EXTERNAL

ENVIRONMENT
ANALYSIS
COORDINATOR :
M. SYAEFUDIN ANDRIANTO

TEACHING TEAM :
EKO RUDDY CAHYADI
MIMIN AMINAH
LINDAWATI KARTIKA
 Introduction
Technological changes and the continuing growth of information
gathering and processing capabilities increase the need for firms to develop
effective competitive actions on a timely basis. The rapid sociological changes
occurring in many countries affect labor practices and the nature of products
demanded by increasingly diverse consumers. Governmental policies and
laws also affect where and how firms choose to compete.
Viewed in their totality, the conditions that affect firms today indicate
that for most organizations, their external environment is filled with
uncertainty. To successfully deal with this uncertainty and to achieve strategic
competitiveness and thrive, firms must be aware of and fully understand the
different segments of the external environment.
Firms understand the external environment by acquiring information
about competitors, customers, and other stakeholders to build their own
base of knowledge and capabilities. On the basis of the new information,
firms take actions, such as building new capabilities and core competencies,
in hopes of buffering themselves. from any negative environmental effects
and to pursue opportunities as the basis for better serving their stakeholders’
needs. A firm’s strategic actions are influenced by the conditions in the three
parts (the general, industry, and competitor) of its external environment.
Figure 1 The External Environment
The General, Industry, and Table 1 The General Environment: Segments and Elements

Competitor Environments (1)

The general environment is composed of dimensions in
the broader society that influence an industry and the firms
within it. These dimensions into seven environmental
segments: demographic, economic, political/legal,
sociocultural, technological, global, and physical.
Firms cannot directly control the general environment’s
segments. The recent bankruptcy filings by General Motors
and Chrysler Corporation highlight this fact. These firms could
not directly control various parts of their external
environment, including the economic and political/legal
segments; however, these segments are influencing the
actions the firms are taking now including the forming of
Chrysler’s alliance with Fiat.
Because firms cannot directly control the segments of
their external environment, successful ones learn how to
gather the information needed to understand all segments and
their implications for selecting and implementing the firm’s
strategies.
The General, Industry, and
Competitor Environments (2)
The industry environment is the set of factors that directly influences a firm and its competitive
actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the
threat of product substitutes, and the intensity of rivalry among competitors. In total, the interactions
among these five factors determine an industry’s profit potential; in turn, the industry’s profit potential
influences the choices each firm makes about its strategic actions. The challenge for a firm is to locate a
position within an industry where it can favorably influence the five factors or where it can successfully
defend against their influence. The greater a firm’s capacity to favorably influence its industry
environment, the greater the likelihood that the firm will earn above-average returns. How companies
gather and interpret information about their competitors is called.

Analysis of the general environment is focused on environmental trends while an analysis of the
industry environment is focused on the factors and conditions influencing an industry’s profitability
potential and an analysis of competitors is focused on predicting competitors’ actions, responses, and
intentions. In combination, the results of these three analyses influence the firm’s vision, mission, and
strategic actions. Although we discuss each analysis separately, performance improves when the firm
integrates the insights provided by analyses of the general environment, the industry environment, and
the competitor environment.
 External Environmental Analysis
Identifying opportunities and threats is an important objective of studying
the general environment. An opportunity is a condition in the general
environment that if exploited effectively, helps a company achieve strategic
competitiveness. A threat is a condition in the general environment that may
hinder a company’s efforts to achieve strategic competitiveness.

Table 2 Components of the External Environmental Analysis

The Demographic Segment
The demographic segment is concerned with a
population’s size, age structure, geographic distribution,
ethnic mix, and income distribution. Demographic
segments are commonly analyzed on a global basis
because of their potential effects across countries’ borders
and because many firms compete in global markets.
• Population Size
• Age Structure
• Geographic Distribution
• Ethnic Mix
• Income Distribution
The Economic Segment

The economic environment refers to the nature and direction of the economy in which a
firm competes or may compete. In general, firms seek to compete in relatively stable
economies with strong growth potential. Because nations are interconnected as a result of
the global economy, firms must scan, monitor, forecast, and assess the health of their host
nation and the health of the economies outside their host nation.

The Political/Legal Segment

The political/legal segment 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. Essentially, this segment represents how organizations try to
influence governments and how they try to understand the influences (current and
projected) of those governments on their strategic actions.
The Technological Segment

Pervasive and diversified in scope, technological changes affect many parts of societies. These effects
occur primarily through new products, processes, and materials. The technological segment includes the
institutions and activities involved with creating new knowledge and translating that knowledge into new
outputs, products, processes, and materials. Given the rapid pace of technological change, it is vital for
firms to thoroughly study the technological segment. The importance of these efforts is suggested by the
finding that early adopters of new technology often achieve higher market shares and earn higher returns.
Thus, both large and small firms should continuously scan the external environment to identify potential
substitutes for technologies that are in current use, as well as to identify newly emerging technologies from
which their firm could derive competitive advantage.

The Sociocultural Segment

The sociocultural segment is concerned with a society’s attitudes and cultural values.
Because attitudes and values form the cornerstone of a society, they often drive
demographic, economic, political/legal, and technological conditions and changes.
The Global Segment

The global segment includes relevant new global markets, existing markets that are
changing, important international political events, and critical cultural and institutional
characteristics of global markets. There is little doubt that markets are becoming more global
and that consumers as well as companies throughout the world accept this fact. Consider the
automobile industry as an example of this. The global auto industry is one in which an increasing
number of people believe that because “we live in a global community,” consumers in multiple
nations are willing to buy cars and trucks “from whatever area of the world.”

The Physical Environment Segment

The physical environment segment 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. Concerned with trends oriented to sustaining the world’s physical environment,
firms recognize that ecological, social, and economic systems interactively influence what
happens in this particular segment.
 Industry Environment Analysis
An industry is a group of firms producing products
that are close substitutes. In the course of
competition, these firms influence one another.
Typically, industries include a rich mixture of
competitive strategies that companies use in
pursuing above-average returns. In part, these
strategies are chosen because of the influence of an
industry’s characteristics.
The five forces model of competition expands the
arena for competitive analysis. Historically, when
studying the competitive environment, firms
concentrated on companies with which they
competed directly. However, firms must search more
broadly to recognize current and potential Figure 2 The Five Forces of Competition Model
competitors by identifying potential customers as
well as the firms serving them.
 Threat of New Entrants
Identifying new entrants is important because they can threaten the market share of
existing competitors. One reason new entrants pose such a threat is that they bring additional
production capacity. Unless the demand for a good or service is increasing, additional capacity
holds consumers’ costs down, resulting in less revenue and lower returns for competing firms.
Often, new entrants have a keen interest in gaining a large market share. As a result, new
competitors may force existing firms to be more efficient and to learn how to compete on new
dimensions (e.g., using an Internet-based distribution channel).
The likelihood that firms will enter an industry is a function of two factors: barriers to entry
and the retaliation expected from current industry participants. Entry barriers make it difficult
for new firms to enter an industry and often place them at a competitive disadvantage even
when they are able to enter. As such, high entry barriers tend to increase the returns for
existing firms in the industry and may allow some firms to dominate the industry. Thus, firms
competing successfully in an industry want to maintain high entry barriers in order to
discourage potential competitors from deciding to enter the industry.
Bargaining Power of Suppliers
Increasing prices and reducing the quality of their products are potential means
suppliers use to exert power over firms competing within an industry. If a firm is
unable to recover cost increases by its suppliers through its own pricing
structure, its profitability is reduced by its suppliers’ actions. A supplier group is
powerful when
• It is dominated by a few large companies and is more concentrated than the
industry to which it sells.
• Satisfactory substitute products are not available to industry firms.
• Industry firms are not a significant customer for the supplier group.
• Suppliers goods are critical to buyers marketplace success.
• The effectiveness of suppliers products has created high switching costs for
industry firms.
• It poses a credible threat to integrate forward into the buyers industry.
Credibility is enhanced when suppliers have substantial resources and provide
a highly differentiated product.
 Bargaining Power of Buyers
Firms seek to maximize the return on their invested capital.
Alternatively, buyers (customers of an industry or a firm) want to
buy products at the lowest possible price—the point at which the
industry earns the lowest acceptable rate of return on its invested
capital. To reduce their costs, buyers bargain for higher quality,
greater levels of service, and lower prices. These outcomes are
achieved by encouraging competitive battles among the industry’s
firms. Customers (buyer groups) are powerful when :
• They purchase a large portion of an industry’s total output.
• The sales of the product being purchased account for a
significant portion of the seller’s annual revenues.
• They could switch to another product at little, if any, cost.
• The industry’s products are undifferentiated or standardized,
and the buyers pose a credible threat if they were to integrate
backward into the sellers industry.
Threat of Substitute Products
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. For example, as a sugar substitute, NutraSweet (and other
sugar substitutes) places an upper limit on sugar manufacturers’ prices—
NutraSweet and sugar perform the same function, though with different
characteristics.
In general, product substitutes present a strong threat to a firm when
customers face few, if any, 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 dimensions that customers value (such as quality, service
after the sale, and location) reduces a substitute’s attractiveness.
 Intensity of Rivalry Among Competitors
Because an industry’s firms are mutually dependent, actions taken by one company usually invite
competitive responses. In many industries, firms actively compete against one another. 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. Firms within industries are rarely homogeneous; they differ in resources and
capabilities and seek to differentiate themselves from competitors. Typically, firms seek to differentiate their
products from competitors’ offerings in ways that customers value and in which the firms have a competitive
advantage. Common dimensions on which rivalry is based include price, service after the sale, and innovation.
The most prominent factors that experience shows to affect the intensity of firms’ rivalries :
• 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
Interpreting Industry Analyses
Effective industry analyses are products of careful study and interpretation
of data and information from multiple sources. A wealth of industry-specific
data is available to be analyzed. Because of globalization, international
markets and rivalries must be included in the firm’s analyses.
Analysis of the five forces in the industry allows the firm to determine the
industry’s attractiveness in terms of the potential to earn adequate or
superior returns. In general, the stronger competitive forces are, the lower the
profit potential for an industry’s firms. An unattractive industry has low entry
barriers, suppliers and buyers with strong bargaining positions, strong
competitive threats from product substitutes, and intense rivalry among
competitors. These industry characteristics make it difficult for firms to
achieve strategic competitiveness and earn above-average returns.
Alternatively, an attractive industry has high entry barriers, suppliers and
buyers with little bargaining power, few competitive threats from product
substitutes, and relatively moderate rivalry
Strategic Groups
A set of firms that emphasize similar strategic dimensions and use a similar strategy
is called a strategic group. The competition between firms within a strategic group is
greater than the competition between a member of a strategic group and companies
outside that strategic group. Therefore, intra-strategic group competition is more
intense than is inter-strategic group competition. In fact, more heterogeneity is evident
in the performance of firms within strategic groups than across the groups. The
performance leaders within groups are able to follow strategies similar to those of other
firms in the group and yet maintain strategic distinctiveness to gain and sustain a
competitive advantage.
Strategic groups have several implications. First, because firms within a group offer
similar products to the same customers, the competitive rivalry among them can be
intense. The more intense the rivalry, the greater the threat to each firm’s profitability.
Second, the strengths of the five industry forces differ across strategic groups. Third, the
closer the strategic groups are in terms of their strategies, the greater is the likelihood of
rivalry between the groups.
Competitor Analysis (1) In a competitor analysis, the firm seeks to understand
the following:
• 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.
Information about these four dimensions helps
the firm prepare an anticipated response profile for
each competitor (see Figure 3). The results of an
effective competitor analysis help a firm understand,
interpret, and predict its competitors’ actions and
responses. Understanding the actions of competitors
clearly contributes to the firm’s ability to compete
successfully within the industry. Interestingly,
research suggests that executives often fail to analyze
Figure 3 Competitor Analysis Components competitors’ possible reactions to competitive actions
their firm takes, placing their firm at a potential
competitive disadvantage as a result.
 Competitor Analysis (2)
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.
Useful data and information combine to form competitor intelligence : the set of data and
information the firm gathers to better understand and better anticipate competitors’ objectives,
strategies, assumptions, and capabilities.
In competitor analysis, the firm gathers intelligence not only about its competitors, but also
regarding public policies in countries around the world. Such intelligence facilitates an
understanding of the strategic posture of foreign competitors. Through effective competitive and
public policy intelligence, the firm gains the insights needed to make effective strategic decisions
about how to compete against its rivals.
When gathering competitive intelligence, firms must also pay attention to the complementors of
its products and strategy. Complementors are companies or networks of companies that sell
complementary goods or services that are compatible with the focal firm’s good or service. When a
complementor’s good or service adds value to the sale of the focal firm’s good or service it is likely
to create value for the focal firm.
 Instruction.
Open the journal, read carefully and discuss with your partners
in group!

Case 1

02 - FTH - The Rivalry Matrix.pdf

Case 2

02 - RRE - Global Trends and Their Influence on Future Busines Performance.pdf

Instruction.
Open the journal, read carefully and discuss with your partners
in group!
 Case 3

02 - PME1 - The Five Competitive Forces That Shape Strategy.pdf

Instruction.
Open the journal, read carefully and discuss with your
partners in group!