The External Environment:

Opportunities, Threats,
Industry Competition and
Competitor Analysis
The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
Agenda: Seven content areas
The firms external environment
General and industry environment
External environment analysis process activities
General environment segments
Porters 5 Competitive Forces
Strategic groups: Definition and influence
Competitor Analysis: Intelligence and ethics


Effects of External Environment: Philip Morris
International (PMI)
Largest international market share and leading
company in 11 of top 30 cigarette markets, looking
at future conditions of decline in smoking
Implementing strategies in anticipation of future
external environmental conditions
Working with foreign governments on regulatory framework
Opportunities in emerging markets
Smokeless tobacco in anticipation of fewer smokers- Swedish
Match AB JV to market smokeless tobacco
Support of sustainable farming
Waste reduction in manufacturing
Efficient use of natural resources
Elimination of child labor
Giving back to communities where it operates

External Environment:
General, Industry and Competitor
Three External Environments include:
General
Industry
Competitor


External Environment:
General, Industry and Competitor (Contd)
The General Environment
The broader society dimensions that influence an
industry and the firms within it
Grouped into 7 dimensions OR environmental segments
Each segment composed of elements
GM and Chrysler filed for bankruptcy, Chrysler formed
alliance with Fiat
No control over segments of environment
Segment intelligence can help re-orient strategy to
mitigate influence
The External Environment
Threat of New Entrants
Power of suppliers
Power of Buyers
Product Substitutes
Intensity of Rivalry
Competitor
Environment
Technological
Global Political/Legal
Sociocultural
Physical Economic
Demographic
Environment
Industry
External Environment:
General, Industry and Competitor (Contd)
Industry Environment
Set of factors directly influencing
A firms competitive actions/responses
Relates to Porters 5 Forces see upcoming slides
Competitor analysis: gather and interpret competitor
information
Competitor Environment
Gives details about
A firms direct and indirect competitors
The competitive dynamics expected to impact a firm's efforts to
generate above-average returns
External Environment Analysis
Opportunity
General environment condition that, if exploited, helps a
company achieve strategic competitiveness e.g P&G
market research that male members are interested in
fragrances and skin care products- gender specific
products instead of general categories

Threat
General environment condition that may hinder a
company's efforts to achieve strategic competitiveness-
Polaroid missed the digital photography trend which went
bankrupt in 2001 until acquired by Petters Group to
rejuvenate the brand 2002 onwards ; went bankrupt
again in 2008 only intangible assets being used by the
acquiring company
External Environment Analysis (Contd)
4 components of External Environment Analysis
Scanning- identifying early signals of environment
changes and trends- Amazon.com analyses the
consumer buying behavior from online transactions. PMI
scans data on tax policies on cigarettes
Monitoring Detecting meaning through ongoing
observations of environmental changes and trends.
Buying power of Hispanics in USA is estimate as $1.3
trillion by 2013- thus special products for them
Forecasting Developing projections of anticipated
outcomes based on monitored changes and trends-P&G
and Colgate are pressuring retailers for price reduction
due to private label sales and low prices
Continued..
Assessing- Determining the timing and importance of
environmental changes and trends for firms strategies
and their management. As before P&G and other
branded product companies have assessed the impact of
consumer demand for more value in branded products
due to private label product pressures arising out of
global financial crisis. Better designed smaller sized
houses by builders- space utilization, low energy needs,
better traffic movement and reliable but inexpensive
furnishings/ fixtures
General environment 7-segments and elements
Demographic
segment
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
Economic Inflation rate
Interest rate
Trade deficit/surplus
Budget deficit/surplus
Personal saving rates
Business saving rates
Gross domestic product
Political/legal Anti-trust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies
Socio-cultural Women in workforce
Workforce diversity
Attitudes about work life quality
Shift in work and career preferences
Shifts in preferences in product and service
characteristics
Technological Product innovations
Application of knowledge
Use of wireless technology
Private-government supported R&D
New communication technologies
Plant automation
Global Important political events
Critical global markets
Peace in middle east
Newly industrialized countries
Different cultural and institutional attributes
Entry of China in WTO & guanxi
Physical
environment
Energy consumption
Sources of energy development
Renewable energy efforts
Minimize environmental footprint
Water availability as resource
Environmental friendly products
Global warming
Industry Environment Analysis
Industry
Definition: Group of firms producing products that are
close substitutes
Because of blurring boundaries, customer groups and
their needs become the criteria of finding boundaries of
markets instead of industries
Industry environment, in comparison to the general
environment, has more direct effect on firms
Strategic competitiveness and
Above-average returns
Intensity of industry competition and industrys profit
potential are a function of 5 forces (See next slide)
The Five Forces of Competition Model
Threat of
New entrants
Bargaining power
of suppliers
Bargaining power
of buyers
Threat of
Substitute products
Rivalry among
Competing firms
Industry Environment Analysis (Contd)
Porters 5 Forces
1/5: New entrants
Can threaten market share of existing competitors
May bring additional production capacity
Function of two factors
1: Barriers to entry
Economies of scale in all functions: marketing, manufacturing,
purchasing and R&D- enhances firm flexibility- oracle through Sun
Microsystems, customized products can reduce entry costs Flexible
Manufacturing System- mass customization
Product differentiation- belief that product is unique through ads or
first mover, Ford-stronger, greener, tech advanced loyalty
achieved-P&G, Colgate through ads and NPD-Competitor wanting to
enter provide lower prices

Entry Barrier ..
Capital requirements-huge capital to enter, knowledge is also
required, acquisition maybe expensive to enter, it is high risk game
Switching costs- one time cost incurred by buyers- fin and psychic
cost Microsoft windows, Freq Flier Program create barriers
Access to distribution channels- Switching costs-use price breaks and
cooperative advertising to overcome barriers
Cost disadvantages independent of scale-proprietary technology, raw
material or location, government subsidies- deliver products directly
can overcome barrier of location
Govt policy- govts. provide license, permission or subsidies- liquor,
radio, TV, BANKING AND TRUCKING may have control of govt.

2: Expected retaliation- swift and harsh reaction can hold back new
players. If has major stake or huge sunk investments the retaliation will
be vigorous- locating niches may be entry mode for new players esp
SMEs- Honda entry in bike markets
Industry Environment Analysis (Contd)
Porters 5 Forces
2/5: Bargaining power of suppliers
By reducing quality and increasing price- exercise their
power
They are powerful when
1. Few large companies and more concentrated than the
industry to which they sell
2. No substitutes exists for supplier product
3. Industry firms not significant customer to supplier group.
4. Suppliers goods are critical to buyers success
5. High switching costs due to effectiveness of suppliers
products
6. Threat of forward integration

Industry Environment Analysis (Contd)
Porters 5 Forces
3/5: Bargaining power of buyers
Want to buy at lowest price, high service, better quality
They are powerful when
1. Purchase large portion of industrys total output
2. Product sales accounts for significant seller annual
revenue
3. Low switching costs (to other industry product)
4. Industry products are undifferentiated or standardized and
threat of backward integration
Buyer know the supplier costs and use internet to know cost
structure of suppliers
Industry Environment Analysis (Contd)
Porters 5 Forces
4/5: Threat of substitute products (products from outside
the industry)-wood, aluminum, glass as substitutes in construction
industry or Nutrasweet for sugar- put upper ceiling on prices
Goods or services outside of given industry perform same or
similar functions at a competitive price (i.e., plastic has replaced
steel in many applications) if low switching costs
Differentiation helps to overcome substitute threat
5/5: Intensity of Rivalry Among Competitors- when
position improves or threat to profitability occurs-rivalry happens
on price, service, innovation
Numerous or equally balanced competitors
Slow industry growth
High fixed costs or high storage costs
Lack of differentiation or low switching costs
High strategic stakes
High exit barriers
Industry Environment Analysis (Contd)
Porters 5 Forces
5/5: Intensity of Rivalry Among Competitors
High exit barriers (Contd)
1. Specialized assets
2. Fixed costs of exit (i.e., labor agreements)
3. Strategic interrelationships (i.e., one business depends on
another)
4. Emotional barriers (i.e., loyalty to employees, etc.)
5. Government and social restrictions
These 5 forces determine the attractiveness of
industry

Strategic Groups
Strategic Groups
Set of firms emphasizing similar strategic dimensions to
use a similar strategy
Dimensions: extent of technological leadership, product quality,
pricing policies, distribution channels, customer service
Such analysis is helpful in diagnosing competition, positioning and
the profitability of industry
Implications
Because firms within a group compete (offer similar products)
rivalry can be intense the greater the rivalry the greater the
threat to each firms profitability
Strengths of the 5 forces differs across strategic groups
The closer the strategic groups, in terms of strategy, the
greater the likelihood of rivalry
Strategic groups in Pharmaceutical
Industry
OTC
Drug
makers
Generic
drug
makers
Patented
drug
makers
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Percent requiring prescription
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Competitor Analysis
Competitor analysis and organization response:
What drives competitors
Shown by organization's future objectives
What the competitor is doing and can do
Revealed in organization's current strategy
What the competitor believes about the industry
Shown in organization's assumptions
What the competitors capabilities are
Shown by organization's strengths and weaknesses
Competitor Analysis Components
Future Objectives
How do our goals compare with our
competitors goals?
Where will emphasis be placed in the
future?
What is the attitude toward risk?
Current Strategy
How are we currently competing?
Does their strategy support changes
in the competitive structure?
Assumptions
Do we assume the future will be volatile?
Are we operating under a status quo?
What assumptions do our competitors
hold about the industry and themselves?
Capabilities
What are our strengths and weaknesses?
How do we rate compared to our
competitors?
Response
What will our competitors do in the future?
Where do we hold an advantage over
our competitors?
How will this change our relationship
With our competitors?
Competitor Analysis (Contd)
Competitor intelligence
Set of data and information the firm gathers to better
understand and anticipate competitors' objectives,
strategies, assumptions, and capabilities
Collect information on complementors who add value to
focal firms product and strategies- eg printers and
cameras. Intel and Microsoft are complementors or Sky
Team Alliance or Star Alliance in commercial airline
industry have complementarities
Intelligence Collection (Contd)
Follow ethical practices when gathering competitor
intelligence
Obtain public information
Attend trade fairs and shows and collect brochures, view
exhibits, listen to their discussions
Some practices may be legal, but unethical
Unethical tactics can include
Blackmail
Trespassing
Eavesdropping
Stealing drawings, samples or documents