Chapter 2

The External Environment:

Opportunities, Threats,
Industry Competition, and
Competitor Analysis

PART 1 STRATEGIC MANAGEMENT INPUTS

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by Charlie Cook
 Strategic Management Process and SM Course Flow

Strategic Actions Strategic inputs

External
Environment Vision
Mission

Internal
Environment

StrategyFormulation Strategy Implementation

Non-
Business competitiv Corporate Corporate Structures
Strategy e Strategy Governanc &
strategies e Controls

Strategic
M&A Cooperativ Strategic
Internationa Entrepreneurshi
Strategie e Leadership
Strategic Outcome

l strategies p
s Strategies

Strategic
Competitiveness

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 Environmental Analysis: Levels

General
Environment

Industry
Environment

Strategic
Groups

Competitor
Analysis
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Figure 2.1 The External Environment

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Table 2.2 Components of the External Environmental Analysis

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

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 Opportunities and Threats

• Opportunity
– A condition in the general
environment that, if exploited
effectively, helps a firm achieve
strategic competitiveness.
• Threat
– A condition in the general
environment that may hinder
a firm’s efforts to achieve
strategic competitiveness.

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 General Environment

• Dimensions in the broader society that influence

an industry and the firms within it:
– Demographic
– Economic
– Political/legal
– Sociocultural
– Technological
– Global
– Physical
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Table 2.1 The General Environment: Segments and Elements

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Segments of the General Environment

Geographic
distribution
Age
Ethnic mix
structure

The
Population Income
size Demographic distribution
Segment

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Segments of the General Environment
(cont’d)

• The Economic Segment

– Uncertainty in
• Market growth rates
• Consumer demand
• Inflation and interest rates
• Trade deficits or surpluses
• Budget deficits or surpluses
• Personal and business savings rates
• Gross domestic product

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Segments of the General Environment
(cont’d)

• The Political/Legal Segment

– Regulations
– Consumer privacy laws
– Lobbying
– Antitrust, deregulation laws
– Taxation

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Segments of the General Environment
(cont’d)

• The Sociocultural Segment

– Changing attitudes and cultural values
• Attitudes and approaches to health care
• Attitudes about quality of worklife
• Diverse and aging workforce/ Gen Z- digital natives
• Women in the workplace
• Concerns about environment
• Shifts in work and career preferences
• Shifts in product and service preferences

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Segments of the General Environment
(cont’d)

• The Technological Segment

– Product innovations
– Rapid technological change and the risk of disruption
– Knowledge application
– Growth of the Internet: AI, Robotics, AR/VR, Biotech
– New communication technologies/social media

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Segments of the General Environment
(cont’d)

Critical
Important
global niche
geopolitical
markets
trends Global
Different
Focusing cultural and
Growth of institutional
the informal attributes
economy

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Segments of the General Environment
(cont’d)

• The Sustainability of Physical Environment

Segment
– Emerging trends oriented to sustaining the world’s
physical environment
– Recognition of the interactive influence of ecological,
social, and economic systems
– Growing concerns for sustainable industry
development and increased corporate social
responsibility for the future effects of globalized
operations

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 Industry Environment Analysis

• Industry Defined
– A group of firms producing products
that are close substitutes.
– Firms use a rich mix of different
competitive strategies to pursue above-
average returns when competing in a
particular industry.
– An industry’s structural characteristics
influence a firm’s choice of strategies

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Table 2.3 The Spectrum of Industry Structures

Perfect
Oligopoly Duopoly Monopoly
Competition

Concentration Many firms A few firms Two firms One firm

Entry and Exit No barriers Significant barriers High barriers

Barriers

Product Homogeneous
Differentiation Potential for product differentiation
Product

Perfect
Information Imperfect availability of information
Information flow
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Figure 2.3 The Five Forces of Competition Model

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 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: IPR,RM,
Location, Govt. subsidies
• Government policy: trucking, liquor, tobacco, radio,
TV, banking
• Expected retaliation
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 Barriers to Entry

• Economies of Scale
– Marginal improvements in efficiency that a firm
experiences as it incrementally increases its size
• Factors (advantages and disadvantages)
related to large- and small-scale entry
– Flexibility in pricing and market share-niche markets
– Costs related to scale economies- low overheads
– Competitor retaliation unlikely for small entries

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 Barriers to Entry (cont’d)

• Product Differentiation • Switching Costs

– Unique products – One-time costs customers incur
– Customer loyalty buying from a different supplier
– Products at competitive • New equipment
prices • Retraining employees
• Psychic costs of ending a relationship
• Capital Requirements
– Physical facilities
• Distribution Channel Access
– Inventories – Stocking or shelf space
– Marketing activities – Price breaks
– Availability of capital – Cooperative advertising allowances

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 Barriers to Entry (cont’d)

• Cost Disadvantages • Expected retaliation

Independent of Scale – Responses by existing
– Proprietary product competitors may depend
technology on a firm’s present stake in
– Favorable access to the industry (available
raw materials business options)
– Desirable locations
• Government policy
– Licensing and permit
requirements
– Deregulation of industries

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 Bargaining Power of Suppliers

• Supplier power increases when:

– Suppliers are large and few in number.
– Suitable substitute products are not available.
– Individual buyers are not large customers of suppliers
and there are many of them.
– Suppliers’ goods are critical to the buyers’
marketplace success.
– Suppliers’ products create high switching costs.
– Suppliers pose a threat to integrate forward into
buyers’ industry.

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 Bargaining Power of Buyers

• Buyer power increases when:

– Buyers are large and few in number.
– Buyers purchase a large portion of an industry’s total
output.
– Buyers’ purchases are a significant portion of a
supplier’s annual revenues.
– Buyers’ switching costs are low.
– Buyers can pose threat to integrate backward into the
sellers’ industry.

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 Threat of Substitute Products

• The threat of substitute products increases

when:
– Buyers face few switching costs.
– The substitute product’s price is lower.
– Substitute product’s quality and performance are
equal to or greater than the existing product.
• Differentiated industry products that are
valued by customers reduce this threat.

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Intensity of Rivalry Among Competitors

• Industry rivalry increases when:

– There are numerous or equally balanced competitors.
– Industry growth slows or declines.
– There are high fixed costs or high storage costs.
– There is a lack of differentiation opportunities or low
switching costs.
– When the strategic stakes are high.
– When high exit barriers prevent competitors from
leaving the industry.

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 Applying Five-Forces Analysis
Forecasting Industry Profitability
 If we can forecast changes in industry
structure we can predict likely impact on
competition and profitability.
Strategic Positioning
• Once we know which structural features of the
industry support profitability and which depress
profitability, we can choose a favorable positioning
within the industry.
Strategies to Improve Industry Profitability
 Which of the structural variables that are depressing
profitability can we change by individual or
collective strategies?
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 Table 2.2 Profitability of US Industries
(selected industries only)
Median return on equity (%), 1999-2007

HIGH PROFITABILITY LOW PROFITABILITY

Household & Personal Products 26.0 Motor Vehicles & Parts 9.3
Pharmaceuticals 21.0 Insurance Life & Health 9.1
Petroleum 20.1 Forest & Paper Products 7.3
Tobacco 21.6 Food Production 6.5
Food Consumer Products 19.5 Semiconductors & Electronic 6.2
Components
Securities and Investment Banking 18.4 Network & Communications 5.9
Equipment
Beverages 17.2 Telecommunications 5.8
Medical Products & Equipment 17.2 Entertainment 2.7
Scientific & Photographic Equip. 15.6 Airlines (12.6)

Commercial Banks 14.8

Computer Software 14.0
Aerospace & Defense 13.9
2–28
 Interpreting Industry Analyses

Low entry barriers

Suppliers and buyers

have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
(Low profit potential)
among competitors

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Interpreting Industry Analyses (cont’d)

High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
among competitors (High profit potential)

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 Strategic Groups

• Strategic Group Defined

– A set of firms emphasizing similar strategic
dimensions and using similar strategies.
– Intra-strategic group competition is more intense than
is inter-strategic group competition due to:
• Similar market positions
• Similar products
• Similar strategic actions

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 Strategic Groups

• Strategic Dimensions • Implications

– Extent of technological – Intense competitive
leadership rivalry within a group
– Product quality threatens profitability of
– Pricing Policies all group members.
– Distribution channels – Strengths of the five
forces differ across
– Customer service
strategic groups.
– The closer the groups
are in their strategies,
the greater the rivalry
between groups.

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 The World Automobile Industry:
Strategic Groups

Tata
Motors

Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups

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 Competitor Analysis

• Competitor Intelligence
– The ethical gathering of needed information
and data that provides understanding of:
• 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 the industry, as shown
by its assumptions.
• What the competitor’s capabilities are, as shown by its
strengths and weaknesses.

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 Competitor Analysis (cont’d)

• How do our goals

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

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 Competitor Analysis (cont’d)

Future Objectives
• How are we currently
competing?
Current Strategy • Does this strategy
support changes in the
competitive structure?

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 Competitor Analysis (cont’d)

Future Objectives • Do we assume the

future will be volatile?
• Are we operating under
Current Strategy
a status quo?
• What assumptions do
Assumptions our competitors hold
about the industry and
themselves?

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 Competitor Analysis (cont’d)

Future Objectives

Current Strategy

• What are our strengths

Assumptions and weaknesses?
• How do we rate
compared to our
Capabilities competitors?

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 Competitor Analysis (cont’d)

Future Objectives Response

• What will our competitors

Current Strategy
do in the future?
• Where do we hold an
Assumptions advantage over our
competitors?
• How will this change our
Capabilities relationship with our
competitors?

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Figure 2.3 Competitor Analysis Components

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 Complementors

• Complementors
– The network of companies that sell complementary
products or services or are compatible with the
focal firm’s own product or service.digital camera
and printer; Intel and Microsoft etc
• If a complementor’s product or service adds value to the
sale of the focal firm’s product or service, it is likely to
create value for the focal firm.
• However, if a complementor’s product or service is in a
market into which the focal firm intends to expand, the
complementor can represent a formidable competitor.

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 Ethical Considerations

• Practices considered both legal and ethical:

1. Obtaining publicly available information
2. Attending trade fairs and shows to obtain
competitors’ brochures, viewing their exhibits, and
listening to discussions about their products,
consulting professional firms
• Practices considered both unethical and illegal:
– Blackmail (
– Trespassing
– Eavesdropping/spying
– Stealing drawings, samples, or documents
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