Chapter 2

The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis
Robert E. Hoskisson Michael A. Hitt R. Duane Ireland
2004 by South-Western/Thomson Learning
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The Strategic Management Process

Strategic Thinking
Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership

Strategic Analysis

Chapter 3 The External Environment

Creating Competitive Advantage

Chapter 5 BusinessBusiness-Level Strategy Chapter 8 Acquisition and Restructuring Strategies

Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 9 International Strategy

Chapter 7 CorporateCorporate-Level Strategy

Chapter 10 Cooperative Strategy

Monitoring And Creating Entrepreneurial Opportunities

Chapter 11 Corporate Governance

Chapter 12 Strategic Entrepreneurship 2

Discussion Questions
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1.

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2. 3. 4.

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What are the components of the general environment? How does each affect the strategy of a firm? What are the five competitive forces in an industry environment? What attributes make each of the five competitive forces intense? What is a strategic group and why is it an important concept?
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More discussion questions

Discussion Questions (cont.)

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5.

How do you conduct a competitor analysis?

Discussion Question 1
What are the components of the general environment? How does each affect the strategy of a firm?

The External Environment

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

Technological

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
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External Environmental Analysis

Analysis of general environment Analysis of industry environment Analysis of competitor environment

The External Environment Strategic Intent Strategic Mission

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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

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General Environment
 Political/Legal
    

Segment

Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

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General Environment
 Technological
  

Segment

Product innovations Applications of knowledge Focus of private and government-supported governmentR&D expenditures  New communication technologies

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General Environment
 Global
   

Segment

Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes

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General Environment
 Demographic
  

Segment

Population size Age structure Geographic distribution  Ethnic mix  Income distribution
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Discussion Question 2

What are the five competitive forces in an industry environment?

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Industry Environment
A

set of factors that directly influences a company and its competitive actions and responses  Interaction among these factors determine an industrys profit potential
    

Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry
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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

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Five Forces Model of Competition

Five Forces of Competition

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Bargaining Power of Buyers

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Discussion Question 3

What attributes make each of the five competitive forces intense?

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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
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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 21 forward into the buyers industry

Bargaining Power of Buyers



Buyers (customers) are powerful when:

they purchase a large portion of an industrys total output  the sales of the product being purchased account for a significant portion of the sellers annual revenues  they could easily switch to another product  the industrys products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the sellers industry

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Threat of Substitute Products



Product substitutes are strong threat when:

customers face few switching costs  substitute products price is lower  substitute products quality and performance capabilities are equal to or greater than those of the competing product


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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

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High Exit Barriers

 Common
  

exit barriers include:

 
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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 companys operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions 25 Return to Discussion Questions

Discussion Question 4

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

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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
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Discussion Question 5

How do you conduct a competitor analysis?

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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 29 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?


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Competitor Analysis
Future objectives

Current Strategy:
How are we currently competing?  Does this strategy support changes in the competitive structure?


Current strategy

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Competitor Analysis
Future objectives

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 and themselves?


Current strategy

Assumptions

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Competitor Analysis
Future objectives

Capabilities:
What are our strengths and weaknesses?  How do we rate compared to our competitors?


Current strategy

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 advantage over our competitors?  How will this change our relationship with our competitors? 34


Assumptions

Capabilities