The External Environment:

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

• Three External Environments include:

– General
– Industry & Strategic groups
– Competitor
External Environment:
General, Industry and Competitor (Cont’d)

• The General Environment

– The broader society dimensions that influence an
industry and the firms within it
– Grouped into 7 dimensions OR ‘environmental segments’
Each segment composed of elements
– GM and Chrysler filed for bankruptcy, Chrysler formed
alliance with Fiat
– No control over segments of environment
– Segment intelligence can help re-orient strategy to
mitigate influence
 The External Environment

Economic Physical

Industry
Environment
Demographic Threat of New Entrants Sociocultural
Power of suppliers
Power of Buyers
Product Substitutes
Intensity of Rivalry
Competitor
Environment

Political/Legal Global

Technological
External Environment:
General, Industry and Competitor (Cont’d)

• Industry Environment
– Set of factors directly influencing
• A firm’s competitive actions/responses
• Relates to Porter’s 5 Forces – see upcoming slides
• Competitor analysis: gather and interpret competitor
information
• Competitor Environment
– Gives details about
• A firm’s direct and indirect competitors
• The competitive dynamics expected to impact a firm's efforts to
generate above-average returns
External Environment Analysis
• Opportunity
– General environment condition that, if exploited, helps a
company achieve strategic competitiveness e.g P&G
market research that male members are interested in
fragrances and skin care products- gender specific
products instead of general categories

• Threat
– General environment condition that may hinder a
company's efforts to achieve strategic competitiveness-
Polaroid missed the digital photography trend which went
bankrupt in 2001 until acquired by Petters Group to
rejuvenate the brand 2002 onwards ; went bankrupt
again in 2008 only intangible assets being used by the
acquiring company
SWOT Analysis

Firm’s strategy must:

• Build on its strengths
• Remedy the weaknesses or work around them
• Take advantage of the opportunities presented
by the environment
• Protect the firm from threats

2-7
External Environment Analysis (Cont’d)

• 4 components of External Environment Analysis

– Scanning- identifying early signals of environment
changes and trends- Amazon.com analyses the
consumer buying behavior from online transactions. PMI
scans data on tax policies on cigarettes
– Monitoring –Detecting meaning through ongoing
observations of environmental changes and trends.
Buying power of Hispanics in USA is estimate as $1.5
trillion by 2020- thus special products for them
– Forecasting –Developing projections of anticipated
outcomes based on monitored changes and trends-P&G
and Colgate are pressuring retailers for price reduction
due to private label sales and low prices
Continued…………..

– Assessing- Determining the timing and importance of

environmental changes and trends for firm’s strategies
and their management. As before P&G and other
branded product companies have assessed the impact of
consumer demand for more value in branded products
due to private label product pressures arising out of
global financial crisis. Better designed smaller sized
houses by builders- space utilization, low energy needs,
better traffic movement and reliable but inexpensive
furnishings/ fixtures
General environment 7-segments and elements
Demographic segment •Population size •Ethnic mix: Social and regional groups
•Age structure •Income distribution
•Geographic distribution

Economic •Inflation rate •Personal saving rates

•Interest rate •Business saving rates
•Trade deficit/surplus •Gross domestic product
•Budget deficit/surplus
Political/legal •Anti-trust laws •Labor training laws
•Taxation laws •Educational philosophies and policies
Deregulation philosophies

Socio-cultural •Women in workforce •Shift in work and career preferences

•Workforce diversity •Shifts in preferences in product and service
•Attitudes about work life quality characteristics

Technological •Product innovations •Private-government supported R&D

•Application of knowledge •New communication technologies
•Use of wireless technology •Plant automation

Global •Important political events •Newly industrialized countries

•Critical global markets •Different cultural and institutional attributes
•Peace in middle east •Entry of China in WTO & guanxi

Physical environment •Energy consumption •Water availability as resource

•Sources of energy development •Environmental friendly products
•Renewable energy efforts •Global warming
•Minimize environmental footprint
Industry Environment Analysis

• Industry
– Definition: Group of firms producing products that are
close substitutes
– Because of blurring boundaries, customer groups and
their needs become the criteria of finding boundaries of
markets instead of industries
– Industry environment, in comparison to the general
environment, has more direct effect on firm’s
• Strategic competitiveness and
• Above-average returns
– Intensity of industry competition and industry’s profit
potential are a function of 5 forces (See next slide)
Porter’s Five Forces of Competition
Framework

SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS

POTENTIAL Threat of Threat of

SUBSTITUTES
ENTRANTS
new entrants substitutes
Rivalry among
existing firms

Bargaining power of buyers

BUYERS

7
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 1/5: New entrants
• Can threaten market share of existing competitors
• May bring additional production capacity
• Function of two factors
– 1: Barriers to entry
» Economies of scale in all functions: marketing, manufacturing,
purchasing and R&D- enhances firm flexibility- oracle through Sun
Microsystems, customized products can reduce entry costs, Flexible
Manufacturing System- mass customization
» Product differentiation- belief that product is unique through ads or
first mover, Ford-stronger, greener, tech advanced – loyalty
achieved-P&G, Colgate through ads and NPD
» Competitor wanting to enter provide lower prices
Entry Barrier ………………..
» Capital requirements-huge capital to enter, knowledge is also
required, acquisition maybe expensive to enter, it is high risk game
» Switching costs- one time cost incurred by buyers- fin and psychic
cost – Microsoft windows, Freq Flier Program create barriers
» Access to distribution channels- Switching costs-use price breaks and
cooperative advertising to overcome barriers
» Cost disadvantages independent of scale-proprietary technology, raw
material or location, government subsidies- deliver products directly
can overcome barrier of location
» Gov’t policy- govts. provide license, permission or subsidies- liquor,
radio, TV, banking and trucking may have control of govt.

– 2: Expected retaliation- swift and harsh reaction can hold back new
players. If has major stake or huge sunk investments the retaliation will
be vigorous- locating niches may be entry mode for new players esp
SMEs- Honda entry in bike markets
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 2/5: Bargaining power of suppliers
– By reducing quality and increasing price- exercise their
power
• They are powerful when …
– 1. Few large companies and more concentrated than the
industry to which they sell
– 2. No substitutes exists for supplier product
– 3. Industry firms not significant customer to supplier group.
– 4. Supplier’s goods are critical to buyer’s success
– 5. High switching costs due to effectiveness of supplier’s
products
– 6. Threat of forward integration
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 3/5: Bargaining power of buyers
– Want to buy at lowest price, high service, better quality
• They are powerful when …
– 1. Purchase large portion of industry’s total output
– 2. Product sales accounts for significant seller annual
revenue
– 3. Low switching costs (to other industry product)
– 4. Industry products are undifferentiated or standardized and
– threat of backward integration
Buyer know the supplier costs and use internet to know cost
structure of suppliers
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 4/5: Threat of substitute products (products from outside
the industry)-wood, aluminum, glass as substitutes in construction
industry or Nutrasweet for sugar- put upper ceiling on prices
• Goods or services outside of given industry perform same or
similar functions at a competitive price (i.e., plastic has replaced
steel in many applications) if low switching costs
• Differentiation helps to overcome substitute threat
– 5/5: Intensity of Rivalry Among Competitors- when
position improves or threat to profitability occurs-rivalry happens
on price, service, innovation
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs or high storage costs
• Lack of differentiation or low switching costs
• High strategic stakes
• High exit barriers
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 5/5: Intensity of Rivalry Among Competitors
• High exit barriers (Cont’d)
– 1. Specialized assets
– 2. Fixed costs of exit (i.e., labor agreements)
– 3. Strategic interrelationships (i.e., one business depends on
another)
– 4. Emotional barriers (i.e., loyalty to employees, etc.)
– 5. Government and social restrictions
These 5 forces determine the attractiveness of
industry
–
The Value Net

2-19
Strategic Groups within Industries

• Two unassailable assumptions in industry analysis

– No two firms are totally different
– No two firms are exactly the same
• Strategic groups
– Cluster of firms that share similar strategies

2-20
Strategic Groups

• Strategic Groups
– Set of firms emphasizing similar strategic dimensions to
use a similar strategy
– Dimensions: extent of technological leadership, product quality,
pricing policies, distribution channels, customer service
– Such analysis is helpful in diagnosing competition, positioning and
the profitability of industry
– Implications
• Because firms within a group compete (offer similar products)
rivalry can be intense – the greater the rivalry the greater the
threat to each firm’s profitability
• Strengths of the 5 forces differs across strategic groups
• The closer the strategic groups, in terms of strategy, the
greater the likelihood of rivalry
Strategic groups in Pharmaceutical
Industry

High
Patented
Level of innovation

drug
makers

OTC
Drug
Generic
makers
drug
makers
Low
Low High
Percent requiring prescription
Strategic groups in Financial Industry

High Commer NBFC

cial
Banks
Interest Rates

Capital
markets DFIs

Low
Easy Hard
Sources of Funds
 Competitor Analysis

• Competitor analysis and organization response:

– What drives competitors
• Shown by organization's future objectives
– What the competitor is doing and can do
• Revealed in organization's current strategy
– What the competitor believes about the industry
• Shown in organization's assumptions
– What the competitor’s capabilities are
• Shown by organization's strengths and weaknesses
 Competitor Analysis Components

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

Current Strategy
• How are we currently competing?
• Does their strategy support changes
in the competitive structure? Response
• What will our competitors do in the future?
• Where do we hold an advantage over
our competitors?
Assumptions • How will this change our relationship
• Do we assume the future will be volatile? With our competitors?
• Are we operating under a status quo?
• What assumptions do our competitors
hold about the industry and themselves?

Capabilities
• What are our strengths and weaknesses?
• How do we rate compared to our
competitors?
 Competitor Analysis (Cont’d)

• Competitor intelligence
– Set of data and information the firm gathers to better
understand and anticipate competitors' objectives,
strategies, assumptions, and capabilities
– Collect information on complementors who add value to
focal firms product and strategies- eg printers and
cameras. Intel and Microsoft are complementors or Sky
Team Alliance or Star Alliance in commercial airline
industry have complementarities
 Intelligence Collection (Cont’d)

• Follow ethical practices when gathering competitor

intelligence
– Obtain public information
– Attend trade fairs and shows and collect brochures, view
exhibits, listen to their discussions
• Some practices may be legal, but unethical
• Unethical tactics can include
– Blackmail
– Trespassing
– Eavesdropping
– Stealing drawings, samples or documents