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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis

Overview: The firm’s external environment External environmental analysis General environmental segments Industry environment (and analysis) Porter’s 5 Competitive Forces Strategic groups: Definition and influence Competitors and competitive intelligence

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External Environment Analysis

4 components Scanning – the study of all segments in the

general environment Monitoring – observing environmental changes

to see if an important trend is emerging Forecasting – the development of feasible

projections of what might happen and how quickly as a result of the changes and trends detected

Assessing – determining the timing and significance of the effects of environmental changes and trends on the firm

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External Environment Analysis

Major part of external analysis is the identification of opportunities and threats

Opportunity Environment condition that, if exploited effectively,

helps a company achieve strategic competitiveness Threat

Environment condition that may hinder a company's efforts to achieve strategic competitiveness

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The External Environment:General, Industry, and Competitor

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The General Environment

The General Environment The broader society dimensions that influence an industry and

the firms within it Grouped into 7 dimensions OR ‘environmental segments’

Demographic – population’s size, age structure, geographic distribution, ethnic mix, and income distribution

Economic – nature and direction of economy Political/Legal – laws and regulations Sociocultural – society’s attitudes and cultural values Technological – new technologies and firms that create them Global – new global markets, existing markets that are

changing, and their characteristics Physical – potential and actual changes in physical

environment and business practices

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The Industry Environment

Industry Environment Set of factors directly influencing a firm’s competitive

actions/responses Industry (Product Market)

Definition: Group of firms producing products that are close substitutes

Industry environment, in comparison to the general environment, has more direct effect on firm’s

Strategic competitiveness and Above-average returns

Intensity of industry competition and industry’s profit potential are a function of 5 forces

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The Five Forces of Competition Model

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Industry Environment Analysis

Threat of New Entrants Deals with the likelihood that new firms will enter an

industry or that an existing member of an industry will enter an additional segment within the larger industry

Can threaten the market share of existing competitors and may bring additional production capacity

New entry is often via an acquisition A stronger force when…

Barriers to entry are weak or nonexistent The expected retaliation by current industry participants is

low

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Industry Environment Analysis

Bargaining power of suppliers Usually other business organizations that provide the

industry with products and services A supplier group is powerful when …

It is dominated by a few large companies and is more concentrated than the industry to which they sell

No satisfactory substitutes exist Industry firms not significant customer to supplier group Supplier’s goods are critical to buyer’s success High switching costs due to effectiveness of supplier’s

products Poses credible threat of forward integration

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Industry Environment Analysis

Bargaining power of buyers Usually other business organizations that purchase

the outputs of an industry Buyer groups are powerful when …

They purchase a large portion of industry’s total output Product sales accounts for a significant portion of seller’s

annual revenue Low switching costs (to other industry product) Industry products are undifferentiated or standardized and

buyers pose a credible threat of backward integration

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Industry Environment Analysis

Threat of substitute products Goods or services from outside a given industry that

perform similar or the same functions as the product the industry produces

Examples Sugar vs. sugar substitutes Aspirin vs. Ibuprofen Aluminum cans vs. plastic bottles

A strong force when… Low switching costs The substitute product’s price is lower or its quality and

performance capabilities are equal to or greater than those of the competing product

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Industry Environment Analysis

Intensity of Rivalry Among Competitors Firms operating in the same market, offering similar

products, and targeting similar customers A stronger force when…

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

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Industry Environment Analysis

Interpreting Industry Analyses Five force analysis helps determine an industry’s

attractiveness for above average returns Stronger forces = Lower profit potential Weaker forces = Higher profit potential

Attractive industry characterized by Low threat of new entry Suppliers and buyers with weak bargaining positions Low threat from substitute products Less intense rivalry among competitors

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Industry Analysis: Strategic Groups

Strategic Group Mapping Strategic Group – a set of firms emphasizing similar

strategic dimensions and using a similar strategy Can be useful for analyzing an industry and an

industry’s competitive structure Can also be helpful in diagnosing competition,

positioning, and the profitability of firm’s within an industry

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Strategic Group Map of Selected Automobile Manufacturers

Strategic Group Map of Selected Retail Chains

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Industry Analysis: Strategic Groups

Implications Because firms within a group compete (offer similar

products) rivalry can be intense – the greater the rivalry the greater the threat to each firm’s profitability

Strengths of the 5 forces can differ across strategic groups

The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry

Helps with positioning and in the identification of direct and indirect competitors

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The Competitor Environment and Competitor Analysis

Competitor Environment Gives details about

A firm’s direct and indirect competitors The competitive dynamics (Ch. 5) expected to impact a

firm's efforts to generate above-average returns

Competitor analysis Focused on predicting the dynamics of competitor's

actions, responses, and intentions Focuses on a firms direct comptitors Seeks to understand each competitors future objectives,

current strategy, assumptions, and capabilities

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Competitor Analysis Components

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Competitor Intelligence

Competitor intelligence Set of data and information the firm gathers to better

understand and anticipate competitors' objectives, strategies, assumptions, and capabilities

Scanning, monitoring, forecasting, and assessing Follow ethical practices when gathering competitor

intelligence Obtain public information Attend trade fairs and shows and collect brochures, view exhibits,

listen to their discussions

Some practices may be legal, but unethical Unethical tactics can include

Blackmail, Trespassing, Eavesdropping, Stealing