Chapter 2: The External Environment:

Opportunities, Threats, Industry Competition

and Competitor Analysis
Overview:

The firms external environment

External environmental analysis
General environmental segments
Industry environment (and analysis)
Porters 5 Competitive Forces
Strategic groups: Definition and influence
Competitors and competitive intelligence

External Environment Analysis

4 components
Scanning the study of all segments in the
general environment
Monitoring observing environmental changes
to see if an important trend is emerging
Forecasting the development of feasible
projections of what might happen and how
quickly as a result of the changes and trends
detected
Assessing determining the timing and
significance of the effects of environmental
changes and trends on the firm

External Environment Analysis

Opportunity

General environment condition that, if exploited

effectively, helps a company achieve strategic
competitiveness

Threat

General environment condition that may hinder a

company's efforts to achieve strategic
competitiveness

The External Environment:

General, Industry, and Competitor

The General Environment

The General Environment

The broader society dimensions that influence an industry

and the firms within it
Grouped into 7 dimensions OR environmental segments
Demographic populations size, age structure, geographic
distribution, ethnic mix, and income distribution
Economic nature and direction of economy
Political/Legal laws and regulations
Sociocultural societys attitudes and cultural values
Technological new technologies and firms that create them
Global new global markets, existing markets that are
changing, and their characteristics
Physical potential and actual changes in physical
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environment and business practices

The Industry Environment

Industry Environment
Set of factors directly influencing a firms competitive
actions/responses
Industry
Definition: Group of firms producing products that are
close substitutes
Industry environment, in comparison to the general
environment, has more direct effect on firms

Strategic competitiveness and

Above-average returns

Intensity of industry competition and industrys profit

potential are a function of 5 forces

The Five Forces of Competition Model

Industry Environment Analysis

Threat of New Entrants
Deals with the likelihood that new firms will enter an
industry or that an existing member of an industry will
enter an additional segment within the larger industry.
Can threaten the market share of existing competitors
and may bring additional production capacity
New entry is often via an acquisition
A stronger force when

Barriers to entry are weak or nonexistent

The expected retaliation by current industry participants is
low

Industry Environment Analysis

Bargaining power of suppliers
Usually other business organizations that provide the
industry with products and services
A supplier group is powerful when

It is dominated by a few large companies and is more

concentrated than the industry to which they sell
No satisfactory substitutes exist
Industry firms not significant customer to supplier group
Suppliers goods are critical to buyers success
High switching costs due to effectiveness of suppliers
products
Poses credible threat of forward integration
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Industry Environment Analysis

Bargaining power of buyers
Usually other business organizations that purchase
the outputs of an industry
Customers are powerful when

They purchase a large portion of industrys total output

Product sales accounts for a significant portion of sellers
annual revenue
Low switching costs (to other industry product)
Industry products are undifferentiated or standardized and
buyers pose a credible threat of backward integration

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Industry Environment Analysis

Threat of substitute products
Goods or services from outside a given industry that
perform similar or the same functions (i.e., sugar vs.
sugar substitute such as NutraSweet)
A strong force when

Low switching costs

The substitute products price is lower or its quality and
performance capabilities are equal to or greater than those of
the competing product

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Industry Environment Analysis

Intensity of Rivalry Among Competitors
Firms operating in the same market, offering similar
products, and targeting similar customers
A stronger force when

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
High exit barriers

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Industry Environment Analysis

Interpreting Industry Analyses

Five force analysis helps determine an industrys

attractiveness for above average returns

Stronger forces = Lower profit potential

Weaker forces = Higher profit potential

Unattractive industry characterized by

Low entry barriers

Suppliers and buyers with strong bargaining positions
Strong threat from substitute products
Intense rivalry among competitors
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Industry Analysis: Strategic Groups

Strategic Groups
Set of firms emphasizing similar strategic
dimensions and using a similar strategy
Can be useful for analyzing an industrys
competitive structure
Can also be helpful in diagnosing competition,
positioning, and the profitability of firms within
an industry

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Strategic Group Map of Selected

Automobile Manufacturers

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Strategic Group Map of Selected

Retail Chains

Industry Analysis: Strategic Groups

Implications

Because firms within a group compete (offer

similar products) rivalry can be intense the
greater the rivalry the greater the threat to
each firms profitability
Strengths of the 5 forces can differ across
strategic groups
The closer the strategic groups, in terms of
strategy, the greater the likelihood of rivalry

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The Competitor Environment

and Competitor Analysis
Competitor Environment
Gives details about

A firms direct and indirect competitors

The competitive dynamics expected to impact a firm's
efforts to generate above-average returns

Competitor analysis
Focused on predicting the dynamics of competitor's
actions, responses, and intentions
Focuses on each company which a firm directly
competes
Seeks to understand each competitors future objectives,
current strategy, assumptions, and capabilities
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Competitor Analysis Components

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Competitor Intelligence
Competitor intelligence
Set of data and information the firm gathers to better
understand and anticipate competitors' objectives,
strategies, assumptions, and capabilities
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

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