The Firm and Its Environment

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CHAPTER

3

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.

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3.1 Introduction

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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.

3.1 INTRODUCTION
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...
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