CHAPTER 2

The External Environment:

Opportunities, Threats,
Industry Competition,
STRATEGIC and Competitor Analysis
MANAGEMENT
INPUTS

Strategic Management
Competitiveness and Globalization:
Concepts and Cases Seventh edition

© 2007 Thomson/South-Western.
All rights reserved. Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
KNOWLEDGE OBJECTIVES

Studying this chapter should provide you with the strategic

management knowledge needed to:
1. Explain the importance of analyzing and understanding
the firm’s external environment.
2. Define and describe the general environment and the
industry environment.
3. Discuss the four activities of the external environmental
analysis process.
4. Name and describe the general environment’s six
segments.
5. Identify the five competitive forces and explain how they
determine an industry’s profit potential.

© 2007 Thomson/South-Western. All rights reserved. 2–2

KNOWLEDGE OBJECTIVES (cont’d)

Studying this chapter should provide you with the strategic

management knowledge needed to:
6. Define strategic groups and describe their influence on
the firm.
7. Describe what firms need to know about their
competitors and different methods (including ethical
standards) used to collect intelligence about them.

© 2007 Thomson/South-Western. All rights reserved. 2–3

 FIGURE 2.1 The External Environment

© 2007 Thomson/South-Western. All rights reserved. 2–4

General Environment
• Dimensions in the broader society that influence
an industry and the firms within it:
 Demographic
 Economic
 Political/legal
 Sociocultural
 Technological
 Global

© 2007 Thomson/South-Western. All rights reserved. 2–5

TABLE 2.1 The General Environment: Segments and Elements

© 2007 Thomson/South-Western. All rights reserved. 2–6

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

© 2007 Thomson/South-Western. All rights reserved. 2–7

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.

© 2007 Thomson/South-Western. All rights reserved. 2–8

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

© 2007 Thomson/South-Western. All rights reserved. 2–9

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
© 2007 Thomson/South-Western. All rights reserved. 2–10
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.

© 2007 Thomson/South-Western. All rights reserved. 2–11

 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

© 2007 Thomson/South-Western. All rights reserved. 2–13

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

© 2007 Thomson/South-Western. All rights reserved. 2–14

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

© 2007 Thomson/South-Western. All rights reserved. 2–15

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

© 2007 Thomson/South-Western. All rights reserved. 2–16

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.

© 2007 Thomson/South-Western. All rights reserved. 2–17

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.

© 2007 Thomson/South-Western. All rights reserved. 2–18

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.

© 2007 Thomson/South-Western. All rights reserved. 2–19

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.

© 2007 Thomson/South-Western. All rights reserved. 2–20

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

© 2007 Thomson/South-Western. All rights reserved. 2–21

 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?

© 2007 Thomson/South-Western. All rights reserved. 2–25

Competitor Analysis (cont’d)

Future Objectives

Current Strategy

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

© 2007 Thomson/South-Western. All rights reserved. 2–26

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?

© 2007 Thomson/South-Western. All rights reserved. 2–27

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

© 2007 Thomson/South-Western. All rights reserved. 2–28