chapter 2 external environment

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2004 by South-Western/Thomson Learning 1

The External Environment: Opportunities,The External Environment: Opportunities,

Threats, Industry Competition, andThreats, Industry Competition, and

Competitor AnalysisCompetitor Analysis

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 2Chapter 2


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Chapter 2Chapter 2Strategic LeadershipStrategic Leadership

Chapter 1Chapter 1

Introduction toIntroduction to

Strategic ManagementStrategic ManagementStrategicThinking

The Strategic Management ProcessThe Strategic Management Process

Chapter 6Chapter 6

Competitive Rivalry andCompetitive Rivalry and

Competitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9

International StrategyInternational Strategy

Chapter 3Chapter 3

The ExternalThe External

EnvironmentEnvironment

Chapter 5Chapter 5

BusinessBusiness--LevelLevel

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11

Corporate GovernanceCorporate Governance

Chapter 7Chapter 7

CorporateCorporate--Level StrategyLevel Strategy


Cooperative StrategyCooperative Strategy


Strategic EntrepreneurshipStrategic Entrepreneurship

Strategic

Analysis

Creating

Competitive

Advantage

Monitoring

And Creating

Entrepreneurial

Opportunities


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Discussion QuestionsDiscussion Questions1. What are the components of thegeneral environment? How does each

affect the strategy of a firm?

2. What are the five competitive forcesin an industry environment?

3. What attributes make each of the five

competitive forces intense?

4. What is a strategic group and why is

it an important concept?

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More discussion questions

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Discussion Questions (cont.)Discussion Questions (cont.)5. How do you conduct a competitoranalysis?

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Discussion Question 1Discussion Question 1

What are the components of thegeneral environment? How doeseach affect the strategy of a firm?


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EnvironmentEconomicEconomic

TechnologicalTechnological

The External EnvironmentThe External Environment

IndustryIndustry


Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliers

Power of buyersPower of buyers

Product substitutesProduct substitutes

Intensity of rivalryIntensity of rivalry

CompetitorCompetitorEnvironmentEnvironment


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External Environmental AnalysisExternal Environmental AnalysisA continuous process which includesA continuous process which includes Scanning: Identifying early signals of environmental

changes and trends

Monitoring: Detecting meaning through ongoingobservations of environmental changes and trends

Forecasting: Developing projections of anticipated

outcomes based on monitored changes and trends

Assessing: Determining the timing and importanceof environmental changes and trends for firms

strategies and their management


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External Environmental AnalysisExternal Environmental Analysis

Strategic IntentStrategic Intent

Strategic MissionStrategic Mission



Analysis of general environmentAnalysis of general environment

Analysis of industry environmentAnalysis of industry environment

Analysis of competitor environmentAnalysis of competitor environment




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General Environment

General Environment

Sociocultural segmentSociocultural segment Women in the workplaceWomen in the workplace

Workforce diversityWorkforce diversity

Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment

Shifts in work and career preferencesShifts in work and career preferences

Shifts in product and service preferencesShifts in product and service preferences


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Economic segmentEconomic segment

General Environment

General Environment

Inflation ratesInflation rates

Interest ratesInterest rates

Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses

Personal savings ratePersonal savings rate

Business savings ratesBusiness savings rates

Gross domestic productGross domestic product


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General Environment

General Environment

Political/Legal SegmentPolitical/Legal Segment Antitrust lawsAntitrust laws

Taxation lawsTaxation laws

Deregulation philosophiesDeregulation philosophies

Labor training lawsLabor training laws

Educational philosophies and policiesEducational philosophies and policies


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General Environment

General Environment

Technological SegmentTechnological Segment Product innovationsProduct innovations

Applications of knowledge

Applications of knowledge

Focus of private and governmentFocus of private and government--supportedsupported

R&D expendituresR&D expenditures

New communication technologiesNew communication technologies


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General Environment

General Environment

Global SegmentGlobal Segment Important political eventsImportant political events

Critical global marketsCritical global markets

Newly industrialize countriesNewly industrialize countries

Different cultural and institutional attributesDifferent cultural and institutional attributes


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General Environment

General Environment

Demographic SegmentDemographic Segment Population sizePopulation size

Age structureAge structure

GeographicGeographic

distributiondistribution

Ethnic mixEthnic mix

Income distributionIncome distribution

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Discussion Question2


What are the five competitive forcesin an industry environment?


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Industry EnvironmentIndustry Environment A set of factors that directly influencesA set of factors that directly influences

a company and its competitive actionsa company and its competitive actionsand responsesand responses

Interaction among these factorsInteraction among these factorsdetermine an industrys profit potentialdetermine an industrys profit potential

Threat of new entrantsThreat of new entrants

Power of suppliersPower of suppliers Power of buyersPower of buyers

Product substitutesProduct substitutes

Intensity of rivalryIntensity of rivalry


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Five Forces Model of CompetitionFive Forces Model of Competition

Identify current and potential competitorsIdentify current and potential competitors

and determine which firms serve themand determine which firms serve them

Conduct competitive analysisConduct competitive analysis Recognize that suppliers and buyers canRecognize that suppliers and buyers can

become competitorsbecome competitors

Recognize that producers of potentialRecognize that producers of potential

substitutes may become competitorssubstitutes may become competitors


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Bargaining Power ofBargaining Power of

BuyersBuyers

Five Forces Model of CompetitionFive Forces Model of Competition

Five Forces ofFive Forces of

CompetitionCompetition

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Discussion

Questions


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What attributes make each of the

five competitive forces intense?


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Threat of New EntrantsThreat of New Entrants Barriers to entryBarriers to entry Economies of scaleEconomies of scale

Product differentiationProduct differentiation Capital requirementsCapital requirements

Switching costsSwitching costs

Access to distribution channelsAccess to distribution channels

Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy

Expected retaliationExpected retaliation


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Bargaining Power of SuppliersBargaining Power of Suppliers A supplier group is powerful when:A supplier group is powerful when: it is dominated by a few large companiesit is dominated by a few large companies

satisfactory substitute products are not availablesatisfactory substitute products are not available

to industry firmsto industry firms

industry firms are not a significant customer forindustry firms are not a significant customer for

the supplier groupthe supplier group

suppliers goods are critical to buyerssuppliers goods are critical to buyers

marketplace successmarketplace success

effectiveness of suppliers products has createdeffectiveness of suppliers products has created

high switching costshigh switching costs

suppliers are a credible threat to integratesuppliers are a credible threat to integrate

forward into the buyers industryforward into the buyers industry


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Bargaining Power of BuyersBargaining Power of Buyers Buyers (customers) are powerful when:Buyers (customers) are powerful when:

they purchase a large portion of an industrysthey purchase a large portion of an industrys

total outputtotal output

the sales of the product being purchasedthe sales of the product being purchased

account for a significant portion of the sellersaccount for a significant portion of the sellers

annual revenuesannual revenues

they could easily switch to another productthey could easily switch to another product

the industrys products are undifferentiated orthe industrys products are undifferentiated or

standardized, and buyers pose a credible threatstandardized, and buyers pose a credible threat

if they were to integrate backward into theif they were to integrate backward into the

sellers industrysellers industry


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Threat of Substitute ProductsThreat of Substitute Products Product substitutes are strong threatProduct substitutes are strong threat

when:when: customers face few switching costscustomers face few switching costs

substitute products price is lowersubstitute products price is lower

substitute products quality and performancesubstitute products quality and performance

capabilities are equal to or greater than those ofcapabilities are equal to or greater than those of

the competing productthe competing product


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Intensity of RivalryIntensity of Rivalry Intensity of rivalry is stronger whenIntensity of rivalry is stronger when

competitors:competitors:

are numerous or equally balancedare numerous or equally balanced

experience slow industry growthexperience slow industry growth

have high fixed costs or high storage costshave high fixed costs or high storage costs

lack differentiation or low switching costslack differentiation or low switching costs

experience high strategic stakesexperience high strategic stakes have high exit barriershave high exit barriers


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High Exit BarriersHigh Exit Barriers Common exit barriers include:Common exit barriers include: specialized assets (assets with values linked tospecialized assets (assets with values linked to

a particular business or location)a particular business or location)

fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements

strategic interrelationships (relationships ofstrategic interrelationships (relationships of

mutual dependence between one business andmutual dependence between one business and

other parts of a companys operation, such asother parts of a companys operation, such as

shared facilities and access to financial markets)shared facilities and access to financial markets) emotional barriers (career concerns, loyalty toemotional barriers (career concerns, loyalty to

employees, etc.)employees, etc.)

government and social restrictionsgovernment and social restrictionsClick



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What is a strategic group and whyis it an important concept?


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StrategicG

roupsStrategicG

roupsStrategic group: a group of firms in anStrategic group: a group of firms in an

industry following the same or similarindustry following the same or similar

strategy along the same strategicstrategy along the same strategicdimensionsdimensions

The strategy followed by a strategicThe strategy followed by a strategic

group differs from strategies beinggroup differs from strategies beingimplemented by other companies inimplemented by other companies in

the industrythe industry

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How do you conduct a competitoranalysis?


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Competitor EnvironmentCompetitor EnvironmentCompetitor intelligenceCompetitor intelligence is the ethicalis the ethicalgathering of needed information andgathering of needed information anddata about competitors objectives,data about competitors objectives,

strategies, assumptions, and capabilitiesstrategies, assumptions, and capabilities what drives the competitor as shown by itswhat drives the competitor as shown by its futurefuture

objectivesobjectives

what the competitor is doing and can do aswhat the competitor is doing and can do as

revealed by itsrevealed by its current strategycurrent strategy What the competitor believes about itself and theWhat the competitor believes about itself and the

industry, as shown by itsindustry, as shown by its assumptionsassumptions

What the the competitor may be able to do, asWhat the the competitor may be able to do, as

shown by itsshown by its capabilitiescapabilities


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Competitor AnalysisCompetitor AnalysisFuture Objectives:

Future objectivesFuture 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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Current strategyCurrent strategy

Current Strategy: How are we currently

competing?

Does this strategy support

changes in the competitive

structure?

Future objectivesFuture objectives


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AssumptionsAssumptions

Assumptions: Do we assume the future

will be volatile?

Are we operating under a

status quo?

What assumptions do our

competitors hold about

the industry andthemselves?




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CapabilitiesCapabilities

Capabilities: What are our strengths

and weaknesses?

How do we rate compared

to our competitors?





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Competitor AnalysisCompetitor AnalysisResponseResponse

Response: What will our competitors

do in the future?

Where do we hold an

advantage over ourcompetitors?

How will this change our

relationship with our

competitors?

CapabilitiesCapabilities




chapter 2 external environment

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