The Competitive Environment
Learning Objectives Upon completing this chapter, you should be able to: Identify the structural characteristics of the environment faced by the ﬁrm and how these drivers inﬂuence both competition and value creation Choose the appropriate level of speciﬁcity in environmental analysis, depending on the locus of the decision-making group Predict how changes occurring in the environment might inﬂuence future competition and value creation Incorporate understanding of environmental changes into the development of strategy Consider options for inﬂuencing changes in the ﬁrm’s environment so as to improve future value creation Analyze customers and competitors to develop a competitive advantage and strategy Appreciate that strategy is realized in the future: decisions are made now but their realization occurs in the future
In late 2000, GE proposed to take over Honeywell. Both these ﬁrms are U.S.-based, and the value of the merger was $USB42. But a merger between two such large ﬁrms has global implications and ramiﬁcations. Although the U.S. Federal Trade Commission (FTC) had approved the merger, the European Union (EU) decided to oppose it on the grounds that it had the potential to reduce competition in Europe. Its concern was that GE’s strong position in the manufacture of jet engines and its ability to offer ﬁnance, if added to Honeywell’s aviation electronic business, would allow the merged entity to bundle their products together. This bundling would, in the view of the European Commission, amount to unfair competition. At the center of the objection is the fact that GE owns a company, Gecas, which is an aircraft-leasing ﬁrm. In 2001, Gecas owned 790 aircraft, which it leased to airlines, and managed another 321 aircraft for other investors. The concern of the European Commission was that since GE owned this ﬁrm, there was the potential for Gecas customers to be forced to purchase GE engines and/or Honeywell electronics. GE’s response to the rejection was to offer to put 19.9% of Gecas up for private placement, with this portion worth possibly $USB1.4. Since GE would still own 80.1%, it would maintain the ability to consolidate Gecas earnings.1 In the face of continued opposition from the EU, GE decided not to pursue the merger.
This example emphasizes that managers of global ﬁrms must recognize that they operate in multiple countries and that their strategy will be inﬂuenced by global as well as domestic considerations. Both GE and Honeywell are U.S. ﬁrms, and the U.S. Federal Trade Commission had approved the proposed merger. Nonetheless, the merger did not go ahead due to European Union opposition. Globalization adds a degree of complexity to decision making, and managers responsible for strategy development and implementation must understand this complexity. The example also illustrates how rapidly the business environment might change, shortening the life of a given strategy. Strategy must be reconﬁgured more frequently to reﬂect these changes. The EU decision may also have been inﬂuenced by considerations independent of the proposed merger, such as decisions by U.S. antitrust authorities on mergers between European ﬁrms. However, both the ﬁrm and its competitors could inﬂuence external changes. GE and its European competitors were active participants in this process, lobbying their respective national governments in an attempt to inﬂuence the outcome. Finally, as a consequence of the EU decision, GE is likely to have to signiﬁcantly change its strategy regarding aircraft engine and related businesses.
The external environment faced by the ﬁrm and its business units affects the strategy of the ﬁrm, the value of the strategy, and thus the ﬁrm’s performance. Environmental analysis is therefore not a passive exercise, but rather an active and essential input to strategy development, helping the ﬁrm and its business...