The Management of Strategy:

Concepts and Cases

Part I: Strategic Management Inputs

Chapter 2: The External Environment:
Opportunities, Threats,
Industry Competition and
Competitor Analysis

©2011 Cengage Learning. All Rights Reserved. May not be scanned,

copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
The Strategic Management Process

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environment segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitor Analysis: Intelligence and ethics

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environment segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitor Analysis: Intelligence and ethics

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
External Environment:
General, Industry and Competitor

• Three External Environments include:

1. General
2. Industry
3. Competitor

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
– Indirect influence on firms

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The External Environment

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
• Direct influence on firms
• 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environment segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitor Analysis: Intelligence and ethics

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
External Environment Analysis

• Opportunity
– General environment condition that, if exploited,
helps a company achieve strategic competitiveness

• Threat
– General environment condition that may hinder a
company's efforts to achieve strategic competitiveness

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 External Environment Analysis (Cont’d)
• 4 components of External Environment Analysis
– Scanning – the study of all segments in the general
environment & reveals ambiguous, incomplete data.
– Critical for highly volatile environments.

– Monitoring – observe environmental changes to see

if important trends is emerging from among those
spotted through scanning.
– Critical is the firm’s ability to detect meaning in
different environmental events and trends.
– Requires firm to identify important stakeholders as
the foundation for serving their unique needs.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 External Environment Analysis (Cont’d)
• 4 components of External Environment Analysis
– Forecasting – analysts develop feasible projections of
what might happen and how quickly as a result of the
changes and trends detected through scanning and
monitoring.
– Eg how much time will elapse before changes in
government taxation policies affect consumers’
purchasing patterns.

– Assessing – determine the timing and significance of

the effects of environmental changes and trends that
have been identified.
– Although gathering and organizing information is
important, appropriately interpreting that intelligence is
equally important.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environment segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitor Analysis: Intelligence and ethics

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Segments of the General Environment
• 7 Segments
– Demographic – population’s size, age structure,
geographic distribution, ethnic mix, income distribution
– Commonly analyzed on a global basis because of their
potential effects across countries’ borders and global
markets
– Economic – the nature and direction of the economy in
which a firm competes or may compete.
– Political/Legal – is the arena in which organizations
and interest groups compete for attention, resources and
a voice in overseeing the body of laws and regulations
guiding interactions among nations as well as between
firms and various local governmental agencies.
– Socio-cultural – is concerned with a society’s attitudes
and cultural values.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Segments of the General Environment
• 7 Segments
– Technological – includes the institutions and activities
involved with creating new knowledge and translating
that knowledge into new outputs, products, processes
and materials.
– Global- includes relevant new global markets, existing
markets that are changing, important international
political events and critical cultural and institutional
characteristics of global markets.
– Physical – refers to potential and actual changes in the
physical environment and business practices that are
intended to positively respond to and deal with those
changes.

Refer to Table 2.1 for segments and elements

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environment segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitor Analysis: Intelligence and ethics

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Industry Environment Analysis

• Industry
– Definition: Group of firms producing products that are
close substitutes
– Industry environment, in comparison to the general
environment, has more direct effect of 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)

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 The Five Forces of Competition Model

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 Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 1/5: Threat of New Entrants
• Can threaten market share of existing competitors
• May bring additional production capacity
• Function of two factors
– 1: Barriers to entry (if this is high, threats will be low)
» Economies of scale
» Product differentiation eg BMW cars
» Capital requirements – need tons of money
» Switching costs – if high, new firm need to give
more value at lower cost
» Access to distribution channels
» Cost disadvantages independent of scale – eg
location
» Gov’t policy – favoring certain firms
– 2: Expected retaliation (if this is high, threats will be
low)
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Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 2/5: Bargaining power of suppliers
• They are powerful when …
– 1. Few large companies and more concentrated
than the industry to which they sell
– 2. No substitutes
– 3. Industry firms are not significant customers 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 (Eg Pepsi opening a
bar and lounge in NY)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 3/5: Bargaining power of buyers
• 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 (Eg TopGlove
going into rubber plantation business)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 4/5: Threat of substitute products
• 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)
– 5/5: Intensity of Rivalry Among Competitors
• 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 eg must enter China market
• High exit barriers – difficult to call it quit

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 5/5: Intensity of Rivalry Among Competitors
• High exit barriers (Cont’d)
– 1. Specialized assets eg planes
– 2. Fixed costs of exit (i.e., labor agreements -
compensation)
– 3. Strategic interrelationships (i.e., one business
depends on another – shared facilities)
– 4. Emotional barriers (i.e., loyalty to employees,
etc.)
– 5. Government and social restrictions (gov concern
for job loses)
–

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Industry Environment Analysis (Cont’d)
• Interpreting Industry Analyses
Unattractive industry has
- Low entry barriers
- Suppliers and buyers with strong bargaining positions
- Strong competitive threats from product substitutes
- Intense rivalry among competitors
Attractive industry has
- High entry barriers
- Suppliers and buyers with little bargaining power
- Few competitive threats from product substitutes
- Relatively moderate rivalry

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environment segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitor Analysis: Intelligence and ethics

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Strategic Groups
• Strategic Groups
– Set of firms emphasizing similar strategic dimensions to
use a similar strategy
– 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environment segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitor Analysis: Intelligence and ethics

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Competitor Analysis
Focuses on each company against which a firm
directly competes.
• 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Competitor Analysis Components

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 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

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 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 (Corporate
espionage?)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.