Chapter 2

The External Environment:

Opportunities, Threats, Industry Competition, and Competitor Analysis
Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2000 South-Western College Publishing
Ch2-1

Strategic Inputs

Chapter 2 External Environment Chapter 3 Internal Environment Strategic Intent Strategic Mission

The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance Chapter 12 Strategic Leadership Chapter 11 Structure & Control Chapter 13
Entrepreneurship

Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 7 Acquisitions & Restructuring Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies

Strategic Actions

& Innovation

Strategic Outcomes

Feedback

Strategic Competitiveness Above Average Returns

Ch2-2

Components of the General Environment

Economic Demographic Industry Environment Competitive Environment Political/ Legal Technological
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Sociocultural

Global

Components of the General Environment

Demographic Segment j Population size j Age structure j Geographic distribution j j j j Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses j Ethnic mix j Income distribution j Personal savings rate j Business savings rates j Gross domestic product j Labor training laws j Educational philosophies and policies j Concerns about the environment j Shifts in work and career preferences j Shifts in preferences regarding product and service characteristics j Focus of private and government-supported R&D expenditures j New communication technologies j Newly industrialized countries j Different cultural and institutional attributes Economic Segment

Political/Legal Segment

j Antitrust laws j Taxation laws j Deregulation philosophies j Women in the workforce j Workforce diversity j Attitudes about work life quality

Sociocultural Segment

Technological Segment

j Product innovations j Applications of knowledge

Global Segment

j Important political events j Critical global markets

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External Environmental Analysis

The external environmental analysis process should be conducted on a continuous basis. This process includes four activities: Scanning
Identifying early signals of environmental changes and trends of environmental changes and trends

Monitoring Detecting meaning through ongoing observations 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

States in the top 10 of those that are trying to transform themselves to the realities and needs of a digital economy may experience an influx of high-tech companies and skilled workers as well as increases in tax revenues
Top 10 U.S. States Moving Toward Digital Economy
Rank 1 2 3 4 5 6 7 8 9 10 State Massachusetts California Colorado Washington Connecticut Utah New Hampshire New Jersey Delaware Arizona
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Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

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Threat of New Entrants

Economies of Scale Barriers to Entry Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Expected Retaliation
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Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

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Bargaining Power of Suppliers

Suppliers are likely to be powerful if:
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Supplier industry is dominated by a few firms Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product Suppliers products are differentiated Suppliers products have high switching costs Supplier poses credible threat of forward integration

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Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

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Bargaining Power of Buyers

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality Buyer has full information
Ch2-12

Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

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Threat of Substitute Products

Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery
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Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

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Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors
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Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers
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Rivalry Among Existing Competitors

High exit barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. Specialized assets Fixed cost of exit (e.g., labor agreements) Strategic interrelationships Emotional barriers Government and social restrictions
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Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers High

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Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers High

Low, Stable Returns

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Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers High

Low, Stable Returns

High, Stable Returns

Ch2-21

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers High

Low, Stable Returns

Low, Risky Returns

High, Stable Returns

Ch2-22

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers Low High

Low Entry Barriers High

Low, Stable Returns

Low, Risky Returns

High, Stable Returns

High, Risky Returns

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Competitor Analysis
The follow-up to Industry Analysis is followeffective analysis of a firms Competitors

Industry Environment Competitive Environment

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Competitor Analysis
Assumptions What assumptions do our competitors hold about the future of industry and themselves? Current Strategy Does our current strategy support changes in the competitive environment? Future Objectives How do our goals compare to our competitors goals? Capabilities How do our capabilities compare to our competitors?
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Response
What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where will emphasis be placed in the future? What is the attitude toward risk?

What Drives the competitor?

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Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? currently How are we What is the attitude competing? toward risk? Does this strategy support changes in the competitive structure?

What is the competitor doing? What can the competitor do?

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Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future support changes in the will be volatile? competition structure? What assumptions do our

What does the competitor believe about itself and the industry?

competitors hold about the industry and themselves? Are we assuming stable competitive conditions?

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Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future supportwill be volatile? changes in the competition structure? What assumptions do our

What are the competitors capabilities?

competitors hold about the Capabilities industry and themselves? What are my competitors Are we operating under strengths and weaknesses? a status quo? How do our capabilities compare to our competitors?

Ch2-29

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future supportwill be volatile? changes in the competition structure? What assumptions do our

Response
What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition?

Capabilities competitors hold about the industry and themselves? What are my competitors Are we operating under strengths and weaknesses? a status quo?
How do our capabilities compare to our competitors?

Ch2-30