CHAPTER 2

The External Environment:

Opportunities, Threats,
Industry Competition,
and Competitor Analysis
 KNOWLEDGE OBJECTIVES

Studying this chapter should provide you with the strategic

management knowledge needed to:
1. Explain the importance of analyzing and understanding
the firm’s external environment.
2. Define and describe the general environment and the
industry environment.
3. Discuss the four activities of the external environmental
analysis process.
4. Name and describe the general environment’s six
segments.
5. Identify the five competitive forces and explain how they
determine an industry’s profit potential.

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 KNOWLEDGE OBJECTIVES (cont’d)

Studying this chapter should provide you with the strategic

management knowledge needed to:
6. Define strategic groups and describe their influence on
the firm.
7. Describe what firms need to know about their
competitors and different methods (including ethical
standards) used to collect intelligence about them.

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 FIGURE 2.1 The External Environment

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 General Environment
• Dimensions in the broader society that influence an
industry and the firms within it:
– Demographic
– Economic
– Political/legal
– Sociocultural
– Technological
– Global

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 TABLE 2.1 The General Environment: Segments and Elements

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 Center Stage for the Twenty-first
Century
Power Plays in the Indian Ocean

Americans, in particular, concentrate on the Atlantic and

Pacific Oceans

The Indian Ocean is dominated by two immense bays,

the Arabian Sea and the Bay of Bengal

Trade in frankincense, spices, precious stones, and textiles

brought together the peoples flung along its long shoreline
during the Middle Ages.
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 Even today, in the jet and information age, 90 percent
of global commerce and about 65 percent of all oil
travel by sea.

Moreover, 70 percent of the total traffic of petroleum products passes

through the Indian Ocean, on its way from the Middle East to the Pacific.

Global energy needs are expected to rise by 45 percent between 2006 and 2030, and
almost half of the growth in demand will come from India and China. China's demand
for crude oil doubled between 1995 and 2005 and will double again in the coming 15
years or so; by 2020, China is expected to import 7.3 million barrels of crude per day --
half of Saudi Arabia's planned output. More than 85 percent of the oil and oil products
bound for China cross the Indian Ocean and pass through the Strait of Malacca.

India’s coal imports from far-off Mozambique are set to increase substantially, adding
to the coal that India already imports from other Indian Ocean countries, such as South
Africa, Indonesia, and Australia. In the future, India-bound ships will also be carrying
increasingly large quantities of liquefied natural gas (LNG) across the seas from
southern Africa, even as it continues importing LNG from Qatar, Malaysia, and
Indonesia.
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 State Capitalism Comes of Age
The End of the Free Market?
Across the United States, Europe, and much of the rest of the
developed world, the recent wave of state interventionism is meant
to the state's heavy hand in the economy is signaling a strategic
rejection of free-market doctrine.
PRINCIPAL ACTORS

State capitalism has four primary actors:

national oil corporations,
state-owned enterprises,
privately owned national champions, and
sovereign wealth funds (SWFs).
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When thinking of "big oil," most Americans think first of
multinational corporations such as BP, Chevron, ExxonMobil,
Shell, or Total. But the 13 largest oil companies in the world,
measured by their reserves, are owned and operated by
governments -- companies such as Saudi Arabia's Saudi Aramco;
the National Iranian Oil Company; Petróleos de Venezuela, S.A.;
Russia's Gazprom and Rosneft; the China National Petroleum
Corporation; Malaysia's Petronas; and Brazil's Petrobras.

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State-owned companies such as these control more than 75 percent of global oil
reserves and production. Instead, they want to use the market to bolster their
own domestic political positions. State-owned enterprises help them do this, in
part by consolidating whole industrial sectors.

Angola's Endiama (diamonds), Azerbaijan's AzerEnerji (electricity generation),

Kazakhstan's Kazatomprom (uranium), and Morocco's Office Chérifien des
Phosphates -- all of these state-owned firms are by far the largest domestic
players in their respective sectors. Some state-owned enterprises have grown
particularly enormous, most notably Russia's fixed-line-telephone and arms-
export monopolies; China's aluminum monopoly, power-transmission duopoly,
and major telecommunications companies and airlines; and India's national
railway, which is among the world's largest nonmilitary employers, with over
1.4 million employees.
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A more recent trend has complicated this phenomenon. In some developing countries, large
companies that remain in private hands rely on government patronage in the form of credit,
contracts, and subsidies.

These privately owned but government-favored national champions get breaks from the
government, which sees them as a means of competing with purely commercial foreign
rivals, and they are thus able to carve out a dominant role in the domestic economy and in
export markets. In turn, these companies use their clout with their governments to gobble
up smaller domestic rivals, reinforcing the companies' strength as pillars of state capitalism.

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 The largest SWFs are those in the emirate of Abu Dhabi,
Saudi Arabia, and China, with Russia playing catch-up. The
only democracy represented among the ten largest SWFs is
Norway.

The task of financing these companies has fallen in part to SWFs,

and this has greatly expanded those funds' size and significance.
They act as repositories for excess foreign currency earned from
the export of commodities or manufactured goods. But SWFs are
more than just bank accounts. They are state-owned investment
funds with mixed portfolios of foreign currencies, government
bonds, real estate, precious metals, and direct stakes in -- and
sometimes majority ownership of -- a host of domestic and
foreign firms. Like all investment funds, SWFs look to maximize
returns. But for state capitalists, these returns can be political as
well as economic.
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 In short, despite the global financial crisis, national oil companies still control
three-quarters of the world's primary strategic resources, state-owned
enterprises and privately owned national champions still enjoy substantial
competitive advantages over their private-sector rivals, and SWFs are still flush
with cash. These companies and institutions are truly too big to fail.

Other protectionist initiatives have begun to weigh on global commerce. China has
reinstated tax relief for certain exporters. Russia has limited foreign investment in 42
"strategic sectors" and imposed new duties on imported cars, pork, and poultry.
Indonesia has imposed import tariffs and licensing restrictions on over 500 types of
foreign products. India has added a 20 percent levy on soybean oil imports. Argentina
and Brazil are publicly considering new tariffs on imported textiles and wine. South
Korea refuses to drop its trade barriers against U.S. auto imports. France has announced
the creation of a state fund to protect domestic companies from foreign takeover.

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 A growing number of Americans have come to believe that globalization moves
their jobs to other countries, depresses their wages, and exposes U.S. consumers to
shoddy foreign products. If U.S. would do well to relearn the lessons of the 1930
Smoot-Hawley Tariff Act, which raised tariffs on 20,000 imported goods to record
levels, prompted retaliation in kind, and thus deepened and lengthened the Great
Depression.

The global financial crisis has created an illusion of international unity based on the
mistaken fear that everyone is sinking in the same boat. A year ago, the talk in policy
circles was of "decoupling," the process by which emerging economies develop a
domestic base for growth broad enough to free them from dependence on consumer
demand in the United States and Europe. Predictions of decoupling have proved
premature. Economic problems originating largely in the United States have forced a hard
landing in dozens of developing countries by crushing demand for their exports.

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 Bangladesh Business Community
1972-75 Mojib Socialistic Approach War

1976-81 Jia Mixed Stability

1981-90 Ershad Mixed Corruption

1991-95 Khaleda Open market Corruption

STRATEGIC And World Market

1996-2001 Hasina FDI Corruption And
MANAGEMENT World Market
INPUTS
2001-2006 Khaleda FDI and Corruption Corruption

Strategic Management
2007-2008 CaG
Competitiveness
ICU
and Globalization:
Emergency
PowerPoint Presentation by Charlie Cook
Concepts and Cases Seventh edition
The University of West Alabama
2009-till
© 2007 Thomson/South-Western. Hasina Global Financial Crisis & Merger, Acquisition
All rights reserved. Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
PPP & Confusion
 Industry Environment
• The set of factors directly influencing 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
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 Competitor Analysis
• Gathering and interpreting
information about all of the
companies that the firm
competes against.
• Understanding the firm’s
competitor environment
complements the insights
provided by studying the
general and industry
environments.

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 Analysis of the External
Environments
• General environment
– Focused on the future
• Industry environment
– Focused on factors and conditions influencing a
firm’s profitability within an industry
• Competitor environment
– Focused on predicting the dynamics of
competitors’ actions, responses and intentions
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 TABLE 2.2 Components of the External Environmental Analysis

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

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 Opportunities and Threats
• 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.

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 Segments of the General
Environment
• The Demographic Segment
– Population size
– Age structure
– Geographic distribution
– Ethnic mix
– Income distribution

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 Segments of the General
Environment (cont’d)
• The Economic Segment
– Inflation rates
– Interest rates
– Trade deficits or surpluses
– Budget deficits or surpluses
– Personal savings rate
– Business savings rates
– Gross domestic product
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 Segments of the General
Environment (cont’d)
• The Political/Legal
Segment
– Antitrust laws
– Taxation laws
– Deregulation philosophies
– Labor training laws
– Educational philosophies
and policies
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 Segments of the General
Environment (cont’d)
• The 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
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 Segments of the General
Environment (cont’d)
• The Technological Segment
– Product innovations
– Applications of knowledge
– Focus of private and government-supported
R&D expenditures
– New communication technologies

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 Segments of the General
Environment (cont’d)
• The Global Segment
– Important political events
– Critical global markets
– Newly industrialized countries
– Different cultural and
institutional attributes

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 Industry Environment Analysis
• Industry Defined
– A group of firms producing products that are
close substitutes
• Firms that influence one another
• Includes a rich mix of competitive strategies that
companies use in pursuing strategic
competitiveness and above-average returns

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 FIGURE 2.2 The Five Forces of Competition Model

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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
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 Barriers to Entry
• Economies of Scale
– Marginal improvements in efficiency that a firm
experiences as it incrementally increases its size
• Factors (advantages and disadvantages)
related to large- and small-scale entry
– Flexibility in pricing and market share
– Costs related to scale economies
– Competitor retaliation
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 Barriers to Entry (cont’d)
• Product differentiation
– Unique products
– Customer loyalty
– Products at competitive
prices
• Capital Requirements
– Physical facilities
– Inventories
– Marketing activities
– Availability of capital
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• Switching Costs
– One-time costs customers incur
when they buy from a different
supplier
• New equipment
• Retraining employees
• Psychic costs of ending a
relationship
• Access to Distribution
Channels
– Stocking or shelf space
– Price breaks
– Cooperative advertising
allowances
2–32
 Barriers to Entry (cont’d)
• Cost Disadvantages • Expected retaliation
Independent of Scale – Responses by existing
– Proprietary product competitors may depend
technology on a firm’s present stake in
– Favorable access to raw the industry (available
materials business options)
– Desirable locations
• Government policy
– Licensing and permit
requirements
– Deregulation of industries

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 Bargaining Power of Suppliers
• Supplier power increases when:
– Suppliers are large and few in number.
– Suitable substitute products are not available.
– Individual buyers are not large customers of suppliers
and there are many of them.
– Suppliers’ goods are critical to the buyers’ marketplace
success.
– Suppliers’ products create high switching costs.
– Suppliers pose a threat to integrate forward into buyers’
industry.
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 Bargaining Power of Buyers
• Buyer power increases when:
– Buyers are large and few in number.
– Buyers purchase a large portion of an industry’s total
output.
– Buyers’ purchases are a significant portion of a
supplier’s annual revenues.
– Buyers’ switching costs are low.
– Buyers can pose threat to integrate backward into
the sellers’ industry.
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 Threat of Substitute Products
• The threat of substitute products increases
when:
– Buyers face few switching costs.
– The substitute product’s price is lower.
– Substitute product’s quality and performance are
equal to or greater than the existing product.
• Differentiated industry products that are
valued by customers reduce this threat.
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 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 the strategic stakes are high.
– When high exit barriers prevent competitors from
leaving the industry.
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 Interpreting Industry Analyses
Low entry barriers

Suppliers and buyers

have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
Low profit potential
among competitors

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 Interpreting Industry Analyses
(cont’d)
High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
among competitors High profit potential

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 Strategic Groups
• Strategic Group Defined
– A set of firms emphasizing similar strategic
dimensions and using similar strategies
• Internal competition between strategic group firms is
greater than between firms outside that strategic group.
• There is more heterogeneity in the performance of
firms within strategic groups.
– Similar market positions
– Similar products
– Similar strategic actions

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 Strategic Groups
• Strategic Dimensions
– Extent of technological leadership
– Product quality
– Pricing Policies
– Distribution channels
– Customer service

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 Competitor Analysis
• Competitor Intelligence
– The ethical gathering of needed information
and data that provides insight into:
• A competitor’s direction (future objectives)
• A competitor’s capabilities and intentions (current
strategy)
• A competitor’s beliefs about the industry (its
assumptions)
• A competitor’s capabilities

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 FIGURE 2.2

Competitor
Analysis
Components

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 Competitor Analysis (cont’d)
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?

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 Competitor Analysis (cont’d)
Future Objectives
• How are we currently
competing?
Current Strategy • Does this strategy
support changes in the
competitive structure?

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 Competitor Analysis (cont’d)
Future Objectives

• Do we assume the future

Current Strategy will be volatile?
• Are we operating under
Assumptions a status quo?
• What assumptions do
our competitors hold
about the industry and
themselves?

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 Competitor Analysis (cont’d)
Future Objectives

Current Strategy

Assumptions
• What are our strengths
and weaknesses?
Capabilities • How do we rate
compared to our
competitors?

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 Competitor Analysis (cont’d)
Future Objectives Response

• What will our

Current Strategy competitors do in the
future?
Assumptions • Where do we hold an
advantage over our
competitors?
Capabilities • How will this change
our relationship with
our competitors?
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 Complementors
• Complementors
– The network of companies that sell complementary
products or services or are compatible with the
focal firm’s own product or service.
• If a complementor’s product or service adds value to the
sale of the focal firm’s product or service, it is likely to
create value for the focal firm.
• However, if a complementor’s product or service is in a
market into which the focal firm intends to expand, the
complementor can represent a formidable competitor.

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 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
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