Strategic Management

MODULE 2

The External Environment: Opportunities,

Threats, Industry Competition, and
Competitor Analysis

FOR CLASS DISCUSSION PURPOSES ONLY

 Introduction
An integrated understanding of the external and
internal environments is essential for firms to
understand the present and predict the future. A
firm’s external environment is divided into three
major areas: the general, industry, and competitor
environments.

FOR CLASS DISCUSSION PURPOSES ONLY

 The External Environment

Source: Strategic Management 12edition by: Hitt, Ireland and Hoskisson

FOR CLASS DISCUSSION PURPOSES ONLY
 Major Areas of External Environment
General environment is composed of dimensions
in the broader society that influence an industry and
the firms within it. These dimensions group into six
environmental segments: demographic, economic,
political/legal, sociocultural, technological, and
global.

FOR CLASS DISCUSSION PURPOSES ONLY

 Major Areas of External Environment
Industry Environment - is the set of factors that
directly influences a firm and its competitive actions
and competitive responses10: 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.

FOR CLASS DISCUSSION PURPOSES ONLY

 Major Areas of External Environment
Competitor environment - analysis of
competitors is focused on predicting the dynamics
of competitors’ actions, responses, and intentions.

FOR CLASS DISCUSSION PURPOSES ONLY

 External Environment Analysis
The purpose of an external environment analysis is
to develop a list of opportunities that could benefit a
firm as well as threats that should be avoided. Firms
should be able to respond either offensively or
defensively to the factors by formulating strategies
that take advantage of external opportunities or that
minimize the impact of potential threats.

FOR CLASS DISCUSSION PURPOSES ONLY

 External Environment Analysis
Opportunity - is a condition in the general
environment that, if exploited, helps a company
achieve strategic competitiveness.
Threat - is a condition in the general environment
that may hinder a company’s efforts to achieve
strategic competitiveness

FOR CLASS DISCUSSION PURPOSES ONLY

Internal External
Strength Opportunity

Discover
Apply,
sustain

Strategy

Overcome Avert

Weakness
Threat
 Components of the External
Environmental Analysis
Environmental Scanning – involves surveillance
of a firm’s external environment to predict
environmental changes and detect changes already
under way.
Environmental Monitoring – tracks the
evolution of environmental trends, sequence of
events, or streams of activities. Monitoring enables
firms to evaluate how dramatically environmental
trends are changing the competitive landscape.

FOR CLASS DISCUSSION PURPOSES ONLY

 Components of the External Environmental
Analysis
Environmental Forecasting – involves the
development of plausible projections about the
direction, scope, and speed and intensity of
environmental change.
Environmental Assessing - assessing is to
determine the timing and significance of the
effects of environmental changes and trends on
the strategic management of the firm.
FOR CLASS DISCUSSION PURPOSES ONLY
 Segments of the General Environment
Demographic segment - is concerned with a
population’s size, age structure, geographic
distribution, ethnic mix, and income distribution.
Economic environment - refers to the nature
and direction of the economy in which a firm
competes or may compete.

FOR CLASS DISCUSSION PURPOSES ONLY

 Segments of the General Environment
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 the
interactions among nations.
Sociocultural - segment is concerned with a
society’s attitudes and cultural values

FOR CLASS DISCUSSION PURPOSES ONLY

 Segments of the General Environment
Technological segment - includes the
institutions and activities involved with creating
new knowledge and translating that knowledge into
new outputs, products, processes, and materials.
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.
FOR CLASS DISCUSSION PURPOSES ONLY
 Industry Environment Analysis
Firm performance is determined primarily by two
factors: industry and firm effect. Industry effects
describes the underlying economic structure of the
industry. They attribute firm performance to the
industry in which the firm compete. Firm effects
attribute firm performance to the action strategic
leaders.
Industry - is a group of firms producing products
that are close substitutes.
FOR CLASS DISCUSSION PURPOSES ONLY
 Industry Environment Analysis
Threat of New Entrants – refers to the
possibility that the profits of established firms in
the industry may be eroded by new competitors.

FOR CLASS DISCUSSION PURPOSES ONLY

 Barriers to Entry
Economies of Scale – refers to spreading the
costs of production over the volume of units
produced. The cost of a product per unit declines
as the absolute volume per period increases.
Product Differentiation – when existing
competitors have strong brand identification and
customer loyalty, differentiation creates a barrier
to entry by forcing entrants to spend heavily to
overcome existing customer loyalty.
FOR CLASS DISCUSSION PURPOSES ONLY
 Barriers to Entry
Capital Requirements – the need to invest large
financial resources to compete creates a barrier to
entry, especially if the capital is required for risky
or unrecoverable up-front advertising or research
and development.
Switching Costs – a barrier to entry is created by
the existence of one-time costs that the buyer faces
when switching from one supplier’s product or
service to another.
FOR CLASS DISCUSSION PURPOSES ONLY
 Barriers to Entry
Access to Distribution Channel – the new
entrant’s need to secure distribution for its
product can create a barrier to entry.

FOR CLASS DISCUSSION PURPOSES ONLY

 Industry Environment Analysis
Bargaining Power of Suppliers - affects the
intensity of competition in an industry, especially
when there are few suppliers, when there are few
good substitute raw materials, or when the cost of
switching raw materials is especially high.
Bargaining Power of Buyers - when customers
are concentrated or large in number or buy in
volume, their bargaining power represents a major
force affecting the intensity of competition in an
industry. FOR CLASS DISCUSSION PURPOSES ONLY
 Industry Environment Analysis
Threat of Substitute Products - in many industries,
firms are in close competition with producers of
substitute products in other industries. The threat of
substitutes is the idea that products or services
available from outside the given industry will come
close to meeting the needs of current customers.
Intensity of Rivalry Among Competitors – it
describes the intensity with which companies within
the same industry jockey for market share and
profitability. FOR CLASS DISCUSSION PURPOSES ONLY
 Factors affects 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

FOR CLASS DISCUSSION PURPOSES ONLY

 Interpreting Industry Analysis
For industry analysis to be valuable, a company
must collect and evaluate a wide variety of
information. Industry analysis helps a firm not
only to evaluate the profit potential of an industry
but also consider various ways to strengthen its
position.

FOR CLASS DISCUSSION PURPOSES ONLY

 Strategic Groups
In an industry analysis, two assumptions are
unassailable: (1) no two firms are totally different,
and (2) no two firms are exactly same. This is
important because rivalry tends to be greater
among firms that are alike. Strategic groups are
cluster of firms that share similar strategies.

FOR CLASS DISCUSSION PURPOSES ONLY