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EXTERNAL ENVIRONMENT
Mohammad Arief
External and Internal Analyses
Genera
l
Envi
ronm
ent
General
Environment
Genera
l
Enviro
nm
ent
Sociocultural
Glo
bal
Technological
Politi
cal/Le
gal
Dem
ogra
phic E
conom
ic
IndustryEnvironment
CompetitorEnvironment
By studying the external environment, firms identify what they might choose to do
Opportunities and threats
By studying the internal environment, firms identify what they can do
Unique resources, capabilities, and core competencies
(sustainable competitive advantage)
External and Internal Analyses
Demographic Segment
Population size Age structure Ethnic Mix
Geographical Distribution Income distribution Immigration
Sociocultural Segment
Women in the workforce Workforce diversity Environmental Concerns Work life quality attitudes
Concerns about the environment Shifts in 2 career preferences Shifts in preferences regarding product
/ service characteristics
Political/Legal Segment
Competition Laws Labour Laws Taxation laws
Education philosophies & policy Government econ. involvement /
ownership Philosophies De-/ Regulation philosophy
General Environment Components
Economic Segment
Inflation & interest rates Personal savings rate Business savings rates
Trade deficits or surpluses Budget deficits or surpluses
Gross domestic product
Technological Segment
Product innovations Process Innovations Applications of knowledge
Focus of private & government-supported R&D expenditures
New communication technologies
Global Segment
Important political events Critical global markets
Newly industrialized countries Different cultural and institutional
attributes
General Environment Components
The Industry Environment
The set of factors that directly influences a firm, it’s competitive actions & competitive responses:
1. The threat of new entrants
2. The power of suppliers
3. The power of buyers
4. The threat of product substitutes
5. The intensity of rivalry among competitors
Competitor Analysis
Predicting the dynamics of competitor actions, responses and intentions.
Macro-environmental Forces
The external environmental analysis process should be conducted on a continuous basis.
This process includes four activities:
Scanning Identifying early signals of environmental changes and trends
Monitoring Detect meaning by ongoing observations of environmental
changes and trends
Forecasting Developing projections of anticipated outcomes based on monitored changes and trends
Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management
External Environmental Analysis
External Environmental Analysis
The external environmental analysis process should be conducted on a continuous basis.
This process includes four activities:
Scanning Identifying early signals of environmental changes and trends
Monitoring Detect meaning by ongoing observations of environmental changes and trend
Forecasting Developing projections of anticipated outcomes based on monitored changes and trends
Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management
Threat of New
Entrants
Threat of Substitute Products
Threat of New
Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Porter’s 5 Forces Model of Competition
Rivalry Among Competing Firms in Industry
Product Differentiation* Capital Requirements*
Switching Costs*Access to Distribution Channels*
Cost Disadvantages Independent of Scale* Government Policy*
Expected Retaliation*
Economies of Scale*Barriers to Entry
Barriers to Entry
Threat of New Entrants
* Supplier industry is dominated by a few firms.
* Buyer is not an important customer to supplier.
* Suppliers’ product is an important input to buyers’ product.
* Suppliers’ products are differentiated.
Suppliers are likely to be powerful if:
* Suppliers’ products have high switching costs.
* Supplier poses credible threat of forward integration.
Suppliers exert power in the industry by:
* Threatening to raise prices or to reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Suppliers’ products have few substitutes.*
Bargaining Power of Suppliers
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are large relative to seller’s sales
Purchase accounts for a significant fraction of supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer presents a credible threat of backward integration
Product unimportant to quality
Buyer has full information
Buyers compete with supplying industry
by:
Bargaining down prices
Forcing higher quality
Playing firms off each other
Products with similar function limit the prices firms can charge
* Products with improving price / performance tradeoffs relative to present industry products
Keys to evaluating substitute products:
For Example:
Electronic security systems in place of security guards
Fax machines or e-mailed attachments in place of overnight mail delivery
Threat of Substitute Products
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways
Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or
service Making new product introductions
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves entire industry worse off Advertising battles may increase total industry demand,
but may be costly to smaller competitors
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when
Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers
Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.
Specialized assets Fixed cost of exit (e.g., labour agreements) Strategic interrelationships Emotional barriers Government and social restrictions
Competitor Environment
Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities.
• What drives the competitor as shown by its future objectives,
• What the competitor is doing and can do as revealed by its current strategy,
• What the competitor believes about itself and the industry, as shown by its assumptions,
• What the the competitor may be able to do, as shown by its capabilities.
Competitor Analysis
Future Objectives: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?
Competitor Analysis
Current strategy
Current Strategy:Future objectives • How are we currently
competing?
• Does this strategy support changes in the competitive structure?
Competitor Analysis
Assumptions
Current strategy
Future objectivesAssumptions:• Do we assume the future will
be volatile?
• Are we operating under a status quo?
• What assumptions do our competitors hold about the industry and themselves?
Competitor Analysis
Capabilities
Assumptions
Current strategy
Future objectivesCapabilities:• What are our strengths and
weaknesses?
• How do we rate compared to our competitors?
Competitor Analysis
Capabilities
Assumptions
Current strategy
Future objectives Response
Response:• What will our competitors do
in the future?
• Where do we hold an advantage over our competitors?
• How will this change our relationship with our competitors?
