CHAPTER II

The External Environment Analysis

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Learning Objectives
• Understand the General, Industry and Competitor Environments

• Define the External Environmental Analysis

• Describe the Segments of the General Environment
• Explain the Industry Environment Analysis(Porter's FF)
• Explain the Competitor Analysis
• Understand the Ethical consideration

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 General, Industry and Competitor
Environments

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 General, Industry and Competitor
Environments
• 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 general environment is composed of dimensions in the broader society that influence an
industry and the firms within it.
• We group these dimensions into six environmental segments:
 demographic
 economic
 political/legal
 sociocultural
 technological and;
 global

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 General Industry and Competitor
Environments cont.
• The industry environment is the set of factors that directly influences a firm
and its competitive actions and competitive responses:
 the threat of new entrants
 the power of suppliers
 the power of buyers
 the threat of product substitutes
 and the intensity of rivalry among competitors

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 General Industry and Competitor
Environments cont.
• How companies gather and interpret information about their competitors is called
competitor analysis.
• Understanding the firm’s competitor environment complements the insights provided
by studying the general and industry environments.
• 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.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 External Environmental Analysis

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 External Environmental Analysis
• Analyzing the external environment is a difficult, yet significant, activity.
• An important objective of studying the general environment is identifying opportunities
and threats.
• An opportunity is a condition in the general environment that, if exploited, helps a
company achieve strategic competitiveness.
• A threat is a condition in the general environment that may hinder a company’s efforts
to achieve strategic competitiveness.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

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
 Segments of the General Environment

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 Segments of the General Environment cont.
• The Demographic Segment
• The Economic Segment
• The Political/Legal Segment
• The Sociocultural Segment
• The Technological Segment
• The Global Segment

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Demographic Segment
• The demographic segment is concerned with a population’s size,
age structure, geographic distribution, ethnic mix, and income
distribution.
• Often demographic segments are analyzed on a global basis
because of their potential effects across countries’ borders and
because many firms compete in global markets.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 The Economic Segment
• The economic environment refers to the nature and direction of
the economy in which a firm competes or may compete.
• Because nations are interconnected as a result of the global
economy, firms must scan, monitor, forecast, and assess the health
of economies outside their host nation.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 The Political/Legal Segment
• 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.
• Essentially, this segment represents how organizations try to influence government and
how governments influence them. As the politics of regulations change, this segment
influences the nature of competition through changing the rules.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 The Sociocultural Segment
• The sociocultural segment is concerned with a society’s attitudes and cultural
values. Because attitudes and values form the cornerstone of a society, they
often drive demographic, economic, political/legal, and technological
conditions and changes.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 The Technological Segment
• The technological segment includes the institutions and activities
involved with creating new knowledge and translating that
knowledge into new outputs, products, processes, and materials.
• Given the rapid pace of technological change, it is vital for firms
to thoroughly study the technological segment.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 The Global Segment
• 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.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Industry Environment Analysis

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Industry Environment Analysis
1. Threat of New Entrants

Identifying new entrants is important because they can threaten the market share of
existing competitors. One reason new entrants pose such a threat is that they bring
additional production capacity.

2. Bargaining Power of Suppliers

Is the mirror image of the bargaining power of buyers and refers to the pressure that
suppliers can put on companies by raising their prices, lowering their quality, or reducing
the availability of their products.

3. Bargaining Power of Buyers

Buyers (customers of an industry or a firm) want to buy products at the lowest

possible price—the point at which the industry earns the lowest acceptable rate of return
on its invested capital.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Industry Environment Analysis cont.
4. Threat of Substitute Product

Substitute products are goods or services from outside a given industry that
perform similar or the same functions as a product that the industry produces.

5. Intensity of Rivalry Among Competitors

Competitive rivalry intensifies when a firm is challenged by a competitor’s actions

or when a company recognizes an opportunity to improve its market position.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Competitor Analysis

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Competitor Analysis
• The competitor environment is the final part of the external environment requiring
study.
• Competitor analysis focuses on each company against which a firm directly competes.
• For example, XM and SIRIUS satellite radio, should be keenly interested in
understanding each other’s objectives, strategies, assumptions, and capabilities.
• Furthermore, intense rivalry creates a strong need to understand competitors.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Ethical Consideration

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

 Ethical Consideration
• Firms should follow generally accepted ethical practices in gathering
competitor intelligence.
• A certain practices (including blackmail, trespassing, and stealing drawings,
samples, or documents) are widely viewed as unethical and often are illegal.
To protect themselves from digital fraud or theft by competitors that break into their
employees’ PCs, some companies buy insurance to protect against PC hacking.

© Hitt, Ireland and Hoskisson, 2017, published by South-Western Cengage Learning

Thank you!   