Chapter Two

The External Environment

Introduction
General Environment
Industry Environment
Competitor Environment
External Environmental Analysis
Industry Environment Analysis
Interpreting Industry Analyses
Competitor Analysis
Introduction

• An integrated understanding of the external and internal

environments is essential for firms to understand the
present and predict the future.

• A firm’s external environment is divided into three major

areas: the general, industry, and competitor environments.
The External
Environment
 General Environment
The general environment is composed of dimensions in the broader
society that influence an industry and the firms within it.
• Firms cannot directly control the general environment’s segments and
elements. Accordingly, successful companies gather the information
required to understand each segment and its implications for the
selection and implementation of the appropriate strategies.
 Industry Environment
• The Industry Environment is the set of factors that directly influences
a firm and its competitive actions and competitive responses:

• Threat of new entrants

• Power of suppliers
• Power of buyers
• Threat of product substitutes
• Intensity of rivalry among competitors

The interactions among these five factors determine an industry’s

profit potential. The challenge is to locate a position within an
industry where a firm can favorably influence those factors or
where it can successfully defend against their influence.
 Competitor Environment
• All of the companies that the firm competes against.
• How companies gather and interpret information about their
competitors is called competitor analysis.
• Understanding its competitor environment may be critical to the
survival of firms
 ….cont’d
Generally:
• Analysis of the general environment is focused on the future;
• Analysis of the industry environment is focused on the factors
and conditions influencing a firm’s profitability within its
industry; and
• Analysis of competitors is focused on predicting the dynamics
of competitors’ actions, responses, and intentions.

• In combination, the results of the three analyses the firm uses

to understand its external environment influence its vision,
mission, and strategic actions.
 External Environmental Analysis
• Most firms face external environments that are highly
turbulent, complex, and global conditions that make
interpreting them increasingly difficult.
•Opportunity
• A condition in the general environment that if
exploited, helps a company achieve strategic
competitiveness
•Threat
• A condition in the general environment that may
hinder a company’s efforts to achieve strategic
competitiveness
Components of the External Environmental Analysis
Segments of the General Environment
The Economic Segment: The
economic environment refers to
the nature and direction of the
economy in which a firm competes
or may compete.
• Inflation rates
• Interest rates
• Trade deficits or surpluses
• Budget deficits or
surpluses
• Personal savings rate
• Business savings rates
• Gross domestic product
 …cont’d
The sociocultural segment is
concerned with a society’s
attitudes and cultural values.
• Women in the workplace
• Workforce diversity
• Attitudes about quality of
work life
• Concerns about environment
• Shifts in work and career
preferences
• Shifts in product and service
preferences
 ….cont’d
The global segment includes
relevant new global markets,
existing markets that are
changing, important international
political events, and critical
cultural and institutional
characteristics of global markets.
• Globalization
• Global Economy
 ….cont’d
The technological segment
includes the institutions and
activities involved with creating
new knowledge and translating
that knowledge into new outputs,
products, processes, and
materials.
• New communication
technologies
• Product innovations
• technological change
• Internet technology
 ….cont’d
The political/legal segment is the
arena in which organizations and
interest groups compete for
attention, resources, and a voice in
overseeing the body of laws and
regulations guiding the interactions
among nations.
• Taxation laws
• Labor training laws
• Educational and policies
 ….cont’d
• The Demographic Segment
• Population size
• Age structure
• Geographic distribution
• Income distribution
 Industry Environment Analysis
• Industry is : A group of firms producing products that are close
substitutes
• In the course of competition, these firms influence one
another.
• Typically, industries include a rich mix of competitive strategies
that companies use in pursuing strategic competitiveness and
above-average returns.
The Five Forces of Competition Model
The intensity of industry competition and an industry’s profit
potential are functions of five forces of competition:
 Interpreting Industry Analyses
Low entry barriers

Suppliers and buyers have

strong positions

Unattractive
Strong threats from
substitute products
Industry

Intense rivalry among

competitors Low profit potential
 ….cont’d
High entry barriers

Suppliers and buyers have

weak positions

Attractive
Few threats from
substitute products
Industry

Moderate rivalry among

competitors High profit potential
 Competitor Analysis
• Competitor analysis focuses on each company against which a
firm directly competes.
• Competitor intelligence is the set of data and information the
firm gathers to better understand and better anticipate
competitors’ objectives, strategies, assumptions, and
capabilities.
• In a competitor analysis, the firm seeks to understand:
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 the industry, as shown by its
assumptions.
What the competitor’s capabilities are, as shown by its strengths
and weaknesses.
Competitor Analysis
Components
Competition in business