The External Environment:

Opportunities, Threats, and Industry

Competition, and Competitor Analysis
Strategic Inputs
Chapter 2
The External
The Strategic
Environment
Strategic Intent
Strategic Mission
Management
Chapter 3
The Internal
Environment
Process
Strategy Formulation Strategy Implementation
Chapter 5 Chapter 11
Chapter 4 Chapter 6 Chapter 10
Competitive Rivalry Organizational
Strategic Actions

Business-Level Corporate- Corporate

and Competitive Structure and
Strategy Level Strategy Governance
Dynamics Controls

Chapter 7
Chapter 8 Chapter 9 Chapter 12 Chapter 13
Acquisition and
International Cooperative Strategic Strategic
Restructuring
Strategy Strategy Leadership Entrepreneurship
Strategies
Strategic Outcomes

Strategic
Competitiveness
Above-Average
Returns
Feedback
The External Environment
Environment
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Threat of new entrants

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Power of suppliers
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Power of buyers
Product substitutes
Intensity of rivalry

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General
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
 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
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Bargaining Power of
Buyers
 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
 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.
 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?
• Does this strategy support
Current strategy 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 the
Assumptions industry and themselves?
 Competitor Analysis
Future objectives Capabilities:
• What are our strengths and
weaknesses?
• How do we rate compared to
Current strategy 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
Capabilities relationship with our
competitors?