Case report essay
Analyzing the External
Environment of the Firm
“The Truth is Out There…”
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Agenda
- Forecasting – Gathering and sorting information
- SWOT Analysis – Basic framework
- Five Forces Analysis
- Value Net Analysis
- Strategic Groups Analysis
Q. What is green, fuzzy, and if it fell out of a tree onto your head, could kill you?
A. A pool table.
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Forecasting
What is Forecasting?
- Crystal balls and tea leaves?
- Massive computer programs?
- Can you really un-fog the future?
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No, seriously; what is it?
Forecasting
Three Major Functions:
- External Scanning – Predicting changes in the firm’s environment, detecting changes already underway, working out possible responses
- External Monitoring – Tracking trends, sequences of related activities, organized programs
- Competitive Intelligence – Tracking and understanding the industry, monitoring the competition, identifying opportunities and threats that may be emerging
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Keep in mind that this isn’t a completely constructive activity; many companies fail because managers either become overwhelmed with the volume of available information and miss something critical, or become overly attached to their own analysis and cling to it despite the fact that it isn’t correct.
Competitive Intelligence
- Competitive intelligence is based on information collected through various public and industry sources, not espionage;
- It’s a tool that can alert management to threats before they get out of control, not a crystal ball
- It’s an analysis; a set of opinions, calculations and conclusions, not just raw data
- It’s a way of life – or at least it should be; everyone in the company should be paying attention to these things
- It’s a dessert topping! Okay, it isn’t really. But it can help prevent the competition from eating your lunch…
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Keep in mind that even the best forecasts (and resulting action plans) are made by humans, and therefore are not perfect. Our authors have listed a good selection of bad forecasts, but you can probably remember ones that were just as bad.
Scenario Analysis
- Predicting future events based on past experience
- Possible with enough good data
- Advantage: Improved planning, multiple contingencies developed in advance
- Disadvantage: Confirmation Bias, GIGO errors, wishful thinking
Consider, for example, a ski resort. If the weather is favorable (e.g. lots of snow) the resort should do well; if it’s too snowy people may have trouble getting there, and business will suffer; if there’s no snow this year no one will come and the business will be dead in the water. And if a volcano explodes in Iceland people may be unable to fly to or from Europe for a week.
The downside is, people tend to see what they want to see – even really capable, experienced people. Consider T. Boone Pickens pushing wind power until that didn’t work out, Bernie Madoff swindling people who knew he couldn’t do what he said he was doing, or the CEO of Digital saying no one would ever buy a home computer…
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Business Case: McDonald’s in 1984
- For the 1984 Summer Olympics, McDonald’s introduced the “When Team USA Wins, You Win!” promotion
- When any US athlete won a medal, the company would give each customer a corresponding free food item
- Then the USSR and its client states pulled out of the Olympics…
This story was actually parodied in “The Simpsons” – Crusty the Clown pulls a similar mistake.
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SWOT Analysis
- Four basic categories that sum up general environment, industry conditions, and firm resources and needs:
- Strengths – What are we good at, well equipped with?
- Weaknesses – Where do we need help?
- Opportunities – Where can we expand, gain market share, etc.?
- Threats – Where are we vulnerable to external threats (competition or otherwise)?
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Let me remind everyone that this analysis is only a tool; there are no absolutes about how to use it, or even what definitions to use for each of these categories. In some ways, SWOT is merely a mnemonic that helps remind you to look at all of these things. You could simplify it to “Internal and External Analysis” or expand it to include hundreds of sub-categories, but functionally it remains the same question.
SWOT Example
- Harley Davidson SWOT
- Strengths
- Strong & adaptable brand image
- Weaknesses
- Limited ability to develop new non-traditional products
- Opportunities
- Growing leisure interest in motorcycles worldwide
- Threats
- Differing foreign policies governing motorcycles
General Environment
- What do we mean by “General Environment,” anyway?
- Demographics
- Sociocultural Measures
- Legal/Political Issues
- Technological
- Economic
- International
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There’s a good chart of these in our textbook; if you haven’t already gone over it, I’d recommend doing so before the next exam…
Porter’s Five Forces Model
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Invented by Michael Porter, at Harvard Business School. As with most of these tools, not perfect – but useful. Five forces assumes a zero-sum condition, and a relatively static model, which may not always apply.
Porter’s Five Forces Model
- Example of Five Forces Analysis: BMW
- Threat of new entrants
- Very low
- Threat of substitutes
- Medium
- Power of suppliers
- Medium
- Power of buyers
- Medium
- Rivalry among existing firms
- Very High
Value Net Analysis
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Similar to the 5-forces model, but here we’re considering that some other firms in the environment can actually help – if we make high-powered computers, a firm that markets software that works well on our platform is a good thing, and so on.
Business Case: The “LISA” Computer
- Released in 1983 by Apple
- Fastest, most advanced, and most powerful personal computer developed as of that time; some of its features would not appear on another machine for decades
- Priced at $9,995 ($23,698 in 2014 dollars)
- Limited software availability and no third party software (including games) at all…
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Strategic Groups
- What is a Strategic Group?
Consider:
- No two firms are exactly alike
- No two firms are completely different
- Within an Industry, firms with similar products, geographic scope, price, quality or utility will utilize similar strategies
- Using the same strategies will result in many of the same actions, including direct competition
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A strategic group is a cluster of firms that share similar strategies and activities
Example of Strategic Groups
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Wendy’s and McDonald’s and Burger King are all in a single strategic group; they do not compete with each other the way that they do with Chili’s or Red Robin – but they have to keep an even closer eye on each other, because they’re competing for the same customers and revenue…
Example: Coffee Houses
- Starbucks/Bigby/Peets
- Anastasia’s Asylum
- Foxhollow Coffee
- The Legal Grind
- The Dana Street Roasting Company
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