Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Chapter 2 The External Environment: Opportunities, Threats, and Industry Competition, and Competitor Analysis Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

Strategy Implementation The Strategic Management Process Chapter 2 The External Environment Strategic Intent Strategic Mission Strategic Inputs Chapter 3 The Internal Environment Strategy Formulation Strategy Implementation Chapter 4 Business-Level Strategy Chapter 5 Competitive Rivalry and Competitive Dynamics Chapter 6 Corporate- Level Strategy Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Strategic Actions Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 9 Cooperative Strategy Chapter 12 Strategic Leadership Chapter 13 Strategic Entrepreneurship Strategic Competitiveness Above-Average Returns Strategic Outcomes Feedback

The External Environment Sociocultural General Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry General Demographic Economic Global Competitor Environment Political/Legal Environment Environment Technological General

External Environmental Analysis A continuous process which includes 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

External Environmental Analysis Analysis of general environment Analysis of industry environment Analysis of competitor environment The External Environment The External Environment Strategic Intent Strategic Mission

General Environment 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

General Environment Economic segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product

General Environment Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

General Environment Technological Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

General Environment Global Segment Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes

General Environment Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution

Industry Environment A set of factors that directly influences a company and its competitive actions and responses. Interaction among these factors determine an industry’s profit potential. Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry

Five Forces Model of Competition Identify current and potential competitors and determine which firms serve them. Conduct competitive analysis. Recognize that suppliers and buyers can become competitors. Recognize that producers of potential substitutes may become competitors.

Five Forces Model of Competition Five Forces of Competition Rivalry Among Competing Firms Threat of New Entrants Threat of Substitute Products Bargaining Power of Suppliers Bargaining Power of Buyers

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

Bargaining Power of Suppliers A supplier group is powerful when: it is dominated by a few large companies satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high switching costs suppliers are a credible threat to integrate forward into the buyers’ industry

Bargaining Power of Buyers Buyers (customers) are powerful when: they purchase a large portion of an industry’s total output the sales of the product being purchased account for a significant portion of the seller’s annual revenues they could easily switch to another product the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry

Threat of Substitute Products Product substitutes are strong threat when: customers face few switching costs substitute product’s price is lower substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

Intensity of Rivalry Intensity of rivalry is stronger when competitors: are numerous or equally balanced experience slow industry growth have high fixed costs or high storage costs lack differentiation or low switching costs experience high strategic stakes have high exit barriers

High Exit Barriers Common exit barriers include: specialized assets (assets with values linked to a particular business or location) fixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions

Strategic Groups Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions. The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry.

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: Future objectives How are we currently competing? Does this strategy support changes in the competitive structure? Current strategy

Competitor Analysis Assumptions: Future objectives 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? Current strategy Assumptions

Competitor Analysis Capabilities: Future objectives What are our strengths and weaknesses? How do we rate compared to our competitors? Current strategy Assumptions Capabilities

Competitor Analysis Response: Future objectives Response Current strategy 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? Assumptions Capabilities