Chapter 2

The External Environment:

Opportunities, Threats,
Industry Competition, and
Competitor Analysis

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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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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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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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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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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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A Sixth Force: Complementors
• Andrew Grove, the former CEO of Intel, has
argued that Porter’s Five Forces Model ignores a
sixth force: the power, vigor, and competence of
complementors. It demonstrates relationships
between two firms who do not directly buy from
or sell to each other but whose products have a
strong complementary relationship. For example,
the complementors to the personal computer
industry are the companies that make software
applications to run on the computers.

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Complementors (contd.)
• When the number of complementors is increasing
and producing attractive complementary products,
demand increases and profits in the industry can
broaden opportunities for creating value.
Conversely, if complementors are weak, and are
not producing attractive complementary products,
they can become a threat, slowing industry growth
and limiting profitability.

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Interpreting Industry Analyses
Aggressive Complementors

Low entry barriers

Suppliers and buyers
have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
among competitors Low profit potential

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Interpreting Industry Analyses (cont’d)

Supportive Complementors

High entry barriers

Suppliers and buyers

have weak positions Attractive
Few threats from Industry
substitute products

Moderate rivalry
among competitors High profit potential

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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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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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