Chapter 2

The External Environment: Opportunities,

Threats, and Industry Competition, and
Competitor Analysis

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

©2003 Southwestern Publishing Company 1

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
2
Feedback
The External Environment
Environment
Sociocultural

Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
Competitor
Environment

Technological

General 3
 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

4
External Environmental Analysis
Analysis of general environment
Analysis of industry environment
Analysis of competitor environment

The External
Environment
Strategic Intent
Strategic Mission

5
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

6
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

7
General Environment
 Political/Legal Segment
 Antitrust laws
 Taxation laws
 Deregulation philosophies
 Labor training laws
 Educational philosophies and policies

8
General Environment
 Technological Segment
 Product innovations
 Applications of knowledge
 Focus of private and government-supported
R&D expenditures
 New communication technologies

9
General Environment
 Global Segment
 Important political events
 Critical global markets
 Newly industrialize countries
 Different cultural and institutional attributes

10
General Environment
 Demographic Segment
 Population size
 Age structure
 Geographic
distribution
 Ethnic mix
 Income distribution

11
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
12
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.

13
Five Forces Model of Competition

Five Forces of
Competition

Bargaining Power of
Buyers 14
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

15
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 16
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 17
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

18
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

19
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
20
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.

21
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 22
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?

23
Competitor Analysis
Current Strategy:
Future objectives
 How are we currently
competing?
 Does this strategy support
Current strategy changes in the competitive
structure?

24
Competitor Analysis
Assumptions:
Future objectives
 Do we assume the future
will be volatile?
 Are we operating under a
Current strategy status quo?
 What assumptions do our
competitors hold about
Assumptions the industry and
themselves?

25
Competitor Analysis
Capabilities:
Future objectives
 What are our strengths
and weaknesses?
 How do we rate compared
Current strategy to our competitors?

Assumptions

Capabilities
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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? 27