**LP- 2 wk-2 8 Sep14Ch-2 Analyzing the External Environment of the Firm Learning Objectives Importance of developing forecasts of the business environ Critical inputs to forecasting, i.e., scanning, monitoring and collecting CIScenario PlanningImpact of Competitive Environ on Profitability Trends and Events of General environStrategic Grouping and its impact on business Strat

CORPORATE WATCH Pakistan becomes 5th largest remittances recipient countryYamaha to invest $150m in Pakistan auto sectorPakistan can become world's 18th largest economy by 2050 and Now is the right time to invest in Pakistan startups----- How? Sit-in caused Rs. 547bn loss to national economy so far and visit by Chinese President has been postponed---- delay in $32Bn investmentPakistani businesses can export over 3,500 items to the US duty freeDollar hits six-month high against rupee

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EXAMPLES OF CA / CPThe Standard Chartered Bank. The bank`s clients can now print cheques any time at their own premises, through its internet based global delivery channel. European Competition Commissioner is preparing to decide on the case after spending three years examining whether Google squeezes out rival services in online search results. Airbus and Boeing both topped 1,000 new jets orders in the first eight months of the year, but Boeing is far ahead after adjusting for cancellations. Adjusting for cancellations, Airbus reported 722 net orders between January and August. That compares with 941 net orders for Boeing from Jan. 1 to Sept. 2, after accounting for 63 cancellations.KASB Bank posts Rs171m profit The bank`s total assets amounted over Rs.69 billion.The Indus Motor Company (IMC) has announced final cash dividend of Rs23.50 per share, in addition to an earlier interim dividend of Rs6 per share. IMC reported profit-after-tax of Rs3.87 billion during 2013-14, increase of 15 per cent over the previous year. However, the sales revenue decreased by 11pc to Rs. 57bn from Rs.64bn in 2012-13.

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**WHY ANALYZE EXTERNAL ENVIRONMENT?Purpose:Forecasting Highlight with examples: Motorola case study Lehman Brothers MECO & NTR in Pakistan Bicycle Industry in Pakistan Privatization of PTCL Power Generation in Pakistan

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SECTORSale proceeds 1991 to August 4, 2014No.Amount (Rs. in million)Banking7 41,023Capital Market Transaction24186,689Energy14 51,756Telecom4 187,024Automobile7 1,102Cement17 16,177Chemical161,643Engineering7 182Fertilizers740,281Ghee Mills24 842Rice8236Roti Plants1591Textile4 370Newspapers5 270Tourism4 1,805Others6 159Total169529, 650

Result of Failure to ANALYZE EXTERNAL ENVIRONMENTMotorola Founded in 1930 as maker of radios, and consumer electronicsColor TV business sold in 1970 and intensified high tech for commercial, industrial and governments sectors1980 became leading supplier of cellular telephones1994 Fortune magazine rated as the most loved companyWhat went wrong?Failed to notice changes in trends switching from analog to digital tech and arrival of competitors (Nokia and Ericsson)

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Questions?Why has Kodak and some other retail outlets in USA & UK filed for Bankruptcy?Do we have Bankruptcy Law in Pakistan?3. How many firms and Orgs have filed for bankruptcy in Pakistan in last 10 years?**

**WHY DO WE DO THAT? We undertake External analysis by Scanning, Monitoring and obtaining Competitive Intelligence / Information (CI) so as to Forecast events and trends.The trends and events are product of:Globalization Time to Market Innovating technologies Shifting roles and responsibilities ---- Economic conditions

**CREATING ENVIRONMENTALLY AWARE ORG 3 Steps:Institute measures for and inculcate the habit of: Undertaking Environmental Scanning Uninterrupted Monitoring of business activities and Obtain Competitive Intelligence (CI) in order to pre-empt the changing trends and events Be aware of the General Environment arising out of:Demography, Social, Politico-legal, Technology, Economic and Global environment (slide-13)Remain abreast of Competitive EnvironmentPorters Five-Forces (Buyers, Suppliers, Substitutes, Potential Entrants and Mutual rivalry

** Ist Step ENVIRONMENTAL SCANNING

DefinitionThe process of conducting surveillance of firms external environment to predict environmental changes to come and detect changes already underway. Purpose To become aware of changing trends To adopt pro-active strategies rather than resorting to reactive strategies / measures to correct the changing trends and events

**ENVIRONMENTAL MONITORING Definition It is to track the evolution of environmental trends, sequence of events, or streams of activitiesPurpose To undertake closer scrutiny to become fully cognizant of impact of changing trends and events It enables the firms to evaluate how dramatically environmental trends are changing the CI.

** COMPETITIVE INTELLIGENCE (CI) Definition It is an activity which helps firms define and understand their industry and identify their rivals strengths and weaknesses. Purpose To collect data for managerial decision makingIf done properly, it avoids surprises for the firms and companies Is it an ethical issue? Refer to page 41 Exh 2.2

**ENVIRONMENTAL FORECASTING Definition Based on Scanning, Monitoring and CI, the process involves the development of plausible projections about the direction, scope, speed, and intensity of environmental changes. Purpose To predict change It answers the questions:How long would it take to for a new technology to reach the market place ?Will the present social concern about an issue result in new legislation?Are current lifestyles trends likely to continue?

**SCENARIO PLANNING Definition: A military borrowed concept: As a result of environmental scanning, monitoring and competitive intelligence, plan a range of scenarios An in-depth analysis based on range of disciplines, interests, tangible and intangible impacts and effects emerging out of various conditions of economic, local and international laws and changing geo-political and politico-military situations Purpose Not to miss out any factor To develop range of options (Opportunities)

SCENARIO PLANNING AT SHELL OIL COMPANY Process involves following steps:Extensive interviews through open ended questionnaires Analyzing of interviews and making agenda points Synthesizing agenda points Holding series of workshops and deliberating on agenda points and formulating Scenarios that may occur in 10 -15 years time Testing of Strategic Options (Policy Options/ Strategy) to ascertain robustness of each scenario

*Specially formed teams may do this job on continuous basis *

Specially formed teams may do this job on continuous basis

**2nd Step THE GENERAL ENVIRONMENT DefinitionIt is composed of 6 factors that can have dramatic affects on the firms adopted strategy. It includesDemographic SegmentationSocio-cultural aspect of life Politico / Legal Environment Technological InnovationsEconomic ConditionsGlobal Environment Discuss Exh 2.3 page 46 and Exh 2.4 page 54

**3rd Step THE COMPETITIVE ENVIRONMENTDefinition. Termed as Task or Industry environment, it includes factors that have direct relationship with the industry or the firm. However, it may not generate as much strategic advantage as the Value net analysis, (S-19)They are Porters Five Forces:Threat of new entrants (Competitors) Bargaining powers of buyersRivalry among existing firms Bargaining powers of suppliersThreat of introduction of substitute products or services

Porters Five Forces**Threat of new Entrants Bargaining powers of buyers Threat of substitute products or servicesBargaining powers of Suppliers

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THREAT OF NEW ENTRANTS (COMPETITORS)

The Measures that reduce threat of new entrants:Economies of Scale Product DifferentiationsCapital RequirementsSwitching Costs Access to Distribution ChannelsCost Disadvantages Independent of Scale Proprietary productFavorable access to raw materials Government subsidiesFavorable government policies

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BARGAINING POWERS OF BUYERS

Purchasing large volumes Products Standard or undifferentiated Few switching costsEarns low profitsBuyers pose credible threat of backward integrationProduct v/s quality unimportant

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RIVALRY AMONG EXISTING FIRMS

Numerous or equally balanced competitors Slow industry growthHigh fixed or storage costs Lack of differentiation or switching costsCapacity augmented in large increments economies of scale High Exit Barriers economic, strategic and emotional factors that keep firms competing though they may be earning low or negative returns on their investments

INDUSTRY ANALYSIS- FEW caveats *Value Net *Transactions Interactions Transactions Interactions

Value Net

Bargaining Power of Suppliers Threat to raise prices or reduce quality of purchased goods and services is omnipotent. The profitability can always be squeezed. The powerful groups can always assert in the following manner: Dominated by few companies Not obliged to contend with substitute products for sale to industryIndustry is not an important customer of the supplier groupSuppliers product is an important input to the buyers businessProducts are differentiated or switching costs have been built up Threat of forward integration is persistent

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Threat of introduction of substitute products or services

Substitutes limit the profitability of industry by placing a ceiling on the prices (price war)More attractive the price/performance ratio ---- tighter the lid on profitability of industryTravel by executives v/s teleconferencing is one example causing losses to airline, hotelling and automobile industry Discussion forums Twitter, Bloggers etc **

**STRATEGIC GROUPS WITHIN INDUSTRY No two firms are totally different No two firms are exactly the same What value is the strategic group concept?Strategic groupings help a firm identify barriers to mobility that protects a group by other groupsIt helps a firm identify groups whose competitive position may be marginal.It helps chart future directions of firms strategies. Strategic groupings is helpful in thinking through implications of each industry trend for the strategic group as a whole

World Automobile Industry *Prepare Pakistani Model -------*Toyota Ford, GM, Honda, Nissan BMW,MercedesFerrari,Lexus Hyundai, Kia, Suzuki High Price LowHigh Breadth of product Line

Prepare Pakistani Model -------

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Thank youQuiz-1 ----- next week Assignment -1 Application questions page 65. submit by 17 Sep 14**