Free Essay: The Firm and Its Environment - 16181 Words

The Firm and Its Environment

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

57

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 units identify attractive opportunities and make decisions on where and how to compete. The drivers of change are for the most part external to the firm. As the global economy entered the new century, changes were taking place on multiple fronts at a very fast pace. Some of these changes made traditional business models and tools outdated, changing the rules for existing competitors and challenging the assumptions of others, both new and old. In this chapter we review some approaches that can guide us as we wrestle with the challenges of developing strategy in this fast-changing environment. Strategy development requires the ﬁrm to understand what critical variables are changing, the pace at which these changes are occurring, and their likely impact on the ﬁrm, as illustrated in Figure 3.1.

Select key variables Forecast pace of change Estimate impact

Strategy

Figure 3.1 Process of Environmental Analysis

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Chapter 3. The Competitive Environment

Select Key Variables
First, managers need to select the key variables that can affect their ﬁrm or business. What these are will depend on the ﬁrm and the judgment, knowledge, and intuition of the senior managers in identifying what is relevant. Consider, for example, forecasting the demand for automobiles. Knowledge of such variables as household income, interest rates, and consumer conﬁdence would probably be very helpful. On the other hand, in forecasting the demand for baby food, the birth rate would be a key explanatory variable. So what is relevant and important depends on the business concerned.

Forecast Changes
Second, we need to estimate, or forecast, the nature and pace of these changes. If forecast changes are likely to occur in the distant future, we may just monitor. Continuing the baby food example, birth rates in much of the world are declining. This is a relatively slow process, occurring over many years, so while its impact in any year is relatively minor, its long-term impact is substantial. Other changes, such as those in data storage and communications, are occurring very rapidly, so the ﬁrm’s response must be more immediate. In some industries the problem is to identify points of discontinuity, times when change is occurring very rapidly. Innovations such as the PC or electronic funds transfer, which generate entire new industries and place established ﬁrms under considerable pressure, are examples.2 In addition, some of these changes, such as population growth, will be relatively easy to forecast while others, such as changes to the Russian legal system, are much less predictable.

Estimate the Impact of the Changes
Finally, we need to estimate the potential impact of these changes on the ﬁrm. Some changes will have a major impact, some a very minor one. The ﬁrm should allocate its environmental scanning resources toward those changes that have both a high probability of occurring within the relevant time horizon and a major impact on strategy. A variety of forecasting techniques may assist in this process. For example, in dealing with the trend changes of the type discussed in Chapter 1, times series and regression models can prove very helpful.3 The reason for trying to understand the changing world is that strategy and strategic decisions are realized in the future, not the present. Strategic decisions are made now, but their implications are not realized until the future. The success or otherwise of a strategy depends not on the state of the world today but on the state of the world in the future. In analyzing the external environment faced by a ﬁrm or a business unit, we distinguish three levels, designated as the remote, industry, and competitive environment, as shown in Figure 3.2. Successful strategy development requires an understanding of changes at all three levels. Remote environment: The broad social/technical/economic environment in which the ﬁrm competes. This environment is global in nature, exerts a powerful inﬂuence on strategy, and in many instances is slow-acting. Due to the breadth of these changes, they can be expected to affect a number of industries. Industry environment: Changes that impact on all competitors in a speciﬁc industry. Examples are changes in entry barriers from changing government regulations,

3.1 Introduction
Remote

59

Industry

Competitive FIRM Environment

Environment

Environment

Figure 3.2 Environmental Analysis

technology, or the development of substitute products. Such changes inﬂuence all ﬁrms in the industry, possibly in different ways. Competitive environment: Changes in customers and direct competitors that inﬂuence the competitive strategy of the business unit, such as the development of new products by competitors, the emergence of new channels of distribution, and the rise of new customer values. Which level of analysis is required depends on the level of strategy that we are considering, corporate or business unit, as shown in Figure 3.3.

Strategy level Corporate

Analysis level Remote

What analyzed Broad environmental trends affecting all business units Structural changes in the industry Environmental trends influencing the specific SBU Suppliers, entrants, substitutes Customers, competitors

Strategic decisions New opportunities, resource allocation among SBU's Resource allocation Competitive strategy Competitive strategy Competitive advantage

Industry

Business unit

Remote

Industry Product/market

Figure 3.3 Levels of Environmental Analysis

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Chapter 3. The Competitive Environment

When developing corporate-level strategy, key decisions are which businesses should the corporation be in, what should be its geographic scope, and how resources should be allocated among the business units. At the corporate level, analysis will generally be undertaken at two levels, the broad remote level and an analysis of developments in each industry in which the firm competes. Flowing from the remote analysis is a better understanding of major threats to the firm or opportunities that it may wish to pursue. For example, the firm may decide to move a substantial element of its manufacturing offshore to China. Since it is likely that such an investment may take several years to become profitable, the decision must incorporate a view on a number of broad economic variables, such as political stability in China and future exchange rates. Industry analysis is undertaken at the corporate level to ensure that the corporate level has a sound understanding of the attractiveness of the industries in which its various business units compete and thus can form a view on prospective profit levels of its businesses. Such decisions, whether to enter new businesses or to commit major resources to an existing industry, must be based on anticipated results for many years into the future, possibly as long as 5 to 10 years. The firm must have a view of the future before it can commit these resources, even if there is considerable uncertainty. Business-unit managers need to undertake analysis at all three levels. Strategy for a given business unit will be inﬂuenced by certain developments in the remote environment, although which elements are critical will depend on the speciﬁc business unit. They must also understand changes speciﬁc to their industry. As we have noted, a business unit must create value, with revenue greater than its costs. But it is possible for the industry structure to be such that while the ﬁrm creates value, it cannot capture that value for itself. If the business is in an extremely competitive industry, buyers may capture all the value, with all productivity improvements and cost reductions passed on to customers. Alternatively, it may be that a ﬁrm in another industry has developed a substitute product with price/performance characteristics that will have a major impact on the revenue, and thus proﬁtability, of the business. Thus an understanding of the nature of the industry, and how this is changing, is essential in developing strategy at the business-unit level. Strategy at the business-unit level is interlinked with the concept of competitive advantage and should focus on developing such an advantage. This requires a detailed understanding of customer needs and how these differ across customer segments, how these needs are changing, and likely future strategies of competitors. We begin this chapter with a review of the broader or remote environment and the various forces at work therein. We then focus on the more immediate industry environment, reviewing some of the analytic tools that can bring more insight to our understanding of that environment. Finally, we look at the ﬁrm’s competitive environment, focusing on its relationships with its customers and direct competitors and the ways in which these are likely to change in the future. We conclude by summarizing the challenge to managers as they contemplate the likely changes that lie ahead. In considering the subject matter in this chapter, there are two key ideas you should bear in mind. First, do not assume that the future will be a mere extrapolation of the past. Many alternative futures are possible, for the future does not yet exist. Where we are uncertain about the future, it may be very beneﬁcial to consider alternative scenarios, opening our minds to the idea that change is inevitable and that we need to be ﬂexible when changes cannot be accurately forecast.4 Second, you should recognize that since the future does not yet exist, we might be able to inﬂuence it through our decisions. Do not assume that the remote or industry environments are not subject to inﬂuence. Some of the most successful competitive strategies have involved doing that very thing.

3.2 The Remote Environment

61

3.2 THE REMOTE ENVIRONMENT
There are obviously many different aspects of the remote environment that can have signiﬁcant impact on the operation of the ﬁrm, its competitors, and its customers. A simple acronym that can assist us in overviewing these aspects is the PESTLE model, so called because it covers the political, economic, sociocultural, technological, legal, and environmental aspects of the overall business environment, as shown in Figure 3.4 Figure 3.4 depicts the ﬁrm as comprising a number of strategic business units to reinforce our emphasis that the analysis of the remote environment will be undertaken at both the corporate and the business-unit level. Since the ﬁrm’s strategic business units (SBUs) operate in different product markets, they each need to undertake their own analysis of the remote environment, analyzing the variables and changes appropriate to them. At the same time, corporate-level staff will also be analyzing the environment, possibly to identify merger and acquisition candidates or other growth opportunities. For example, both corporate and business-unit managers at du Pont may be monitoring economic developments in Malaysia. When this occurs, the ﬁrm needs to ensure that these two entities coordinate their activities. Firms often utilize corporate support staff to develop a view on relevant future variables, and all business units adopt that view. For example, corporate economic staff may forecast future exchange rates, and that view is adopted throughout the ﬁrm.

Political
Governments set the rules for business in areas such as competition policy, taxation policy, multinational agreements, and others, as shown in Table 3.1. Historically, governments intervened in national economies both to pursue political ends and to redress the perceived failure of market mechanisms to fulﬁll consumer welfare goals. In some countries, such as the United States, this intervention has involved government regulation while in others, such as the United Kingdom and France, state ownership of business corporations was vigorously pursued. In still other countries, such as India and Japan,

Political

Environmental Social SBU 4 SBU 1

SBU 3

Multibusiness firm SBU 2

Legal

Economic Technological

Figure 3.4 Framework for Analysis of the Remote Environment

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Chapter 3. The Competitive Environment TABLE 3.1 Selected Political Variables

Competition policy Taxation policy Privatization Regulation of ﬁnancial markets Employment law Government stability Multinational agreements Government spending

state-driven mercantilism to increase exports and reduce imports has been the pattern. In Japan, MITI was a key element in its drive for economic advancement. For much of the 20th century, increased government involvement was the norm around the world. Since the early 1980s there has been a marked shift in competition policy, with an increasing reliance on free markets. Regulatory barriers around the world in such industries as airlines, banking, railroads, insurance, telecommunications, and trucking have been reduced. Governments seem to have realized that the regulations designed to protect consumers or competitors in an earlier era were no longer beneficial. Far too often regulation locked in inefficient competitive structures and restricted entry and innovation, denying consumers the beneﬁts of competition. Such regulation also affected the liquidity of ﬁnancial markets and the rights of shareholders.
The EU is attempting to rewrite the takeover code to permit a larger number of hostile mergers, a move being strongly resisted by Germany. The EU proposals include that companies targeted by hostile bids consult shareholders before executing a defensive strategy, that the board maintain a neutral stance during a takeover bid, and that the board consult shareholders before taking “poison pill” steps to head off unwanted advances from another corporation.5 If implemented, these measures may prevent the boards of European ﬁrms from rejecting takeovers that are in the interests of small minority shareholders.

On the other hand, as global competition has increased, some legislation has come to be viewed as limiting the ability of corporations to compete on a global scale. While this enforcement policy has changed somewhat, there may still be some way to go. Thus U.S. regulations have constrained overseas ﬁrms attempting to operate in the United States, and a similar pattern exists in the United Kingdom.
RWE is a German utility, primarily in water. In the last few years it has been attempting to expand internationally, since it believes that there are limited investment opportunities in the domestic German market. In 2000 it bought Britain’s Thames Water and in 2001 purchased American Water Works, the largest water company in the United States, for $USB4.6. In addition to becoming global, RWE is also attempting to become a multiutility company, but current U.S. law prevents the company from moving into gas or electricity. Interbrew, the Belgian brewer, was ordered by the U.K. government to sell Carling, Britain’s most popular beer, as the price for the approval of the £B2.3 ($USB3.5) takeover of Bass Brewers. Carling was later bought by Adolph Coors, America’s third-largest brewer for £B1.2.6

Another major area where government action affects ﬁrm strategy is the country’s taxation regime. Corporate tax levels vary around the world; as a consequence, some

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63

ﬁrms have relocated their head ofﬁce to such low-tax countries as Liechtenstein or Monaco. Another issue to consider is which income will be taxed in which country. U.S. ﬁrms are liable for U.S. tax on their worldwide income. The tax regime may also affect the repatriation of proﬁts. Australia is attempting to renegotiate its joint tax arrangements with the United States, which currently applies a signiﬁcant tax to proﬁts earned in the United States by subsidiaries of Australian ﬁrms. Germany has changed its tax system by removing any capital gains tax when companies sell their investments in other ﬁrms.7 The impact of this has been small due to the decline in share markets, but it is expected to have greater impact in the future, when there could be a major reshaping of the German industrial landscape as shares in several of that nation’s companies change hands. In many countries, previously government-owned organizations such as airlines and utilities are being privatized and joining the private sector as governments adopt the view that private enterprise is more effective than government in promoting consumer welfare. This trend started in Europe in the 1980s and is now occurring even in such previously unlikely countries as the People’s Republic of China (PRC). This trend has been aided by political change, such as the collapse of communism in the Soviet Union and Eastern Europe.8 Countries are increasingly entering into multinational agreements through bodies such as the World Trade Organization (WTO), the International Monetary Fund, and the United Nations. After many years, China has ﬁnally been admitted to the WTO despite the fact that this opens up many of its inefﬁcient state-owned enterprises to global competition. In Europe, the European Union is taking on increasing importance as individual nation-state members are subject to its regulations, while many other countries have joined together to form economic and political unions, as shown in Table 3.2. Looking forward in the political arena, we expect further attempts to increase economic cooperation as the world economy becomes ever more tightly integrated. There is a risk that the world may be moving toward a structure of regional trading blocs, as shown above, and that economic warfare might break out between the blocs. Most analysts consider this unlikely, but it is a scenario that prudent global managers should consider, particularly as they expand global sourcing. The ability of individual national governments to pursue independent economic policies has undoubtedly been limited by increased economic interdependency and emerging international institutions. The political stability of a country is an important issue when considering investment decisions. In the recent past there has been considerable instability in such countries as Argentina (defaulted on its international debt), Yugoslavia (has split up into several independent countries), and the Middle East (affected by war and terrorism).
TABLE 3.2 Asean European Union Regional Trading Blocks Brunei Darussalam, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam Austria,* Belgium,* Cyprus, Denmark, Estonia, Finland,* France,* Germany,* Greece,* Ireland,* Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Czech Republic, Italy,* Luxembourg,* Portugal,* Spain,* Sweden, the Netherlands,* United Kingdom Canada, Chile, Mexico, United States Argentina, Brazil, Paraguay, Uruguay

NAFTA Mercosur
* = euro currency.

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Chapter 3. The Competitive Environment

Economic
For most products, market attractiveness is strongly inﬂuenced by the size and growth of demand, which in turn is inﬂuenced by the country’s economic well-being. There are a number of economic variables that may be relevant in determining opportunities, as shown in Table 3.3. Many related measures of economic well-being are available, but critical metrics include total GDP as well as per-capita measures such as GDP per capita and disposable income per capita. In addition, since we are interested in the future, we would also be concerned with the growth rates of these economic variables. China is an attractive market for many ﬁrms not because its GDP per capita is high but because its growth rate is high and it is expected to become a major market in the future. With increasing globalization and interconnectedness among countries, the effects of an economic downturn in one country are no longer conﬁned to that country alone. During the late 1990s, after having enjoyed strong economic growth for many years, such “Asian Tigers” as Indonesia, South Korea, and Thailand suffered recessions and unstable ﬁnancial markets that reverberated around the world. Of equal importance to strategists is not only the mean per-capita income but also its distribution across the population. In India, although average incomes are still quite low, there is a large middle class, estimated at over 200 million people, representing a signiﬁcant market opportunity for quite sophisticated products. Major PRC conurbations such as Shanghai and Beijing provide similar opportunities. The economic development of China has exerted signiﬁcant pressure on the rest of the world, particularly since China has average manufacturing labor costs of $US0.6 per hour. Along with European and U.S. companies, Asian ﬁrms are also establishing production facilities in China. Half the information technology products of Taiwanese ﬁrms are currently made in China. This movement has resulted in many Asian ﬁrms attempting to change their position in the value chain. Manufacturing is outsourced to China, and Asian ﬁrms are attempting to concentrate on marketing, design and innovation, development of differentiation and brand image, and intangibles.9 For global ﬁrms, exchange-rate movements can have a major effect on proﬁtability and costs. A resources company may ﬁnd that its revenues are in U.S. dollars but its costs are in South African rand. Changes in the exchange rate can have a major impact on proﬁtability unless the ﬁrm takes some hedging action. Firms use a range of derivatives, such as currency swaps, to attempt to reduce risk, as we discuss later in the book. The European Union, the most advanced grouping of nations, introduced a single currency, the euro, in 12 member countries on January 1, 2001. For the ﬁrst time, Euro-

TABLE 3.3

Selected Economic Variables

GDP, GDP per capita Disposable income Interest rates Exchange rates Inﬂation Unemployment Balance of payments Savings rate Capital productivity Labor cost and productivity

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pean consumers will be able to directly compare prices in different countries without having to worry about exchange rates. At the same time, ﬁrms will ﬁnd it easier to assess the performance of subsidiaries operating in different countries, since they now all use the same currency. For example, a Dutch business such as Philips can more easily assess the ﬁnancial performance of its Italian subsidiary, which now reports in euros. This common currency places restrictions on the member states, since if a member country faces economic difﬁculties, it is limited in the extent to which it can use exchange rates or interest rates in monetary policy. These economic variables have to be treated holistically. For example, in 2002 there was concern about the sustainability of the U.S. economy and whether the United States was moving into recession at the same time that its trade deﬁcit reached the unsustainable value of 5% of GDP, possibly plunging the world into a period of economic instability. Given the uncertainty about the future performance of the U.S. economy, together with the lack of transparency in audited accounting data of U.S. ﬁrms, it was feared that foreigners would no longer be prepared to support this trade deﬁcit with inward investment.10 Not only were foreigners investing less in U.S. shares; acquisitions of U.S. ﬁrms by foreign companies also slowed, reﬂecting concern about the future of the U.S. economy. As a result of these trends, there was signiﬁcant fall in the value of the U.S. dollar.

Sociocultural
Strategy will also be inﬂuenced by changes in a number of sociocultural variables, as indicated in Table 3.4. Culture can be deﬁned as “the distinctive customs, achievements, products, outlook, etc. of a society or group; the way of life of a society or group.”11 The society or group may be the inhabitants of a nation state, such as Chile; a geographic region within a nation state, such as the South or the Midwest in the United States; a geographic region encompassing multiple nation-states, such as the Hispanic countries; or a people without regard to geographic location, such as the Armenian, Jewish, and Chinese diasporas. Furthermore, a single individual may belong to multiple groups, each having different cultures, such as Turkish immigrants domiciled in Germany. Cultures differ from one another on many bases, such as language, religion, values and attitudes, education, social organization, technical and material culture, politics, law, and aesthetics. They also change over time. Furthermore, within any individual cultural group, subcultures develop that may reﬂect both the broad group culture but also speciﬁc subcultural elements, such as baby-boomers and Generations X and Y.12 The buying behaviors of these different cultural groups vary signiﬁcantly. In Western families,

TABLE 3.4

Selected Sociocultural Variables

Culture Population size and growth Population age and ethnic mix Lifestyle changes Social mobility Educational levels Labor market participation rates Religion Attitudes toward technology

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Chapter 3. The Competitive Environment TABLE 3.5 Country Australia Japan Niger Spain United States Median Age by Country Median Age, 2000 35.2 41.2 15.1 37.7 35.5 Median Age, 2040 42.0 53.0 18.3 54.6 41.0

Source: “UN Population Statistics”: www.un.org.

for example, women traditionally did the shopping for many products and services, whereas in rural Bangladesh, men do the shopping. Population size, growth, and distribution must also be analyzed. Signiﬁcant strains may result from such demographic shifts. One of the best known is the impact on social security systems as birth rates drop, longevity increases, and the number of older beneﬁciaries rises relative to the number of contributors. Not only does this change raise possibly divisive strains; it has signiﬁcant economic and political ramiﬁcations. As shown in Table 3.5, the median age in many countries is forecast to increase dramatically, raising the possibility of a crisis in social security systems. Indeed, some countries are considering raising their immigration rate to reduce the median age. In other countries, a growing proportion of the older population have private pension arrangements, which will ameliorate the state-funded pension problem. In turn, these demographic changes create new opportunities and relationships for insurance and mutual funds. Other socioeconomic changes that may need to be analyzed are lifestyle changes, such as the increasing sophistication of customers, higher levels of education, better access to information, and a greater acceptance of and familiarity with technology. The advance of automation and information-based industries typically leads to (relatively) decreased demand for unskilled labor and increases in demand for highly skilled technical and professional labor. The net result is larger income differentials within societies, differentials that carry a number of social implications, such as permanent unemployment of those individuals who cannot cope with the modern knowledge-based society. Another component of these changes is the shifting attitude toward globalization and the tension between localism and globalism. On the one hand, individual groups both seek their own identities and act out their group membership in various ways. Important bases for group membership include religion and nationalism. Thus the growth of Muslim and Hindu fundamentalism is an important factor in the Middle East/North Africa and India. In such diverse areas as Turkey, Wales, the Basque country of Spain, and Brittany in France, these local and regional pressures are evident. Concern has been raised about American inﬂuence—and Western inﬂuence in general—in many countries. The French government is ﬁghting what some regard as a rearguard action against what it views as an American cultural invasion in general and an anglicizing of the French language in particular. However, concern is not limited to language. In late 1999, protests in many European countries against genetically modiﬁed foods led to rejections of and/or bans on Monsanto’s Roundup Ready soybean seeds. In August 1999, several McDonald’s franchises in Belgium and France were badly damaged or destroyed by protesters angry about the “globalization of food.” Protesters angry at the impact of globalization have disrupted several WTO meetings. Malaysia and other Asian countries have also expressed concern at the “Westernization” of their societies and have issued calls for a return to Asian values.

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To a large extent people don’t notice culture on a day-by-day basis, but it becomes very evident when they encounter different cultures as ﬁrms move from domestic into foreign markets. Here, the issue is less one of cultural change than it is of attempting to understand a culture that is different. Companies acting in an ethnocentric manner may ruin an otherwise successful strategy implementation.

Technological
Virtually all observers of the business scene agree that not only is the pace of technological change extremely fast; it is accelerating. If we were to arbitrarily select the end of World War II as a start date, we would ﬁnd that many of the products and services we take for granted today have been developed since that time. A partial list includes color television, dry copier machines, synthetic ﬁbers and almost all plastics, cellular telephones, computers, integrated circuits, microwave ovens, passenger jet aircraft, communication satellites, virtually all antibiotics and numerous other life-saving drugs, ATMs, space travel, video and audio tape recorders, and CDs and DVDs. Many of these innovations represented disruptive technological change that fundamentally restructured industries. Some technological variables are shown in Table 3.6. Information technology is having a pervasive impact on ﬁrms and their strategies, driven by the rapid and continuing reductions in price of these products. This rapid decline in costs is well expressed by Moore’s law—that the number of transistors on a computer chip doubles every 18 to 24 months and thus that the speed of microprocessors, at constant cost, also doubles every 18 to 24 months. Although some observers anticipate that exponential gains in chip performance will eventually slow down, most experts agree that Moore’s law will govern the industry for at least another 10 years. Intel has reportedly developed a chip with a speed of 10 gigahertz at room temperature, which is a major improvement over current (2002) speeds of 2.2 gigahertz. Other technological developments have resulted in faster processing speeds as well as and reduced heat and power consumption.13 Moore’s law means that computing power will become ever faster and cheaper. Not only will increasing numbers of people around the world have access to powerful computing, but computer power will be built into devices other than computers themselves. Already, computers allow such diverse products as vehicles, aircraft, surgical equipment, and elevators to operate more efﬁciently, predictably, and safely. In the future we may even see computer chips in packaging as costs continue to decline.14 These applications reﬂect the effects of the convergence of computing, communications, and

TABLE 3.6

Selected Technological Variables

Information technology R&D spending New products New technology Global technology transfer Technological advantages of a country The Internet Incremental and disruptive technologies Biotechnology

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Chapter 3. The Competitive Environment
1 0.9 0.8

Capital Investment Rate

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1965 1970 1975 1980 1985 Year 1990 1995 2000 2005

Figure 3.5 Ratio of IT Investment to All Other Investment by U.S. Firms
“Fixed Assets Tables, Table 2.7, Historical-Cost Investment in Private Fixed Assets,” Bureau of Economic Analysis, 2002. www.bea.doc.gov.

media technologies as well as the growth of the knowledge economy, a topic to which we will return in Chapter 5. The changes above are illustrative of the impact that information technology is having on business practices. This impact is also manifest in the changing mix of capital investment. As shown in Figure 3.5, U.S. ﬁrms have been allocating an increasing proportion of their capital expenditure to information technology, computer hardware and software, and communications equipment. This chart shows the proportion of investment in information-processing equipment and software to investment in all other ﬁxed assets by U.S. businesses over the period 1970–2001. As can be seen, this ratio has increased dramatically, from 31.7% in 1970 to 85.4% in 2001, although there was a slight reduction in 2000 due to 1999 overspending in anticipation of Y2K. In dollar terms, IT investment has increased from $USB16 in 1970 to $B403 in 2001. The Internet is a major new technology affecting the business landscape. The Internet is, or can be, many things. It is a distribution channel, a communications tool, a marketplace, and an information system. For example, it can alter the way in which the ﬁrm communicates with its customers and suppliers, the way in which it collects customer data, and the amount of information available to customers. We have already noted that ﬁrms are created because the costs of organizing and maintaining them are lower than transaction costs in the market. One of the implications of developments in computers, networks, communications, and data storage is that they have changed transactions costs and hence are opening up the possibility of signiﬁcant industry restructuring. These developments may also create disintermediation, which means that the function of an intermediary can be dispensed with. When buyers and sellers of, say, insurance, can ﬁnd each other easily over the Internet, who needs intermediaries such as brokers? These changes are most likely to occur in industries where “products” can be digitized, among which are personal ﬁnancial services. Table 3.7 shows the average cost per transaction in retail banking for ﬁve different modes. As the data indicate, there is a substantial incentive for retail banks to move to other channels of distribution, but they are

3.2 The Remote Environment TABLE 3.7 Mode In Branch Teller Telephone; Customer Service Ofﬁcer ATM (Excluding Deposits) Telephone; Voice Response Internet
Source: Internal Costing Data; Major Australian Bank

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Average Cost per Transaction in Retail Banking Cost/Transaction ($AU) 5.40 5.20 0.60 0.16 0.06

constrained by their legacy assets of a branch network. A new entrant without this highcost structure may ﬁnd barriers to entry have been reduced, the new barrier being technology, customer acceptance of technology, and data security. Similar developments have occurred in industries such as hotels, car rentals, and share trading, where online trading now accounts for about 20% of all trades. The Internet is an example of Metcalfe’s law, namely that the value of a network to an individual user is proportional to the square of the number of users. Hence the interest in interconnection, open standards, and the development of new protocols such as XML, which carries information on what data are being transmitted as well as the format of that data. At the same time, the Internet has increased ﬁrms’ concern with data security from external hackers or internal staff abusing the system. Data security is seen as a major obstacle to the widespread adoption of e-commerce, and developments in sophisticated encryption systems will be critical. Major changes can also be expected in electronic markets, either business-tobusiness (B2B) or business-to-consumer (B2C), where ﬁrms interact with actual and potential customers and suppliers over the Internet. Such electronic markets are estimated to capture cost savings of 10% to 20%, but they also possess other beneﬁts. Sellers can reach more customers, gather better data, and communicate more effectively. Buyers are able to compare products and prices from different suppliers, which may increase price competition between suppliers. Underlying all this is the capacity to reduce costs through better information and better systems. In the United States, the ratio of inventories to shipments across the economy has fallen from 2.0 in 1970 to about 1.2 in 2000, representing a huge increase in capital productivity.15 Firms unable to achieve such improvements operate at a considerable disadvantage. While future developments of these exchanges is uncertain, it is expected that they will grow in scope and importance, driven by developments in information technology and its cost-reducing potential. At the same time, we expect to see a range of structural forms of these exchanges. Some are likely to be vertical, with all members in a single industry. In the United States, Ford, GM, and DaimlerChrysler formed such an exchange with combined purchases of $USB240. The basic aim was to reduce costs in the supply chain, while forcing down supplier prices.16 Others will be horizontal, based on products that span several industries. These exchanges will certainly be scrutinized by regulators to ensure that ﬁrms do not engage in anticompetitive behavior. Many technological innovations are characterized by nonlinear growth patterns and often follow a logistics adoption curve. Managers who project initially low growth rates into the future may be surprised as inﬂection points are passed and rapid growth occurs.17 As Christensen has noted, technological change can be categorized as sustaining or disruptive.18 Sustaining technologies improve the performance of established products along the dimensions that mainstream customers in major markets

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have historically valued. This type of technological change rarely precipitates the failure of established ﬁrms—it represents a continuation of the present and is seen as more controllable by management. Disruptive technologies are those that bring a new and very different value proposition to the customer. One such example is digital cameras; another is discount brokerage. Such products have features that are highly valued (initially) by a limited number of customers, often customers new to the market. These new products are often seen as inferior by existing customers, initially underperforming in comparison with established products, but they are often simpler, smaller, cheaper, and easier to use than existing products. In new applications, these attributes may have signiﬁcant value. Such disruptive technology may precipitate the failure of leading ﬁrms since they pay too much attention to the issue of cannibalization of their existing products. The real problem often arises from their lack of awareness of the rate of technological change in, and consequent functional improvement of, the new technology. Since it is difﬁcult to analyze such markets, established and bureaucratic ﬁrms are unlikely to give them the attention they require. Business history is also replete with examples of major companies that turned down inventions that were ultimately extremely successful. Chester Carlson, inventor of xerography, was turned down by IBM, RCA, A. B. Dick, and many other companies before Joe Wilson, CEO of a relatively small Rochester company, Haloid Corporation, had the courage to bet the future of his company on Carlson’s invention.19
All major appliance manufacturers turned down James Dyson, inventor of the bagless vacuum cleaner, when he approached them with his invention. He eventually started his own company, which by 2001 was the market leader in the United Kingdom and in 2002 entered the U.S. market.20

Legal
As we saw in the opening example, global ﬁrms must pay considerable attention to legal considerations and ensure that their strategies comply with legal requirements, as illustrated in Table 3.8. The legal framework of a country inﬂuences ﬁrm strategy through its laws regarding such areas as mergers and acquisitions, capital movements, industry regulation, and employment conditions. Legal frameworks differ across countries. The United States and the United Kingdom have well-developed legal systems based on precedence and case law. In most of Europe the basis of the legal system is the Napoleonic Code. Other countries such as Russia are still trying to develop a strong and independent legal system. Similarly the Peoples Republic of China is struggling to develop a commercial code, and the laws governing business activities are still in evolution. Different countries have different views on the social responsibility of the ﬁrm. The EU is strengthening the obligation of European ﬁrms to “inform and consult” workers’

TABLE 3.8

Selected Legal Variables

Legal framework Status of the rule of law Regulatory framework Trade practices Consumer protection

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71

representatives about company strategy, and the EU employment commissioner has suggested that staff are the main stakeholders in a ﬁrm. This may affect the ability of a ﬁrm to close a plant or reduce staff in the EU, as experienced by Marks and Spencer when it attempted to close several stores in continental Europe. Some managers regard these requirements as an infringement on the right to manage, since it will make labor markets less ﬂexible. Proposed regulations include consultation about layoffs in all companies with 50 or more staff after 2008.21 Many developed countries have an active and politically independent regulatory framework. In the United States, bodies such as the Environmental Protection Agency (EPA), Securities and Exchange Commission (SEC), and Federal Trade Commission (FTC) are powerful actors that have to be considered when establishing strategy. During the decade up to 2001, Microsoft was under investigation by the U.S. Justice Department, with the ﬁnal resolution being made in the court. In the EU, there are several directorates-general responsible for deﬁned areas of regulation. There is a D-G Competition, a D-G Environment, and a D-G Health and Consumer Protection. The latter body is responsible for food labeling in general and labeling of genetically modiﬁed foods in particular.22 The investment banking and accounting industries in the United States are under considerable pressure from the Department of Justice and the Securities and Exchange Commission to change their practices. There is concern about conﬂict of interest: can an audit ﬁrm provide an audit that is unbiased and independent when it also engages in consulting work for the same client? Can an investment bank provide unbiased investment reports on a ﬁrm when it is also soliciting for consulting work, mergers, and acquisitions or IPOs with that same ﬁrm? In late 2002, we saw most of the large accounting ﬁrms split off their consulting business, with PWC selling its consulting business to IBM for $USB3.5.23 Some professional bodies also have a major impact on ﬁrm behavior. International accounting bodies are attempting to get ﬁrms to record all ﬁnancial assets and liabilities at their current market value rather than at their historical cost, since ﬁnancial markets are now more volatile. This would have major implications for banks. The value of loans would ﬂuctuate with changes in interest rates, and banks could be forced to write down loans if their credit quality was reduced. These changes would have to be incorporated into the bank’s income statement, possibly producing a large accounting loss. Looking at likely future trends, we believe that countries are likely to maintain policies that lead to competition in product markets. On the other hand, in such areas as health and safely, the environment, rights of various minorities, and so on, it seems likely that ﬁrms will face more stringent standards in the future. For example, the British government is considering mandatory paid paternity leave for fathers. Further, globalization is beginning to have signiﬁcant repercussions on the legal environment. The U.S. FTC prevented the takeover of a British ﬁrm, BOC, by a combination of L’Air Liquide (French) and Air Products (U.S.).

Environmental
Senior managers can expect to have to deal with a variety of environmental issues that may have signiﬁcant impact on their companies’ future prospects, as shown in Table 3.9. Executives in the automobile industry, for example, have been subject to increased pressure from governments, environmental groups, various single-issue advocacy groups, and the public at large. Indeed, the European Union has proposed that car manufacturers bear the cost of taking back scrap cars from 2003 onward and be required to recycle or

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Chapter 3. The Competitive Environment TABLE 3.9 Selected Environmental Variables

Environmental legislation Nongovernment organizations Social responsibility Triple bottom line

reuse 80% of a car’s weight from 2005 onward. The industry and some governments— including those of Britain, Spain, and Germany—have resisted this proposal. Their counterproposal is that car manufacturers should bear such a cost, but only for new cars sold after the law is ﬁnally passed. Some ﬁrms, such as BP, are committed to reducing their impact on the environment; in fact, their stated goal is to do no damage to the environment. In pursuit of this goal, BP claims their veriﬁed greenhouse gas emissions were 10% lower in 2001 than in 1990.24 Changes in the physical environment, roughly viewed as comprising the natural and man-made environment, affect our daily lives and the functioning of our organizations. Natural and man-made forces coexist in an uneasy equilibrium but whereas some natural forces seem independent of human action, other changes in the natural environment result from it. More fundamental changes may have a variety of consequences. For example, heightened awareness of the damage to the natural environment caused by pollution has given rise to new industries such as pollution control and renewable energy. In countries such as France and Germany, pollution has become an important political issue and legislators are elected as members of “green” parties. Indeed, in many countries, the strength of the environmental movement has led to strong legislation affecting ﬁrms’ production systems, products, and packaging. In Germany, ﬁrms are responsible for the disposal of packaging in which their products are shipped. Perhaps as a consequence, German consumers used 11% less packaging in 1995 than in 1991, while disposable packaging use in the United States grew by 13% over the same period.25 In response to these pressures, some individuals have proposed that business ﬁrms should adopt the concept of the triple bottom line, suggesting that the ﬁrm must pursue social, environmental, and economic objectives.26 Although the PESTLE approach makes the elements of a remote environment scan easy to remember, there is a potential danger. Many of the changes we have discussed are in fact interrelated. Such technological innovations as the computer or the World Wide Web have enormous sociocultural and political implications. Legal-regulatory decisions may have vital economic, environmental, and political dimensions, and so on. There is therefore a danger of overcompartmentalizing, when in fact the important changes in our time typically have multiple and interrelated effects. When planning strategy, you should never allow debates over “which box?” to impede an understanding of the potential impacts of expected changes—after all, that’s what’s important! Global ﬁrms, by their very nature, need to be aware of these changes in the remote environment in every region of the world. In addition, a diversiﬁed ﬁrm will need to undertake such an analysis at several levels. It will need to understand the changes occurring that are important for the ﬁrm as a total entity, such as the admission of China and Taiwan to the WTO. At the same time, we reiterate that each of the individual business units will need to undertake a thorough analysis of its own remote environment. We have used a general approach to analysis, but the speciﬁc dimensions and tools used to

3.3 The Industry Environment

73

understand changes will depend on the speciﬁc ﬁrm and business unit for which strategy is being developed.

3.3 THE INDUSTRY ENVIRONMENT
While the remote environment will have a major impact on the ﬁrm’s strategy, our next level of analysis goes deeper, exploring the structural characteristics of the industry in which a business competes and the effect of these on strategy. Since global ﬁrms are likely to operate in a number of different industries, this level of analysis is more appropriate at the business-unit level. Corporate-level staff would be expected to undertake this analysis when exploring mergers and acquisitions or when setting performance standards for a business unit. Figure 3.6 depicts our model of industry structure, where industry structure includes suppliers, buyers, entrants, and substitutes as well as direct competitors. The depiction is based on the work of Michael Porter and is sometimes referred to as the ﬁve forces model.27 The structural variables identiﬁed in the model affect all the ﬁrms in the industry, but not all ﬁrms will be affected equally. An industry analysis helps in understanding the power relationships among the players in the industry, which in turn inﬂu-

Political

Social Suppliers

Environmental

Direct Entrants FIRM Competitors Indirect competitors

Buyers Legal Economic

Technological

Figure 3.6 The Industry Environment
Adapted with permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter, Copyright © 1980, 1998 by The Free Press. All rights reserved.

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ence current and future levels of prices, investment in the industry, and ﬁrm proﬁtability. Such an analysis may also assist the ﬁrm in choosing a basis for competitive advantage that capitalizes on opportunities or mitigates problems. As shown in Figure 3.6 the structural factors are generally grouped into ﬁve categories, and we now review each of these. First is the pressure from direct competitors, or, to use another phrase, the competitive intensity of the industry. If intensity is high, proﬁtability of ﬁrms in the industry is likely to be low. For example, a combination of slow growth and excess capacity is likely to produce lower margins, particularly if this is coupled with high exit barriers. The second factor inﬂuencing industry proﬁtability is the ease of entry of new competitors. Industry proﬁtability is likely to be low when entry barriers are low—when it is easy for competitors to enter and compete. Barriers to entry include the capital required to enter as well as nonﬁnancial barriers such as access to distribution channels, knowledge, and economies of scale, as we discuss in later chapters. Low industry proﬁtability itself can also be considered as a barrier to entry. When industry proﬁtability is high, this acts as a signal to other ﬁrms—including potential competitors who may be operating in the same industry in different locales (so-called parallel competitors)—to enter our market. The spread of the multinational, resulting in today’s global marketplace, is a consequence of this behavior. An important strategic implication from the above is that good proﬁts are often a leading indicator of increased competition. Too often, good results cause ﬁrms to be less competitive, complacency rendering them vulnerable to new sources of competition. Economic theory also suggests that under conditions of oligopolistic competition, we should devote considerable effort to attaining deeper understanding of our competitors (current and potential) and their likely future course of action. Proﬁtable markets, however, do not just attract potential direct competitors, those who do business in the same way we do; they also attract substitutes, or indirect competitors, the third factor inﬂuencing industry proﬁtability. These are competitors capable of meeting the same customer needs as our own business but which do so in a very different manner. Thus plastic bottles compete with aluminum cans for beverages, while digital cameras compete with traditional ﬁlm cameras. Substitutes often feature new technology that has basic quality and high cost early in its life cycle. This may cause incumbent ﬁrms to dismiss the threat posed by the substitute. Too often, incumbents ignore the potential for rapid technological advancement with the substitute, as is illustrated in Table 3.10, which shows the price and performance characteristics of a nonprofessional single-lens reﬂex digital camera produced by Canon. The prices of these cameras have declined rapidly over time (Canon’s competitors would have followed a similar pattern). At the same time the functionality of these cameras has improved signiﬁcantly, so picture quality, measured by the number of pixels, has increased almost ﬁvefold. The challenge for incumbents making traditional ﬁlm-based cameras is to comprehend the rate of this technological change. The rate of technological change for their product is likely to be very slow, since the product is technologically mature. In 1995 it would have been difﬁcult for these ﬁrms to understand that in just seven years the prices of the competing product would decline from ¥M1.98 to ¥M0.358 while functionality improved. Physical size and weight have declined at the same time as picture resolution has increased, and prices have fallen dramatically. Since these are salient characteristics inﬂuencing purchase, the value of the product to customers increased signiﬁcantly over the time period. This is a classic example of the well-known S-curve of technological change: improvements occur slowly at ﬁrst, accelerate, and then slow down as the technology reaches its limit.28 It may be difﬁcult for executives in ﬁrms using traditional technology

3.3 The Industry Environment TABLE 3.10 Model EOS DCS 3 EOS D 2000 EOS D 30 EOS D 60 Price/Performance Characteristics of Canon Digital Camera Date Introduced July 1995 March 1998 October 2000 March 2002 Price (¥) 1,980,000 1,980,000 358,000 358,000 Picture Resolution (megapixels) 1.3 2.0 3.25 6.3

75

Weight (grams) 1800* 1650 780 780

* = with battery. Source: “Canon Camera Museum,” 2003: www.canon.com. Reproduced by permission of Canon.

(e.g., ﬁlm-based cameras), for which technological improvements are gradual, to recognize the threat posed by a disruptive technology. Without doubt, technological advance and deregulation have combined to vastly increase the threats posed by indirect competition. The probability that new indirect entrants will be successful is typically viewed as lower than that for parallel competitors, but the effects of their infrequent successes may be devastating. They provide examples of the low-probability, high-impact event against which it it so difﬁcult to defend. The other forces bearing on the ﬁrm act vertically. The fourth is the pressure from suppliers which is very much dependent on their importance to the ﬁrm. Sometimes this can be assessed in terms of the importance of the input product as a percentage of the ﬁrm’s total costs. In other cases, suppliers can be critical for different reasons. They may add appeal for the ﬁrm’s subsequent customers, or their product or service may be critical to the continuity of the customer ﬁrm’s production processes. Whenever dependency is high, however, the supplier’s bargaining power is enhanced, and this tends to be reﬂected in their margins vis-à-vis those of their customer, as well as other dimensions such as delivery time and ﬂexibility. Of course, as the power of suppliers rises, so does the threat of their forward integration down the channel of distribution into competition with the ﬁrm. This may occur via direct entry or acquisition. In other cases, the supplier may engage in promoting its brand directly to the ﬁrm’s customers, raising the ﬁrm’s switching costs as their customers’ preferences move toward products incorporating the promoting supplier’s products. Intel provides one of the best-known examples. Many of their customers that manufacture PCs have co-branded Intel inside on their own products, recognizing that their customers’ brand associations should be favorable and lead to improved sales of their products, compared with those using other manufacturers’ chips. Intel’s advertising budget at the time of writing was over more than $USB1. Very similar forces operate with respect to the ﬁnal set of factors, the ﬁrm’s relationship with its immediate customers. If the ﬁrm becomes dependent on a few large customers, its bargaining power is signiﬁcantly diminished. These large customers will pressure for discounts, and their margins will usually beneﬁt at the expense of the seller’s. In the early 21st century, these battles are being actively fought between the suppliers to the major automobile ﬁrms and their customers, the auto ﬁrms. Automobile ﬁrms are very powerful customers that, when faced with overcapacity, declining market shares in the critical U.S. market, and large losses, were able to pressure horriﬁed suppliers for price reductions of up to 15%. Structural characteristics may signiﬁcantly affect ﬁrm and industry proﬁtability. For some industries, structural characteristics are such that almost no ﬁrm in the industry is able to make an adequate return, yet ﬁrms refuse to exit. For example, proﬁtability in

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the paper industry worldwide is poor—and has been for many years. The international airline industry has also been a poor proﬁt performer, and the devastating consequence of September 11, 2001, is likely to be that other airlines beyond Swiss Air, Ansett, and Sabena will fall into insolvency or be merged out of existence.

Industry Value Chain
Industry analysis of the type discussed above is incomplete since it neglects the dynamics of what we will call the industry value chain—the linked set of ﬁrms and the activities undertaken by those ﬁrms. Interindustry competition is increasingly common in today’s world. In such cases competition can be seen as occurring between two complete industry value chains. Consider the beverage-packaging market, with two competing packaging systems: aluminum cans and plastic bottles. Figure 3.7 compares the industry value chain for each type of container. Changes at any level of the value chain for aluminum cans inﬂuence the competitiveness of cans versus bottles. For example, aluminum smelting is a very energy-intensive process, using huge amounts of electricity. Any increase in electricity costs will obviously increase the cost of cans. On the other hand, feedstock for the plastic bottles is dependent on petrochemical prices, which will undoubtedly be inﬂuenced by the actions of the OPEC cartel. Currently, bottles made from polyethylene terephthalate (PET) have high levels of permeability, making them unsuitable for beverages such as beer. Should technological developments overcome this characteristic, the impact on the aluminum can industry is likely to be severe. Whether a ﬁrm is in the aluminum, plastics, or packaging industry, its managers should be monitoring changes at every level of the chain, not only for their own industry but also for those with which it competes in end-use markets and applications. Proﬁtability may also vary dramatically at each stage in this chain, depending on power relationships. This, in turn, may inﬂuence decisions on where to compete. Consider the case of Microsoft and Intel, which were the main beneﬁciaries of IBM’s decision to

Aluminum can
Bauxite

PET bottle
Crudeoil

Alumina

Ethylene

Aluminium

Polyethylene

Coil Can Bottle

Consumer
Figure 3.7 Industry Value Chain, Aluminum and Plastic Packaging

3.3 The Industry Environment

77

outsource the operating system and microprocessor in its personal computers. Their margins far exceeded the eventual meager leftovers that IBM received. Industry value chains also allow us to examine disintermediation, where one level in the value chain is eliminated. The vast improvements in information technology and the advent of the Web have shifted the economics of direct marketing. As we have already noted, for information products such as airline tickets, disintermediation is quite widespread, as any ex–travel agent can attest.

Limitations of the Industry Model
Before moving on, we should note important limitations of the popular ﬁve forces model. First, it is predicated on the assumption that ﬁrms are single-business singleindustry entities. Consequently, in a multibusiness ﬁrm the model is relevant only for an individual business unit. A ﬁrm such as du Pont has several business units, each of which competes in its own industry. But the corporation as an entity does not compete in an industry. The model of industry analysis can be applied only at the business-unit level, so its use is limited. Further, competition increasingly occurs among more or less formal alliances of ﬁrms or networks; again, the ﬁve forces model, with its concept of a clearly deﬁned entity, is of little assistance in analyzing these cooperative/competitive conditions. A second assumption is that we can deﬁne “an industry” with little difﬁculty. The mere fact that “substitutes” (indirect competitors) appear in the economic model suggests that the problem of deﬁning “an industry” may be a little more difﬁcult in reality. In the last part of the 20th century, some curious new words began to creep into the English language, terms such as cosmeceuticals, edutainment, and the like referred to in Chapter 1. Each of these words symbolizes the observation that the boundaries of an “industry” are indistinct, fuzzy, and often permeable. Where is the boundary between communications, entertainment, publishing, computing? Is Sony in competition with News Corporation? Anyone who has actually tried to deﬁne where one industry (or market) stops and another begins will testify that the problem is by no means as simple as it may at ﬁrst sight appear. We are convinced that much innovation in fact occurs at the boundaries of what traditional players refer to as “the industry,” with results that may be devastating for incumbents. Indeed, some speciﬁc innovations result from the juxtaposition and cross-fertilization of what were previously regarded as different industries. Third, the model assumes that the structure of an industry has a major impact on the proﬁtability of a business unit within that industry—in other words, that there are signiﬁcant differences in proﬁtability of business units across industries, resulting from structural differences between the industries. One study by Rumelt found that industry effects were actually quite small.29 Other studies by Porter found more signiﬁcant industry effects, although they did not use business-unit proﬁtability as the dependent measure.30 A more recent study found that ﬁrm-speciﬁc factors were more important than industry effects for industry leaders and laggards. For ﬁrms in the middle, neither dominant nor laggard, industry effects were important.31 These researchers conclude that superior management works, irrespective of industry, while average management needs an attractive industry structure to be proﬁtable. Perhaps we can conclude by saying that industry structure will have an impact—the presence of powerful customers, for example, normally depresses proﬁtability, but it is not the only factor affecting business profitability. Fourth, the model fails to convey the dynamic nature of most industries. Some industries are characterized by rapid changes in product innovation and rapidly escalat-

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ing competition based on price-performance characteristics, with competitors attempting to establish ﬁrst-mover advantages in both products and markets—a form of competition that has been referred to as hypercompetition.32 Other industries, such as petroleum, steel, and cement, are characterized by relatively slow structural change. The automobile industry is going through a transition at the moment. Historically, ﬁrms such as Ford and General Motors built huge, vertically integrated systems that offered advantages through common ownership. Today, a different strategic pattern is developing. Both Ford and GM have announced that they plan to sell off their captive component suppliers—Delphi and Visteon, respectively. So the two ﬁrms are moving from hierarchy to market-based transactions—and expect to achieve cost and ﬂexibility advantages. It is vitally important that managers treat the structure of their industry as variable rather than ﬁxed. The term structural competition was coined to capture the idea that today’s senior manager must learn to think as much like an investment banker as an operating executive. Unless this game is played well, our ﬁrm may end up out in the cold, isolated by the structural moves of its competitors. Thus, to assist in developing strategy, we must concentrate on the dynamics: How will the industry look in the future? Will it remain attractive or should we consider exiting? As managers, it is essential to keep this future focus and not to regard the industry, its boundaries, or its structure as ﬁxed. Managers should also realize that industry structure is inﬂuenced by the ﬁrm’s actions and that some strategic decisions are made to inﬂuence this structure. In the face of powerful buyers, suppliers may undertake horizontal mergers, increasing their power relative to buyers. Such mergers may also reduce competitive rivalry and move competition from a price to a nonprice basis, affecting average industry proﬁtability. Faced with a powerful supplier possessing specialized assets, the ﬁrm may integrate backward to reduce the supplier’s power. Finally, the players that affect industry structure in the real world constitute a much more complex set than is portrayed in the simple ﬁve forces model. While some of these may be legitimately be viewed as among the external forces depicted in Figure 3.8, others belong inside the “magic circle.” The issue of deﬁning the scope of the players we should consider, and deﬁning the boundaries of the industry, is the subject of the rest of this section. Figure 3.8 portrays the complexity of the players involved in determining industry structure by showing examples of the entities that may inﬂuence that industry. We label as “allies” entities that may favorably inﬂuence structure. While these might be construed to include government agencies or regulators that could be viewed as inﬂuences in the remote environment, they also include those who beneﬁt from our ﬁrm’s activities even though they are not directly involved in its value chain. Inhabitants of local communities, businesses such as hotels and restaurants that beneﬁt from their propinquity to the ﬁrm’s facilities, and special-interest groups or non-governmental organizations (NGOs) might all conceivably constitute allied constituencies. Just as some entities may support the ﬁrm’s strategies, others oppose it. Union opposition is frequent when major changes of strategy threaten to disrupt the lives of union members, while those allied with the ﬁrm’s competitors may have comparable inﬂuence. Further, trade bodies such as trade associations, professional associations, or technical groups may exert favorable or unfavorable inﬂuence. Finally, the growth of Internet access has made all ﬁrms vulnerable to the negative website phenomenon, where disgruntled employees, customers, and others may use “virtual organizations” to exert unfavorable inﬂuence.

3.4 The Business-Unit Environment
Political

79

Social Suppliers Allies Direct Entrants FIRM Competitors Virtual organizations Buyers Economic Trade bodies Unions

Environmental

Indirect competitors

Legal

Technological

Figure 3.8 The Augmented Industry Environment

Figure 3.8 also indicates the importance of regarding “industry” boundaries as permeable by showing a dotted line rather than a solid line. Technology and deregulation are both powerful forces affecting the permeability of these boundaries. In many countries it was not so long ago that we had commercial banks, savings and loans (building societies), and insurance companies, but today the “ﬁnancial services” nomenclature has become common as mutuals demutualize, building societies metamorphose into banks, and all scramble to develop an Internet presence. Further, ﬁrms are moving away from a model of an independent entity with arm’slength transactional relationships with other ﬁrms. Instead, we now see the rise of network structures where ﬁrms work together to create a network of suppliers, distributors, other service providers, and customers. Value is created by the entire network, which also makes the concept of a rigid and well-deﬁned industry somewhat questionable. The moral that astute managers should draw from these examples is to keep their antennae tuned to the happenings at the periphery of what others regard as “the industry,” for it is there that some of the most interesting and innovative competitive developments will occur.

3.4 THE BUSINESS-UNIT ENVIRONMENT
The ﬁnal level of environmental analysis is undertaken to assess changes that could inﬂuence the position of the business unit relative to its competitors and the nature of

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its competitive advantage. The major focus is on identifying opportunities or problems resulting from changes in the competitive milieu and/or in customer requirements. This process should be seen as dynamic, creative, and opportunity-focused, based on sound analysis.

Customer Analysis
Customer analysis at the business-unit level involves developing a detailed understanding of customers, their needs and values, and how these needs may vary within a given market (market segmentation). In addition, emphasis must be on how these needs are changing and what the ﬁrm can do to introduce change to the marketplace. Growth comes not from doing the same thing as competitors; it comes from being creative, with the insight to understand the fundamental changes in the marketplace and how to respond to or create these. As with any analysis, the purpose is to understand—but more importantly, it is to identify the creative strategies that will generate value for the business. Customer Value Understanding the sources of customer value is a large and complex subject, better explored in a marketing course.33 However, we should examine some of the basic issues involved in determining sources of value. One of the most important of these is understanding who the customer is. A broad perspective is vital, and we should therefore consider as a potential customer any person or organization involved in the channel of distribution or decision (other than competitors) whose actions can affect the purchase of the ﬁrm’s products and services. This view recognizes that “customers” includes those who can inﬂuence the decision to purchase the ﬁrm’s products and services, not just those who pay. We should also recognize that customers are always individuals, inasmuch as organizations do not make decisions; people in organizations make decisions. We may also need to clearly understand the needs of customers as well as their dissatisfactions. Dissatisfactions may present opportunities to the business, an untapped market that it can exploit. Chapter 7 discusses measures of customer value. Market Segmentation Markets are characterized as comprising buyers, either individual or institutional, with different needs and requirements. Therefore meeting the needs of customers requires developing different types of offers, each focused on the needs of a deﬁned segment. Market segmentation is the process of grouping together actual and potential customers whose needs are similar so that target segments can be selected and the appropriate marketing program designed. Particularly for industrial products, such segmentation requires a thorough understanding of customer economics, since such customers are likely to make purchases based primarily on economic criteria. One source of growth is identifying, and forcing if possible, the emergence of new segments. No method of segmentation will be perfect; there will always be some ambiguity. One possible test of successful segmentation is whether or not a competitor can have a profitable existence in the designated segment without being a competitor in a related segment. When this is possible, it suggests that there is little cost sharing between segments. Following segmentation, the ﬁrm should be able to do the following: Determine how to describe a market in terms of groups that demonstrate high within-group homogeneity and across-group heterogeneity Identify the needs and beneﬁts required in each group

3.4 The Business-Unit Environment

81

Determine which segments are attractive and how fast is the segment growing Decide which segments to target and which competitive strategy to adopt for each targeted segment Marketing theorists generally suggest that segments can be deﬁned on the basis of one or more of the following characteristics:34 Geographic, such as country, region, or city size Demographic, such as age, gender, ﬁrm size, ﬁrm proﬁtability Behavioral, such as use occasion, type of purchase situation Social/psychological, such as personality, social class, organizational culture Segmentation permits the ﬁrm to develop an offer that meets the needs of its chosen customers. It allows the ﬁrm to focus on those segments in which it has a competitive advantage and should permit greater differentiation of the offer and, consequently, better margins. Development of a competitive advantage can be achieved only with a detailed understanding of the market and its segments, since these characterize the variability in customer needs and values. Since customer needs are constantly changing, the business unit will of necessity need to monitor and update its segmentation approach, both in terms of the basis for developing segments and the number and description of its chosen segments. Segment growth also affects the ability of the ﬁrm to generate and sustain a competitive advantage. Rapidly growing segments typically exhibit increased turbulence, making share gain more feasible. Growing share in a very stable market is always going to be difﬁcult. In a growing market there are new customers, new values, new needs and beneﬁts required, and the possibility of designing products with different combinations of features—all of which may lead to rapid share gain if business-unit management has the foresight required to create the opportunity and build capabilities to exploit it. When analyzing market segments, it may be useful to classify them as either a cost segment, a value segment, or a combination. In some market segments, there is relatively little variation in either the price charged or characteristics of the product or service. In these segments, customer choice will be based primarily on price considerations, with consequent implications for the competitive strategy of the business. Other segments may exhibit substantial variation in prices, with clear differences between the offerings of the various competitors, generally facilitated by strong differences in customer preferences between different offerings. In these market segments, price plays a lesser role, and the firm must develop a competitive strategy based on well-understood dimensions of customer value, In reality, most segments will be a combination of these two alternatives. The task of the business is to work out in which segments it can bring its capabilities to bear and to develop additional ones where worthwhile. Customers often play different roles—such as gatekeeper, inﬂuencer, decision maker, buyer, and user—in a purchase process. Failure to understand these roles may preclude sufﬁcient understanding of sources of value. Different customers will also have differing needs and wants, depending on sociocultural and situational factors, as well as differing roles in the purchasing process. There are clearly many ways to think about these needs and wants. However, considering three types of needs and wants—functional, psychological, and economic—provides a useful general framework for understanding the benefits delivered by a product or service. First, however, we must distinguish between features and beneﬁts.

82

Chapter 3. The Competitive Environment

Features versus Beneﬁts In marketing a product or service, it is often critical to distinguish between features/attributes and beneﬁts. Firms produce and deliver products and services but customers only perceive value in the beneﬁts that these products and services provide. Some simple examples make this distinction clear. In its factories, Black and Decker manufactures electric drills whose features include color, drill speed, hardness of bit, drill bit gauge, drill weight, presence/absence of battery and battery life, ability to embrace other tools (e.g., sander), and so forth. For the most part, customers have little interest in these features per se; what concerns customers are the beneﬁts offered by the drill, notably the holes it can make and the ease of making them. Similarly, retailers and wholesalers may care little for the speciﬁc products they sell; they are more interested in such beneﬁts as net proﬁt, sales per linear foot, and return on investment. Focus on beneﬁts versus features has the important additional value of broadening the view of competition. To return to the Black and Decker example, when the focus of attention is on features, key competitors are other electric drill manufacturers. When the focus of attention is on beneﬁts, the ﬁrm necessarily considers all other methods of making holes; for example, the substitutes or indirect competitors include nails, adhesives, water drills, and lasers, an important broadening of the competitive scope that prepares the ﬁrm for new forms of competition. When considering the beneﬁts offered by a product or service, it is useful to categorize these as functional, psychological, and economic. Functional beneﬁts serve a particular purpose, typically by allowing the individual, family, or organization to do something that needs to be done. They are generally concerned with such dimensions as performance level, performance reliability, time and place availability, accuracy, and ease of use. For example, food fulﬁls the function of satisfying hunger needs, disc brakes enable the car to stop, and a word-processing program eases the student’s pain in writing an assignment. Psychological beneﬁts typically make people feel good in terms of such dimensions as status, afﬁliation, reassurance, reduced risk by not changing suppliers, security, and scarcity. These beneﬁts may be associated with functional beneﬁts but are different in kind. For example, in addition to the quality of the food, ﬁne restaurants offer such beneﬁts as perceived prestige and ambience; certain models and brands of automobiles offer status in addition to functional comfort and transportation beneﬁts. Louis Vuitton products offer gift buyers a risk-reduction beneﬁt and the near certainty that their gift will be appreciated. With economic beneﬁts the focus is on economic aspects of the purchase, such as price, cost savings, credit terms, and proﬁts; some customers maintain that these are the only beneﬁts that matter. Indeed, for many intermediaries such as wholesalers, distributors, and retailers, the core beneﬁt from the purchase of goods for resale is the proﬁt made on the spread between selling and buying prices.35 For other types of customer, the economic aspect of the purchase is one of several beneﬁts. In general, customers prefer to pay less rather than more for the functional and psychological beneﬁts they receive because, as economists point out, this maximizes their utility. However, for some goods and services, customers may actually prefer higher prices because these bring psychological beneﬁts such as status and prestige, as with designer brands and Rolex watches. In many cases purchase decisions obviously involve a combination of motives, but failure to appreciate these, and the priorities placed upon them by different customers, may lead to inappropriate decisions with respect to value-chain modiﬁcation. Chapter 7 presents frameworks for integrating consideration of value and cost in making business strategy decisions. In particular, we will discuss how these concepts can be integrated to develop the competitive strategy of the business unit.

3.4 The Business-Unit Environment

83

Analyzing Competitors
Most competitor analysis is undertaken at the business-unit level. In undertaking to analyze speciﬁc competitors, we are making an implicit assumption that the unit in question is engaged in oligopolistic competition since under perfect competition there would be no purpose in the exercise. There is a deﬁned process that we should follow in conducting a competitor analysis, the stages in which are shown in Figure 3.9. Since the best competitive strategies are typically preemptive, identiﬁcation is a very important stage that should encompass not only the competitors we must deal with today but also those that could represent a threat tomorrow. Further, we should deﬁne a competitor as any entity capable of meeting the same set of customer requirements as those that we intend to meet. Thus, in attempting to identify competitors, we should also consider substitutes, or indirect competitors. Whereas in day-to-day decision making actual direct competitors are likely to dominate in our thinking, the key to longer-term ownership of market positions is to anticipate potential competitors. Remember that microeconomics tells us that economic proﬁts will inevitably attract competitors. Thus, we can argue that good proﬁt performance is a leading indicator of increased competition. The old saying that an ounce of prevention is worth a ton of cure has much merit when developing competitive strategy! Once competitors have been identiﬁed, we typically will have to target those that we believe represent the greatest challenge to us, that is, those that are most likely to prevent us from achieving our goals. Key to making this decision well is the ability to understand the world from the perspective of the competitor, for seen through the competitor’s eyes, the world will look very different. If we are unable to do this, we are unlikely to be very successful in plotting competitive strategies. Proﬁling competitors involves collecting a variety of information that will help us understand them better. As we noted, the prime focus of competitor analysis is typically at the business-unit level, but in Figure 3.10, we have illustrated the types of information about a competitor that might be collected at different levels. Analyzing competitor information may employ a variety of techniques, such as analysis of resources and competences (see Chapter 5), assessment of ﬁnancial capabilities (see Chapter 4), portfolio analysis (see Chapter 8), and close examination of the competitors’ value chains (see Chapter 7). Yet without the ability to integrate the information and recognize underlying patterns, little that is useful will result.36 Skill in pattern recognition is

Stages:

Identification

Targeting

Profiling

Analysis

Projection

Action

Figure 3.9 Process for Competitor Analysis.
Copyright: Christian and Hulbert, 1998.

84

Chapter 3. The Competitive Environment

Level of analysis Corporate

Functional Management Degree of Financial strengths, capabilities, vertical performance Portfolio weaknesses proclivities integration

Business Market Marketing system performance Positioning mix

Business unit

Product-market

Figure 3.10 Types of Competitive Information at Different Levels

one of the key requirements for good analysts, whether they work for the CIA or a global company. The difﬁculty was long ago acknowledged by Sun Tzu, the ancient Chinese strategist and author of The Art of War (ca. 500 B.C.), who explained it thus: All men see the tactics whereby I conquer, but none see the strategy out of which victory evolved. As the above discussion suggests, there can be no absolute certainty in competitor analysis. Nonetheless, the outcome of the work should be a number of likely projected scenarios, which are then fed into the planning of our strategy. Our strategy should be tested against these scenarios, seeking options that are likely to prove robust regardless of competitive actions. One of the most unimaginative, and often dangerous, competitive moves is simply to ape the actions (anticipated or otherwise) of a competitor. As global competition intensiﬁes, attrition will ensure that, on average, the survivors are smarter and more adaptable than their failed predecessors. They will therefore be building strategies that capitalize upon their own distinctive competences. To imitate is tantamount to letting the competitor choose the weapons and the battleﬁeld, a violation of a most basic principle of strategy.

3.5 MULTI-INDUSTRY COMPETITION
Much of our recent discussion has implicitly assumed that competition takes place among single-industry ﬁrms. Indeed, much of Chapter 7 will assume this context. Yet, as we noted earlier, in many industries, understanding competition and competitive strategy is a much more complex task than is implied by the industry model. We distinguish a minimum of four levels of competition: network-to-network, company-to-company, businessto-business, and product-to-product. The last is a market level of competition with which we will not concern ourselves in this book, while business-to-business competition will be dealt with in Chapter 7. In this chapter we conclude by brieﬂy examining the issues raised by network-to-network and company-to-company levels of competition.

Network Competition
In response to rapid change and the increasing cost of business and product development, more and more firms are moving to organize themselves as network competitors. Other factors have assisted in precipitating this change. One, as noted earlier, appears to be a desire to variate fixed costs by more outsourcing. As markets become more competitive globally, retaining internally less-than-world-class activities obvi-

3.5 Multi-Industry Competition

85

ously becomes less viable, and outsourcing typically results in networked relationships with suppliers. Firms find it increasingly difficult to be at world’s best practice in all their activities, and competition forces them to outsource their poorly performing activities. The quality movement has contributed to a drop in the number of suppliers, as the buying firm becomes more demanding in seeking reliable quality and a relationship model prevails over the traditional bid-based transaction model. As firms globalize their activities, they also tend to seek global support, and suppliers that do not operate worldwide must enter into alliances and networks to maintain their business position. Finally, attempts to improve supply-chain efficiency and minimize working capital, again fostered by ever more competitive markets, result in closer, networked relationships among firms, which must cooperate in sharing information to derive benefit from the arrangement. Rather than depict the ﬁrm’s organization structure in the normal fashion, we might consider thinking about the network organization as member of a web of interrelationships, as depicted in Figure 3.11. Bluetooth is a development, led by Ericsson, to develop wireless technology with applications to computers and cell phones. Such wireless technology could potentially revolutionize personal connectivity, eliminating the need for wired connections. Bluetooth is a speciﬁcation for low-cost radio links among cell phones, hand-held computers, and other communication devices, including the Internet, over short distances without the need for cable. It is designed for low-powered short-range operation between devices, and it costs some $20–$30 to install on a computer. This technology is beyond the capabilities of any single ﬁrm, and Ericsson has established a network of ﬁrms—including IBM, Intel, Microsoft, Motorola, Nokia, Toshiba, Agere, and 3Com—and more than 2000 associate ﬁrms to develop the required technology and applications. This network of ﬁrms is itself in competition with another technology, and it is yet unclear which will be the winner. There are obviously large stakes involved, so ﬁrstmover advantages and standards will be critical. The second technology is currently denoted as Wi-Fi, a protocol permitting laptop computers within range of a base station to access the Internet at high speeds without the need for a cable. Microsoft has been reported as betting on both developments—it is part of Bluetooth and it is supporting Wi-Fi in its Windows XP operating system. It will be interesting to see how this competition develops. Bluetooth may have other market opportunities as a wireless payment system in shops and as an electronic travel pass, where its ability to transmit signals via
Ericsson Nokia IBM

BLUETOOTH

Toshiba

Agere Motorola Intel Other associates

Microsoft

Figure 3.11 Network of Firms in Bluetooth
Source: “Bluetooth Membership,” 2004: www.bluetooth.org.

86

Chapter 3. The Competitive Environment

short-range wireless would be an advantage.37 There will certainly be competition between these two systems as each strives for dominance. As Figure 3.11 indicates, the network model is by no means restricted to the ﬁrm and the suppliers with which it interacts in its now-deconstructed business system. Increasingly, erstwhile competitors are allying where they believe their joint interests are best served by such arrangements. Although Japan has long witnessed rivalry between major keiretsu, network-versus-network competition is fast growing elsewhere in the world. One of the most visible illustrations is provided by the airline industry. When the then CEO of British Airways (BA) ﬁrst proposed an alliance with American Airlines, BA’s major transatlantic competitor, he evidently failed to foresee the impact on American’s major domestic competitor, United Airlines. United formed the Star Alliance, which has grown to be the biggest airline alliance in the world, subsuming a dozen airlines and more than 800 destinations. BA’s One World alliance has also grown, but airlines not part of any such grouping are now desperately seeking partners, so successful has the Star Alliance become.

Corporate-Level Competition
Corporate-level competitors are perhaps best identiﬁed by assessing the overlap in their business portfolios. Shell and Exxon, GE and Siemens, Boeing and Airbus, GM and Ford are obviously corporate-level competitors because each pairing of companies competes in multiple businesses. Rolls Royce Aero Engines is an important business-level competitor for GE in its gas turbine business, but is not a key corporate-level competitor. The responsibility for competitor analysis and strategizing with respect to Rolls Royce would therefore lie at the business level within GE, although major strategic decisions with respect to its GE’s aero engine business would rise to the corporate level. Typically, targeting efforts in competitor analysis depend not only on the extent of the portfolio overlap but also on judgments about the intent of a particular competitor’s management. This demands insight into both the competitor’s capabilities and the intentions of its managers. Thus, while a typical corporate proﬁle would involve gathering information about the competitor’s ﬁnancial performance, business portfolios, physical facilities, knowledge assets, functional strengths, and the like, it should also include gathering information and insight about the management of the targeted competitor.

3.6 SUMMARY
Sensing of the environment is key to strategic thinking. Broad environmental trends affect many industries and ﬁrms, including our own suppliers and our customers. Yet exposure to this external environment does not come of its own accord. Indeed, many of the admonitions to management, such as “sticking to the knitting” or “concentrating on core competences,” create the danger of “cocooning,” of insulating too many senior managers from the very forces that should be their preoccupation in strategy development. We may overstate the case, but in most ﬁrms the pressures to focus internally far outweigh those that stress external focus. Of course, this is not an either–or problem; rather, it is essential to strike an appropriate balance. Most companies have at least some blinkers, whether operational or strategic. However the wise CEO will ﬁnd ways to take off these blinkers, both individually and organizationally. We believe that such exposure is critical to creativity and innovation. To break the mold and come up with new para-

Endnotes

87

digms requires an ability to separate one’s thinking from the here and now. Activities such as encouraging people to go to external seminars (where they will meet people from other industries and ﬁrms), best-of-class benchmarking, and externally based measurement all help avoid the dreaded complacency that so quickly infests too many successful ﬁrms. The leader’s task is to ensure that people don’t get too comfortable, to maintain a state of organizational vigilance even when the ﬁrm appears to be successful. We believe it is incumbent on managers to maintain an outward orientation toward the firm’s environment, focusing on a realistic understanding of likely changes and their impact. Further, we must recognize that some change will be unpredictable and therefore balance focus and commitment with flexibility and responsiveness. The overarching need is to develop strategies that will be successful in the world of the future, not the world of the present.

REVIEW QUESTIONS
1. Why should a ﬁrm undertake a detailed analysis of its environment? Can the ﬁrm spend too many resources analyzing its environment? 2. “Since the world is changing rapidly and unpredictably, there is no value in attempting to undertake detailed analysis of the environment.” How would you respond to this statement? 3. Select a ﬁrm with several business units. Which remote environmental variables, in your view, are important for the ﬁrm and for each business unit? 4. Give an example of a ﬁrm that appears to have failed to understand its changing environment. Can you provide reasons why this occurred? 5. Are any of the changes in the remote environment under the control of the management of the ﬁrm? If so, which? 6. Select an industry and review the factors that are affecting its proﬁtability. Are the boundaries of this industry changing? If so, what is driving these changes? What is the likely structure of this industry in ﬁve years? 7. Does too much attention to direct competitors place the ﬁrm at risk? How? 8. Is the concept of an “industry” useful when so many ﬁrms are engaged in networks and outsourcing?

ENDNOTES
1 D.

Cameron and A. Hill, “Gecas at the Centre on Commission Concerns,” Financial Times, June 29, 2001, p. 29. 2 L. Downes and C. Mui, Unleashing the Killer App: Digital Strategies for Market Dominance (Boston: Harvard Business School Press, 1998). 3 J. E. Hanke, D. W. Wichern, and A. G. Reitsch, Business Forecasting (Upper Saddle River, NJ: Prentice Hall, 2001). 4 G. Ringland, Scenario Planning: Managing for the Future (New York: Wiley, 1998), pp. xi, 407. 5 A. McCathie, “Berlin Breaks Ranks on EU Merger Law,” Australian Financial Review, June 22, 2001, p. 28. 6 “The World This Week,” The Economist, January 5, 2002, p. 7. 7 “Loosen Up or Lose Out,” The Economist, December 7, 2002, p. 8.

88

Chapter 3. The Competitive Environment For a thoughtful discussion of the shift from government to market mechanisms, see D. Yergin and J. Stanislaw, The Commanding Heights: The Battle between Government and the Marketplace That Is Remaking the Modern World (New York: Simon & Schuster, 1998), p. 457. 9 “Soaring Dragon, Busy Tigers,” The Economist, April 27, 2002, pp. 63–64. 10 G. Zucherman and C. Karmin, “Foreigners Disenchanted with US Stocks,” The Australian Financial Review, May 21, 2002, p. 26. 11 The New Shorter Oxford English Dictionary (Oxford, UK: Claredon, 1993). 12 In the United States, Generation X comprises 17 million persons; Generation Y (echo boomers, the millennium generation) born between 1979 and 1994, comprises 60 million persons (versus 72 million baby boomers). E. Neuborne, “Generation Y: Today’s Teens—The Biggest Bulge Since the Boomers—May Force Marketeers to Toss Their Old Tricks”, Business Week, February 15, 1999, p. 80. 13 J. Markoff, “The Increase in Chip Speeds Is Accelerating, Not Slowing,” New York Times, February 4, 2002, p. C1. 14 G. T. Ferguson, “Have Your Objects Call My Objects,” Harvard Business Review, June 2002, pp. 138–144. 15 “Let the Bad Times Roll,” The Economist, April 7, 2001, pp. 65–66. 16 “Seller Beware,” The Economist, March 4, 2000, pp. 67–68. 17 R. Foster, Innovation: The Attacker’s Advantage (New York: Summit, 1986). 18 C. M. Christensen, The Innovator’s Dilemma (Boston: Harvard Business School Press, 1997). 19 J. H. M. Dessauer, My Years with Xerox: The Billions Nobody Wanted (Garden City, NY: Doubleday, 1971). 20 M. Rohrlich, “The Science of Suction Hits the Dirt,” New York Times, August 29, 2002, p. F 1. 21 “Inform, Consult, Impose,” The Economist, June 16, 2001, p. 70. 22 “Activities of the European Union”, 2003, www.europa. eu.int/pol/index-en.htm. 23 D. Crowe, “IBM’s $6.4Bn Consulting Shake-Up,” Australian Financial Review, August 1, 2002, p. 1. 24 “BP Environmental and Social report”, 2002, www. bp.com/envirsocial/index.asp. 25 “Getting Green Dotted: The German Recycling Law Explained in Plain English,” May 13, 2001. Raymond Communications, College Park, MD: www.raymond.com/library/news/227-1.html. 26 J. Elkington, Cannibals with Forks: The Triple Bottom of 21st Century Business (Oxford, UK: Capstone, 1997). 27 M. E. Porter, Competitive Strategy (New York: Free Press, 1980). 28 Foster, Innovation. 29 R. P. Rumelt, “How Much Does Industry Matter,” Strategic Management Journal 12, no. 3 (1991), pp. 167–186. 30 A. McGahan and M. E. Porter, “How Much Does Industry Matter, Really?,” Strategic Management Journal 18 (special issue) (1997), pp. 15–30. 31 G. Hawawini, V. Subramanian, and P. Verdin, Is Proﬁtability Driven by Industry- or Firm-Speciﬁc Factors? A New Look at the Evidence (Fontainbleau, France: INSEAD, 2000). 32 R. A. D’Aveni, Hyper-Competition (New York: Free Press, 1994). 33 N. Capon and J. M. Hulbert, Marketing Management in the 21st Century (Upper Saddle River, NJ: Prentice Hall, 2001). 34 Ibid. 35 Of course, working capital–related issues such as inventory turns and time to pay are also important. 36 J. A. Czepiel, Competitive Marketing Strategy (Englewood Cliffs, NJ: Prentice Hall, 1992). 37 “Teething Trouble,” The Economist, December 22, 2001, p. 78.
8

The Firm and Its Environment

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