HI6006

Competitive Strategy

Lecture 2: External Environment

Where are we in our study of Strategy?
 An Overview

 Understand a firm’s external environment and

be able to analyse it

 Differentiate between the general environment

and the industry environment

 Apply an External Analysis to any industry

The External Environment
 Activity

Consider how the world is changing currently.

Which aspects of the External Environment are

turbulent?

What is uncertain about the future?

What signals may be seen as ambiguous ?

[consider some of those listed on the next slide]

Elements of the General Environment
 Opportunity or Threat

 A firm’s external environment creates:

• opportunities (e.g. the opportunity for BP to
enter other global markets)
• threats (e.g. the possibility that additional
regulations in its global markets will reduce
opportunities for BP to extract oil and gas)

 Opportunities and threats affect a firm’s strategic

actions
 A Way to Analyse the External Environment

P – the Political landscape

E – the Economic outlook

S – the Socio-Cultural adaptations

T – the Technology space

E – the earth Environment and Sustainability

L – the Legal and Ethical domain

 Industry Environment Analysis

 An industry is a group of firms that produce

similar products or offer similar services that are
close substitutes.

 Compared with the general environment, the

industry environment has a more direct effect on a
firm’s:
• Strategic competitiveness
• Ability to earn above-average returns
 The Five Forces Model

 The Five Forces Model (Porter)

• An analytical tool used to help firms understand the
attractiveness of an industry as measured by its
profitability potential

 Assumes that an industry’s profitability is a

function of interactions among the five forces
• Suppliers, buyers, rivalry, product substitutes and potential
new entrants to the industry.
Five Industry Forces
 Usefulness of the 5 Forces Model

• Historically, firms concentrated only on direct

competitors
• Focusing on wider industry members highlights
potential opportunities and competitors
• e.g. Suppliers can integrate forward, or buyers
integrate backward and become competitors
• Five forces analysis helps firms understand the
profitability potential of the industry in which they
compete
 1. Industry Rivalry
Within and among the existing layers in an
industry, there is considerable rivalry as they
compete for customers, to improve productivity,
brand recognition, market share etc.
It is important to know one’s relative place in the
industry, e.g. relative size, market share,
consumer trust, ……………………
(consider some more measures of ‘relative place’)

Strategies to adopt if industry rivalry is rife: price

war, improved service, innovation and
differentiation
 2. Threat of New Entrants

High entry barriers tend to increase the returns for

existing firms in a industry and may allow some firms
to dominate the industry

Strategies to combat this:

Industry incumbents will try to maintain high entry
barriers in order to discourage potential competitors
from entering the industry, such as:
Economies of scale, Product differentiation, Capital requirements, Switching
costs, Access to distribution channels, Cost disadvantages independent of
scale, Government policy.

Consider industries where the above-mentioned strategies are practiced.

How do they retaliate when a new entrant enters their industry?
 3. Power of Suppliers

Suppliers to an industry have relative power when:

• their inputs are critical to our success
• they are few in number
• some are very large and may have a monopoly or
oligopoly
• no substitute products are available
• the firms in this industry are not the most significant
customers for these suppliers
Supplier power increases when:
• suppliers create high switching costs
• suppliers could potentially integrate forward into our
industry.
 4. Bargaining Power of Buyers

Buyers hold bargaining power when:

• they hold a high relative market share
• they make up a high percentage of a player’s
annual sales
• they could easily boycott us by switching to
another industry’s products, as our buyers’
switching costs have remained low
• the products of our industry are undifferentiated
(standardized)
• our buyers could potentially integrate
backwards into our industry
 5. Threat of Substitute Products

Advances in technology often lead to substitute

products becoming available (e.g. plastic, digital
photography, 3D printing, dental veneers ………)
The threat of substitute products is high if:
 our industry has neglected to create switching
costs
 substitute products are offered at lower prices
 substitute product’s quality and performance are
equal to or greater than the existing product
Strategy to combat the threat of substitute
products: an industry typified by innovation and a
differentiated product base
 The Industry is Unattractive if:

 Intense rivalry amongst existing players

 Strong bargaining power rests with Suppliers

 Strong bargaining power rests with Buyers

 Imminent threat of Substitute Products

 Low barriers-to-entry for new competitors

 The Industry is Attractive if:

 Low or moderate rivalry among existing players

 Supply and/or Buyer power is low

 No existing or foreseen threats of substitute

products

 Switching costs are high

 Case Analysis

 Read the Case – looking to identify (highlight)

key strategic issues
 Decide which Strategy Model or theoretical
concepts are relevant to this case
 Use the model as your ‘template’ to summarise
the key issues identified in the case
 Form a picture of how this company (case)
applies the strategy model or theoretical
concepts
 Evaluate how well the company (case) has
applied Strategy Theory
 Case Analysis – Otis [Case 12, p533]

 Consider how external forces have shaped the

elevator industry since first invented in1852

 Do a PESTEL analysis of the elevator industry

currently

 Apply the 5 Forces model to this industry, based

on the facts of the case
 Tutorial Activities in small groups

1. Examine the mini-case regarding German luxury cars

(p57) in the light of the 5 Forces model

2. Apply a PESTEL analysis to BMW, Mercedes Benz or

Audi (note: the same opportunities and threats will apply to each
of them)

3. Which elements (see slide 6) of the General Environment

are significant to the future of the German luxury car
industry.