The External Environment: Opportunities, Threats, and Industry Competition, and Competitor Analysis

Chapter 2
The External Environment: Opportunities,

Threats, and Industry Competition, and
Competitor Analysis
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2003 South-Western Publishing Company 1

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 2
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
3
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
4
Environment
 Economic segment
 Inflation rates
 Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic product
5
Environment
 Political/Legal Segment
 Antitrust laws
 Taxation laws
 Deregulation philosophies
 Labor training laws
 Educational philosophies and policies
6
Environment
 Technological Segment
 Product innovations
 Applications of knowledge
 Focus of private and government-supported
R&D expenditures
 New communication technologies
7
Environment
 Global Segment
 Important political events
 Critical global markets
 Newly industrialize countries
 Different cultural and institutional attributes
8
Environment
 Demographic Segment
 Population size
 Age structure
 Geographic
distribution
 Ethnic mix
 Income distribution
9
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
10
Five Forces Model of Competition
Five Forces of
Competition
Bargaining Power of
Buyers 11
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
12
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 13
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 14
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
15
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
16
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
17
Competitor Analysis
Capabilities:
Future objectives
 What are our strengths
and weaknesses?
 How do we rate compared
Current strategy to our competitors?
Assumptions
Capabilities
18
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? 19

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Chapter 2

The External Environment: Opportunities,

©2003 South-Western Publishing Company 1

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