Why Analyze the External Environment?

The objective is to identify opportunities and threats within the external environment

Opportunity: General environment conditions that, if exploited, help a company achieve strategic
competitiveness

Threat: General environment conditions that may hinder a company's efforts to achieve strategic
competitiveness

The General, Industry, and Competitor Environments

General Environment: Composed of dimensions in the broader society that influence an industry and the firms
within it

- Firms cannot change the general environment, they can only predict it and recognize trends

- Demographic:
- Population size, age, structure, geographic distribution, ethnic mix, and income distribution
- Economic:
- The nature and direction of the economy in which a firm competes or may compete
- Inflation, savings & interest rates, GDP, trade and budget deficits, etc.
- Political/Legal:
- how organizations try to influence governments and how they try to understand the
influences of those governments on their competitive actions and responses
- Antitrust, tax and labour laws, deregulation, etc.
- Sociocultural:
- Society’s attitudes and cultural values that drive broader things like demographics,
economics, politics, and technological changes
- Women and diversity in the workforce, environmental concerns, products, service & career
preferences, etc.
- Technological:
- The institutions and activities involved in creating new knowledge and translating that
knowledge into new outputs, products, processes, and materials
- Innovations, private vs government R&D, knowledge applications, etc.
- Global:
- Relevant new global markets, existing markets that are changing, important international
political events, and critical cultural and institutional characteristics of global markets
- Cultural and institutional attributes, political events, global markets, etc.
- Environmental:
- Potential and actual changes in the physical environment and business practices that are
intended to positively respond to those changes with the intent of creating a sustainable
environment
- Ecological system
Industry Environment: The set of factors that directly influence a firm and its competitive actions and
responses

- The interaction of P5F determine an industry’s profit potential which influences the choices that a
firm makes about its competitive actions
- Industry environment has more direct effect on firm’s strategic competitiveness and ability to earn
AARs than the general environment

- Threat of New Entrants:

- New entrants can threaten the market share of existing competitors and is a factor of two
things:
- Barriers to Entry: Make it difficult for a firm to enter and place them at a disadvantage
- Economies of Scale
- Product Differentiation
- Capital Requirements
- Switching Costs
- Access to Distribution Channels
- Cost Disadvantages Independent of Scale
- Government Policy
- Expected Retaliation: An expectation of swift and vigorous competitive responses reduces
the likelihood of entry, and can be expected when the existing firm:
- has a major stake in the industry
- when it has substantial resources,
- and when industry growth is slow or constrained
- Threat of Product Substitutes: Substitute products are goods or services from outside a given
industry that perform similar or the same functions as a product that the industry produces
- product substitutes present a strong threat to a firm when customers face few switching
costs and when the substitute product’s price is lower or its quality and performance
capabilities are equal to or greater than those of the competing product
- differentiating a product along valuable dimensions decreases this threat
- Power of Suppliers: Suppliers can exert power when they are capable of raising prices and reducing
their quality of products, this occurs when:
- the supplier group is dominated by a few large companies (more constrained than the firms
industry)
- satisfactory substitutes do not exist
- industry firms are not a significant customer
- suppliers goods are critical to marketplace success
- effectiveness of suppliers products has created high switching costs
- suppliers pose a real threat of forward integration into the industry
- Power of Buyers:
- buyers purchase a large portion of industry output
- sales of the product being bought account for a significant portion of the seller's revenue
- buyers could switch to another product at little cost
- Industry products are undifferentiated or standardized
- buyers pose a threat of integrating backwards into the seller’s industry
- Intensity of Rivalry: Competitive rivalry intensifies when a firm is challenged by a competitor’s actions
or when a company recognizes an opportunity to improve its market position
- numerous or equally balanced competitors
- slow industry growth
 - high fixed costs or storage costs causes firms to want to maximise productive capacity, this
creates excess capacity industry wide and leads to competition through lowered prices to
clear inventories
- lack of differentiation or low switching costs
- high strategic stakes
- high exit barriers causes firms to keep competing with low returns on capital
- specialised assets
- Strategic interrelationships
- Emotional barriers
- government and social restrictions

Competitor Environment: A firm’s direct and indirect competitors. One must monitor and analyse each
company a firm competes with because competitive dynamics impact a firm's efforts to generate AARs

- Future Objectives: What drives the competitor

- How do our goals compare with our competitors goals?
- Where will the emphasis be placed in the future?
- What is the attitude towards risk?
- Current Strategy: What the competitor is going, and can do
- How are we currently competing?
- Does their strategy support changes in the competitive structure?
- Assumptions: What the competitor believes about the industry
- Do we assume the future will be volatile?
- Is there a status quo?
- What assumptions do our competitors hold about the industry and themselves?
- Strengths and Weaknesses: What the competitor’s capabilities are
- What are our strengths and weaknesses?
- How do we rate compared to our competitors?

- Critical to an effective competitor analysis is gathering data and information that can help the firm
understand its competitors’ intentions and the strategic implications resulting from them
- Competitor Intelligence: is the set of data and information the firm gathers to better understand and
anticipate competitors’ objectives, strategies,assumptions, and capabilities

External Environment Analysis

Scanning: Identifying early signals of environmental changes and trends

Monitoring: Detecting meaning through ongoing observations of environmental changes and trends

- Determining if an important trend is emerging from what was seen during scanning and identify its
competitive implications
- The firm must identify important stakeholders and understand its reputation among these
stakeholders
Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends

- Analysts develop feasible projections of what might happen, and how quickly, based on the events
and trends seen in scanning and monitoring
- Forecasting with accuracy is challenging
Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies
and their management

- Appropriately interpreting the intelligence the collected information provides to determine if an

identified trend in the general environment is an opportunity or threat