The External Environment:

Opportunities, Threats, Industry

Competition and Competitor Analysis

Nothing focuses the mind

better than the constant sight of
a competitor who wants to wipe
you off the map.
Wayne Calloway, Former CEO, PepsiCo

Strategic
Inputs

Chapter 2
External
Environment

Strategic Intent
Strategic Mission

Chapter 3
Internal
Environment

Strategic
Outcomes

Strategic
Actions

Strategy Formulation
Chapter 4
Business-Level
Strategy

Chapter 5
Competitive
Dynamics

Chapter 7
Acquisitions &
Restructuring

Chapter 8
International
Strategy

Feedback

The Strategic
Management
Process

Strategy Implementation

Chapter 6
Corporate-Level
Strategy

Chapter 10
Corporate
Governance

Chapter 11
Structure
& Control

Chapter 9
Cooperative
Strategies

Chapter 12
Strategic
Leadership

Chapter 13

Strategic
Competitiveness
Above Average
Returns

Entrepreneurship

& Innovation

External Assessment

It is not the strongest of the species that

survive, nor the most intelligent, but the one

most responsive to change.
Charles Darwin

Objectives
Explain the importance of analyzing and understanding the firms external
environment.
Define and describe the general environment and the industry
environment.
Discuss the four activities of the external environmental analysis process.
Name and describe the general environments seven segments.
Identify the five competitive forces and explain how they determine an
industrys profit potential.
Define strategic groups and describe their influence on the firm.
Describe what firms need to know about their competitors and different
methods (+ ethical stds) to collect intelligence about them.

Introduction
External environment affects firms strategic actions sociocultural
PMI seeks to grow through a JV with Swedish Match AB to
distribute smokeless tobacco in multiple global markets.
Less dangerous than cigarettes in contributing to disease
Smokeless tobacco - growth potential in many markets.

General environment - political/legal and the physical

environment
Lower taxes in countries
Proactive working with govts; regulated in US
Harm reduction; innovation

Opportunities and threats affect a firms strategic

actions

Introduction
Purpose of External Audit
Identify
Opportunities
Threats
Firms external environment creates both
Opportunities
PMI to enter smokeless tobacco market
Threats
Additional regulations in markets will reduce consumption of PMIs
tobacco products.
Collectively, opportunities and threats affect a firms strategic actions

Opportunities
Condition in general environment that, if exploited, helps
company achieve strategic competitiveness.

Recent market research results suggested to Procter &

Gamble (P&G) that an increasing number of men across the
globe are interested in fragrances and skin care products.
To take advantage of this opportunity, P&G is reorienting
its beauty business by gender, to better serve him and
her rather than its typical organization around product
categories

Threats
A condition in the general environment that may hinder a companys
efforts to achieve strategic competitiveness.

The once-revered firm Polaroid can attest to the seriousness of

external threats.

Polaroid leader in industry in top 50 firms in US.

Photographic equipment using digital technology developed
Filed for bankruptcy in 2001.
Sold to Bank Ones OEP Imaging unit in 2002

Changed its own name to Polaroid Corp.

Jacques Nasser, a former CEO at Ford, took over as CEO
Nasser used the brand in a partnership with Petters Group to put the
Polaroid name on TVs and DVDs made in Asian factories and sell them
through Wal-Mart and Target.

Polaroid went public again

later sold to Petters Group in 2005.

Again bankruptcy filing in December 2008.

Not responding to threats in its external environment

Components of External Environment

Analysis
Scanning
Monitoring
Forecasting
Assessing

Identifying early signals of environmental

changes and trends
Detecting meaning through ongoing observations of
environmental changes and trends
Developing projections of anticipated outcomes based on
monitored changes and trends
Determining the timing and importance of
environmental changes and trends for firms'
strategies and their management

Scanning and Monitoring

Scanning

identify early signals of potential changes

Detect changes that are already under way
reveals ambiguous, incomplete, unconnected data and information.
Challenging but critically important; in highly volatile environments.
activities must be aligned with the organizational context;

a scanning system designed for a volatile environment is inappropriate for a

firm in a stable

Monitoring

observe environmental changes to see if an important trend is emerging

from among those spotted through scanning.
Effective monitoring requires the firm to identify important stakeholders
as the foundation for serving their unique needs
important when a firm competes in an industry with high technological
uncertainty

Forecasting & Analysis

Analysts might forecast

time that will be required for a new technology to reach the

marketplace
length of time before different corporate training
procedures are required to deal with anticipated changes in
the composition of the workforce
how much time will elapse before changes in governmental
taxation policies affect consumers purchasing patterns.

Although gathering and organizing information is important,

appropriately interpreting that intelligence to determine if
an identified trend in the external environment is an
opportunity or threat is equally important.

External environment
Firms understand external envmt by acquiring information
Competitors, customers, and other stakeholders

to build their own base of knowledge and capabilities.

On the basis of the new information,

Firms take actions, such as building new capabilities and core

competencies
In hopes of buffering themselves from any negative
environmental effects
To pursue opportunities as the basis for better serving their
stakeholders needs

A firms strategic actions are influenced by conditions in

three parts
general, industry, and competitor - external environment

External environment

Demographic population size

Worlds population doubled (3 billion to 6 billion) in 40-year
period between 1959 and 1999.
Population growth to continue but at a slower pace.
Worlds population - 9 billion by 2040.
By 2050, India most populous nation (over 1.8 billion people).
China, the United States, Indonesia, and Pakistan

predicted - next four largest nations by population in 2050.

Firms to recognize market potential that may exist for them

in these five nations.

Demographic age structure

Worlds population is rapidly aging
People approaching retirement
Developing countries - large numbers of people under
the age of 35, birth rates declining sharply
Delayed retirements may allow companies to think of
creative ways for skilled, long-time employees to impart
their accumulated knowledge to younger employees as
they work a bit longer than originally anticipated.

Demographic geographic distribution

Geographic distribution patterns are not identical
throughout the world.
China - 60 % population lives in rural areas;
growth is in urban communities

Shanghai (current population in excess of 13 million)

Beijing (over 12.2 million).

Data suggest that firms seeking to sell their products

in China should recognize the growth in metropolitan
areas rather than in rural areas; BUT NOW..

Demographic ethnic mix

Firms might want to assess the degree to
which their goods or services could be
adapted to serve the unique needs
Changes in the ethnic mix also affect a
workforces composition

Demographic income distribution

Purchasing power and discretionary income of groups
Improved living standards over time, variations exist within and
between nations
Increase in dual-career couples

Notable effect on average incomes.

Real income declining in some nations, the household income of

dual-career couples has increased
Middle class (36%) people with one third of their income left for
discretionary spending after providing for basic food and shelter

Political Factors
Consider issues such as:

How stable is the political environment?

Will government policy influence laws that
regulate or tax your business?
What is the government's position on ethics?
What is the government's policy on the
economy?
Does government have a view on culture/religion?
Is the government involved in trading
agreements?

Economic Factors
Consider the state of a trading economy in
the short and long-terms. You need to look at:

Interest rates.
The level of inflation
Employment level
Long-term prospects for the economy
Gross Domestic Product (GDP)
Demand, supply, money, interest rates,
exchange rates, imports and exports.

Socio cultural Factors

Social and cultural influences on business vary from country
to country
Factors include:

What is the dominant religion?

What are attitudes to foreign products and services?
Does language impact upon the diffusion of products onto
markets?
How much time do consumers have for leisure?
What are the roles of men and women within society?
How long are the population living? Are the older generations
wealthy?
Do the population have a strong/weak opinion on green issues?

Socio cultural Factors

Lifestyle trends
Demographics
Consumer attitudes and opinions
Media views
Law changes affecting social factors
Brand, company, technology image
Consumer buying patterns
Fashion and role models
Major events and influences
Buying access and trends
Ethnic/religious factors
Advertising and publicity
Ethical issues

Technological Factors
Technology is vital for competitive advantage, and is a
major driver of globalization
Consider the following points:

Does technology allow for products and services to be made

more cheaply and to a better standard of quality?
Do the technologies offer consumers and businesses more
innovative products and services?
How is distribution changed by new technologies e.g. books
via the Internet, flight tickets, auctions, etc?
Does technology offer companies a new way to communicate
with consumers?

The General Environment:

Segments and Elements

Industry Environment

Industry Environment

An industry is a
group of firms
producing products
that are close
substitutes

Industry Environment
Interactions among five factors determine an industrys
profit potential; in turn, the industrys profit potential
influences choices each firm makes about strategic
actions.
The challenge for a firm is to locate a position within an
industry where it can favorably influence the five factors
or where it can successfully defend against their
influence.
The greater a firms capacity to favorably influence its
industry environment, the greater the likelihood that the
firm will earn above-average returns.

5 Forces model
Provides a framework to analyze the forces that
reduce the profits of an industry
Focuses on whether or not a force is sufficiently
strong to reduce or eliminate the profit of an
industry
Focuses on industry as a whole not on individual
firms
The stronger these forces are, the more likely the
profits will be less for the particular industry

Threat of new entrants

Threat of new entrants

Barriers to entry caused by (defensive mechanisms)

Economies of scale - minimum size requirements for profitable operations

Product Differentiation Brand loyalty by customers; entrant to spend heavy
to overcome

Capital Requirement - high initial investments and fixed costs

Cost disadvantages - Cost advantages of existing players due to experience
curve effects of operation, heavy spending on ads by existing players

Switching costs - high SC for customers; buyer to pay for addl prices as new
product to surpass existing qualities

Access to distribution channels players

Distribution channels controlled by existing

Government policy

Protected intellectual property like patents, licenses etc

Access to raw material - controlled by existing player

Scarcity of important resources, e.g. qualified expert staff
Expected retaliation

Threat of new entrants

Some industries are harder to enter than others.

The Pharmaceutical Industry, with all of its risks and high

price patents, is almost impossible for new firms to get in
on the huge profit margins
A pizza shop has a very low barrier to entry almost
anyone with an oven and some pepperoni can start one

Some industries can create barriers to entry by having

customers dedicated to their brand.

For example mineral water. It takes a small capital

investment, but big soft drink companies have squeezed out
potential competitors with huge marketing campaigns

Effects of Entry Barriers and Exit Barriers

on Industry Profits
Exit Barriers
Low

Low
Entry
Barriers

High

High

Effects of Entry Barriers and Exit Barriers

on Industry Profits
Exit Barriers
Low

Low
Entry
Barriers

High

Low,
Stable
Returns

High

Effects of Entry Barriers and Exit Barriers

on Industry Profits
Exit Barriers
Low

Low
Entry
Barriers

High

Low,
Stable
Returns
High,
Stable
Returns

High

Effects of Entry Barriers and Exit Barriers

on Industry Profits
Exit Barriers

Low
Entry
Barriers

High

Low

High

Low,
Stable
Returns

Low, Risky
Returns

High,
Stable
Returns

Effects of Entry Barriers and Exit Barriers

on Industry Profits
Exit Barriers

Low
Entry
Barriers

High

Low

High

Low,
Stable
Returns

Low, Risky
Returns

High,
Stable
Returns

High,
Risky
Returns

Bargaining Power Of Suppliers

Comprises all sources for inputs that are needed to provide
goods or services. Its high when:
Market dominated by few large suppliers
There are no substitutes for the particular input
Suppliers customers are fragmented, with low bargaining
power
The switching costs from one supplier to another are high
There is the possibility of the supplier integrating forwards
in order to obtain higher prices and margins. This threat is
especially high when

The buying industry has a higher profitability than the supplying industry
Forward integration provides economies of scale for the supplier
The buying industry hinders the supplying industry in their development
(e.g. reluctance to accept new releases of products)
The buying industry has low barriers to entry

Bargaining Power Of Buyers

Determines how much customers can impose pressure
on margins and volumes. Its high when

Buyers are large, few in number and there is a concentration of

buyers
The supplying industry comprises a large number of small
operators
The supplying industry operates with high fixed costs
The product is undifferentiated and can be replaced by
substitutes
Switching to alternative product is simple, not related to high
costs
Customers are price-sensitive
Customers could produce the product themselves
The customer knows about the production costs of the product
There is the possibility for the customer integrating backwards

Threat from substitutes

It exists if there are

Relative Price substitute

Relative quality substitute
Switching costs to buyers are low

Determined by factors like

Brand loyalty of customers

Close customer relationships
The relative price for performance of substitutes
Current trends

Threat of Substitutes
A substitute product for butter is margarine. This is a product
that is not quite the same, but the customer can get the same
value from it. When butter prices soar, people can simply choose
margarine, so the butter producers are not free to set their
prices wherever they want.

E.mail/fax instead of overnight deliveries

Plastic containers rather than glass jars
Tea instead of coffee
Sugar /sweeteners/canderal

If there was a good alternative to gasoline, would the prices

fluctuate so much?

Intensity of Rivalry Among Competitors

Industry rivalry increases when:
There are numerous or equally balanced competitors.
Industry growth slows or declines.
There are high fixed costs or high storage costs.
There is a lack of differentiation opportunities or low
switching costs.
When high exit barriers prevent competitors from
leaving the industry.
Rivalry based on price, after sale service, innovation
Telecom industry

Interpreting Industry Analysis

Low entry barriers
Suppliers and
buyers have strong
positions
Strong threats
from substitute
products
Intense rivalry
among
competitors

Unattractive
Industry
Low profit
potential

Interpreting Industry Analysis (contd)

High entry
barriers
Suppliers and
buyers have weak
positions
Few threats from
substitute
products
Moderate rivalry
among
competitors

Attractive
Industry
High profit
potential

Competitor Analysis

Competitor Analysis
Gathering and interpreting
information about all of the
companies that the firm
competes against.
Understanding the firms
competitor environment
complements the insights
provided by studying the
general and industry
environments.

Competitor Analysis
The follow-up to Industry Analysis
is effective analysis of a firms
Competitors
Industry
Environment

Competitive
Environment

Competitive Forces

Collection & evaluation of data on

competitors is essential for successful
strategy formulation

Key Questions Concerning Competitors

Their strengths
Their weaknesses
Their objectives and strategies
Their responses to external variables
Their vulnerability to our alternative strategies

Key Questions Concerning Competitors

(contd)

Our vulnerability to strategic counterattack

Our product/service positioning
Entry and exit of firms in the industry
Key factors for our current position in industry
Sales/profit rankings of competitors over time

Key Questions Concerning Competitors

(contd)

Nature of supplier & distributor relationships

The threat of substitute products/services

Should we keep our strategies secret from
employees and stakeholders?

Competitor Analysis
Competitor Intelligence

The ethical gathering of needed information

and data that provides insight into:
A competitors direction (future objectives)
A competitors capabilities and intentions
(current strategy)
A competitors beliefs about the industry (its
assumptions)
A competitors capabilities

254

2007
Thomson/South
-Western. All
rights reserved.

What Drives the competitor?

What is the competitor doing?

What can the competitor do?

What does the competitor believe

about itself and the industry?

What are the competitors

capabilities?

Competitor Analysis Components

Additional Concepts

Strategic Groups
Strategic Group Defined

A set of firms emphasizing similar strategic

dimensions (business models) and using similar
strategies
Internal competition between strategic group firms is
greater than between firms outside that strategic
group.
Extent of technological leadership, product quality,
pricing policy, distribution channels, customer service
(IBM, HP, Dell)

The World Automobile Industry: Strategic Groups

High
Ferrari
Lamborghini
Porsche

Price

Mercede
s*
BMW

Toyota
Ford
General
Motors
Chrysler
*
Honda
Nissan

Hyund
ai
Kia
Low
Low

Breadth of Product Line

High

Complementors
Complementors
The network of companies that sell complementary products
or services or are compatible with the focal firms own
product or service.
If a complementors product or service adds value to the sale
of the focal firms product or service, it is likely to create
value for the focal firm.
However, if a complementors product or service is in a market
into which the focal firm intends to expand, the complementor
can represent a formidable competitor.
Might also include suppliers and buyers
Google, STAR Alliance

 that directly sell a product (or products) or

service (or services) that complement the
product or service of another company by adding
value to mutual customers; for
example, Intel and Microsoft (Pentium processo
rs and Windows), or Microsoft
and McAfee (Microsoft Windows & McAfee antivirus).

Ethical Considerations
Practices considered both legal and ethical:
Obtaining publicly available information
Attending trade fairs and shows to obtain competitors
brochures, view their exhibits, and listen to discussions
about their products

Practices considered both unethical and illegal:

Blackmail
Trespassing
Eavesdropping
Stealing drawings, samples, or documents

What Are the Key Factors

for Competitive Success?

KSFs are competitive elements that most

affect every industry members ability to
prosper in the marketplace

Specific strategy elements

Product attributes
Resources
Competencies
Competitive capabilities

KSFs spell difference between

Profit and loss

Competitive success or failure

Identifying Industry
Key Success Factors

Answers to three questions pinpoint KSFs

On what basis do customers choose between competing

brands of sellers?

What must a seller do to be competitively successful -what resources and competitive capabilities does it
need?

What does it take for sellers to achieve a sustainable

competitive advantage?

Strategic Management Principle

A sound strategy incorporates
efforts to be competent on all
industry key success factors and to
excel on at least one factor!

The Global Challenge

Faced by Firms

Gain & maintain exports to other

nations
Defend domestic markets against
imported goods

Global Perspective
Chinas Automobile Producers Heading to the United States in 2008

Chinas auto exports doubled in 2006

China produces more cars than Germany and is the
worlds third largest automobile producer
Changfeng Group first Chinese automaker in the Detroit
Auto Show

The Global Challenge

Multinational Corporations
(MNCs)
Simultaneously globally competitive &
nationally responsive

The Global Challenge

Globalization
Worldwide integration of:

Strategy formulation
Strategy implementation
Strategy evaluation

Thank You