Chapter 2

The External Environment:

Opportunities, Threats, Industry
Competition, and Competitor Analysis

2
The Strategic Management Process
Chapter 1
Strategic Introduction to
Chapter 2
Thinking Strategic Leadership
Strategic Management

Chapter 3
Strategic The External
Analysis Environment

Chapter 5 Chapter 6
Chapter 7
Business-Level Competitive Rivalry and
Creating Corporate-Level Strategy
Strategy Competitive Dynamics
Competitive
Advantage Chapter 8
Chapter 9 Chapter 10
Acquisition and
International Strategy Cooperative Strategy
Restructuring Strategies

Monitoring
And Creating Chapter 11 Chapter 12
Entrepreneurial Corporate Governance Strategic Entrepreneurship
Opportunities 3
Discussion Questions
1. What are the components of the general
environment? How does each affect the strategy
of a firm?
2. What are the five competitive forces in an
industry environment?
3. What attributes make each of the five competitive
forces intense?
4. What is a strategic group and why is it an
important concept?
Discussion Questions (cont.)
5. How do you conduct a competitor analysis?
 Discussion Question 1

What are the components of the

general environment? How does each
affect the strategy of a firm?
The External Environment
Environment
Economic

Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry

Competitor
Environment

Technological

General

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External Environmental Analysis
A continuous process which includes
 Scanning: Identifying early signals of
environmental
changes and trends
 Monitoring: Detecting meaning through ongoing
observations of environmental changes and trends
 Forecasting: Developing projections of anticipated
outcomes based on monitored changes and trends
 Assessing: Determining the timing and importance
of environmental changes and trends for firms’
strategies and their management
External Environmental Analysis
Analysis of general environment

Analysis of industry environment

Analysis of competitor environment

The External
Environment

Strategic Intent
Strategic Mission
General Environment
• Sociocultural segment
 Women in the workplace
 Workforce diversity
 Attitudes about quality of worklife
 Concerns about environment
 Shifts in work and career preferences
 Shifts in product and service preferences
 General Environment
 Economic segment
 Inflation rates
 Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic product
 General Environment
• Political/Legal Segment
 Antitrust laws
 Taxation laws
 Deregulation philosophies
 Labor training laws
 Educational philosophies and policies
 General Environment
 Technological Segment
 Product innovations
 Applications of knowledge
 Focus of private and government-supported R&D
expenditures
 New communication technologies
 General Environment
• Global Segment
 Important political events
 Critical global markets
 Newly industrialize countries
 Different cultural and institutional attributes
 General Environment
 Demographic Segment
 Population size
 Age structure
 Geographic distribution
 Ethnic mix
 Income distribution
 Discussion Question 2

What are the five competitive forces in an

industry environment?
Industry Environment
• A set of factors that directly influences a company
and its competitive actions and responses
• Interaction among these factors determine an
industry’s profit potential

 Threat of new entrants

 Power of suppliers
 Power of buyers
 Product substitutes
 Intensity of rivalry
 Five Forces Model of Competition
• Identify current and potential competitors and determine which firms
serve them
• Conduct competitive analysis
• Recognize that suppliers and buyers can become competitors
• Recognize that producers of potential substitutes may become
competitors
Five Forces Model of Competition

Five Forces of
Competition

Bargaining Power of Buyers

Discussion Question 3

What attributes make each of the five

competitive forces intense?
Threat of New Entrants
• Barriers to entry
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of scale
 Government policy
 Expected retaliation
 Bargaining Power of Suppliers
• A supplier group is powerful when:
 it is dominated by a few large companies
 satisfactory substitute products are not available to industry firms
 industry firms are not a significant customer for the supplier
group
 suppliers’ goods are critical to buyers’ marketplace success
 effectiveness of suppliers’ products has created high switching
costs
 suppliers are a credible threat to integrate forward into the buyers’
industry
Bargaining Power of Buyers
• Buyers (customers) are powerful when:
 they purchase a large portion of an industry’s total output
 the sales of the product being purchased account for a
significant portion of the seller’s annual revenues
 they could easily switch to another product
 the industry’s products are undifferentiated or standardized,
and buyers pose a credible threat if they were to integrate
backward into the seller’s industry
Threat of Substitute Products
• Product substitutes are strong threat when:

 customers face few switching costs

 substitute product’s price is lower
 substitute product’s quality and performance capabilities are
equal to or greater than those of the competing product
Intensity of Rivalry
• Intensity of rivalry is stronger when competitors:
 are numerous or equally balanced
 experience slow industry growth
 have high fixed costs or high storage costs
 lack differentiation or low switching costs
 experience high strategic stakes
 have high exit barriers
High Exit Barriers
• Common exit barriers include:
 specialized assets (assets with values linked to a particular
business or location)
 fixed costs of exit such as labor agreements
 strategic interrelationships (relationships of mutual dependence
between one business and other parts of a company’s operation,
such as shared facilities and access to financial markets)
 emotional barriers (career concerns, loyalty to employees, etc.)
 government and social restrictions
 Discussion Question 4

What is a strategic group and why is it

an important concept?
Strategic Groups
Strategic group: a group of firms in an industry
following the same or similar strategy along the same
strategic dimensions
The strategy followed by a strategic group differs from
strategies being implemented by other companies in
the industry
 Discussion Question 5

How do you conduct a competitor

analysis?

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Competitor Environment
Competitor intelligence is the ethical gathering of
needed information and data about competitors’
objectives, strategies, assumptions, and capabilities
 what drives the competitor as shown by its future objectives
 what the competitor is doing and can do as revealed by its current
strategy
 What the competitor believes about itself and the industry, as
shown by its assumptions
 What the the competitor may be able to do, as shown by its
capabilities
Competitor Analysis
Future Objectives:
Future objectives
 How do our goals
compare with our
competitors’ goals?
 Where will the emphasis
be placed in the future?
 What is the attitude
toward risk?
Competitor Analysis
Future objectives
Current Strategy:
 How are we currently
competing?
Current strategy
 Does this strategy
support changes in the
competitive structure?
Competitor Analysis
Future objectives
Assumptions:
 Do we assume the future
will be volatile?
 Are we operating under a
Current strategy
status quo?
 What assumptions do our
competitors hold about
Assumptions
the industry and
themselves?

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Competitor Analysis
Future objectives
Capabilities:
 What are our strengths
and weaknesses?
Current strategy  How do we rate compared
to our competitors?

Assumptions

Capabilities
Competitor Analysis
Future objectives Response

Response:
Current strategy  What will our competitors do
in the future?
 Where do we hold an
Assumptions advantage over our
competitors?
 How will this change our
relationship with our
Capabilities competitors?