement that many thought would benefit both by creating a host of opportunities for firms to sell their goods and services in what would be a new market for them The key political challenge affecting the partiesrsquo efforts was the European Unionrsquos decision notto permit ldquohellip refunds South Korea pays to local companies who import parts from third countries before exporting finished goodsrdquo62 Both South Korea and European Union firms are monitoring the progress of these talks in order to be able to forecast the effects of a possible trade agreement on their strategic actions

The Sociocultural SegmentThe sociocultural segment is concerned with a societyrsquos attitudes and cultural values Because attitudes and values form the cornerstone of a society they often drive demo-graphic economic politicallegal and technological conditions and changes

The politicallegal segment is the arena in which organizations and interest groups compete for attention resources and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between fi rms and various local governmental agencies

The sociocultural segment is concerned with a societyrsquos attitudes and cultural values

47C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Societiesrsquo attitudes and cultural values appear to be undergoing possible changes at the start of the second decade of the twenty-first century This seems to be the case in the United States and other nations as well Attitudes and values about health care in the United States is an area where sociocultural changes might occur Statistics are a driving force for these potential changes For example while the United States ldquohellip has the high-est overall health care expenditure as well as the highest expenditure per capital of any country in the worldrdquo63 millions of the nationrsquos citizens lack health insurance Some feel that effective health care reform in the United States requires securing coverage for all citizens and lowering the cost of services64 Changes to the nature of health care policies and their delivery would likely affect business firms meaning that they must carefully monitor this possibility and future trends regarding health care in order to anticipate the effects on their operations

As the US labor force has increased it has also become more diverse as significantly more women and minorities from a variety of cultures entered In 1993 the total US workforce was slightly less than 130 million in 2005 it was slightly greater than 148 million It is predicted to grow to more than 192 million by 2050 In the same year 2050 the US workforce is forecasted to be composed of 48 percent female workers 11 percent Asian American workers 14 percent African American workers and 24 percent Hispanic workers65 The growing gender ethnic and cultural diversity in this workforce creates challenges and opportunities including combining the best of both menrsquos and womenrsquos traditional leadership styles Although diversity in the workforce has the poten-tial to improve performance research indicates that management of diversity initiatives is required in order to reap these organizational benefits Human resource practitioners are trained to successfully manage diversity issues to enhance positive outcomes66

Another manifestation of changing attitudes toward work is the continuing growth of contingency workers (part-time temporary and contract employees) throughout the global economy This trend is significant in several parts of the world including Canada Japan Latin America Western Europe and the United States In the United States the fastest growing group of contingency workers is those with 15 to 20 years of work experi-ence The layoffs resulting from the recent global crisis and the loss of retirement income of many ldquobaby boomersrdquomdashmany of whom feel they must work longer to recover losses to their retirement portfoliosmdashare a key reason for this Companies interested in hiring on a temporary basis may benefit by gaining access to the long-term work experiences of these newly available workers67

Although the lifestyle and workforce changes referenced previously reflect the val-ues of the US population each country and culture has unique values and trends As suggested earlier national cultural values affect behavior in organizations and thus also influence organizational outcomes68 For example the importance of collectivism and social relations in Chinese and Russian cultures lead to the open sharing of information and knowledge among members of an organization69 Knowledge sharing is important for defusing new knowledge in organizations and increasing the speed in implementing innovations Personal relationships are especially important in China as guanxi (personal connections) has become a way of doing business within the country and for individuals to advance their careers in what is becoming a more open market society70 Understanding the importance of guanxi is critical for foreign firms doing business in China

The Technological SegmentPervasive and diversified in scope technological changes affect many parts of societies These effects occur primarily through new products processes and materials The techno-logical segment includes the institutions and activities involved with creating new knowl-edge and translating that knowledge into new outputs products processes and materials

Given the rapid pace of technological change it is vital for firms to thoroughly study the technological segment71 The importance of these efforts is suggested by the find-ing that early adopters of new technology often achieve higher market shares and earn

The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs products processes and materials

Read what one leading marketing consultant says about changing consumer attitudes and how companyrsquos should be adapting

wwwcengagecommanagementhitt

STRATEGYRIGHT NOW

47C

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xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Societiesrsquo attitudes and cultural values appear to be undergoing possible changes at the start of the second decade of the twenty-first century This seems to be the case in the United States and other nations as well Attitudes and values about health care in the United States is an area where sociocultural changes might occur Statistics are a driving force for these potential changes For example while the United States ldquohellip has the high-est overall health care expenditure as well as the highest expenditure per capital of any country in the worldrdquo63 millions of the nationrsquos citizens lack health insurance Some feel that effective health care reform in the United States requires securing coverage for all citizens and lowering the cost of services64 Changes to the nature of health care policies and their delivery would likely affect business firms meaning that they must carefully monitor this possibility and future trends regarding health care in order to anticipate the effects on their operations

As the US labor force has increased it has also become more diverse as significantly more women and minorities from a variety of cultures entered In 1993 the total US workforce was slightly less than 130 million in 2005 it was slightly greater than 148 million It is predicted to grow to more than 192 million by 2050 In the same year 2050 the US workforce is forecasted to be composed of 48 percent female workers 11 percent Asian American workers 14 percent African American workers and 24 percent Hispanic workers65 The growing gender ethnic and cultural diversity in this workforce creates challenges and opportunities including combining the best of both menrsquos and womenrsquos traditional leadership styles Although diversity in the workforce has the poten-tial to improve performance research indicates that management of diversity initiatives is required in order to reap these organizational benefits Human resource practitioners are trained to successfully manage diversity issues to enhance positive outcomes66

Another manifestation of changing attitudes toward work is the continuing growth of contingency workers (part-time temporary and contract employees) throughout the global economy This trend is significant in several parts of the world including Canada Japan Latin America Western Europe and the United States In the United States the fastest growing group of contingency workers is those with 15 to 20 years of work experi-ence The layoffs resulting from the recent global crisis and the loss of retirement income of many ldquobaby boomersrdquomdashmany of whom feel they must work longer to recover losses to their retirement portfoliosmdashare a key reason for this Companies interested in hiring on a temporary basis may benefit by gaining access to the long-term work experiences of these newly available workers67

Although the lifestyle and workforce changes referenced previously reflect the val-ues of the US population each country and culture has unique values and trends As suggested earlier national cultural values affect behavior in organizations and thus also influence organizational outcomes68 For example the importance of collectivism and social relations in Chinese and Russian cultures lead to the open sharing of information and knowledge among members of an organization69 Knowledge sharing is important for defusing new knowledge in organizations and increasing the speed in implementing innovations Personal relationships are especially important in China as guanxi (personal connections) has become a way of doing business within the country and for individuals to advance their careers in what is becoming a more open market society70 Understanding the importance of guanxi is critical for foreign firms doing business in China

The Technological SegmentPervasive and diversified in scope technological changes affect many parts of societies These effects occur primarily through new products processes and materials The techno-logical segment includes the institutions and activities involved with creating new knowl-edge and translating that knowledge into new outputs products processes and materials

Given the rapid pace of technological change it is vital for firms to thoroughly study the technological segment71 The importance of these efforts is suggested by the find-ing that early adopters of new technology often achieve higher market shares and earn

The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs products processes and materials

Read what one leading marketing consultant says about changing consumer attitudes and how companyrsquos should be adapting

wwwcengagecommanagementhitt

STRATEGYRIGHT NOW

48Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s higher returns Thus both large and small firms should continuously scan the external environ-ment to identify potential substitutes for technolo-gies that are in current use as well as to identify newly emerging technologies from which their firm could derive competitive advantage72

As a significant technological development the Internet has become a remarkable capability to pro-vide information easily quickly and effectively to an ever-increasing percentage of the worldrsquos popu-lation Companies continue to study the Internetrsquos capabilities to anticipate how it may allow them to create more value for customers in the future and to anticipate future trends

In spite of the Internetrsquos far-reaching effects wire-less communication technology is predicted to be the next significant technological oppor-tunity for companies to apply when pursuing strategic competitiveness Handheld devices and other wireless communications equipment are used to access a variety of network-based services The use of handheld computers with wireless network connectivity Web-enabled mobile phone handsets and other emerging platforms (eg consumer Internet-access devices) is expected to increase substantially soon becoming the dominant form of com-munication and commerce73

Amazoncomrsquos Kindle is an emerging wireless technology with capabilities firms should evaluate In addition to books customers can download an ever-increasing array of products to the Kindle In mid-2009 over 275000 of Amazonrsquos books were available through the Kindle Magazines and newspapers are available for purchase and use on the Kindle as well The ease of reading daily newspapers on the Kindle without charge instead of waiting for hard copy to be delivered is threatening the very existence of a host of news-papers The Kindle can also be used to surf the Web and send e-mail messages74

Currently in its second generation there is no doubt that Amazon will continue developing more advanced versions of the Kindle with each version having additional functionalities As a service the Kindle creates opportunities for those wanting to dis-tribute knowledge electronically but is a threat to companies whose strategies call for the distribution of physical ldquohard copiesrdquo of written words As such many firms should study this technology to understand its competitive implications

The Global SegmentThe global segment includes relevant new global markets existing markets that are changing important international political events and critical cultural and institutional characteristics of global markets75 There is little doubt that markets are becoming more global and that consumers as well as companies throughout the world accept this fact Consider the automobile industry as an example of this The global auto industry is one in which an increasing number of people believe that because ldquowe live in a global com-munityrdquo consumers in multiple nations are willing to buy cars and trucks ldquofrom whatever area of the worldrdquo76

When studying the global segment firms (including automobile manufacturers) should recognize that globalization of business markets may create opportunities to enter new markets as well as threats that new competitors from other economies may enter their market as well This is both an opportunity and a threat for the worldrsquos automobile manufacturersmdashworldwide production capacity is now a potential threat to all of these global companies while entering another market to sell a companyrsquos products appears to be an opportunity In terms of overcapacity evidence indicated that in mid-2009this global industry had ldquohellip the capacity to make an astounding 94 million vehicles each year (which is roughly) 34 million too many based on current salesrdquo77 This prediction of excess capacity suggests that most if not all automobile manufacturers may decide

The global segment includes relevant new global markets existing markets that are changing important international political events and critical cultural and institutional characteristics of global markets

Spen

cer

Plat

tG

etty

imag

es

The Kindle DX a new pur-pose-built reading device features storage for up to 3500 books Amazon has also partnered with select major newspapers to offer readers discounts on the DX in return for long-term subscriptions

49C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

to enter markets that are new to them in order to try to sell more of the units they are producing

The markets from which firms generate sales and income are one indication ofthe degree to which they are participating in the global economy For example in 2008 53 percent of McDonaldrsquos operating income was accounted for by its internationaloperations78 Food giant H J Heinz earns over 60 percent of its revenue outside the United States79 Consumer products giant Procter amp Gamble with operations in over 180 countries recently generated over 56 percent of its sales revenue in markets outside the United States80 Thus for these companies and so many others understanding the conditions of todayrsquos global segment and being able to predict future conditions is critical to their success

The global segment presents firms with both opportunities and threats or risks Because of the threats and risks some firms choose to take a more cautious approach to competing in international markets These firms participate in what some refer to as globalfocusing Globalfocusing often is used by firms with moderate levels of international operations who increase their internationalization by focusing on global niche markets81

In this way they build on and use their special competencies and resources while limit-ing their risks with the niche market Another way in which firms limit their risks in international markets is to focus their operations and sales in one region of the world82

In this way they can build stronger relationships in and knowledge of their markets As they build these strengths rivals find it more difficult to enter their markets and compete successfully

In all instances firms competing in global markets should recognize the different sociocultural and institutional attributes of global markets Earlier we mentioned that South Korea and the European Union remain committed to developing a trade agree-ment that benefits both parties If this happens European Union companies (as well as those from other regions of the world as well) who choose to compete in South Korea must understand the value placed on hierarchical order formality and self-control as well as on duty rather than rights Furthermore Korean ideology emphasizes communi-tarianism a characteristic of many Asian countries Korearsquos approach differs from those of Japan and China however in that it focuses on inhwa or harmony Inhwa is based on a respect of hierarchical relationships and obedience to authority Alternatively the approach in China stresses guanximdashpersonal relationships or good connectionsmdashwhile in Japan the focus is on wa or group harmony and social cohesion83 The institutional context of China suggests a major emphasis on centralized planning by the government The Chinese government provides incentives to firms to develop alliances with foreign firms having sophisticated technology in hopes of building knowledge and introducing new technologies to the Chinese markets over time84

The Physical Environment SegmentThe physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes85 Concerned with trends oriented to sustaining the worldrsquos physical environment firms recognize that ecological social and economic systems interactively influence what happens in this particular segment86

There are many parts or attributes of the physical environment that firms should consider as they try to identify trends in this segment Some argue that global warming is a trend firms and nations should carefully examine in efforts to predict any potential effects on the global society as well as on their business operations87 Energy consump-tion is another part of the physical environment that concerns both organizations and nations Canada for example ldquohellip has formulated various strategic measures to accelerate the development of energy efficiency systems and renewable energy technologies and has made significant progressrdquo88

Because of increasing concern about sustaining the quality of the physical environment a number of companies are developing environmentally friendly policies

The physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes

50Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s Target Corporation operates in ways that will minimize the firmrsquos environmental footprint In the companyrsquos words ldquoTarget strives to be a responsible steward of the environment In addition to complying with all environmental legislation we seek to understand our impact and continuously improve our business practices in many areasrdquo89 (Additional commentary about Targetrsquos actions toward the physical environment appears in a Strategic Focus in Chapter 4) As noted in the Opening Case Philip Morris International is committed to sustainable tobacco farming and the efficient use of resources in recognition of the effects of its operations on the physical environment

We discuss other firmsrsquo efforts to ldquoreduce their environmental footprintrdquo and to be good stewards of the physical environment as a result of doing so in the following Strategic Focus As we note the number of ldquogreenrdquo products companies are producing continues to increase

As our discussion of the general environment shows identifying anticipated changes and trends among external elements is a key objective of analyzing the firmrsquos general envi-ronment With a focus on the future the analysis of the general environment allows firms to identify opportunities and threats It is necessary to have a top management team with the experience knowledge and sensitivity required to effectively analyze this segment of the environment90 Also critical to a firmrsquos choices of strategic actions to take is an under-standing of its industry environment and its competitors we consider these issues next

Industry Environment AnalysisAn industry is a group of firms producing products that are close substitutes In the course of competition these firms influence one another Typically industries include a rich mixture of competitive strategies that companies use in pursuing above-average returns In part these strategies are chosen because of the influence of an industryrsquos char-acteristics91

Compared with the general environment the industry environment has a more direct effect on the firmrsquos strategic competitiveness and ability to earn above-average returns92

An industryrsquos profit potential is a function of five forces of competition the threats posed by new entrants the power of suppliers the power of buyers product substitutes and the intensity of rivalry among competitors (see Figure 22 on page 52)

The five forces model of competition expands the arena for competitive analysis Historically when studying the competitive environment firms concentrated on com-panies with which they competed directly However firms must search more broadly to recognize current and potential competitors by identifying potential customers as well as the firms serving them For example the communications industry is now broadly defined as encompassing media companies telecoms entertainment companies and companies producing devices such as phones and iPods In such an environment firms must study many other industries to identify firms with capabilities (especially technol-ogy-based capabilities) that might be the foundation for producing a good or a service that can compete against what they are producing93 Using this perspective finds firms focusing on customers and their needs rather than on specific industry boundaries to define markets

When studying the industry environment firms must also recognize that suppliers can become a firmrsquos competitors (by integrating forward) as can buyers (by integrating backward) For example several firms have integrated forward in the pharmaceutical industry by acquiring distributors or wholesalers In addition firms choosing to enter a new market and those producing products that are adequate substitutes for existing products can become a companyrsquos competitors Next we examine the five forces the firm analyzes to understand the profitability potential within the industry (or a segment of an industry) in which it competes or may choose to compete

An industry is a group of fi rms producing products that are close substitutes

The number of companies throughout the world that recognize that they compete within the confines of the physical environment and that they are expected to reduce the negative effect of their operations on the physical

environment while competing continues to increase Those concerned about the physical environment value this trend

Producing and selling additional ldquogreenrdquo (ie environmentally friendly) products is one company response to this trend By mid-2009 for example firms had launched almost 460 new green products such as toilet paper diapers and household cleaning products in the United States alone Analysts saw these launchings which represented a threefold increase compared to launches in 2008 as more evidence that ldquogreenrdquo is going mainstream

In addition to products companies across the globe are committing to or increasing their commitment to environmental sustainability McDonaldrsquos for example ldquotakes its responsibility to the environment seriouslyrdquo Green restaurant design sustainable packaging and waste management and energy efficiency are areas where McDonaldrsquos acts to reduce its environmental footprint Dell Inc recently announced that its operations are now ldquocarbon neutralrdquo Dell envisions this as an important step in the firmrsquos quest to become ldquothe greenest technology company on the planetrdquo Google and Yahoo have also pledged to become carbon neutral

Honest Tea produces ldquodelicious truly healthy organic beveragesrdquo Since its founding in 1998 the firm has had a very strong commitment to environmentally friendly business practices including the way its new corporate headquarters was designed In the companyrsquos words ldquoWhen it came time for a new office we did our best to walk our talk and create an office that is environmentally friendly to both the planet and our employeesrdquo Honest Tea used reclaimed bricks flooring and desks when building its new facility

Procter amp Gamble (PampG) recently announced increased targets for its 2012 sustainability goals Among the goals are those to (1) ldquodevelop and market at least $50 billion in cumulative sales of sustainable innovation products (2) deliver a 20 percent reduction (per unit of production) in carbon dioxide emissions energy consumption water usage and disposed waste from PampG plants and (3) enable 300 million children to Live Learn and Thrive and deliver three billion liters of clean water through PampGrsquos Childrenrsquos Safe Drinking Water programrdquo Dutch consumer products giant Unilever also has an ongoing commitment to sustainability The firmrsquos sustainability actions include reducing water usage in its plants working with its suppliers to encourage sustainability practices on their parts and improving the eco-efficiency of their manufacturing facilities

A number of other companies mirror the commitments of these firms in response to emerging trends in the physical environment segment In addition to positively

FIRMSrsquo EFFORTS TO TAKE CARE OF THE PHYSICAL

ENVIRONMENT IN WHICH THEY COMPETE

AP

Phot

oW

ong

May

e-E

Procter amp Gamblersquos easily shipped PUR packets have helped provide over 1 billion liters of clean drink-ing water since the creation of the Childrenrsquos Safe Drinking Water program in 2004

52

responding to the observed trends in this segment of the general environment there is some evidence that firms engaging in these types of behaviors outperform those failing to do so This emerging evidence suggests that these behaviors benefit companies their stakeholders and the physical environment in which they operate

Sources 2009 Eco-friendly growth BusinessWeek May 45ndash6 2009 Honest Tea httpwwwhonestteacom June 12 2009 McDonaldrsquos Corporate Responsibility httpwwwmcdonaldscom June 12 2009 Procter amp Gamble deepens corporate commitment to sustainability httpwwwpandgcom April 29 2009 Introduction to Unilever httpwwwunilevercom June 12 2008 Procter amp Gamble Sustainability Full Report httpwwwpandgcom May 10 J Ball 2008Green goal of ldquocarbon neutralityrdquo has limits Wall Street Journal Online httpwwwwsjcom December 28 T B Porter 2008 Managerial applications of corporate social responsibility and systems thinking for achieving sustainability outcomes Systems Research and Behavioral Science 25 397ndash411

Threat of New EntrantsIdentifying new entrants is important because they can threaten the market share of exist-ing competitors94 One reason new entrants pose such a threat is that they bring additional production capacity Unless the demand for a good or service is increasing additional capacity holds consumersrsquo costs down resulting in less revenue and lower returns for competing firms Often new entrants have a keen interest in gaining a large market share As a result new competitors may force existing firms to be more efficient and to learn how to compete on new dimensions (eg using an Internet-based distribution channel)

The likelihood that firms will enter an industry is a function of two factors barriers to entry and the retaliation expected from current industry participants Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter As such high entry barriers tend to increase

Figure 22 The Five Forces of Competition Model

Threat ofnew entrants

Bargaining powerof suppliers

Bargaining powerof buyers

Threat ofsubstitute products

Rivalry amongcompeting firms

49C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

to enter markets that are new to them in order to try to sell more of the units they are producing

The markets from which firms generate sales and income are one indication ofthe degree to which they are participating in the global economy For example in 2008 53 percent of McDonaldrsquos operating income was accounted for by its internationaloperations78 Food giant H J Heinz earns over 60 percent of its revenue outside the United States79 Consumer products giant Procter amp Gamble with operations in over 180 countries recently generated over 56 percent of its sales revenue in markets outside the United States80 Thus for these companies and so many others understanding the conditions of todayrsquos global segment and being able to predict future conditions is critical to their success

The global segment presents firms with both opportunities and threats or risks Because of the threats and risks some firms choose to take a more cautious approach to competing in international markets These firms participate in what some refer to as globalfocusing Globalfocusing often is used by firms with moderate levels of international operations who increase their internationalization by focusing on global niche markets81

In this way they build on and use their special competencies and resources while limit-ing their risks with the niche market Another way in which firms limit their risks in international markets is to focus their operations and sales in one region of the world82

In this way they can build stronger relationships in and knowledge of their markets As they build these strengths rivals find it more difficult to enter their markets and compete successfully

In all instances firms competing in global markets should recognize the different sociocultural and institutional attributes of global markets Earlier we mentioned that South Korea and the European Union remain committed to developing a trade agree-ment that benefits both parties If this happens European Union companies (as well as those from other regions of the world as well) who choose to compete in South Korea must understand the value placed on hierarchical order formality and self-control as well as on duty rather than rights Furthermore Korean ideology emphasizes communi-tarianism a characteristic of many Asian countries Korearsquos approach differs from those of Japan and China however in that it focuses on inhwa or harmony Inhwa is based on a respect of hierarchical relationships and obedience to authority Alternatively the approach in China stresses guanximdashpersonal relationships or good connectionsmdashwhile in Japan the focus is on wa or group harmony and social cohesion83 The institutional context of China suggests a major emphasis on centralized planning by the government The Chinese government provides incentives to firms to develop alliances with foreign firms having sophisticated technology in hopes of building knowledge and introducing new technologies to the Chinese markets over time84

The Physical Environment SegmentThe physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes85 Concerned with trends oriented to sustaining the worldrsquos physical environment firms recognize that ecological social and economic systems interactively influence what happens in this particular segment86

There are many parts or attributes of the physical environment that firms should consider as they try to identify trends in this segment Some argue that global warming is a trend firms and nations should carefully examine in efforts to predict any potential effects on the global society as well as on their business operations87 Energy consump-tion is another part of the physical environment that concerns both organizations and nations Canada for example ldquohellip has formulated various strategic measures to accelerate the development of energy efficiency systems and renewable energy technologies and has made significant progressrdquo88

Because of increasing concern about sustaining the quality of the physical environment a number of companies are developing environmentally friendly policies

The physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes

50Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s Target Corporation operates in ways that will minimize the firmrsquos environmental footprint In the companyrsquos words ldquoTarget strives to be a responsible steward of the environment In addition to complying with all environmental legislation we seek to understand our impact and continuously improve our business practices in many areasrdquo89 (Additional commentary about Targetrsquos actions toward the physical environment appears in a Strategic Focus in Chapter 4) As noted in the Opening Case Philip Morris International is committed to sustainable tobacco farming and the efficient use of resources in recognition of the effects of its operations on the physical environment

We discuss other firmsrsquo efforts to ldquoreduce their environmental footprintrdquo and to be good stewards of the physical environment as a result of doing so in the following Strategic Focus As we note the number of ldquogreenrdquo products companies are producing continues to increase

As our discussion of the general environment shows identifying anticipated changes and trends among external elements is a key objective of analyzing the firmrsquos general envi-ronment With a focus on the future the analysis of the general environment allows firms to identify opportunities and threats It is necessary to have a top management team with the experience knowledge and sensitivity required to effectively analyze this segment of the environment90 Also critical to a firmrsquos choices of strategic actions to take is an under-standing of its industry environment and its competitors we consider these issues next

Industry Environment AnalysisAn industry is a group of firms producing products that are close substitutes In the course of competition these firms influence one another Typically industries include a rich mixture of competitive strategies that companies use in pursuing above-average returns In part these strategies are chosen because of the influence of an industryrsquos char-acteristics91

Compared with the general environment the industry environment has a more direct effect on the firmrsquos strategic competitiveness and ability to earn above-average returns92

An industryrsquos profit potential is a function of five forces of competition the threats posed by new entrants the power of suppliers the power of buyers product substitutes and the intensity of rivalry among competitors (see Figure 22 on page 52)

The five forces model of competition expands the arena for competitive analysis Historically when studying the competitive environment firms concentrated on com-panies with which they competed directly However firms must search more broadly to recognize current and potential competitors by identifying potential customers as well as the firms serving them For example the communications industry is now broadly defined as encompassing media companies telecoms entertainment companies and companies producing devices such as phones and iPods In such an environment firms must study many other industries to identify firms with capabilities (especially technol-ogy-based capabilities) that might be the foundation for producing a good or a service that can compete against what they are producing93 Using this perspective finds firms focusing on customers and their needs rather than on specific industry boundaries to define markets

When studying the industry environment firms must also recognize that suppliers can become a firmrsquos competitors (by integrating forward) as can buyers (by integrating backward) For example several firms have integrated forward in the pharmaceutical industry by acquiring distributors or wholesalers In addition firms choosing to enter a new market and those producing products that are adequate substitutes for existing products can become a companyrsquos competitors Next we examine the five forces the firm analyzes to understand the profitability potential within the industry (or a segment of an industry) in which it competes or may choose to compete

An industry is a group of fi rms producing products that are close substitutes

The number of companies throughout the world that recognize that they compete within the confines of the physical environment and that they are expected to reduce the negative effect of their operations on the physical

environment while competing continues to increase Those concerned about the physical environment value this trend

Producing and selling additional ldquogreenrdquo (ie environmentally friendly) products is one company response to this trend By mid-2009 for example firms had launched almost 460 new green products such as toilet paper diapers and household cleaning products in the United States alone Analysts saw these launchings which represented a threefold increase compared to launches in 2008 as more evidence that ldquogreenrdquo is going mainstream

In addition to products companies across the globe are committing to or increasing their commitment to environmental sustainability McDonaldrsquos for example ldquotakes its responsibility to the environment seriouslyrdquo Green restaurant design sustainable packaging and waste management and energy efficiency are areas where McDonaldrsquos acts to reduce its environmental footprint Dell Inc recently announced that its operations are now ldquocarbon neutralrdquo Dell envisions this as an important step in the firmrsquos quest to become ldquothe greenest technology company on the planetrdquo Google and Yahoo have also pledged to become carbon neutral

Honest Tea produces ldquodelicious truly healthy organic beveragesrdquo Since its founding in 1998 the firm has had a very strong commitment to environmentally friendly business practices including the way its new corporate headquarters was designed In the companyrsquos words ldquoWhen it came time for a new office we did our best to walk our talk and create an office that is environmentally friendly to both the planet and our employeesrdquo Honest Tea used reclaimed bricks flooring and desks when building its new facility

Procter amp Gamble (PampG) recently announced increased targets for its 2012 sustainability goals Among the goals are those to (1) ldquodevelop and market at least $50 billion in cumulative sales of sustainable innovation products (2) deliver a 20 percent reduction (per unit of production) in carbon dioxide emissions energy consumption water usage and disposed waste from PampG plants and (3) enable 300 million children to Live Learn and Thrive and deliver three billion liters of clean water through PampGrsquos Childrenrsquos Safe Drinking Water programrdquo Dutch consumer products giant Unilever also has an ongoing commitment to sustainability The firmrsquos sustainability actions include reducing water usage in its plants working with its suppliers to encourage sustainability practices on their parts and improving the eco-efficiency of their manufacturing facilities

A number of other companies mirror the commitments of these firms in response to emerging trends in the physical environment segment In addition to positively

FIRMSrsquo EFFORTS TO TAKE CARE OF THE PHYSICAL

ENVIRONMENT IN WHICH THEY COMPETE

AP

Phot

oW

ong

May

e-E

Procter amp Gamblersquos easily shipped PUR packets have helped provide over 1 billion liters of clean drink-ing water since the creation of the Childrenrsquos Safe Drinking Water program in 2004

52

responding to the observed trends in this segment of the general environment there is some evidence that firms engaging in these types of behaviors outperform those failing to do so This emerging evidence suggests that these behaviors benefit companies their stakeholders and the physical environment in which they operate

Sources 2009 Eco-friendly growth BusinessWeek May 45ndash6 2009 Honest Tea httpwwwhonestteacom June 12 2009 McDonaldrsquos Corporate Responsibility httpwwwmcdonaldscom June 12 2009 Procter amp Gamble deepens corporate commitment to sustainability httpwwwpandgcom April 29 2009 Introduction to Unilever httpwwwunilevercom June 12 2008 Procter amp Gamble Sustainability Full Report httpwwwpandgcom May 10 J Ball 2008Green goal of ldquocarbon neutralityrdquo has limits Wall Street Journal Online httpwwwwsjcom December 28 T B Porter 2008 Managerial applications of corporate social responsibility and systems thinking for achieving sustainability outcomes Systems Research and Behavioral Science 25 397ndash411

Threat of New EntrantsIdentifying new entrants is important because they can threaten the market share of exist-ing competitors94 One reason new entrants pose such a threat is that they bring additional production capacity Unless the demand for a good or service is increasing additional capacity holds consumersrsquo costs down resulting in less revenue and lower returns for competing firms Often new entrants have a keen interest in gaining a large market share As a result new competitors may force existing firms to be more efficient and to learn how to compete on new dimensions (eg using an Internet-based distribution channel)

The likelihood that firms will enter an industry is a function of two factors barriers to entry and the retaliation expected from current industry participants Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter As such high entry barriers tend to increase

Figure 22 The Five Forces of Competition Model

Threat ofnew entrants

Bargaining powerof suppliers

Bargaining powerof buyers

Threat ofsubstitute products

Rivalry amongcompeting firms

50Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s Target Corporation operates in ways that will minimize the firmrsquos environmental footprint In the companyrsquos words ldquoTarget strives to be a responsible steward of the environment In addition to complying with all environmental legislation we seek to understand our impact and continuously improve our business practices in many areasrdquo89 (Additional commentary about Targetrsquos actions toward the physical environment appears in a Strategic Focus in Chapter 4) As noted in the Opening Case Philip Morris International is committed to sustainable tobacco farming and the efficient use of resources in recognition of the effects of its operations on the physical environment

We discuss other firmsrsquo efforts to ldquoreduce their environmental footprintrdquo and to be good stewards of the physical environment as a result of doing so in the following Strategic Focus As we note the number of ldquogreenrdquo products companies are producing continues to increase

As our discussion of the general environment shows identifying anticipated changes and trends among external elements is a key objective of analyzing the firmrsquos general envi-ronment With a focus on the future the analysis of the general environment allows firms to identify opportunities and threats It is necessary to have a top management team with the experience knowledge and sensitivity required to effectively analyze this segment of the environment90 Also critical to a firmrsquos choices of strategic actions to take is an under-standing of its industry environment and its competitors we consider these issues next

Industry Environment AnalysisAn industry is a group of firms producing products that are close substitutes In the course of competition these firms influence one another Typically industries include a rich mixture of competitive strategies that companies use in pursuing above-average returns In part these strategies are chosen because of the influence of an industryrsquos char-acteristics91

Compared with the general environment the industry environment has a more direct effect on the firmrsquos strategic competitiveness and ability to earn above-average returns92

An industryrsquos profit potential is a function of five forces of competition the threats posed by new entrants the power of suppliers the power of buyers product substitutes and the intensity of rivalry among competitors (see Figure 22 on page 52)

The five forces model of competition expands the arena for competitive analysis Historically when studying the competitive environment firms concentrated on com-panies with which they competed directly However firms must search more broadly to recognize current and potential competitors by identifying potential customers as well as the firms serving them For example the communications industry is now broadly defined as encompassing media companies telecoms entertainment companies and companies producing devices such as phones and iPods In such an environment firms must study many other industries to identify firms with capabilities (especially technol-ogy-based capabilities) that might be the foundation for producing a good or a service that can compete against what they are producing93 Using this perspective finds firms focusing on customers and their needs rather than on specific industry boundaries to define markets

When studying the industry environment firms must also recognize that suppliers can become a firmrsquos competitors (by integrating forward) as can buyers (by integrating backward) For example several firms have integrated forward in the pharmaceutical industry by acquiring distributors or wholesalers In addition firms choosing to enter a new market and those producing products that are adequate substitutes for existing products can become a companyrsquos competitors Next we examine the five forces the firm analyzes to understand the profitability potential within the industry (or a segment of an industry) in which it competes or may choose to compete

An industry is a group of fi rms producing products that are close substitutes

The number of companies throughout the world that recognize that they compete within the confines of the physical environment and that they are expected to reduce the negative effect of their operations on the physical

environment while competing continues to increase Those concerned about the physical environment value this trend

Producing and selling additional ldquogreenrdquo (ie environmentally friendly) products is one company response to this trend By mid-2009 for example firms had launched almost 460 new green products such as toilet paper diapers and household cleaning products in the United States alone Analysts saw these launchings which represented a threefold increase compared to launches in 2008 as more evidence that ldquogreenrdquo is going mainstream

In addition to products companies across the globe are committing to or increasing their commitment to environmental sustainability McDonaldrsquos for example ldquotakes its responsibility to the environment seriouslyrdquo Green restaurant design sustainable packaging and waste management and energy efficiency are areas where McDonaldrsquos acts to reduce its environmental footprint Dell Inc recently announced that its operations are now ldquocarbon neutralrdquo Dell envisions this as an important step in the firmrsquos quest to become ldquothe greenest technology company on the planetrdquo Google and Yahoo have also pledged to become carbon neutral

Honest Tea produces ldquodelicious truly healthy organic beveragesrdquo Since its founding in 1998 the firm has had a very strong commitment to environmentally friendly business practices including the way its new corporate headquarters was designed In the companyrsquos words ldquoWhen it came time for a new office we did our best to walk our talk and create an office that is environmentally friendly to both the planet and our employeesrdquo Honest Tea used reclaimed bricks flooring and desks when building its new facility

Procter amp Gamble (PampG) recently announced increased targets for its 2012 sustainability goals Among the goals are those to (1) ldquodevelop and market at least $50 billion in cumulative sales of sustainable innovation products (2) deliver a 20 percent reduction (per unit of production) in carbon dioxide emissions energy consumption water usage and disposed waste from PampG plants and (3) enable 300 million children to Live Learn and Thrive and deliver three billion liters of clean water through PampGrsquos Childrenrsquos Safe Drinking Water programrdquo Dutch consumer products giant Unilever also has an ongoing commitment to sustainability The firmrsquos sustainability actions include reducing water usage in its plants working with its suppliers to encourage sustainability practices on their parts and improving the eco-efficiency of their manufacturing facilities

A number of other companies mirror the commitments of these firms in response to emerging trends in the physical environment segment In addition to positively

FIRMSrsquo EFFORTS TO TAKE CARE OF THE PHYSICAL

ENVIRONMENT IN WHICH THEY COMPETE

AP

Phot

oW

ong

May

e-E

Procter amp Gamblersquos easily shipped PUR packets have helped provide over 1 billion liters of clean drink-ing water since the creation of the Childrenrsquos Safe Drinking Water program in 2004

52

responding to the observed trends in this segment of the general environment there is some evidence that firms engaging in these types of behaviors outperform those failing to do so This emerging evidence suggests that these behaviors benefit companies their stakeholders and the physical environment in which they operate

Sources 2009 Eco-friendly growth BusinessWeek May 45ndash6 2009 Honest Tea httpwwwhonestteacom June 12 2009 McDonaldrsquos Corporate Responsibility httpwwwmcdonaldscom June 12 2009 Procter amp Gamble deepens corporate commitment to sustainability httpwwwpandgcom April 29 2009 Introduction to Unilever httpwwwunilevercom June 12 2008 Procter amp Gamble Sustainability Full Report httpwwwpandgcom May 10 J Ball 2008Green goal of ldquocarbon neutralityrdquo has limits Wall Street Journal Online httpwwwwsjcom December 28 T B Porter 2008 Managerial applications of corporate social responsibility and systems thinking for achieving sustainability outcomes Systems Research and Behavioral Science 25 397ndash411

Threat of New EntrantsIdentifying new entrants is important because they can threaten the market share of exist-ing competitors94 One reason new entrants pose such a threat is that they bring additional production capacity Unless the demand for a good or service is increasing additional capacity holds consumersrsquo costs down resulting in less revenue and lower returns for competing firms Often new entrants have a keen interest in gaining a large market share As a result new competitors may force existing firms to be more efficient and to learn how to compete on new dimensions (eg using an Internet-based distribution channel)

The likelihood that firms will enter an industry is a function of two factors barriers to entry and the retaliation expected from current industry participants Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter As such high entry barriers tend to increase

Figure 22 The Five Forces of Competition Model

Threat ofnew entrants

Bargaining powerof suppliers

Bargaining powerof buyers

Threat ofsubstitute products

Rivalry amongcompeting firms

The number of companies throughout the world that recognize that they compete within the confines of the physical environment and that they are expected to reduce the negative effect of their operations on the physical

environment while competing continues to increase Those concerned about the physical environment value this trend

Producing and selling additional ldquogreenrdquo (ie environmentally friendly) products is one company response to this trend By mid-2009 for example firms had launched almost 460 new green products such as toilet paper diapers and household cleaning products in the United States alone Analysts saw these launchings which represented a threefold increase compared to launches in 2008 as more evidence that ldquogreenrdquo is going mainstream

In addition to products companies across the globe are committing to or increasing their commitment to environmental sustainability McDonaldrsquos for example ldquotakes its responsibility to the environment seriouslyrdquo Green restaurant design sustainable packaging and waste management and energy efficiency are areas where McDonaldrsquos acts to reduce its environmental footprint Dell Inc recently announced that its operations are now ldquocarbon neutralrdquo Dell envisions this as an important step in the firmrsquos quest to become ldquothe greenest technology company on the planetrdquo Google and Yahoo have also pledged to become carbon neutral

Honest Tea produces ldquodelicious truly healthy organic beveragesrdquo Since its founding in 1998 the firm has had a very strong commitment to environmentally friendly business practices including the way its new corporate headquarters was designed In the companyrsquos words ldquoWhen it came time for a new office we did our best to walk our talk and create an office that is environmentally friendly to both the planet and our employeesrdquo Honest Tea used reclaimed bricks flooring and desks when building its new facility

Procter amp Gamble (PampG) recently announced increased targets for its 2012 sustainability goals Among the goals are those to (1) ldquodevelop and market at least $50 billion in cumulative sales of sustainable innovation products (2) deliver a 20 percent reduction (per unit of production) in carbon dioxide emissions energy consumption water usage and disposed waste from PampG plants and (3) enable 300 million children to Live Learn and Thrive and deliver three billion liters of clean water through PampGrsquos Childrenrsquos Safe Drinking Water programrdquo Dutch consumer products giant Unilever also has an ongoing commitment to sustainability The firmrsquos sustainability actions include reducing water usage in its plants working with its suppliers to encourage sustainability practices on their parts and improving the eco-efficiency of their manufacturing facilities

A number of other companies mirror the commitments of these firms in response to emerging trends in the physical environment segment In addition to positively

FIRMSrsquo EFFORTS TO TAKE CARE OF THE PHYSICAL

ENVIRONMENT IN WHICH THEY COMPETE

AP

Phot

oW

ong

May

e-E

Procter amp Gamblersquos easily shipped PUR packets have helped provide over 1 billion liters of clean drink-ing water since the creation of the Childrenrsquos Safe Drinking Water program in 2004

52

responding to the observed trends in this segment of the general environment there is some evidence that firms engaging in these types of behaviors outperform those failing to do so This emerging evidence suggests that these behaviors benefit companies their stakeholders and the physical environment in which they operate

Sources 2009 Eco-friendly growth BusinessWeek May 45ndash6 2009 Honest Tea httpwwwhonestteacom June 12 2009 McDonaldrsquos Corporate Responsibility httpwwwmcdonaldscom June 12 2009 Procter amp Gamble deepens corporate commitment to sustainability httpwwwpandgcom April 29 2009 Introduction to Unilever httpwwwunilevercom June 12 2008 Procter amp Gamble Sustainability Full Report httpwwwpandgcom May 10 J Ball 2008Green goal of ldquocarbon neutralityrdquo has limits Wall Street Journal Online httpwwwwsjcom December 28 T B Porter 2008 Managerial applications of corporate social responsibility and systems thinking for achieving sustainability outcomes Systems Research and Behavioral Science 25 397ndash411

Threat of New EntrantsIdentifying new entrants is important because they can threaten the market share of exist-ing competitors94 One reason new entrants pose such a threat is that they bring additional production capacity Unless the demand for a good or service is increasing additional capacity holds consumersrsquo costs down resulting in less revenue and lower returns for competing firms Often new entrants have a keen interest in gaining a large market share As a result new competitors may force existing firms to be more efficient and to learn how to compete on new dimensions (eg using an Internet-based distribution channel)

The likelihood that firms will enter an industry is a function of two factors barriers to entry and the retaliation expected from current industry participants Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter As such high entry barriers tend to increase

Figure 22 The Five Forces of Competition Model

Threat ofnew entrants

Bargaining powerof suppliers

Bargaining powerof buyers

Threat ofsubstitute products

Rivalry amongcompeting firms

52

responding to the observed trends in this segment of the general environment there is some evidence that firms engaging in these types of behaviors outperform those failing to do so This emerging evidence suggests that these behaviors benefit companies their stakeholders and the physical environment in which they operate

Sources 2009 Eco-friendly growth BusinessWeek May 45ndash6 2009 Honest Tea httpwwwhonestteacom June 12 2009 McDonaldrsquos Corporate Responsibility httpwwwmcdonaldscom June 12 2009 Procter amp Gamble deepens corporate commitment to sustainability httpwwwpandgcom April 29 2009 Introduction to Unilever httpwwwunilevercom June 12 2008 Procter amp Gamble Sustainability Full Report httpwwwpandgcom May 10 J Ball 2008Green goal of ldquocarbon neutralityrdquo has limits Wall Street Journal Online httpwwwwsjcom December 28 T B Porter 2008 Managerial applications of corporate social responsibility and systems thinking for achieving sustainability outcomes Systems Research and Behavioral Science 25 397ndash411

Threat of New EntrantsIdentifying new entrants is important because they can threaten the market share of exist-ing competitors94 One reason new entrants pose such a threat is that they bring additional production capacity Unless the demand for a good or service is increasing additional capacity holds consumersrsquo costs down resulting in less revenue and lower returns for competing firms Often new entrants have a keen interest in gaining a large market share As a result new competitors may force existing firms to be more efficient and to learn how to compete on new dimensions (eg using an Internet-based distribution channel)

The likelihood that firms will enter an industry is a function of two factors barriers to entry and the retaliation expected from current industry participants Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter As such high entry barriers tend to increase

Figure 22 The Five Forces of Competition Model

Threat ofnew entrants

Bargaining powerof suppliers

Bargaining powerof buyers

Threat ofsubstitute products

Rivalry amongcompeting firms

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ortunities Threats Ind

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etition and

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the returns for existing firms in the industry and may allow some firms to dominate the industry95 Thus firms competing successfully in an industry want to maintain high entry barriers in order to discourage potential competitors from deciding to enter the industry

Barriers to EntryFirms competing in an industry (and especially those earning above-average returns) try to develop entry barriers to thwart potential competitors For example the server market is hypercompetitive and dominated by IBM Hewlett-Packard and Dell Historically the scale economies these firms have developed by operating efficiently and effectively have created significant entry barriers causing potential competitors to think very carefully about entering the server market to compete against them Recently though Oracle paid $74 billion to acquire Sun Microsystems which is primarily a computer hardware com-pany Early evidence suggests that Oracle intends to ldquohellip focus Sunrsquos server business on a small but promising segment of the market computer appliances preloaded with Oracle softwarerdquo96 The degree of success Oracle will achieve as a result of its decision to enter the server market via an acquisition remains uncertain

Several kinds of potentially significant entry barriers may discourage competitors from entering a market

Economies of Scale Economies of scale are derived from incremental efficiency improvements through experience as a firm grows larger Therefore the cost of pro-ducing each unit declines as the quantity of a product produced during a given period increases This is the case for IBM Hewlett-Packard and Dell in the server market as previously described

Economies of scale can be developed in most business functions such as marketing manufacturing research and development and purchasing97 Increasing economies of scale enhances a firmrsquos flexibility For example a firm may choose to reduce its price and capture a greater share of the market Alternatively it may keep its price constant to increase profits In so doing it likely will increase its free cash flow which is very helpful during financially challenging times

New entrants face a dilemma when confronting current competitorsrsquo scale economies Small-scale entry places them at a cost disadvantage Given the size of Sun Microsystems relative to the three major competitors in the server market Oracle may be at least ini-tially be at a disadvantage in competing against them Alternatively large-scale entry in which the new entrant manufactures large volumes of a product to gain economies of scale risks strong competitive retaliation

Some competitive conditions reduce the ability of economies of scale to create an entry barrier Many companies now customize their products for large numbers of small customer groups Customized products are not manufactured in the volumes necessary to achieve economies of scale Customization is made possible by flexible manufacturing systems (this point is discussed further in Chapter 4) In fact the new manufacturing technology facilitated by advanced information systems has allowed the development of mass customization in an increasing number of industries Although it is not appropriate for all products and implementing it can be challenging mass customization has become increasingly common in manufacturing products98 In fact online ordering has enhanced the ability of customers to obtain customized products They are often referred to as ldquomarkets of onerdquo99 Companies manufacturing customized products learn how to respond quickly to customersrsquo needs in lieu of developing scale economies

Product Differentiation Over time customers may come to believe that a firmrsquos product is unique This belief can result from the firmrsquos service to the customer effective advertising campaigns or being the first to market a good or service Currently Ford Motor Company is seeking to differentiate its products from competitors on the basis

54Pa

rt 1

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ateg

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s that it is ldquohellip stronger greener and more technologically advanced than those other guysrdquo100 If successful with these efforts Ford hopes those buying its cars today will gener-ate the type of loyalty that results in repeat purchases

Companies such as Procter amp Gamble (PampG) and Colgate-Palmolive spend a great deal of money on advertising and product development to convince potential custom-ers of their productsrsquo distinctiveness and of the value buying their brands provides101 Customers valuing a productrsquos uniqueness tend to become loyal to both the product and the company producing it In turn customer loyalty is an entry barrier for firms thinking of an entering an industry and competing against the likes of PampG and Colgate To com-pete against firms offering differentiated products to individuals who have become loyal customers new entrants often allocate many resources to overcome existing customer loyalties To combat the perception of uniqueness new entrants frequently offer prod-ucts at lower prices This decision however may result in lower profits or even losses

Capital Requirements Competing in a new industry requires a firm to have resources to invest In addition to physical facilities capital is needed for inventories marketing activities and other critical business functions Even when a new industry is attractive the capital required for successful market entry may not be available to pursue the mar-ket opportunity For example defense industries are difficult to enter because of the substantial resource investments required to be competitive In addition because of the high knowledge requirements of the defense industry a firm might acquire an existing company as a means of entering this industry But it must have access to the capital nec-essary to do it Obviously Oracle had the capital required to acquire Sun Microsystems as a foundation for entering the server market

Switching Costs Switching costs are the one-time costs customers incur when they buy from a different supplier The costs of buying new ancillary equipment and of retraining employees and even the psychic costs of ending a relationship may be incurred in switching to a new supplier In some cases switching costs are low such as when the consumer switches to a different soft drink or when a smoker switches from a Philip Morris International cigarette to one produced by competitor Japan Tobacco International Switching costs can vary as a function of time For example in terms of credit hours toward graduation the cost to a student to transfer from one university to another as a freshman is much lower than it is when the student is entering the senior year Occasionally a decision made by manufacturers to produce a new innovative prod-uct creates high switching costs for the final consumer Customer loyalty programs such as airlinesrsquo frequent flyer miles are intended to increase the customerrsquos switching costs

If switching costs are high a new entrant must offer either a substantially lower price or a much better product to attract buyers Usually the more established the relation-ships between parties the greater are switching costs

Access to Distribution Channels Over time industry participants typically develop effective means of distributing products Once a relationship with its distribu-tors has been built a firm will nurture it thus creating switching costs for the distributors Access to distribution channels can be a strong entry barrier for new entrants particu-larly in consumer nondurable goods industries (eg in grocery stores where shelf space is limited) and in international markets New entrants have to persuade distributors to carry their products either in addition to or in place of those currently distributed Price breaks and cooperative advertising allowances may be used for this purpose however those practices reduce the new entrantrsquos profit potential

Cost Disadvantages Independent of Scale Sometimes established competitors have cost advantages that new entrants cannot duplicate Proprietary product technology favorable access to raw materials desirable locations and government subsidies are examples

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etition and

Co

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nalysis

Successful competition requires new entrants to reduce the strategic relevance of these factors Delivering purchases directly to the buyer can counter the advantage of a desirable location new food establishments in an undesirable location often follow this practice

Government Policy Through licensing and permit requirements governments can also control entry into an industry Liquor retailing radio and TV broadcasting banking and trucking are examples of industries in which government decisions and actions affect entry possibilities Also governments often restrict entry into some industries because of the need to provide quality service or the need to protect jobs Alternatively deregulation of industries exemplified by the airline industry and utilities in the United States allows more firms to enter102 However some of the most publicized government actions are those involving antitrust In 2009 for example the European Commission announced a fine of $14 billionmdashthe largest the Commission had assessedmdashagainst Intel the worldrsquos largest computer-chip maker The fine was for ldquohellip breaking European antitrust rulesrdquo103 The Commissionrsquos major conclusion was that Intelrsquos competitive actions were blocking effective access by competitors to European markets In response to the announcement Intel indicated that it would appeal the fine as well as the ruling that the firm would have to change its business practices in the European Union104 These rulings caused other dominant firms such as Microsoft and Google to wonder about potential governmental rulings that the Commission might assess against them in the future

Expected RetaliationCompanies seeking to enter an industry also anticipate the reactions of firms in the industry An expectation of swift and vigorous competitive responses reduces the likelihood of entry Vigorous retaliation can be expected when the existing firm has a major stake in the industry (eg it has fixed assets with few if any alternative uses) when it has substantial resources and when industry growth is slow or constrained For example any firm attempting to enter the airline industry at the current time can expect significant retaliation from existing competitors due to overcapacity

Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers Small entrepreneurial firms are generally best suited for identifying and serv-ing neglected market segments When Honda first entered the US motorcycle market it concentrated on small-engine motorcycles a market that firms such as Harley-Davidson ignored By targeting this neglected niche Honda avoided competition After consolidating its position Honda used its strength to attack rivals by introducing larger motorcycles and competing in the broader market Competitive actions and competitive responses between firms such as Honda and Harley-Davidson are discussed more fully in Chapter 5

Bargaining Power of SuppliersIncreasing prices and reducing the quality of their products are potential means suppli-ers use to exert power over firms competing within an industry If a firm is unable to recover cost increases by its suppliers through its own pricing structure its profitability is reduced by its suppliersrsquo actions A supplier group is powerful when

It is dominated by a few large companies and is more concentrated than the industry to which it sellsSatisfactory substitute products are not available to industry firms Industry firms are not a significant customer for the supplier group Suppliersrsquo goods are critical to buyersrsquo marketplace success The effectiveness of suppliersrsquo products has created high switching costs for industry firmsIt poses a credible threat to integrate forward into the buyersrsquo industry Credibility is enhanced when suppliers have substantial resources and provide a highly differenti-ated product

56Pa

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s The airline industry is one in which suppliersrsquo bargaining power is changing Though the number of suppliers is low the demand for major aircraft is also relatively low Boeing and Airbus aggressively compete for orders of major aircraft creating more power for buyers in the process In mid-2009 United Airlines announced that it might place a ldquosignificantrdquo order for wide-body airliners with either Airbus or Boeing in the fourth quarter of the year if the firm could earn an acceptable return on its investment Unitedrsquos expectation that the winning bid from either Airbus or Boeing would include a financ-ing arrangement that would strengthen its ldquohellip balance sheet over the long term and not impact (the firmrsquos) cash flow positionrdquo105 highlights the buyerrsquos power in this proposed transaction

Bargaining Power of BuyersFirms seek to maximize the return on their invested capital Alternatively buyers (customers of an industry or a firm) want to buy products at the lowest possible pricemdashthe point at which the industry earns the lowest acceptable rate of return on

its invested capital To reduce their costs buyers bargain for higher quality greater levels of service and lower prices These outcomes are achieved by encouraging competitive battles among the industryrsquos firms Customers (buyer groups) are powerful when

They purchase a large portion of an industryrsquos total output The sales of the product being purchased account for a significant por-

tion of the sellerrsquos annual revenuesThey could switch to another product at little if any cost The industryrsquos products are undifferentiated or standardized and the

buyers pose a credible threat if they were to integrate backward into the sellersrsquo industry

Armed with greater amounts of information about the manufactur-errsquos costs and the power of the Internet as a shopping and distribution alternative have increased consumersrsquo bargaining power in many indus-tries One reason for this shift is that individual buyers incur virtually zero switching costs when they decide to purchase from one manufac-turer rather than another or from one dealer as opposed to a second or third one

Threat of Substitute ProductsSubstitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces For example as a sugar substitute NutraSweet (and other sugar substitutes) places an upper limit on sugar manufacturersrsquo pricesmdashNutraSweet and sugar perform the same function though with different characteristics Other product substitutes include e-mail and fax machines instead of overnight deliveries plastic containers rather than glass jars and tea instead of coffee Newspaper firms have experienced significant circulation declines over the past decade or more The declines are due to substitute outlets for news including Internet sources cable television news channels and e-mail and cell phone alerts These products are increasingly popular especially among younger and technologically savvy people and as product substitutes they have significant potential to continue to reduce overall newspaper circulation sales

In general product substitutes present a strong threat to a firm when customers face few if any switching costs and when the substitute productrsquos price is lower or its quality and performance capabilities are equal to or greater than those of the competing product Differentiating a product along dimensions that customers value (such as quality service after the sale and location) reduces a substitutersquos attractiveness

ICP-

UK

Ala

my

With consumer access to news at their fingertips via the iPhone and other wireless devices news-papers and other tradi-tional news sources face increasing competition for customers

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Intensity of Rivalry Among CompetitorsBecause an industryrsquos firms are mutually dependent actions taken by one company usually invite competitive responses In many industries firms actively compete against one another Competitive rivalry intensifies when a firm is challenged by a competitorrsquos actions or when a company recognizes an opportunity to improve its market position

Firms within industries are rarely homogeneous they differ in resources and capa-bilities and seek to differentiate themselves from competitors106 Typically firms seek to differentiate their products from competitorsrsquo offerings in ways that customers value and in which the firms have a competitive advantage Common dimensions on which rivalry is based include price service after the sale and innovation

Next we discuss the most prominent factors that experience shows to affect the intensity of firmsrsquo rivalries

Numerous or Equally Balanced CompetitorsIntense rivalries are common in industries with many companies With multiple com-petitors it is common for a few firms to believe they can act without eliciting a response However evidence suggests that other firms generally are aware of competitorsrsquo actions often choosing to respond to them At the other extreme industries with only a few firms of equivalent size and power also tend to have strong rivalries The large and often similar-sized resource bases of these firms permit vigorous actions and responses The competitive battles between Airbus and Boeing exemplify intense rivalry between rela-tively equal competitors and almost certainly will be so as the companies bid for the order to produce wide-body planes for United Airlines

Slow Industry GrowthWhen a market is growing firms try to effectively use resources to serve an expand-ing customer base Growing markets reduce the pressure to take customers from com-petitors However rivalry in no-growth or slow-growth markets (slow change) becomes more intense as firms battle to increase their market shares by attracting competitorsrsquo customers107

Typically battles to protect market share are fierce Certainly this has been the case in the airline industry and in the fast-food industry as McDonaldrsquos Wendyrsquos and Burger King try to win each otherrsquos customers The instability in the market that results from these competitive engagements may reduce the profitability for all firms engaging in such competitive battles

High Fixed Costs or High Storage CostsWhen fixed costs account for a large part of total costs companies try to maximize the use of their productive capacity Doing so allows the firm to spread costs across a larger volume of output However when many firms attempt to maximize their productive capacity excess capacity is created on an industry-wide basis To then reduce invento-ries individual companies typically cut the price of their product and offer rebates and other special discounts to customers However these practices common in the automo-bile manufacturing industry in the recent past often intensify competition The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is observed frequently in industries with high storage costs Perishable products for exam-ple lose their value rapidly with the passage of time As their inventories grow producers of perishable goods often use pricing strategies to sell products quickly

Lack of Differentiation or Low Switching CostsWhen buyers find a differentiated product that satisfies their needs they frequently pur-chase the product loyally over time Industries with many companies that have success-fully differentiated their products have less rivalry resulting in lower competition for

58Pa

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s individual firms Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns However when buyers view products as commodities (ie as products with few differentiated features or capabilities) rivalry intensifies In these instances buyersrsquo purchasing decisions are based primarily on price and to a lesser degree service Personal computers are a commodity product Thus the rivalry between Dell Hewlett-Packard and other computer manufacturers is strong and these companies are always trying to find ways to differentiate their offerings (Hewlett-Packard now pursues product design as a means of differentiation)

High Strategic StakesCompetitive rivalry is likely to be high when it is important for several of the competi-tors to perform well in the market For example although it is diversified and is a market leader in other businesses Samsung has targeted market leadership in the consumer electronics market and is doing quite well This market is quite important to Sony and other major competitors such as Hitachi Matsushita NEC and Mitsubishi suggesting that rivalry among these competitors will remain strong

High strategic stakes can also exist in terms of geographic locations For example Japanese automobile manufacturers are committed to a significant presence in the US marketplace because it is the worldrsquos largest single market for automobiles and trucks Because of the stakes involved in this country for Japanese and US manufacturers rivalry among firms in the US and the global automobile industry is intense With the excess capacity in this industry we mentioned earlier in this chapter there is every rea-son to believe that the rivalry among global automobile manufacturers will become even more intense certainly in the foreseeable future

High Exit BarriersSometimes companies continue competing in an industry even though the returns on their invested capital are low or negative Firms making this choice likely face high exit barriers which include economic strategic and emotional factors causing them to remain in an industry when the profitability of doing so is questionable Exit barriers are especially high in the airline industry Although earning even average returns is difficult for these firms they face substantial exit barriers such as their ownership of specialized assets (eg large aircraft)108 Common exit barriers include the following

Specialized assets (assets with values linked to a particular business or location) Fixed costs of exit (such as labor agreements) Strategic interrelationships (relationships of mutual dependence such as those between one business and other parts of a companyrsquos operations including shared facilities and access to financial markets)Emotional barriers (aversion to economically justified business decisions because of fear for onersquos own career loyalty to employees and so forth)Government and social restrictions (often based on government concerns for job losses and regional economic effects more common outside the United States)

Interpreting Industry AnalysesEffective industry analyses are products of careful study and interpretation of data and information from multiple sources A wealth of industry-specific data is avail-able to be analyzed Because of globalization international markets and rivalries must be included in the firmrsquos analyses In fact research shows that in some industries international variables are more important than domestic ones as determinants of strategic competitiveness Furthermore because of the development of global mar-kets a countryrsquos borders no longer restrict industry structures In fact movement into

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international markets enhances the chances of success for new ventures as well as more established firms109

Analysis of the five forces in the industry allows the firm to determine the industryrsquos attractiveness in terms of the potential to earn adequate or superior returns In general the stronger competitive forces are the lower the profit potential for an industryrsquos firms An unattractive industry has low entry barriers suppliers and buyers with strong bar-gaining positions strong competitive threats from product substitutes and intense rivalry among competitors These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns Alternatively an attractive industry has high entry barriers suppliers and buyers with little bargaining power few competitive threats from product substitutes and relatively moderate rivalry110 Next we explain strategic groups as an aspect of industry competition

Strategic GroupsA set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group111 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group Therefore intrastrategic group competition is more intense than is interstrategic group competition In fact more heterogeneity is evident in the performance of firms within strategic groups than across the groups The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage112

The extent of technological leadership product quality pricing policies distribution channels and customer service are examples of strategic dimensions that firms in a stra-tegic group may treat similarly Thus membership in a particular strategic group defines the essential characteristics of the firmrsquos strategy113

The notion of strategic groups can be useful for analyzing an industryrsquos competitive structure Such analyses can be helpful in diagnosing competition positioning and the profitability of firms within an industry114 High mobility barriers high rivalry and low resources among the firms within an industry limit the formation of strategic groups115

However research suggests that after strategic groups are formed their membership remains relatively stable over time making analysis easier and more useful116 Using stra-tegic groups to understand an industryrsquos competitive structure requires the firm to plot companiesrsquo competitive actions and competitive responses along strategic dimensions such as pricing decisions product quality distribution channels and so forth This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions

Strategic groups have several implications First because firms within a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry the greater the threat to each firmrsquos profitability Second the strengths of the five industry forces differ across strategic groups Third the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups

Competitor AnalysisThe competitor environment is the final part of the external environment requiring study Competitor analysis focuses on each company against which a firm directly competes For example Philip Morris International and Japan Tobacco International Coca-Cola and PepsiCo Home Depot and Lowersquos and Boeing and Airbus are keenly interested in understanding each otherrsquos objectives strategies assumptions and capabilities Indeed

A strategic group is a set of fi rms emphasizing similar strategic dimensions to use a similar strategy

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s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

61C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

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s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

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63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

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Str

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s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

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ateg

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s that it is ldquohellip stronger greener and more technologically advanced than those other guysrdquo100 If successful with these efforts Ford hopes those buying its cars today will gener-ate the type of loyalty that results in repeat purchases

Companies such as Procter amp Gamble (PampG) and Colgate-Palmolive spend a great deal of money on advertising and product development to convince potential custom-ers of their productsrsquo distinctiveness and of the value buying their brands provides101 Customers valuing a productrsquos uniqueness tend to become loyal to both the product and the company producing it In turn customer loyalty is an entry barrier for firms thinking of an entering an industry and competing against the likes of PampG and Colgate To com-pete against firms offering differentiated products to individuals who have become loyal customers new entrants often allocate many resources to overcome existing customer loyalties To combat the perception of uniqueness new entrants frequently offer prod-ucts at lower prices This decision however may result in lower profits or even losses

Capital Requirements Competing in a new industry requires a firm to have resources to invest In addition to physical facilities capital is needed for inventories marketing activities and other critical business functions Even when a new industry is attractive the capital required for successful market entry may not be available to pursue the mar-ket opportunity For example defense industries are difficult to enter because of the substantial resource investments required to be competitive In addition because of the high knowledge requirements of the defense industry a firm might acquire an existing company as a means of entering this industry But it must have access to the capital nec-essary to do it Obviously Oracle had the capital required to acquire Sun Microsystems as a foundation for entering the server market

Switching Costs Switching costs are the one-time costs customers incur when they buy from a different supplier The costs of buying new ancillary equipment and of retraining employees and even the psychic costs of ending a relationship may be incurred in switching to a new supplier In some cases switching costs are low such as when the consumer switches to a different soft drink or when a smoker switches from a Philip Morris International cigarette to one produced by competitor Japan Tobacco International Switching costs can vary as a function of time For example in terms of credit hours toward graduation the cost to a student to transfer from one university to another as a freshman is much lower than it is when the student is entering the senior year Occasionally a decision made by manufacturers to produce a new innovative prod-uct creates high switching costs for the final consumer Customer loyalty programs such as airlinesrsquo frequent flyer miles are intended to increase the customerrsquos switching costs

If switching costs are high a new entrant must offer either a substantially lower price or a much better product to attract buyers Usually the more established the relation-ships between parties the greater are switching costs

Access to Distribution Channels Over time industry participants typically develop effective means of distributing products Once a relationship with its distribu-tors has been built a firm will nurture it thus creating switching costs for the distributors Access to distribution channels can be a strong entry barrier for new entrants particu-larly in consumer nondurable goods industries (eg in grocery stores where shelf space is limited) and in international markets New entrants have to persuade distributors to carry their products either in addition to or in place of those currently distributed Price breaks and cooperative advertising allowances may be used for this purpose however those practices reduce the new entrantrsquos profit potential

Cost Disadvantages Independent of Scale Sometimes established competitors have cost advantages that new entrants cannot duplicate Proprietary product technology favorable access to raw materials desirable locations and government subsidies are examples

55C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Successful competition requires new entrants to reduce the strategic relevance of these factors Delivering purchases directly to the buyer can counter the advantage of a desirable location new food establishments in an undesirable location often follow this practice

Government Policy Through licensing and permit requirements governments can also control entry into an industry Liquor retailing radio and TV broadcasting banking and trucking are examples of industries in which government decisions and actions affect entry possibilities Also governments often restrict entry into some industries because of the need to provide quality service or the need to protect jobs Alternatively deregulation of industries exemplified by the airline industry and utilities in the United States allows more firms to enter102 However some of the most publicized government actions are those involving antitrust In 2009 for example the European Commission announced a fine of $14 billionmdashthe largest the Commission had assessedmdashagainst Intel the worldrsquos largest computer-chip maker The fine was for ldquohellip breaking European antitrust rulesrdquo103 The Commissionrsquos major conclusion was that Intelrsquos competitive actions were blocking effective access by competitors to European markets In response to the announcement Intel indicated that it would appeal the fine as well as the ruling that the firm would have to change its business practices in the European Union104 These rulings caused other dominant firms such as Microsoft and Google to wonder about potential governmental rulings that the Commission might assess against them in the future

Expected RetaliationCompanies seeking to enter an industry also anticipate the reactions of firms in the industry An expectation of swift and vigorous competitive responses reduces the likelihood of entry Vigorous retaliation can be expected when the existing firm has a major stake in the industry (eg it has fixed assets with few if any alternative uses) when it has substantial resources and when industry growth is slow or constrained For example any firm attempting to enter the airline industry at the current time can expect significant retaliation from existing competitors due to overcapacity

Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers Small entrepreneurial firms are generally best suited for identifying and serv-ing neglected market segments When Honda first entered the US motorcycle market it concentrated on small-engine motorcycles a market that firms such as Harley-Davidson ignored By targeting this neglected niche Honda avoided competition After consolidating its position Honda used its strength to attack rivals by introducing larger motorcycles and competing in the broader market Competitive actions and competitive responses between firms such as Honda and Harley-Davidson are discussed more fully in Chapter 5

Bargaining Power of SuppliersIncreasing prices and reducing the quality of their products are potential means suppli-ers use to exert power over firms competing within an industry If a firm is unable to recover cost increases by its suppliers through its own pricing structure its profitability is reduced by its suppliersrsquo actions A supplier group is powerful when

It is dominated by a few large companies and is more concentrated than the industry to which it sellsSatisfactory substitute products are not available to industry firms Industry firms are not a significant customer for the supplier group Suppliersrsquo goods are critical to buyersrsquo marketplace success The effectiveness of suppliersrsquo products has created high switching costs for industry firmsIt poses a credible threat to integrate forward into the buyersrsquo industry Credibility is enhanced when suppliers have substantial resources and provide a highly differenti-ated product

56Pa

rt 1

Str

ateg

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put

s The airline industry is one in which suppliersrsquo bargaining power is changing Though the number of suppliers is low the demand for major aircraft is also relatively low Boeing and Airbus aggressively compete for orders of major aircraft creating more power for buyers in the process In mid-2009 United Airlines announced that it might place a ldquosignificantrdquo order for wide-body airliners with either Airbus or Boeing in the fourth quarter of the year if the firm could earn an acceptable return on its investment Unitedrsquos expectation that the winning bid from either Airbus or Boeing would include a financ-ing arrangement that would strengthen its ldquohellip balance sheet over the long term and not impact (the firmrsquos) cash flow positionrdquo105 highlights the buyerrsquos power in this proposed transaction

Bargaining Power of BuyersFirms seek to maximize the return on their invested capital Alternatively buyers (customers of an industry or a firm) want to buy products at the lowest possible pricemdashthe point at which the industry earns the lowest acceptable rate of return on

its invested capital To reduce their costs buyers bargain for higher quality greater levels of service and lower prices These outcomes are achieved by encouraging competitive battles among the industryrsquos firms Customers (buyer groups) are powerful when

They purchase a large portion of an industryrsquos total output The sales of the product being purchased account for a significant por-

tion of the sellerrsquos annual revenuesThey could switch to another product at little if any cost The industryrsquos products are undifferentiated or standardized and the

buyers pose a credible threat if they were to integrate backward into the sellersrsquo industry

Armed with greater amounts of information about the manufactur-errsquos costs and the power of the Internet as a shopping and distribution alternative have increased consumersrsquo bargaining power in many indus-tries One reason for this shift is that individual buyers incur virtually zero switching costs when they decide to purchase from one manufac-turer rather than another or from one dealer as opposed to a second or third one

Threat of Substitute ProductsSubstitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces For example as a sugar substitute NutraSweet (and other sugar substitutes) places an upper limit on sugar manufacturersrsquo pricesmdashNutraSweet and sugar perform the same function though with different characteristics Other product substitutes include e-mail and fax machines instead of overnight deliveries plastic containers rather than glass jars and tea instead of coffee Newspaper firms have experienced significant circulation declines over the past decade or more The declines are due to substitute outlets for news including Internet sources cable television news channels and e-mail and cell phone alerts These products are increasingly popular especially among younger and technologically savvy people and as product substitutes they have significant potential to continue to reduce overall newspaper circulation sales

In general product substitutes present a strong threat to a firm when customers face few if any switching costs and when the substitute productrsquos price is lower or its quality and performance capabilities are equal to or greater than those of the competing product Differentiating a product along dimensions that customers value (such as quality service after the sale and location) reduces a substitutersquos attractiveness

ICP-

UK

Ala

my

With consumer access to news at their fingertips via the iPhone and other wireless devices news-papers and other tradi-tional news sources face increasing competition for customers

57C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Intensity of Rivalry Among CompetitorsBecause an industryrsquos firms are mutually dependent actions taken by one company usually invite competitive responses In many industries firms actively compete against one another Competitive rivalry intensifies when a firm is challenged by a competitorrsquos actions or when a company recognizes an opportunity to improve its market position

Firms within industries are rarely homogeneous they differ in resources and capa-bilities and seek to differentiate themselves from competitors106 Typically firms seek to differentiate their products from competitorsrsquo offerings in ways that customers value and in which the firms have a competitive advantage Common dimensions on which rivalry is based include price service after the sale and innovation

Next we discuss the most prominent factors that experience shows to affect the intensity of firmsrsquo rivalries

Numerous or Equally Balanced CompetitorsIntense rivalries are common in industries with many companies With multiple com-petitors it is common for a few firms to believe they can act without eliciting a response However evidence suggests that other firms generally are aware of competitorsrsquo actions often choosing to respond to them At the other extreme industries with only a few firms of equivalent size and power also tend to have strong rivalries The large and often similar-sized resource bases of these firms permit vigorous actions and responses The competitive battles between Airbus and Boeing exemplify intense rivalry between rela-tively equal competitors and almost certainly will be so as the companies bid for the order to produce wide-body planes for United Airlines

Slow Industry GrowthWhen a market is growing firms try to effectively use resources to serve an expand-ing customer base Growing markets reduce the pressure to take customers from com-petitors However rivalry in no-growth or slow-growth markets (slow change) becomes more intense as firms battle to increase their market shares by attracting competitorsrsquo customers107

Typically battles to protect market share are fierce Certainly this has been the case in the airline industry and in the fast-food industry as McDonaldrsquos Wendyrsquos and Burger King try to win each otherrsquos customers The instability in the market that results from these competitive engagements may reduce the profitability for all firms engaging in such competitive battles

High Fixed Costs or High Storage CostsWhen fixed costs account for a large part of total costs companies try to maximize the use of their productive capacity Doing so allows the firm to spread costs across a larger volume of output However when many firms attempt to maximize their productive capacity excess capacity is created on an industry-wide basis To then reduce invento-ries individual companies typically cut the price of their product and offer rebates and other special discounts to customers However these practices common in the automo-bile manufacturing industry in the recent past often intensify competition The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is observed frequently in industries with high storage costs Perishable products for exam-ple lose their value rapidly with the passage of time As their inventories grow producers of perishable goods often use pricing strategies to sell products quickly

Lack of Differentiation or Low Switching CostsWhen buyers find a differentiated product that satisfies their needs they frequently pur-chase the product loyally over time Industries with many companies that have success-fully differentiated their products have less rivalry resulting in lower competition for

58Pa

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s individual firms Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns However when buyers view products as commodities (ie as products with few differentiated features or capabilities) rivalry intensifies In these instances buyersrsquo purchasing decisions are based primarily on price and to a lesser degree service Personal computers are a commodity product Thus the rivalry between Dell Hewlett-Packard and other computer manufacturers is strong and these companies are always trying to find ways to differentiate their offerings (Hewlett-Packard now pursues product design as a means of differentiation)

High Strategic StakesCompetitive rivalry is likely to be high when it is important for several of the competi-tors to perform well in the market For example although it is diversified and is a market leader in other businesses Samsung has targeted market leadership in the consumer electronics market and is doing quite well This market is quite important to Sony and other major competitors such as Hitachi Matsushita NEC and Mitsubishi suggesting that rivalry among these competitors will remain strong

High strategic stakes can also exist in terms of geographic locations For example Japanese automobile manufacturers are committed to a significant presence in the US marketplace because it is the worldrsquos largest single market for automobiles and trucks Because of the stakes involved in this country for Japanese and US manufacturers rivalry among firms in the US and the global automobile industry is intense With the excess capacity in this industry we mentioned earlier in this chapter there is every rea-son to believe that the rivalry among global automobile manufacturers will become even more intense certainly in the foreseeable future

High Exit BarriersSometimes companies continue competing in an industry even though the returns on their invested capital are low or negative Firms making this choice likely face high exit barriers which include economic strategic and emotional factors causing them to remain in an industry when the profitability of doing so is questionable Exit barriers are especially high in the airline industry Although earning even average returns is difficult for these firms they face substantial exit barriers such as their ownership of specialized assets (eg large aircraft)108 Common exit barriers include the following

Specialized assets (assets with values linked to a particular business or location) Fixed costs of exit (such as labor agreements) Strategic interrelationships (relationships of mutual dependence such as those between one business and other parts of a companyrsquos operations including shared facilities and access to financial markets)Emotional barriers (aversion to economically justified business decisions because of fear for onersquos own career loyalty to employees and so forth)Government and social restrictions (often based on government concerns for job losses and regional economic effects more common outside the United States)

Interpreting Industry AnalysesEffective industry analyses are products of careful study and interpretation of data and information from multiple sources A wealth of industry-specific data is avail-able to be analyzed Because of globalization international markets and rivalries must be included in the firmrsquos analyses In fact research shows that in some industries international variables are more important than domestic ones as determinants of strategic competitiveness Furthermore because of the development of global mar-kets a countryrsquos borders no longer restrict industry structures In fact movement into

59C

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ortunities Threats Ind

ustry Co

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etition and

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etitor A

nalysis

international markets enhances the chances of success for new ventures as well as more established firms109

Analysis of the five forces in the industry allows the firm to determine the industryrsquos attractiveness in terms of the potential to earn adequate or superior returns In general the stronger competitive forces are the lower the profit potential for an industryrsquos firms An unattractive industry has low entry barriers suppliers and buyers with strong bar-gaining positions strong competitive threats from product substitutes and intense rivalry among competitors These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns Alternatively an attractive industry has high entry barriers suppliers and buyers with little bargaining power few competitive threats from product substitutes and relatively moderate rivalry110 Next we explain strategic groups as an aspect of industry competition

Strategic GroupsA set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group111 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group Therefore intrastrategic group competition is more intense than is interstrategic group competition In fact more heterogeneity is evident in the performance of firms within strategic groups than across the groups The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage112

The extent of technological leadership product quality pricing policies distribution channels and customer service are examples of strategic dimensions that firms in a stra-tegic group may treat similarly Thus membership in a particular strategic group defines the essential characteristics of the firmrsquos strategy113

The notion of strategic groups can be useful for analyzing an industryrsquos competitive structure Such analyses can be helpful in diagnosing competition positioning and the profitability of firms within an industry114 High mobility barriers high rivalry and low resources among the firms within an industry limit the formation of strategic groups115

However research suggests that after strategic groups are formed their membership remains relatively stable over time making analysis easier and more useful116 Using stra-tegic groups to understand an industryrsquos competitive structure requires the firm to plot companiesrsquo competitive actions and competitive responses along strategic dimensions such as pricing decisions product quality distribution channels and so forth This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions

Strategic groups have several implications First because firms within a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry the greater the threat to each firmrsquos profitability Second the strengths of the five industry forces differ across strategic groups Third the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups

Competitor AnalysisThe competitor environment is the final part of the external environment requiring study Competitor analysis focuses on each company against which a firm directly competes For example Philip Morris International and Japan Tobacco International Coca-Cola and PepsiCo Home Depot and Lowersquos and Boeing and Airbus are keenly interested in understanding each otherrsquos objectives strategies assumptions and capabilities Indeed

A strategic group is a set of fi rms emphasizing similar strategic dimensions to use a similar strategy

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Qwerty on KAT for More

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s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

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When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

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s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

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63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

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Str

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s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

55C

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xternal Enviro

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ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

Successful competition requires new entrants to reduce the strategic relevance of these factors Delivering purchases directly to the buyer can counter the advantage of a desirable location new food establishments in an undesirable location often follow this practice

Government Policy Through licensing and permit requirements governments can also control entry into an industry Liquor retailing radio and TV broadcasting banking and trucking are examples of industries in which government decisions and actions affect entry possibilities Also governments often restrict entry into some industries because of the need to provide quality service or the need to protect jobs Alternatively deregulation of industries exemplified by the airline industry and utilities in the United States allows more firms to enter102 However some of the most publicized government actions are those involving antitrust In 2009 for example the European Commission announced a fine of $14 billionmdashthe largest the Commission had assessedmdashagainst Intel the worldrsquos largest computer-chip maker The fine was for ldquohellip breaking European antitrust rulesrdquo103 The Commissionrsquos major conclusion was that Intelrsquos competitive actions were blocking effective access by competitors to European markets In response to the announcement Intel indicated that it would appeal the fine as well as the ruling that the firm would have to change its business practices in the European Union104 These rulings caused other dominant firms such as Microsoft and Google to wonder about potential governmental rulings that the Commission might assess against them in the future

Expected RetaliationCompanies seeking to enter an industry also anticipate the reactions of firms in the industry An expectation of swift and vigorous competitive responses reduces the likelihood of entry Vigorous retaliation can be expected when the existing firm has a major stake in the industry (eg it has fixed assets with few if any alternative uses) when it has substantial resources and when industry growth is slow or constrained For example any firm attempting to enter the airline industry at the current time can expect significant retaliation from existing competitors due to overcapacity

Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers Small entrepreneurial firms are generally best suited for identifying and serv-ing neglected market segments When Honda first entered the US motorcycle market it concentrated on small-engine motorcycles a market that firms such as Harley-Davidson ignored By targeting this neglected niche Honda avoided competition After consolidating its position Honda used its strength to attack rivals by introducing larger motorcycles and competing in the broader market Competitive actions and competitive responses between firms such as Honda and Harley-Davidson are discussed more fully in Chapter 5

Bargaining Power of SuppliersIncreasing prices and reducing the quality of their products are potential means suppli-ers use to exert power over firms competing within an industry If a firm is unable to recover cost increases by its suppliers through its own pricing structure its profitability is reduced by its suppliersrsquo actions A supplier group is powerful when

It is dominated by a few large companies and is more concentrated than the industry to which it sellsSatisfactory substitute products are not available to industry firms Industry firms are not a significant customer for the supplier group Suppliersrsquo goods are critical to buyersrsquo marketplace success The effectiveness of suppliersrsquo products has created high switching costs for industry firmsIt poses a credible threat to integrate forward into the buyersrsquo industry Credibility is enhanced when suppliers have substantial resources and provide a highly differenti-ated product

56Pa

rt 1

Str

ateg

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s The airline industry is one in which suppliersrsquo bargaining power is changing Though the number of suppliers is low the demand for major aircraft is also relatively low Boeing and Airbus aggressively compete for orders of major aircraft creating more power for buyers in the process In mid-2009 United Airlines announced that it might place a ldquosignificantrdquo order for wide-body airliners with either Airbus or Boeing in the fourth quarter of the year if the firm could earn an acceptable return on its investment Unitedrsquos expectation that the winning bid from either Airbus or Boeing would include a financ-ing arrangement that would strengthen its ldquohellip balance sheet over the long term and not impact (the firmrsquos) cash flow positionrdquo105 highlights the buyerrsquos power in this proposed transaction

Bargaining Power of BuyersFirms seek to maximize the return on their invested capital Alternatively buyers (customers of an industry or a firm) want to buy products at the lowest possible pricemdashthe point at which the industry earns the lowest acceptable rate of return on

its invested capital To reduce their costs buyers bargain for higher quality greater levels of service and lower prices These outcomes are achieved by encouraging competitive battles among the industryrsquos firms Customers (buyer groups) are powerful when

They purchase a large portion of an industryrsquos total output The sales of the product being purchased account for a significant por-

tion of the sellerrsquos annual revenuesThey could switch to another product at little if any cost The industryrsquos products are undifferentiated or standardized and the

buyers pose a credible threat if they were to integrate backward into the sellersrsquo industry

Armed with greater amounts of information about the manufactur-errsquos costs and the power of the Internet as a shopping and distribution alternative have increased consumersrsquo bargaining power in many indus-tries One reason for this shift is that individual buyers incur virtually zero switching costs when they decide to purchase from one manufac-turer rather than another or from one dealer as opposed to a second or third one

Threat of Substitute ProductsSubstitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces For example as a sugar substitute NutraSweet (and other sugar substitutes) places an upper limit on sugar manufacturersrsquo pricesmdashNutraSweet and sugar perform the same function though with different characteristics Other product substitutes include e-mail and fax machines instead of overnight deliveries plastic containers rather than glass jars and tea instead of coffee Newspaper firms have experienced significant circulation declines over the past decade or more The declines are due to substitute outlets for news including Internet sources cable television news channels and e-mail and cell phone alerts These products are increasingly popular especially among younger and technologically savvy people and as product substitutes they have significant potential to continue to reduce overall newspaper circulation sales

In general product substitutes present a strong threat to a firm when customers face few if any switching costs and when the substitute productrsquos price is lower or its quality and performance capabilities are equal to or greater than those of the competing product Differentiating a product along dimensions that customers value (such as quality service after the sale and location) reduces a substitutersquos attractiveness

ICP-

UK

Ala

my

With consumer access to news at their fingertips via the iPhone and other wireless devices news-papers and other tradi-tional news sources face increasing competition for customers

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Intensity of Rivalry Among CompetitorsBecause an industryrsquos firms are mutually dependent actions taken by one company usually invite competitive responses In many industries firms actively compete against one another Competitive rivalry intensifies when a firm is challenged by a competitorrsquos actions or when a company recognizes an opportunity to improve its market position

Firms within industries are rarely homogeneous they differ in resources and capa-bilities and seek to differentiate themselves from competitors106 Typically firms seek to differentiate their products from competitorsrsquo offerings in ways that customers value and in which the firms have a competitive advantage Common dimensions on which rivalry is based include price service after the sale and innovation

Next we discuss the most prominent factors that experience shows to affect the intensity of firmsrsquo rivalries

Numerous or Equally Balanced CompetitorsIntense rivalries are common in industries with many companies With multiple com-petitors it is common for a few firms to believe they can act without eliciting a response However evidence suggests that other firms generally are aware of competitorsrsquo actions often choosing to respond to them At the other extreme industries with only a few firms of equivalent size and power also tend to have strong rivalries The large and often similar-sized resource bases of these firms permit vigorous actions and responses The competitive battles between Airbus and Boeing exemplify intense rivalry between rela-tively equal competitors and almost certainly will be so as the companies bid for the order to produce wide-body planes for United Airlines

Slow Industry GrowthWhen a market is growing firms try to effectively use resources to serve an expand-ing customer base Growing markets reduce the pressure to take customers from com-petitors However rivalry in no-growth or slow-growth markets (slow change) becomes more intense as firms battle to increase their market shares by attracting competitorsrsquo customers107

Typically battles to protect market share are fierce Certainly this has been the case in the airline industry and in the fast-food industry as McDonaldrsquos Wendyrsquos and Burger King try to win each otherrsquos customers The instability in the market that results from these competitive engagements may reduce the profitability for all firms engaging in such competitive battles

High Fixed Costs or High Storage CostsWhen fixed costs account for a large part of total costs companies try to maximize the use of their productive capacity Doing so allows the firm to spread costs across a larger volume of output However when many firms attempt to maximize their productive capacity excess capacity is created on an industry-wide basis To then reduce invento-ries individual companies typically cut the price of their product and offer rebates and other special discounts to customers However these practices common in the automo-bile manufacturing industry in the recent past often intensify competition The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is observed frequently in industries with high storage costs Perishable products for exam-ple lose their value rapidly with the passage of time As their inventories grow producers of perishable goods often use pricing strategies to sell products quickly

Lack of Differentiation or Low Switching CostsWhen buyers find a differentiated product that satisfies their needs they frequently pur-chase the product loyally over time Industries with many companies that have success-fully differentiated their products have less rivalry resulting in lower competition for

58Pa

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s individual firms Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns However when buyers view products as commodities (ie as products with few differentiated features or capabilities) rivalry intensifies In these instances buyersrsquo purchasing decisions are based primarily on price and to a lesser degree service Personal computers are a commodity product Thus the rivalry between Dell Hewlett-Packard and other computer manufacturers is strong and these companies are always trying to find ways to differentiate their offerings (Hewlett-Packard now pursues product design as a means of differentiation)

High Strategic StakesCompetitive rivalry is likely to be high when it is important for several of the competi-tors to perform well in the market For example although it is diversified and is a market leader in other businesses Samsung has targeted market leadership in the consumer electronics market and is doing quite well This market is quite important to Sony and other major competitors such as Hitachi Matsushita NEC and Mitsubishi suggesting that rivalry among these competitors will remain strong

High strategic stakes can also exist in terms of geographic locations For example Japanese automobile manufacturers are committed to a significant presence in the US marketplace because it is the worldrsquos largest single market for automobiles and trucks Because of the stakes involved in this country for Japanese and US manufacturers rivalry among firms in the US and the global automobile industry is intense With the excess capacity in this industry we mentioned earlier in this chapter there is every rea-son to believe that the rivalry among global automobile manufacturers will become even more intense certainly in the foreseeable future

High Exit BarriersSometimes companies continue competing in an industry even though the returns on their invested capital are low or negative Firms making this choice likely face high exit barriers which include economic strategic and emotional factors causing them to remain in an industry when the profitability of doing so is questionable Exit barriers are especially high in the airline industry Although earning even average returns is difficult for these firms they face substantial exit barriers such as their ownership of specialized assets (eg large aircraft)108 Common exit barriers include the following

Specialized assets (assets with values linked to a particular business or location) Fixed costs of exit (such as labor agreements) Strategic interrelationships (relationships of mutual dependence such as those between one business and other parts of a companyrsquos operations including shared facilities and access to financial markets)Emotional barriers (aversion to economically justified business decisions because of fear for onersquos own career loyalty to employees and so forth)Government and social restrictions (often based on government concerns for job losses and regional economic effects more common outside the United States)

Interpreting Industry AnalysesEffective industry analyses are products of careful study and interpretation of data and information from multiple sources A wealth of industry-specific data is avail-able to be analyzed Because of globalization international markets and rivalries must be included in the firmrsquos analyses In fact research shows that in some industries international variables are more important than domestic ones as determinants of strategic competitiveness Furthermore because of the development of global mar-kets a countryrsquos borders no longer restrict industry structures In fact movement into

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international markets enhances the chances of success for new ventures as well as more established firms109

Analysis of the five forces in the industry allows the firm to determine the industryrsquos attractiveness in terms of the potential to earn adequate or superior returns In general the stronger competitive forces are the lower the profit potential for an industryrsquos firms An unattractive industry has low entry barriers suppliers and buyers with strong bar-gaining positions strong competitive threats from product substitutes and intense rivalry among competitors These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns Alternatively an attractive industry has high entry barriers suppliers and buyers with little bargaining power few competitive threats from product substitutes and relatively moderate rivalry110 Next we explain strategic groups as an aspect of industry competition

Strategic GroupsA set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group111 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group Therefore intrastrategic group competition is more intense than is interstrategic group competition In fact more heterogeneity is evident in the performance of firms within strategic groups than across the groups The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage112

The extent of technological leadership product quality pricing policies distribution channels and customer service are examples of strategic dimensions that firms in a stra-tegic group may treat similarly Thus membership in a particular strategic group defines the essential characteristics of the firmrsquos strategy113

The notion of strategic groups can be useful for analyzing an industryrsquos competitive structure Such analyses can be helpful in diagnosing competition positioning and the profitability of firms within an industry114 High mobility barriers high rivalry and low resources among the firms within an industry limit the formation of strategic groups115

However research suggests that after strategic groups are formed their membership remains relatively stable over time making analysis easier and more useful116 Using stra-tegic groups to understand an industryrsquos competitive structure requires the firm to plot companiesrsquo competitive actions and competitive responses along strategic dimensions such as pricing decisions product quality distribution channels and so forth This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions

Strategic groups have several implications First because firms within a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry the greater the threat to each firmrsquos profitability Second the strengths of the five industry forces differ across strategic groups Third the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups

Competitor AnalysisThe competitor environment is the final part of the external environment requiring study Competitor analysis focuses on each company against which a firm directly competes For example Philip Morris International and Japan Tobacco International Coca-Cola and PepsiCo Home Depot and Lowersquos and Boeing and Airbus are keenly interested in understanding each otherrsquos objectives strategies assumptions and capabilities Indeed

A strategic group is a set of fi rms emphasizing similar strategic dimensions to use a similar strategy

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Qwerty on KAT for More

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s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

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When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

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s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

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63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

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s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

56Pa

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ateg

ic M

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s The airline industry is one in which suppliersrsquo bargaining power is changing Though the number of suppliers is low the demand for major aircraft is also relatively low Boeing and Airbus aggressively compete for orders of major aircraft creating more power for buyers in the process In mid-2009 United Airlines announced that it might place a ldquosignificantrdquo order for wide-body airliners with either Airbus or Boeing in the fourth quarter of the year if the firm could earn an acceptable return on its investment Unitedrsquos expectation that the winning bid from either Airbus or Boeing would include a financ-ing arrangement that would strengthen its ldquohellip balance sheet over the long term and not impact (the firmrsquos) cash flow positionrdquo105 highlights the buyerrsquos power in this proposed transaction

Bargaining Power of BuyersFirms seek to maximize the return on their invested capital Alternatively buyers (customers of an industry or a firm) want to buy products at the lowest possible pricemdashthe point at which the industry earns the lowest acceptable rate of return on

its invested capital To reduce their costs buyers bargain for higher quality greater levels of service and lower prices These outcomes are achieved by encouraging competitive battles among the industryrsquos firms Customers (buyer groups) are powerful when

They purchase a large portion of an industryrsquos total output The sales of the product being purchased account for a significant por-

tion of the sellerrsquos annual revenuesThey could switch to another product at little if any cost The industryrsquos products are undifferentiated or standardized and the

buyers pose a credible threat if they were to integrate backward into the sellersrsquo industry

Armed with greater amounts of information about the manufactur-errsquos costs and the power of the Internet as a shopping and distribution alternative have increased consumersrsquo bargaining power in many indus-tries One reason for this shift is that individual buyers incur virtually zero switching costs when they decide to purchase from one manufac-turer rather than another or from one dealer as opposed to a second or third one

Threat of Substitute ProductsSubstitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces For example as a sugar substitute NutraSweet (and other sugar substitutes) places an upper limit on sugar manufacturersrsquo pricesmdashNutraSweet and sugar perform the same function though with different characteristics Other product substitutes include e-mail and fax machines instead of overnight deliveries plastic containers rather than glass jars and tea instead of coffee Newspaper firms have experienced significant circulation declines over the past decade or more The declines are due to substitute outlets for news including Internet sources cable television news channels and e-mail and cell phone alerts These products are increasingly popular especially among younger and technologically savvy people and as product substitutes they have significant potential to continue to reduce overall newspaper circulation sales

In general product substitutes present a strong threat to a firm when customers face few if any switching costs and when the substitute productrsquos price is lower or its quality and performance capabilities are equal to or greater than those of the competing product Differentiating a product along dimensions that customers value (such as quality service after the sale and location) reduces a substitutersquos attractiveness

ICP-

UK

Ala

my

With consumer access to news at their fingertips via the iPhone and other wireless devices news-papers and other tradi-tional news sources face increasing competition for customers

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Intensity of Rivalry Among CompetitorsBecause an industryrsquos firms are mutually dependent actions taken by one company usually invite competitive responses In many industries firms actively compete against one another Competitive rivalry intensifies when a firm is challenged by a competitorrsquos actions or when a company recognizes an opportunity to improve its market position

Firms within industries are rarely homogeneous they differ in resources and capa-bilities and seek to differentiate themselves from competitors106 Typically firms seek to differentiate their products from competitorsrsquo offerings in ways that customers value and in which the firms have a competitive advantage Common dimensions on which rivalry is based include price service after the sale and innovation

Next we discuss the most prominent factors that experience shows to affect the intensity of firmsrsquo rivalries

Numerous or Equally Balanced CompetitorsIntense rivalries are common in industries with many companies With multiple com-petitors it is common for a few firms to believe they can act without eliciting a response However evidence suggests that other firms generally are aware of competitorsrsquo actions often choosing to respond to them At the other extreme industries with only a few firms of equivalent size and power also tend to have strong rivalries The large and often similar-sized resource bases of these firms permit vigorous actions and responses The competitive battles between Airbus and Boeing exemplify intense rivalry between rela-tively equal competitors and almost certainly will be so as the companies bid for the order to produce wide-body planes for United Airlines

Slow Industry GrowthWhen a market is growing firms try to effectively use resources to serve an expand-ing customer base Growing markets reduce the pressure to take customers from com-petitors However rivalry in no-growth or slow-growth markets (slow change) becomes more intense as firms battle to increase their market shares by attracting competitorsrsquo customers107

Typically battles to protect market share are fierce Certainly this has been the case in the airline industry and in the fast-food industry as McDonaldrsquos Wendyrsquos and Burger King try to win each otherrsquos customers The instability in the market that results from these competitive engagements may reduce the profitability for all firms engaging in such competitive battles

High Fixed Costs or High Storage CostsWhen fixed costs account for a large part of total costs companies try to maximize the use of their productive capacity Doing so allows the firm to spread costs across a larger volume of output However when many firms attempt to maximize their productive capacity excess capacity is created on an industry-wide basis To then reduce invento-ries individual companies typically cut the price of their product and offer rebates and other special discounts to customers However these practices common in the automo-bile manufacturing industry in the recent past often intensify competition The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is observed frequently in industries with high storage costs Perishable products for exam-ple lose their value rapidly with the passage of time As their inventories grow producers of perishable goods often use pricing strategies to sell products quickly

Lack of Differentiation or Low Switching CostsWhen buyers find a differentiated product that satisfies their needs they frequently pur-chase the product loyally over time Industries with many companies that have success-fully differentiated their products have less rivalry resulting in lower competition for

58Pa

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s individual firms Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns However when buyers view products as commodities (ie as products with few differentiated features or capabilities) rivalry intensifies In these instances buyersrsquo purchasing decisions are based primarily on price and to a lesser degree service Personal computers are a commodity product Thus the rivalry between Dell Hewlett-Packard and other computer manufacturers is strong and these companies are always trying to find ways to differentiate their offerings (Hewlett-Packard now pursues product design as a means of differentiation)

High Strategic StakesCompetitive rivalry is likely to be high when it is important for several of the competi-tors to perform well in the market For example although it is diversified and is a market leader in other businesses Samsung has targeted market leadership in the consumer electronics market and is doing quite well This market is quite important to Sony and other major competitors such as Hitachi Matsushita NEC and Mitsubishi suggesting that rivalry among these competitors will remain strong

High strategic stakes can also exist in terms of geographic locations For example Japanese automobile manufacturers are committed to a significant presence in the US marketplace because it is the worldrsquos largest single market for automobiles and trucks Because of the stakes involved in this country for Japanese and US manufacturers rivalry among firms in the US and the global automobile industry is intense With the excess capacity in this industry we mentioned earlier in this chapter there is every rea-son to believe that the rivalry among global automobile manufacturers will become even more intense certainly in the foreseeable future

High Exit BarriersSometimes companies continue competing in an industry even though the returns on their invested capital are low or negative Firms making this choice likely face high exit barriers which include economic strategic and emotional factors causing them to remain in an industry when the profitability of doing so is questionable Exit barriers are especially high in the airline industry Although earning even average returns is difficult for these firms they face substantial exit barriers such as their ownership of specialized assets (eg large aircraft)108 Common exit barriers include the following

Specialized assets (assets with values linked to a particular business or location) Fixed costs of exit (such as labor agreements) Strategic interrelationships (relationships of mutual dependence such as those between one business and other parts of a companyrsquos operations including shared facilities and access to financial markets)Emotional barriers (aversion to economically justified business decisions because of fear for onersquos own career loyalty to employees and so forth)Government and social restrictions (often based on government concerns for job losses and regional economic effects more common outside the United States)

Interpreting Industry AnalysesEffective industry analyses are products of careful study and interpretation of data and information from multiple sources A wealth of industry-specific data is avail-able to be analyzed Because of globalization international markets and rivalries must be included in the firmrsquos analyses In fact research shows that in some industries international variables are more important than domestic ones as determinants of strategic competitiveness Furthermore because of the development of global mar-kets a countryrsquos borders no longer restrict industry structures In fact movement into

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etitor A

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international markets enhances the chances of success for new ventures as well as more established firms109

Analysis of the five forces in the industry allows the firm to determine the industryrsquos attractiveness in terms of the potential to earn adequate or superior returns In general the stronger competitive forces are the lower the profit potential for an industryrsquos firms An unattractive industry has low entry barriers suppliers and buyers with strong bar-gaining positions strong competitive threats from product substitutes and intense rivalry among competitors These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns Alternatively an attractive industry has high entry barriers suppliers and buyers with little bargaining power few competitive threats from product substitutes and relatively moderate rivalry110 Next we explain strategic groups as an aspect of industry competition

Strategic GroupsA set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group111 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group Therefore intrastrategic group competition is more intense than is interstrategic group competition In fact more heterogeneity is evident in the performance of firms within strategic groups than across the groups The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage112

The extent of technological leadership product quality pricing policies distribution channels and customer service are examples of strategic dimensions that firms in a stra-tegic group may treat similarly Thus membership in a particular strategic group defines the essential characteristics of the firmrsquos strategy113

The notion of strategic groups can be useful for analyzing an industryrsquos competitive structure Such analyses can be helpful in diagnosing competition positioning and the profitability of firms within an industry114 High mobility barriers high rivalry and low resources among the firms within an industry limit the formation of strategic groups115

However research suggests that after strategic groups are formed their membership remains relatively stable over time making analysis easier and more useful116 Using stra-tegic groups to understand an industryrsquos competitive structure requires the firm to plot companiesrsquo competitive actions and competitive responses along strategic dimensions such as pricing decisions product quality distribution channels and so forth This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions

Strategic groups have several implications First because firms within a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry the greater the threat to each firmrsquos profitability Second the strengths of the five industry forces differ across strategic groups Third the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups

Competitor AnalysisThe competitor environment is the final part of the external environment requiring study Competitor analysis focuses on each company against which a firm directly competes For example Philip Morris International and Japan Tobacco International Coca-Cola and PepsiCo Home Depot and Lowersquos and Boeing and Airbus are keenly interested in understanding each otherrsquos objectives strategies assumptions and capabilities Indeed

A strategic group is a set of fi rms emphasizing similar strategic dimensions to use a similar strategy

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s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

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When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

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s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

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63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

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s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

57C

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xternal Enviro

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ortunities Threats Ind

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etitor A

nalysis

Intensity of Rivalry Among CompetitorsBecause an industryrsquos firms are mutually dependent actions taken by one company usually invite competitive responses In many industries firms actively compete against one another Competitive rivalry intensifies when a firm is challenged by a competitorrsquos actions or when a company recognizes an opportunity to improve its market position

Firms within industries are rarely homogeneous they differ in resources and capa-bilities and seek to differentiate themselves from competitors106 Typically firms seek to differentiate their products from competitorsrsquo offerings in ways that customers value and in which the firms have a competitive advantage Common dimensions on which rivalry is based include price service after the sale and innovation

Next we discuss the most prominent factors that experience shows to affect the intensity of firmsrsquo rivalries

Numerous or Equally Balanced CompetitorsIntense rivalries are common in industries with many companies With multiple com-petitors it is common for a few firms to believe they can act without eliciting a response However evidence suggests that other firms generally are aware of competitorsrsquo actions often choosing to respond to them At the other extreme industries with only a few firms of equivalent size and power also tend to have strong rivalries The large and often similar-sized resource bases of these firms permit vigorous actions and responses The competitive battles between Airbus and Boeing exemplify intense rivalry between rela-tively equal competitors and almost certainly will be so as the companies bid for the order to produce wide-body planes for United Airlines

Slow Industry GrowthWhen a market is growing firms try to effectively use resources to serve an expand-ing customer base Growing markets reduce the pressure to take customers from com-petitors However rivalry in no-growth or slow-growth markets (slow change) becomes more intense as firms battle to increase their market shares by attracting competitorsrsquo customers107

Typically battles to protect market share are fierce Certainly this has been the case in the airline industry and in the fast-food industry as McDonaldrsquos Wendyrsquos and Burger King try to win each otherrsquos customers The instability in the market that results from these competitive engagements may reduce the profitability for all firms engaging in such competitive battles

High Fixed Costs or High Storage CostsWhen fixed costs account for a large part of total costs companies try to maximize the use of their productive capacity Doing so allows the firm to spread costs across a larger volume of output However when many firms attempt to maximize their productive capacity excess capacity is created on an industry-wide basis To then reduce invento-ries individual companies typically cut the price of their product and offer rebates and other special discounts to customers However these practices common in the automo-bile manufacturing industry in the recent past often intensify competition The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is observed frequently in industries with high storage costs Perishable products for exam-ple lose their value rapidly with the passage of time As their inventories grow producers of perishable goods often use pricing strategies to sell products quickly

Lack of Differentiation or Low Switching CostsWhen buyers find a differentiated product that satisfies their needs they frequently pur-chase the product loyally over time Industries with many companies that have success-fully differentiated their products have less rivalry resulting in lower competition for

58Pa

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s individual firms Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns However when buyers view products as commodities (ie as products with few differentiated features or capabilities) rivalry intensifies In these instances buyersrsquo purchasing decisions are based primarily on price and to a lesser degree service Personal computers are a commodity product Thus the rivalry between Dell Hewlett-Packard and other computer manufacturers is strong and these companies are always trying to find ways to differentiate their offerings (Hewlett-Packard now pursues product design as a means of differentiation)

High Strategic StakesCompetitive rivalry is likely to be high when it is important for several of the competi-tors to perform well in the market For example although it is diversified and is a market leader in other businesses Samsung has targeted market leadership in the consumer electronics market and is doing quite well This market is quite important to Sony and other major competitors such as Hitachi Matsushita NEC and Mitsubishi suggesting that rivalry among these competitors will remain strong

High strategic stakes can also exist in terms of geographic locations For example Japanese automobile manufacturers are committed to a significant presence in the US marketplace because it is the worldrsquos largest single market for automobiles and trucks Because of the stakes involved in this country for Japanese and US manufacturers rivalry among firms in the US and the global automobile industry is intense With the excess capacity in this industry we mentioned earlier in this chapter there is every rea-son to believe that the rivalry among global automobile manufacturers will become even more intense certainly in the foreseeable future

High Exit BarriersSometimes companies continue competing in an industry even though the returns on their invested capital are low or negative Firms making this choice likely face high exit barriers which include economic strategic and emotional factors causing them to remain in an industry when the profitability of doing so is questionable Exit barriers are especially high in the airline industry Although earning even average returns is difficult for these firms they face substantial exit barriers such as their ownership of specialized assets (eg large aircraft)108 Common exit barriers include the following

Specialized assets (assets with values linked to a particular business or location) Fixed costs of exit (such as labor agreements) Strategic interrelationships (relationships of mutual dependence such as those between one business and other parts of a companyrsquos operations including shared facilities and access to financial markets)Emotional barriers (aversion to economically justified business decisions because of fear for onersquos own career loyalty to employees and so forth)Government and social restrictions (often based on government concerns for job losses and regional economic effects more common outside the United States)

Interpreting Industry AnalysesEffective industry analyses are products of careful study and interpretation of data and information from multiple sources A wealth of industry-specific data is avail-able to be analyzed Because of globalization international markets and rivalries must be included in the firmrsquos analyses In fact research shows that in some industries international variables are more important than domestic ones as determinants of strategic competitiveness Furthermore because of the development of global mar-kets a countryrsquos borders no longer restrict industry structures In fact movement into

59C

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xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

international markets enhances the chances of success for new ventures as well as more established firms109

Analysis of the five forces in the industry allows the firm to determine the industryrsquos attractiveness in terms of the potential to earn adequate or superior returns In general the stronger competitive forces are the lower the profit potential for an industryrsquos firms An unattractive industry has low entry barriers suppliers and buyers with strong bar-gaining positions strong competitive threats from product substitutes and intense rivalry among competitors These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns Alternatively an attractive industry has high entry barriers suppliers and buyers with little bargaining power few competitive threats from product substitutes and relatively moderate rivalry110 Next we explain strategic groups as an aspect of industry competition

Strategic GroupsA set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group111 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group Therefore intrastrategic group competition is more intense than is interstrategic group competition In fact more heterogeneity is evident in the performance of firms within strategic groups than across the groups The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage112

The extent of technological leadership product quality pricing policies distribution channels and customer service are examples of strategic dimensions that firms in a stra-tegic group may treat similarly Thus membership in a particular strategic group defines the essential characteristics of the firmrsquos strategy113

The notion of strategic groups can be useful for analyzing an industryrsquos competitive structure Such analyses can be helpful in diagnosing competition positioning and the profitability of firms within an industry114 High mobility barriers high rivalry and low resources among the firms within an industry limit the formation of strategic groups115

However research suggests that after strategic groups are formed their membership remains relatively stable over time making analysis easier and more useful116 Using stra-tegic groups to understand an industryrsquos competitive structure requires the firm to plot companiesrsquo competitive actions and competitive responses along strategic dimensions such as pricing decisions product quality distribution channels and so forth This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions

Strategic groups have several implications First because firms within a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry the greater the threat to each firmrsquos profitability Second the strengths of the five industry forces differ across strategic groups Third the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups

Competitor AnalysisThe competitor environment is the final part of the external environment requiring study Competitor analysis focuses on each company against which a firm directly competes For example Philip Morris International and Japan Tobacco International Coca-Cola and PepsiCo Home Depot and Lowersquos and Boeing and Airbus are keenly interested in understanding each otherrsquos objectives strategies assumptions and capabilities Indeed

A strategic group is a set of fi rms emphasizing similar strategic dimensions to use a similar strategy

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Qwerty on KAT for More

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s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

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ortunities Threats Ind

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etition and

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etitor A

nalysis

When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

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s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

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63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

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s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

58Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s individual firms Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns However when buyers view products as commodities (ie as products with few differentiated features or capabilities) rivalry intensifies In these instances buyersrsquo purchasing decisions are based primarily on price and to a lesser degree service Personal computers are a commodity product Thus the rivalry between Dell Hewlett-Packard and other computer manufacturers is strong and these companies are always trying to find ways to differentiate their offerings (Hewlett-Packard now pursues product design as a means of differentiation)

High Strategic StakesCompetitive rivalry is likely to be high when it is important for several of the competi-tors to perform well in the market For example although it is diversified and is a market leader in other businesses Samsung has targeted market leadership in the consumer electronics market and is doing quite well This market is quite important to Sony and other major competitors such as Hitachi Matsushita NEC and Mitsubishi suggesting that rivalry among these competitors will remain strong

High strategic stakes can also exist in terms of geographic locations For example Japanese automobile manufacturers are committed to a significant presence in the US marketplace because it is the worldrsquos largest single market for automobiles and trucks Because of the stakes involved in this country for Japanese and US manufacturers rivalry among firms in the US and the global automobile industry is intense With the excess capacity in this industry we mentioned earlier in this chapter there is every rea-son to believe that the rivalry among global automobile manufacturers will become even more intense certainly in the foreseeable future

High Exit BarriersSometimes companies continue competing in an industry even though the returns on their invested capital are low or negative Firms making this choice likely face high exit barriers which include economic strategic and emotional factors causing them to remain in an industry when the profitability of doing so is questionable Exit barriers are especially high in the airline industry Although earning even average returns is difficult for these firms they face substantial exit barriers such as their ownership of specialized assets (eg large aircraft)108 Common exit barriers include the following

Specialized assets (assets with values linked to a particular business or location) Fixed costs of exit (such as labor agreements) Strategic interrelationships (relationships of mutual dependence such as those between one business and other parts of a companyrsquos operations including shared facilities and access to financial markets)Emotional barriers (aversion to economically justified business decisions because of fear for onersquos own career loyalty to employees and so forth)Government and social restrictions (often based on government concerns for job losses and regional economic effects more common outside the United States)

Interpreting Industry AnalysesEffective industry analyses are products of careful study and interpretation of data and information from multiple sources A wealth of industry-specific data is avail-able to be analyzed Because of globalization international markets and rivalries must be included in the firmrsquos analyses In fact research shows that in some industries international variables are more important than domestic ones as determinants of strategic competitiveness Furthermore because of the development of global mar-kets a countryrsquos borders no longer restrict industry structures In fact movement into

59C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

international markets enhances the chances of success for new ventures as well as more established firms109

Analysis of the five forces in the industry allows the firm to determine the industryrsquos attractiveness in terms of the potential to earn adequate or superior returns In general the stronger competitive forces are the lower the profit potential for an industryrsquos firms An unattractive industry has low entry barriers suppliers and buyers with strong bar-gaining positions strong competitive threats from product substitutes and intense rivalry among competitors These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns Alternatively an attractive industry has high entry barriers suppliers and buyers with little bargaining power few competitive threats from product substitutes and relatively moderate rivalry110 Next we explain strategic groups as an aspect of industry competition

Strategic GroupsA set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group111 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group Therefore intrastrategic group competition is more intense than is interstrategic group competition In fact more heterogeneity is evident in the performance of firms within strategic groups than across the groups The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage112

The extent of technological leadership product quality pricing policies distribution channels and customer service are examples of strategic dimensions that firms in a stra-tegic group may treat similarly Thus membership in a particular strategic group defines the essential characteristics of the firmrsquos strategy113

The notion of strategic groups can be useful for analyzing an industryrsquos competitive structure Such analyses can be helpful in diagnosing competition positioning and the profitability of firms within an industry114 High mobility barriers high rivalry and low resources among the firms within an industry limit the formation of strategic groups115

However research suggests that after strategic groups are formed their membership remains relatively stable over time making analysis easier and more useful116 Using stra-tegic groups to understand an industryrsquos competitive structure requires the firm to plot companiesrsquo competitive actions and competitive responses along strategic dimensions such as pricing decisions product quality distribution channels and so forth This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions

Strategic groups have several implications First because firms within a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry the greater the threat to each firmrsquos profitability Second the strengths of the five industry forces differ across strategic groups Third the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups

Competitor AnalysisThe competitor environment is the final part of the external environment requiring study Competitor analysis focuses on each company against which a firm directly competes For example Philip Morris International and Japan Tobacco International Coca-Cola and PepsiCo Home Depot and Lowersquos and Boeing and Airbus are keenly interested in understanding each otherrsquos objectives strategies assumptions and capabilities Indeed

A strategic group is a set of fi rms emphasizing similar strategic dimensions to use a similar strategy

Qwerty on KAT for More

Qwerty on KAT for More

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rt 1

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ateg

ic M

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put

s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

61C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

Qwerty on KAT for More

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ateg

ic M

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put

s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

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63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

rt 1

Str

ateg

ic M

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s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

59C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

international markets enhances the chances of success for new ventures as well as more established firms109

Analysis of the five forces in the industry allows the firm to determine the industryrsquos attractiveness in terms of the potential to earn adequate or superior returns In general the stronger competitive forces are the lower the profit potential for an industryrsquos firms An unattractive industry has low entry barriers suppliers and buyers with strong bar-gaining positions strong competitive threats from product substitutes and intense rivalry among competitors These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns Alternatively an attractive industry has high entry barriers suppliers and buyers with little bargaining power few competitive threats from product substitutes and relatively moderate rivalry110 Next we explain strategic groups as an aspect of industry competition

Strategic GroupsA set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group111 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group Therefore intrastrategic group competition is more intense than is interstrategic group competition In fact more heterogeneity is evident in the performance of firms within strategic groups than across the groups The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage112

The extent of technological leadership product quality pricing policies distribution channels and customer service are examples of strategic dimensions that firms in a stra-tegic group may treat similarly Thus membership in a particular strategic group defines the essential characteristics of the firmrsquos strategy113

The notion of strategic groups can be useful for analyzing an industryrsquos competitive structure Such analyses can be helpful in diagnosing competition positioning and the profitability of firms within an industry114 High mobility barriers high rivalry and low resources among the firms within an industry limit the formation of strategic groups115

However research suggests that after strategic groups are formed their membership remains relatively stable over time making analysis easier and more useful116 Using stra-tegic groups to understand an industryrsquos competitive structure requires the firm to plot companiesrsquo competitive actions and competitive responses along strategic dimensions such as pricing decisions product quality distribution channels and so forth This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions

Strategic groups have several implications First because firms within a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry the greater the threat to each firmrsquos profitability Second the strengths of the five industry forces differ across strategic groups Third the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups

Competitor AnalysisThe competitor environment is the final part of the external environment requiring study Competitor analysis focuses on each company against which a firm directly competes For example Philip Morris International and Japan Tobacco International Coca-Cola and PepsiCo Home Depot and Lowersquos and Boeing and Airbus are keenly interested in understanding each otherrsquos objectives strategies assumptions and capabilities Indeed

A strategic group is a set of fi rms emphasizing similar strategic dimensions to use a similar strategy

Qwerty on KAT for More

Qwerty on KAT for More

60Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

61C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

Qwerty on KAT for More

62Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

Qwerty on KAT for More

63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

60Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s intense rivalry creates a strong need to understand competitors117 In a competitor analy-sis the firm seeks to understand the following

What drives the competitor as shown by its future objectivesWhat the competitor is doing and can do as revealed by its current strategyWhat the competitor believes about the industry as shown by its assumptionsWhat the competitorrsquos capabilities are as shown by its strengths and weaknesses118

Information about these four dimensions helps the firm prepare an anticipated response profile for each competitor (see Figure 23) The results of an effective com-petitor analysis help a firm understand interpret and predict its competitorsrsquo actions and responses Understanding the actions of competitors clearly contributes to the firmrsquos ability to compete successfully within the industry119 Interestingly research suggests that executives often fail to analyze competitorsrsquo possible reactions to competitive actions their firm takes120 placing their firm at a potential competitive disadvantage as a result

Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitorsrsquo intentions and the strategic implications resulting from them121 Useful data and information combine to form competitor intel-ligence the set of data and information the firm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities In competitor analysis the firm gathers intelligence not only about its competitors but also regarding public policies in countries around the world Such intelligence facilitates an understand-ing of the strategic posture of foreign competitors Through effective competitive and public policy intelligence the firm gains the insights needed to make effective strategic decisions about how to compete against its rivals

Figure 23 Competitor Analysis Components

Future Objectivesbull How do our goals compare with our

competitorsrsquo goals

bull Where will emphasis be placed in the

future

bull What is the attitude toward risk

Current Strategybull How are we currently competing

bull Does their strategy support changes

in the competitive structure

Assumptionsbull Do we assume the future will be volatile

bull Are we operating under a status quo

bull What assumptions do our competitors

hold about the industry and themselves

Capabilitiesbull What are our strengths and weaknesses

bull How do we rate compared to our

competitors

Responsebull What will our competitors do in the

future

bull Where do we hold an advantage over

our competitors

bull How will this change our relationship

with our competitors

61C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

Qwerty on KAT for More

62Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

Qwerty on KAT for More

63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

61C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

When asked to describe competitive intelligence it seems that a number of people respond with phrases such as ldquocompetitive spyingrdquo and ldquocorporate espionagerdquo These phrases denote the fact that competitive intelligence is an activity that appears to involve trade-offs122 According to some the reason for this is that ldquowhat is ethical in one country is different from what is ethical in other countriesrdquo This position implies that the rules of engagement to follow when gathering competitive intelligence change in different con-texts However firms avoid the possibility of legal entanglements and ethical quandaries only when their competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines123 This means that ethical behavior and actions as well as the mandates of relevant laws and regulations should be the foundation on which a firmrsquos competitive intelligence-gathering process is formed We address this matter in greater detail in the next section

When gathering competitive intelligence firms must also pay attention to the com-plementors of its products and strategy124 Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal firmrsquos good or service When a complementorrsquos good or service adds value to the sale of the focal firmrsquos good or service it is likely to create value for the focal firm

There are many examples of firms whose good or service complements other compa-niesrsquo offerings For example firms manufacturing affordable home photo printers comple-ment other companiesrsquo efforts to sell digital cameras Intel and Microsoft are perhaps the most widely recognized complementors The Microsoft slogan ldquoIntel Insiderdquo demonstrates the relationship between two firms who do not directly buy from or sell to each other but whose products have a strong complementary relationship Alliances among airline opera-tions (eg the Star Alliance and the SkyTeam Alliance) find these companies sharing their route structures and customer loyalty programs as means of complementing each othersrsquo operations (Each alliance is a network of complementors) Recently Continental Airlines announced that it was leaving the SkyTeam Alliance to join the Star Alliance The primary reason for this change was to provide greater global coverage to Continentalrsquos customers by combining its routes with those of the other members of the Star Alliance125 In essence Continentalrsquos conclusion was that the complementors of the Star Alliance created more value for its customers than did its complementors in the SkyTeam Alliance

As our discussion shows complementors expand the set of competitors firms must evaluate when completing a competitor analysis For example when Delta Airlines wants to study Continental Airlines it must examine Continentalrsquos strategic actions as an inde-pendent company as well as its actions as a member of the Star Alliance The same is true in reversemdashContinental must study Deltarsquos actions as an independent firm as well as its actions as a member of the SkyTeam Alliance Similarly Intel and Microsoft analyze each otherrsquos actions in that those actions might either help each firm gain a competitive advantage or damage each firmrsquos ability to exploit a competitive advantage

Ethical ConsiderationsFirms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence Industry associations often develop lists of these practices that firms can adopt Practices considered both legal and ethical include (1) obtaining publicly available information (eg court records competitorsrsquo help-wanted advertisements annual reports financial reports of publicly held corporations and Uniform Commercial Code filings) and (2) attending trade fairs and shows to obtain competitorsrsquo brochures view their exhibits and listen to discussions about their products In contrast certain practices (including blackmail trespassing eavesdropping and stealing drawings samples or documents) are widely viewed as unethical and often are illegal

Some competitor intelligence practices may be legal but a firm must decide whether they are also ethical given the image it desires as a corporate citizen Especially with electronic transmissions the line between legal and ethical practices can be difficult to determine For example a firm may develop Web site addresses that are similar to those

Competitor intelligence is the set of data and information the fi rm gathers to better understand and better anticipate competitorsrsquo objectives strategies assumptions and capabilities

Complementors are companies or networks of companies that sell complementary goods or services that are compatible with the focal fi rmrsquos good or service

Qwerty on KAT for More

62Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

Qwerty on KAT for More

63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

62Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s of its competitors and thus occasionally receive e-mail transmissions that were intended for those competitors The practice is an example of the challenges companies face in deciding how to gather intelligence about competitors while simultaneously determin-ing how to prevent competitors from learning too much about them To deal with these challenges firms should establish principles and take actions that are consistent with them ING a global financial company offering banking investments life insurance and retirement services expresses the principles guiding its actions as follows ldquoING conducts business on the basis of clearly defined business principles In all our activities we care-fully weigh the interests of our various stakeholders customers employees communities and shareholders ING strives to be a good corporate citizenrdquo126

Open discussions of intelligence-gathering techniques can help a firm ensure that employees customers suppliers and even potential competitors understand its convictions to follow ethical practices for gathering competitor intelligence An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products operations and strategic intentions127

Why is it important for a firm to study and understand the 1 external environment

What are the differences between the general environment 2 and the industry environment Why are these differences important

What is the external environmental analysis process (four 3 steps) What does the firm want to learn when using this process

What are the seven segments of the general environment 4 Explain the differences among them

The firmrsquos external environment is challenging and complex bullBecause of the external environmentrsquos effect on perfor-mance the firm must develop the skills required to identify opportunities and threats existing in that environment

The external environment has three major parts (1) the bullgeneral environment (elements in the broader society that affect industries and their firms) (2) the industry environment (factors that influence a firm its competitive actions and responses and the industryrsquos profit potential) and (3) the competitor environment (in which the firm analyzes each major competitorrsquos future objectives current strategies assumptions and capabilities)

The external environmental analysis process has four steps bullscanning monitoring forecasting and assessing Through envi-ronmental analyses the firm identifies opportunities and threats

The general environment has seven segments demographic bulleconomic politicallegal sociocultural technological global and physical For each segment the firm wants to determine the strategic relevance of environmental changes and trends

Compared with the general environment the industry environ- bullment has a more direct effect on the firmrsquos strategic actions The five forces model of competition includes the threat of entry the power of suppliers the power of buyers product

substitutes and the intensity of rivalry among competitors By studying these forces the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns

Industries are populated with different strategic groups A bullstrategic group is a collection of firms following similar strat-egies along similar dimensions Competitive rivalry is greater within a strategic group than between strategic groups

Competitor analysis informs the firm about the future objec- bulltives current strategies assumptions and capabilities of the companies with which it competes directly A thorough analysis examines complementors that sustain a competitorrsquos strategy and major networks or alliances in which competi-tors participate When analyzing competitors the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm

Different techniques are used to create competitor intel- bullligence the set of data information and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions Firms should use only legal and ethical practices to gather intel-ligence The Internet enhances firmsrsquo capabilities to gather insights about competitors and their strategic intentions

SUMMARY

REVIEW QUESTIONS

Qwerty on KAT for More

63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

63

How do the five forces of competition in an industry affect 5 its profit potential Explain

What is a strategic group Of what value is knowledge of 6 the firmrsquos strategic group in formulating that firmrsquos strategy

What is the importance of collecting and interpreting 7 data and information about competitors What practices should a firm use to gather competitor intelligenceand why

EXPERIENTIAL EXERCISES

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

EXERCISE 1 AIRLINE COMPETITOR ANALYSISThe International Air Transport Association (IATA) reports statistics on the number of passengers carried each year by major airlines Passenger data for 2007 are reported for the top 10 carriers in three categories

International flights bullDomestic flights bullCombined traffic domestic and international flights bull

The following table lists both passenger data and rankings for each category

Airline

Intl Intl Domestic Domestic Combined Combined

Rank Passengers Rank Passengers Rank Passengers

Air France 3 31549 8 50465

All Nippon Airways 6 44792

American Airlines 7 21479 2 76687 2 98166

British Airways 5 28302

Cathay Pacifi c 10 17695

China Southern Airlines

5 52505 5 56522

Continental Airlines

9 37175 9 49059

Delta Air Lines 3 61651 3 73086

Easyjet 4 30173

Emirates 8 20448

Japan Airlines International

10 35583

KLM 6 23165

Lufthansa 2 41322 7 54165

Northwest Airlines 7 44337 6 54696

Ryanair 1 49030 10 49030

Singapore Airlines 9 18957

Southwest Airlines 1 101911 1 101911

United Airlines 4 58162 4 68363

US Airways Inc 8 37560

64Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

64Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s For this exercise you will develop competitor profiles of selected air carriers

Part OneWorking in groups of five to seven people each team member selects one airline from the table The pool of selected airlines should contain a roughly even balance of three regions North America EuropeMiddle East and Asia Answer the following questions

1 What drives this competitor (ie what are its objectives) 2 What is its current strategy 3 What does this competitor believe about its industry 4 What are its strengths and weaknesses 5 Does this airline belong to an airline alliance (eg Oneworld Star SkyTeam)

When researching your companies you should use multiple resources The companyrsquos Web site is a good starting point Public firms headquartered in the United States will also have annual reports and 10-K reports filed with the Securities and Exchange Commission

Part TwoAs a group summarize the results of each competitor profile into a single table with columns for objectives current strategy beliefs strengths weaknesses and alliance partner(s) Then dis-cuss the following topics

1 Which airlines had the most similar strategies The most dif-ferent Would you consider any of the firms you studied to be in the same strategic group (ie a group of firms that follows similar strategies along similar dimensions) 2 Create a composite five forces model based on the firms you reviewed How might these elements of industry structure (eg substitutes or bargaining power of buyers) differ from the perspective of individual airlines 3 Which airlines appear best positioned to succeed in the future Why

EXERCISE 2 WHAT DOES THE FUTURE LOOK LIKEA critical ingredient to studying the general environment is iden-tifying opportunities and threats As discussed in this chapter an opportunity is a condition in the environment that if exploited helps a company achieve strategic competitiveness In order to identify opportunities one must be aware of current and future trends affecting the world around us

Thomas Fry senior futurist at the DaVinci Institute says that the chaotic nature of interconnecting trends and the vast array of possibilities that arise from them is somewhat akin to watch-ing a spinning compass needle From the way we use phones and e-mail or recruit new workers to organizations the climate for business is changing and shifting dramatically and at rapidly increasing rates Sorting out these changes and making sense of them provides the basis for opportunity decision making Which ones will dominate and which will fade Understanding this is crucial for business success

Your challenge (either individually or as a group) is to identify a trend technology entertainment or design that is likely to alter the way in which business is conducted in the future Once you have identified your topic be prepared to discuss

Which of the seven segments of the general environment will bullthis affect (There may be more than one)Describe the impact bullList some business opportunities that will come from this bullIdentify some existing organizations that stand to benefit bullWhat if any are the ethical implications bull

You should consult a wide variety of sources For example the Gartner Group and McKinsey amp Company produce market research and forecasts for business There are also many Web forecasting tools and addresses such as TED (Technology Entertainment Design) TED hosts an annual conference for groundbreaking ideas and you can find videos of their discus-sions on their Web site Similarly the DaVinci Institute Institute for Global Futures and a host of others offer their own unique vision for tomorrowrsquos environment

OUTWORK YOUR COMPETITION

Jerry RiceFormer Professional Football PlayerNFL Hall of Famer

Jerry Rice (born October 13 1962) is widely regarded as the greatest wide receiver ever and one of the greatest players in National Football League (NFL) history He is the all-time leader in every major statistical category for wide receivers In 20 NFL seasons he was selected to the Pro Bowl 13 times (1986ndash1996 1998 and 2002) and named All-Pro 10 times He won three Super Bowl rings playing for the San Francisco 49ers and an AFC Championship with the Oakland Raiders

Besides his exceptional ability as a receiver Rice is remem-bered for his work ethic and dedication to the game In his

20 NFL seasons he missed only 10 regular season games His 303 games are by far the most ever played by an NFL wide receiver In addition to staying on the field his work ethic showed in his dedication to conditioning and running precise routes

Before you watch the video consider the following concepts and questions and be prepared to discuss them in class

ConceptsCompetition bullOpportunity bullThreat bullIndustry environmentmdashfive forces bullCompetitor analysis bull

VIDEO CASE

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

65

1 D A Bosse R A Phillips amp J S Harrison 2009 Stakeholders reciprocity and firm performance Strategic Management Journal 30 447ndash456

2 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

3 K Helliker 2009 Smokeless tobacco to get push by venture overseas Wall Street Journal Online httpwwwwsjcom February 4

4 P Berrone amp L R Gomez-Mejia 2009 Environmental performance and executive compensation An integrated agency-institutional perspective Academy of Management Journal 52 103ndash126 P Chattopadhyay W H Glick amp G P Huber 2001 Organizational actions in response to threats and opportunities Academy of Management Journal 44 937ndash955

5 C Weigelt amp M B Sarkar 2009 Learning from supply-side agents The impact of technology solution providersrsquo experiential diversity on clientsrsquo innovation adoption Academy of Management Journal 52 37ndash60 D G Sirmon S Gove amp M A Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

6 J P Bonardi G I F Holburn amp R G Vanden Bergh 2006 Nonmarket strategy performance Evidence from US electric utilities Academy of Management Journal 49 1209ndash1228

7 S Labaton 2009 Obama plans fast action to tighten financial rules New York Times Online httpwwwnytimescom January 25

8 J Welch amp S Welch 2009 The economy A little clarity BusinessWeek May 4 80

9 J Uotila M Maula T Keil amp S A Zahra 2009 Exploration exploitation and financial performance Analysis of SampP 500 corporations Strategic Management Journal 30 221ndash231 J L Murillo-Luna C Garces-Ayerbe amp P Rivera-Torres 2008 Why do patterns of environmental response differ A stakeholderrsquos pressure approach Strategic Management Journal 29 1225ndash1240

10 A Kacperczyk 2009 With greater power comes greater responsibility Takeover protection and corporate attention to stakeholders Strategic Management Journal 30 261ndash285 C Eesley amp M J Lenox 2006 Firm responses to secondary stakeholder action Strategic Management Journal 27 765ndash781

11 L Fahey 1999 Competitors New York John Wiley amp Sons B A Walters amp R L Priem 1999 Business strategy and CEO intelligence acquisition Competitive Intelligence Review 10(2) 15ndash22

12 A P Kellogg amp J Bennett 2009 Chryslerrsquo bankruptcy deals blow to affiliates Wall Street Journal Online httpwwwwsjcom May 2

13 J C Short D J Ketchen Jr T B Palmer amp G T Hult 2007 Firm strategic group and industry influences on performance Strategic Management Journal 28 147ndash167

14 K P Coyne amp J Horn 2009 Predicting your competitorrsquos reaction Harvard Business Review 87(4) 90ndash97

15 D Sull 2009 How to thrive in turbulent markets Harvard Business Review 87(2) 78ndash88 J Hagel III J S Brown amp L Davison 2008 Shaping strategy in a world of constant disruption Harvard Business Review 86(10) 80ndash89

16 J A Lamberg H Tikkanen T Nokelainen amp H Suur-Inkeroinen 2009 Competitive dynamics strategic consistency and organizational survival Strategic Management Journal 30 45ndash60

17 E Byron 2009 PampG makes a bigger play for men Wall Street Journal Online httpwwwwsjcom April 29

18 W B Gartner K G Shaver amp J Liao 2008 Opportunities as attributions Categorizing strategic issues from an attributional perspective Strategic Entrepreneurship Journal 2 301ndash315

19 P Lattman 2005 Rebound Forbes March 28 58

20 P Lattman amp J McCracken 2009 Vultures vie in auction for the remains of Polaroid Wall Street Journal httpwwwwsjcom April 17

21 W H Stewart R C May amp A Kalla 2008 Environmental perceptions and scanning in the United States and India Convergence in entrepreneurial information seeking Entrepreneurship Theory and Practice 32

83ndash106 K M Patton amp T M McKenna 2005 Scanning for competitive intelligence Competitive Intelligence Magazine 8(2) 24ndash26

22 J O Schwarz 2008 Assessing the future of futures studies in management Futures 40 237ndash246 K M Eisenhardt 2002 Has strategy changed MIT Sloan Management Review 43(2) 88ndash91

23 J R Hough amp M A White 2004 Scanning actions and environmental dynamism Gathering information for strategic decision making Management Decision 42 781ndash793 V K Garg B A Walters amp R L Priem 2003 Chief executive scanning emphases environmental dynamism and manufac-turing firm performance Strategic Management Journal 24 725ndash744

24 C-P Wei amp Y-H Lee 2004 Event detection from online news documents for supporting environmental scanning Decision Support Systems 36 385ndash401

25 Fahey Competitors 71ndash7326 J Moreno 2009 Wal-Mart gives its

Supermercado concept a tryout Houston Chronicle Online httpwwwchroncom April 30

27 S M Kalita 2009 Companies world-wide rethink strategies Wall Street Journal Online httpwwwwsjcom April 29

28 T M Jones W Felps amp G A Bigley 2007 Ethical theory and stakeholder-related decisions The role of stakeholder culture Academy of Management Review 32 137ndash155

29 M J Leiblein amp T L Madsen 2009 Unbundling competitive heterogeneity Incentive structures and capability influences on technological innovation Strategic Management Journal 30 711ndash735

30 D Matten amp J Moon 2008 Implicit and explicit CSR A conceptual framework for a comparative understanding of corporate social responsibility Academy of Management Review 33 404ndash424 F Sanna-Randaccio amp R Veugelers 2007 Multinational knowledge spillovers with decentralized RampD A game theoretic approach Journal of International Business Studies 38 47ndash63

31 Fahey Competitors32 S Lohr 2009 How crisis shapes the

corporate model Wall Street Journal Online httpwwwwsjcom March 29

NOTES

Questions

How competitive are you How does this manifest itself in 1 your everyday life What about goal setting in your life Do you have objectives 2 that you want to achieve five years after graduation

How is your preparation and planning matched to your 3 long-term objectivesWhat if any difference is there between a companyrsquos objec-4 tives and those of its employees

Chap

ter 2 The External E

nvironm

ent Op

po

rtunities Threats Industry C

om

petitio

n and C

om

petito

r Analysis

66Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s 33 E Byron 2009 PampG investors need a little pampering Wall Street Journal Online httpwwwwsjcom April 30

34 P E Bierly III F Damanpour amp M D Santoro 2009 The application of external knowledge Organizational conditions for exploration and exploitation Journal of Management Studies 46 481ndash509 Fahey Competitors 75ndash77

35 K M Sutcliffe amp K Weber 2003 The high cost of accurate knowledge Harvard Business Review 81(5) 74ndash82

36 E K Foedermayr amp A Diamantopoulos 2008 Market segmentation in practice Review of empirical studies methodological assessment and agenda for future research Journal of Strategic Marketing 16 223ndash265 L Fahey amp V K Narayanan 1986 Macroenvironmental Analysis for Strategic Management St Paul MN West Publishing Company 58

37 US Census Bureau 2009 International data base httpwwwcensusgovpicwwwidbworldpopgraphhtml May 24

38 S Moffett 2005 Fast-aging Japan keeps its elders on the job longer Wall Street Journal June 15 A1 A8

39 S Armour 2009 Mortgage crisis robbing seniors of golden years USA Today June 5ndash7 A1 amp A2

40 J M Nittoli 2009 Now is no time to skimp on retirement plans Wall Street Journal httpwwwwsjcom June 5

41 2009 Migration and geographic distribution httpwwwmedicinejrankorg June 5

42 2009 CultureGrams world edition httpwwwculturegramscom June 5

43 2009 StrictlySpanish The growing Hispanic market in the United States httpwwwstrictlyspanishcom June 5

44 J A Chatman amp S E Spataro 2005 Using self-categorization theory to understand relational demography-based variations in peoplersquos responsiveness to organizational culture Academy of Management Journal 48 321ndash331

45 2006 Characteristics of the civilian labor force 2004 and 2014 US Department of Labor Bureau of Labor Statistics data httpwwwblsgov May

46 J Millman 2005 Low-wage US jobs get ldquoMexicanizedrdquo but therersquos a price Wall Street Journal May 2 A2

47 A K Fosu 2008 Inequality and the growth-poverty nexus Specification empirics using African data Applied Economics Letters 15 563ndash566 A McKeown 2007 Periodizing globalization History Workshop Journal 63(1) 218ndash230

48 O Sullivan 2008 Busyness status distinction and consumption strategies of the income rich time poor Time amp Society 17 5ndash26

49 2009 Half the world is middle class httpwwwedwardsglobalcom May 10

50 D Vrontis amp P Pavlou 2008 Journal for International Business and Entrepreneurship Development 3 289ndash307 A Jones amp N Ennis 2007 Bringing the environment into economic

development Local Economy 22(1) 1ndash5 Fahey amp Narayanan Macroenvironmental Analysis 105

51 P Coy 2009 What good are economists anyway BusinessWeek April 27 26ndash31

52 J Simms 2009 Losses at Japanrsquos electronics companies are no shock Wall Street Journal Online httpwwwwsjcom February 4

53 J Bush 2009 The worries facing Russiarsquos banks Wall Street Journal Online httpwwwwsjcom April 13

54 A Peaple amp N P Muoi 2009 Vietnamrsquos marketmdashthe fizz is deliberate Wall Street Journal Online httpwwwwsjcom June 11

55 R H Lester A Hillman A Zardkoohi amp A A Cannella Jr 2008 Former government officials as outside directors The role of human and social capital Academy of Management Journal 51 999ndash1013 C Oliver amp I Holzinger 2008 The effectiveness of strategic political management A dynamic capabilities framework Academy of Management Review 33 496ndash520

56 J W Spencer 2008 The impact of multinational enterprise strategy on indigenous enterprises Horizontal spillovers and crowding out in developing countries Academy of Management Review 33 341ndash361 W Chen 2007 Does the colour of the cat matter The red hat strategy in Chinarsquos private enterprises Management and Organizational Review 3 55ndash80

57 P Engardio 2009 Clearing the track for high-speed rail BusinessWeek May 4 29

58 M Srivastava 2009 The sudden chill at an Indian hot spot BusinessWeek May 4 59

59 2009 Taking aim at outsources on US soil BusinessWeek June 15 10

60 H W Jenkins Jr 2009 GM needs a political strategy Wall Street Journal Online httpwwwwsjcom June 10

61 G L F Holburn amp R G Vanden Bergh 2008 The effectiveness of strategic political management A dynamic capabilities framework Academy of Management Review 33 521ndash540 M A Hitt L Bierman K Uhlenbruck amp K Shimizu 2006 The importance of resources in the internationalization of professional service firms The good the bad and the ugly Academy of Management Journal 49 1137ndash1157

62 K Olsen 2009 S Korea EU call for early conclusion of trade pact Houston Chronicle Online httpwwwchroncom May 23

63 L Manchikanti 2008 Health care reform in the United States Radical surgery needed now more than ever Pain Physician 11 13ndash42

64 S A Burd 2009 How Safeway is cutting health-care costs Wall Street Journal Online httpwwwwsjcom June 12

65 2009 Characteristics of the civilian labor force US Department of Labor Bureau of Labor Statistics data httpwwwblsgov June

66 E S W Ng 2008 Why organizations choose to manage diversity Toward a leadership-based theoretical framework Human Resource Development Review 7 58ndash78

67 A McConnon 2009 For a temp giant a boom in boomers BusinessWeek June 1 54

68 F Moore amp C Rees 2008 Culture against cohesion Global corporate strategy and employee diversity in the UK plant of a German MNC Employee Relations 30 176ndash189 B L Kirkman K B Lowe amp C B Gibson 2006 A quarter of a century of culturersquos consequences A review of old empirical research incorporating Hofstedersquos cultural values framework Journal of International Business Studies 37 285ndash320

69 S Michailova amp K Hutchings 2006 National cultural influences on knowledge sharing A comparison of China and Russia Journal of Management Studies 43 384ndash405

70 J B Knight amp L Yueh 2008 The role of social capital in the labour market in China Economics of Transition 16 389ndash414 P J Buckley J Clegg amp H Tan 2006 Cultural awareness in knowledge transfer to ChinamdashThe role of guanxi and mianzi Journal of World Business 41 275ndash288

71 R K Sinha amp C H Noble 2008 The adoption of radical manufacturing technologies and firm survival Strategic Management Journal 29 943ndash962

72 K H Tsai amp J-C Wang 2008 External technology acquisition and firm perfor-mance A longitudinal study Journal of Business Venturing 23 91ndash112 D Lavie 2006 Capability reconfiguration An analysis of incumbent responses to technological change Academy of Management Review 31 153ndash174

73 S A Brown 2008 Household technology adoption use and impacts Past present and future Information Systems Frontiers 10 397ndash402

74 W S Mossberg 2009 The latest Kindle Bigger not better than its sibling Wall Street Journal Online httpwwwwsjcom June 11

75 L F Mesquita amp S G Lazzarini 2008 Horizontal and vertical relationships in developing economies Implications for SMEsrsquo access to global markets Academy of Management Journal 51 359ndash380 W P Wan 2005 Country resource environments firm capabilities and corporate diversification strategies Journal of Management Studies 42 161ndash182

76 J R Healey 2009 Penske-Saturn deal could change how cars are sold USA Today June 8 B2

77 D Welch 2009 A hundred factories too many BusinessWeek January 12 42ndash43

78 2009 McDonaldrsquos Corp Standard amp Poorrsquos Stock Report httpwwwstandardandpoorscom May 16

79 G Marcial 2009 Heinz The time may be ripe BusinessWeek May 11 67

67C

hapter 2 The E

xternal Enviro

nment O

pp

ortunities Threats Ind

ustry Co

mp

etition and

Co

mp

etitor A

nalysis

80 2009 Procter amp Gamble Co Standard amp Poorrsquos Stock Report httpwwwstandardandpoorscom May 16

81 K E Meyer 2009 Uncommon common sense Business Strategy Review 20 38ndash43 K E Meyer 2006 Globalfocusing From domestic conglomerates to global specialists Journal of Management Studies 43 1110ndash1144

82 C H Oh amp A M Rugman 2007 Regional multinationals and the Korean cosmetics industry Asia Pacific Journal of Management 24 27ndash42

83 P K Ong amp Y Kathawala 2009 Competitive advantage through good Guanxi in the marine industry International Journal of Chinese Culture and Management 2 28ndash55 X-P Chen amp S Peng 2008 Guanxi dynamics Shifts in the closeness of ties between Chinese coworkers Management and Organizational Review 4 63ndash80 M A Hitt M T Dacin B B Tyler amp D Park 1997 Understanding the differences in Korean and US executivesrsquo strategic orientations Strategic Management Journal 18 159ndash167

84 M A Hitt D Ahlstrom M T Dacin E Levitas amp L Svobodina 2004 The institutional effects on strategic alliance partner selection China versus Russia Organization Science 15 173ndash185

85 L Berchicci amp A King 2008 Postcards from the edge A review of the business and environment literature in J P Walshamp A P Brief (eds) Academy of Manage-ment Annals New York Lawrence Erlbaum Associates 513ndash547

86 M J Hutchins amp J W Sutherland 2008 An exploration of measures of social sustainability and their application to supply chain decisions Journal of Cleaner Production 16 1688ndash1698

87 P K Dutta amp R Radner 2009 A strategic analysis of global warming Theory and some numbers Journal of Economic Behavior amp Organization in press

88 H Liming E Haque amp S Barg 2008 Public policy discourse planning and measure toward sustainable energy strategies in Canada Renewable and Sustainable Energy Reviews 12 91ndash115

89 2009 Target Corporation Environment httpwwwtargetcom June 12

90 C A Bartlett amp S Ghoshal 2003 What is a global manager Harvard Business Review 81(8) 101ndash108 M A Carpenter amp J W Fredrickson 2001 Top management teams global strategic posture and the moderating role of uncertainty Academy of Management Journal 44 533ndash545

91 J Galbreath amp P Galvin 2008 Firm factors industry structure and performance variation New empirical evidence to a classic debate Journal of Business Research 61 109ndash117 B R Koka amp J E Prescott 2008 Designing alliance networks The influence of network position environmental change and strategy on firm performance Strategic Management Journal 29 639ndash661

92 V F Misangyl H Elms T Greckhamer amp J A Lepine 2006 A new perspective on a fundamental debate A multilevel approach to industry corporate and business unit effects Strategic Management Journal 27 571ndash590G Hawawini V Subramanian amp P Verdin 2003 Is performance driven by industry or firm-specific factors A new look at the evidence Strategic Management Journal 24 1ndash16

93 D Bonnet amp G S Yip 2009 Strategy convergence Business Strategy Review 20 50ndash55 E Nelson R van den Dam amp H Kline 2008 A future in content(ion) Can telecom providers win a share of the digital content market Journal of Telecommunications Management 1 125ndash138

94 K E Kushida amp J Zysman 2009 The services transformation and network policy The new logic of value creation Review of Policy Research 26 173ndash194 E D Jaffe I D Nebenzahl amp I Schorr 2005 Strategic options of home country firms faced with MNC entry Long Range Planning 38 183ndash196

95 M R Peneder 2008 Firm entry and turnover The nexus with profitability and growth Small Business Economics 30 327ndash344 A V Mainkar M Lubatkin amp W S Schulze 2006 Toward a product-proliferation theory of entry barriers Academy of Management Review 31 1062ndash1075 J Shamsie 2003 The context of dominance An industry-driven framework for exploiting reputation Strategic Management Journal 24 199ndash215

96 S Hamm 2009 Oracle faces its toughest deal yet BusinessWeek May 4 24

97 S K Ethiraj amp D H Zhu 2008 Performance effects of imitative entry Strategic Management Journal 29 797ndash817 R Makadok 1999 Interfirm differences in scale economies and the evolution of market shares Strategic Management Journal 20 935ndash952

98 M J Rungtusanatham amp F Salvador 2008 From mass production to mass customization Hindrance factors structural inertia and transition hazard Production and Operations Management 17 385ndash396 F Salvador amp C Forza 2007 Principles for efficient and effective sales configuration design International Journal of Mass Customisation 2(12) 114ndash127

99 F Keenan S Holmes J Greene ampR O Crockett 2002 A mass market of one BusinessWeek December 2 68ndash72

100 D Kiley 2009 Ford heads out on a road of its own BusinessWeek January 19 47ndash49

101 E Byron 2009 PampG Colgate hit by consumer thrift Wall Street Journal Online httpwwwwsjcom May 1

102 M A Hitt R M Holmes T Miller ampM P Salmador 2006 Modeling country institutional profiles The dimensions and dynamics of institutional environments presented at the Strategic Management Society Conference October

103 P Kiviniem 2009 Intel to get EU antitrust fine Wall Street Journal Online httpwwwwsjcom May 14

104 C Forelle amp D Clark 2009 Intel fine jolts tech sector Wall Street Journal Online httpwwwwsjcom May 14

105 L Ranson 2009 United confirms aircraft order talks with Airbus and Boeing FlightGlobal httpwwwflightglobalcom April 6

106 D G Sirmon S Gove amp M H Hitt 2008 Resource management in dyadic competitive rivalry The effects of resource bundling and deployment Academy of Management Journal 51 919ndash935

107 S Nadkarni amp V K Narayanan 2007 Strategic schemas strategic flexibility and firm performance The moderating role of industry clockspeed Strategic Management Journal 28 243ndash270

108 P Prada amp M Esterl 2009 Airlines predict more trouble broaden cuts Wall Street Journal Online httpwwwwsjcom June 12

109 S E Feinberg amp A K Gupta 2009 MNC subsidiaries and country risk Internalization as a safeguard against weak external institutions Academy of Management Journal 52 381ndash399

110 M E Porter 1980 Competitive Strategy New York Free Press

111 B Kabanoff amp S Brown 2008 Knowledge structures of prospectors analyzers and defenders Content structure stability and performance Strategic Management Journal 29 149ndash171 M S Hunt 1972 Competition in the major home appliance industry 1960ndash1970 (doctoral dissertation Harvard University) Porter Competitive Strategy 129

112 G McNamara D L Deephouse amp R A Luce 2003 Competitive positioning within and across a strategic group structure The performance of core secondary and solitary firms Strategic Management Journal 24 161ndash181

113 F Zen amp C Baldan 2008 The strategic paths and performance of Italian mutual banks A nonparametric analysis International Journal of Banking Accounting and Finance 1 189ndash214M W Peng J Tan amp T W Tong 2004 Ownership types and strategic groups in an emerging economy Journal of Management Studies 41 1105ndash1129

114 W S DeSarbo amp R Grewal 2008 Hybrid strategic groups Strategic Management Journal 29 293ndash317 M Peteraf ampM Shanley 1997 Getting to know you A theory of strategic group identity Strategic Management Journal 18(Special Issue) 165ndash186

115 J Lee K Lee amp S Rho 2002 An evolutionary perspective on strategic group emergence A genetic algorithm-based model Strategic Management Journal 23 727ndash746

116 J A Zuniga-Vicente J M de la Fuente Sabate amp I S Gonzalez 2004 Dynamics of the strategic group membership-performance linkage in rapidly changing

68Pa

rt 1

Str

ateg

ic M

anag

emen

t In

put

s environments Journal of Business Research 57 1378ndash1390

117 T Yu M Subramaniam amp A A Cannella Jr 2009 Rivalry deterrence in international markets Contingencies governing the mutual forbearance hypothesis Academy of Management Journal 52 127ndash147

118 Porter Competitive Strategy 49119 L Capron amp O Chatain 2008 Competitorsrsquo

resource-oriented strategies Acting on competitorsrsquo resources through interventions in factor markets and political markets Academy of Management Review 33 97ndash121 M B Lieberman amp S Asaba 2006 Why do firms imitate each other Academy of Management Journal 31 366ndash385

120 D B Montgomery M C Moore amp J E Urbany 2005 Reasoning about competitive reactions Evidence from executives Marketing Science 24 138ndash149

121 S Jain 2008 Digital piracy A competitive analysis Marketing Science 27 610ndash626

122 J G York 2009 Pragmatic sustainability Translating environmental ethics into competitive advantage Journal of Business Ethics 85 97ndash109

123 K A Sawka 2008 The ethics of competitive intelligence Kiplinger Business Resource Center Online httpwwwkiplingercom March

124 T Mazzarol amp S Reboud 2008 The role of complementary actors in the development of innovation in small firms International Journal of

Innovation Management 12 223ndash253 A Brandenburger amp B Nalebuff 1996 Co-opetition New York Currency Doubleday

125 2009 Continental to join Star alliance Continental Airlines Homepage httpwwwcontinentalcom June 12

126 2009 ING Profile and fast facts httpwwwingcom June 12

127 C S Fleisher amp S Wright 2009 Examining differences in competitive intelligence practice China Japan and the West Thunderbird International Business Review 51 249ndash261 A Crane 2005 In the company of spies When competitive intelligence gathering becomes industrial espionage Business Horizons 48(3) 233ndash240

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