CHAPTER 2

Analysis of the
STRATEGIC External Environment
MANAGEMENT
INPUTS

Management
of Strategy
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Concepts and Cases
Michael A. Hitt • Robert E. Hoskisson • R. Duane Ireland
FIGURE 2.1 The External Environment

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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

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TABLE 2.1 The General Environment: Segments and Elements

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Industry Environment
• The set of factors directly influencing a firm and
its competitive actions and competitive
responses
 Threat of new entrants
 Power of suppliers
 Power of buyers
 Threat of product substitutes
 Intensity of rivalry among competitors

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Competitor Analysis
• Gathering and interpreting
information about all of the
companies that the firm
competes against.
• Understanding the firm’s
competitor environment
complements the insights
provided by studying the
general and industry
environments.

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Analysis of the External Environments
• General environment
 Focused on the future

• Industry environment
 Focused on factors and conditions influencing a firm’s
profitability within an industry
• Competitor environment
 Focused on predicting the dynamics of competitors’
actions, responses and intentions

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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,
helps a company achieve
strategic competitiveness.

• Threat
 A condition in the general
environment that may hinder a
company’s efforts to achieve
strategic competitiveness.

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Segments of the General Environment
• The Demographic Segment
 Population size
 Age structure
 Geographic distribution
 Ethnic mix
 Income distribution

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Segments of the General Environment
(cont’d)
• The Economic Segment
 Inflation rates
 Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic product

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Segments of the General Environment
(cont’d)
• The Political/Legal Segment
 Antitrust laws
 Taxation laws
 Deregulation philosophies
 Labor training laws
 Educational philosophies and
policies

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Segments of the General Environment
(cont’d)
• The Sociocultural Segment
 Women in the workplace
 Workforce diversity
 Attitudes about quality of worklife
 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
 Applications of knowledge
 Focus of private and government-supported R&D
expenditures
 New communication technologies

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Segments of the General Environment
(cont’d)
• The Global Segment
 Important political events
 Critical global markets
 Newly industrialized countries
 Different cultural and institutional
attributes

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Industry Environment Analysis
• Industry Defined
 A group of firms producing products that are close
substitutes
• Firms that influence one another
• Includes a rich mix of competitive strategies that
companies use in pursuing strategic
competitiveness and above-average returns

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FIGURE 2.2 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
• Government policy
• 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
 Costs related to scale economies
 Competitor retaliation

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Barriers to Entry (cont’d)
• Product differentiation • Switching Costs
 Unique products  One-time costs customers
 Customer loyalty incur when they buy from a
 Products at competitive different supplier
prices • New equipment
• Capital Requirements • Retraining employees
 • Psychic costs of ending a
Physical facilities
relationship
 Inventories
 • Access to Distribution
Marketing activities
 Availability of capital
Channels
 Stocking or shelf space
 Price breaks
 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 raw the industry (available
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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Interpreting Industry Analyses

Low entry barriers

Suppliers and
buyers have strong
positions Unattractive
Strong threats Industry
from 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 High profit potential
competitors

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Strategic Groups
• Strategic Group Defined
 A set of firms emphasizing similar strategic
dimensions and using similar strategies
• Internal competition between strategic group firms
is greater than between firms outside that strategic
group.
• There is more heterogeneity in the performance of
firms within strategic groups.
– Similar market positions
– Similar products
– Similar strategic actions

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Strategic Groups
• Strategic Dimensions
 Extent of technological leadership
 Product quality
 Pricing Policies
 Distribution channels
 Customer service

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Competitor Analysis
• Competitor Intelligence
 The ethical gathering of needed information and data
that provides insight into:
• A competitor’s direction (future objectives)
• A competitor’s capabilities and intentions (current
strategy)
• A competitor’s beliefs about the industry (its
assumptions)
• A competitor’s capabilities

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FIGURE 2.2

Competitor
Analysis
Components

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Competitor Analysis (cont’d)

Future Objectives • How do our goals

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

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Competitor Analysis (cont’d)

Future Objectives

Current Strategy

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

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Competitor Analysis (cont’d)

Future Objectives Response

• What will our

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

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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.
• 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:
 Obtaining publicly available information
 Attending trade fairs and shows to obtain competitors’
brochures, view their exhibits, and listen to
discussions about their products
• Practices considered both unethical and illegal:
 Blackmail
 Trespassing
 Eavesdropping
 Stealing drawings, samples, or documents

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