Chapter 2

The External Environment:

Opportunities, Threats, Industry
Competition, and Competitor Analysis

Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson

©2000 South-Western College Publishing

Ch2-1
 Chapter 2
Strategic External
Environment
The Strategic
Inputs
Strategic Intent
Strategic Mission
Management
Chapter 3
Internal Process
Environment

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Feedback Above Average
Returns
Ch2-2
Components of the General Environment
Economic

Demographic
Sociocultural
Industry
Environment

Competitive
Environment
Political/
Legal Global

Technological
Ch2-3
Components of the General Environment
Demographic  Population size  Ethnic mix
Segment  Age structure  Income distribution
 Geographic distribution
Economic  Inflation rates  Personal savings rate
Segment
 Interest rates  Business savings rates
 Trade deficits or surpluses  Gross domestic product
 Budget deficits or surpluses
Political/Legal  Antitrust laws  Labor training laws
Segment  Taxation laws  Educational philosophies and
policies
 Deregulation philosophies
Sociocultural  Women in the workforce  Concerns about the
Segment  Workforce diversity environment
 Attitudes about work life  Shifts in work and career
preferences
quality
 Shifts in preferences regarding
product and service
characteristics
Technological  Product innovations  Focus of private and
Segment government-supported R&D
 Applications of knowledge expenditures
 New communication
technologies
Global  Important political events  Newly industrialized countries
Segment  Critical global markets  Different cultural and
institutional attributes
Ch2-4
 External Environmental Analysis
The external environmental analysis process should be
conducted on a continuous basis. This process includes
four activities:

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 Ch2-5
 External Environmental Analysis

States in the top 10 of Top 10 U.S. States Moving

those that are trying to
transform themselves to Rank
the realities and needs of
a digital economy may
experience an influx of
high-tech companies and
skilled workers as well as
increases in tax revenues
Toward Digital Economy
State
1 Massachusetts
2 California
3 Colorado
4 Washington
5 Connecticut
6 Utah
7 New Hampshire
8 New Jersey
9 Delaware
10 Arizona

Ch2-6
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Ch2-7
 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry Capital Requirements

Switching Costs
Access to Distribution Channels

Cost Disadvantages Independent

of Scale
Government Policy

Expected Retaliation
Ch2-8
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining
Power of
Suppliers

Ch2-9
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Supplier industry is dominated by a
few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to
supplier
Suppliers’ product is an important
input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration
Ch2-10
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Ch2-11
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases

are large relative to seller’s sales Buyers compete
Purchase accounts for a significant with the supplying
fraction of supplier’s sales industry by:

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

* Playing firms off of
Buyers’ industry earns low profits each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information Ch2-12
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
Ch2-13
 Threat of Substitute Products
Keys to evaluate substitute products:

Products Products with improving

with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
Ch2-14
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
Ch2-15
 Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors

Ch2-16
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
Ch2-17
Rivalry Among Existing Competitors
High exit barriers are economic, strategic and
emotional factors which cause companies to remain
in an industry even when future profitability is
questionable.

Specialized assets
Fixed cost of exit (e.g., labor agreements)
Strategic interrelationships
Emotional barriers
Government and social restrictions

Ch2-18
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low

Entry
Barriers

High

Ch2-19
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable
Low
Returns
Entry
Barriers

High

Ch2-20
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable
Low
Returns
Entry
Barriers

High, Stable
High
Returns

Ch2-21
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable Low, Risky

Low
Returns Returns
Entry
Barriers

High, Stable
High
Returns

Ch2-22
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable Low, Risky

Low
Returns Returns
Entry
Barriers

High, Stable High, Risky

High
Returns Returns

Ch2-23
 Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors

Industry
Environment

Competitive
Environment

Ch2-24
 Competitor Analysis
Assumptions
What assumptions do our
competitors hold about the future Response
of industry and themselves?
What will our
Current Strategy competitors do in the
Does our current strategy support future?
changes in the competitive Where do we have a
environment? competitive
Future Objectives advantage?
How do our goals compare to our How will this change
competitors’ goals? our relationship with
our competition?
Capabilities
How do our capabilities compare
to our competitors?
Ch2-25
 Competitor Analysis
Future Objectives What Drives the competitor?
How do our goals compare
to our competitors’ goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?

Ch2-26
 Competitor Analysis
Future Objectives What is the competitor doing?
How do our goals compare What can the competitor do?
to our competitors’ goals?
Where Current
will emphasisStrategy
be
placed inHow
the future?
are we currently
What is the attitude
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?

Ch2-27
 Competitor Analysis
Future Objectives What does the competitor believe
How do our goals compare about itself and the industry?
to our competitors’ goals?
Where Current
will emphasisStrategy
be
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does thisDostrategy
we assume the future
support changes in the
will be volatile?
competition
What structure?
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?

Ch2-28
 Competitor Analysis
Future Objectives What are the competitor’s
How do our goals compare capabilities?
to our competitors’ goals?
Where Current
will emphasis Strategy
be
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does thisDostrategy
we assume the future
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitorsCapabilities
hold about the
industry and themselves?
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors? Ch2-29
 Competitor Analysis
Future Objectives Response
How do our goals compare What will our competitors
to our competitors’ goals? do in the future?
Where Current
will emphasis Strategy
be Where do we have a
placed in the future? competitive advantage?
How are we currently
What is the attitude
competing? How will this change our
toward risk? Assumptions relationship with our
Does thisDostrategy
we assume the future competition?
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitorsCapabilities
hold about the
industry and themselves?
What are my competitors’
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors? Ch2-30