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Chapter 2

The External Environment: Opportunities, Threats, and Industry Competition, and Competitor Analysis
Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company

Strategic Inputs

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

The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance
Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy

Chapter 6 CorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness Above-Average Returns


The External Environment

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



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

External Environmental Analysis

Analysis of general environment Analysis of industry environment

Analysis of competitor environment

The External Environment Strategic Intent Strategic Mission


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

General Environment

Political/Legal Segment

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

General Environment

Technological Segment

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

General Environment

Global Segment

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


General Environment

Demographic Segment

Population size Age structure Geographic distribution Ethnic mix Income distribution


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

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.


Five Forces Model of Competition

Five Forces of Competition

Bargaining Power of Buyers


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


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 16

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 17

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


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


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

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.

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 22 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?


Competitor Analysis
Future objectives

Current Strategy:

Current strategy

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


Competitor Analysis
Future objectives


Current strategy


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?


Competitor Analysis
Future objectives


Current strategy

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



Competitor Analysis
Future objectives 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? 27