©2004 by South-Western/Thomson Learning 1 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 3

2 Chapter 2 Chapter 2 Strategic Leadership Strategic Leadership Chapter 1 Chapter 1 Introduction to Introduction to Strategic Management Strategic Management Strategic Thinking The Strategic Management Process Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 9 Chapter 9 International Strategy International Strategy Chapter 3 Chapter 3 The External The External Environment Chapter 5 Chapter 5 Business-Level Strategy Chapter 8 Chapter 8 Acquisition and Acquisition and Restructuring Strategies Restructuring Strategies Chapter 11 Chapter 11 Corporate Governance Corporate Governance Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy Chapter 10 Chapter 10 Cooperative Strategy Cooperative Strategy Chapter 12 Chapter 12 Strategic Entrepreneurship Strategic Entrepreneurship Strategic Analysis Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities

3 Discussion Questions 1. What are the components of the general environment? How does each affect the strategy of a firm? 2. What are the five competitive forces in an industry environment? 3. What attributes make each of the five competitive forces intense? 4. What is a strategic group and why is it an important concept? Click Here Click Here Click Here More discussion questions Click Here Click Here

4 Discussion Questions (cont.) 5. How do you conduct a competitor analysis? Click Here

5 Discussion Question 1 What are the components of the general environment? How does each affect the strategy of a firm?

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

7 External Environmental Analysis A continuous process which includes l Scanning: Identifying early signals of environmental changes and trends l Monitoring: Detecting meaning through ongoing observations of environmental changes and trends l Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends l Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management

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

9 General Environment Sociocultural segment Sociocultural segment Women in the workplace Women in the workplace Workforce diversity Workforce diversity Attitudes about quality of worklife Attitudes about quality of worklife Concerns about environment Concerns about environment Shifts in work and career preferences Shifts in work and career preferences Shifts in product and service preferences Shifts in product and service preferences

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

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

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

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

14 General Environment Demographic Segment Demographic Segment Population size Population size Age structure Age structure Geographic distribution Geographic distribution Ethnic mix Ethnic mix Income distribution Income distribution Click Here Return to Discussion Questions

15 Discussion Question 2 What are the five competitive forces in an industry environment?

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

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

18 Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Rivalry Among Competing Firms Five Forces Model of Competition Five Forces of Competition Click Here Return to Discussion Questions

19 Discussion Question 3 What attributes make each of the five competitive forces intense?

20 Threat of New Entrants Barriers to entry Barriers to entry Economies of scale Economies of scale Product differentiation Product differentiation Capital requirements Capital requirements Switching costs Switching costs Access to distribution channels Access to distribution channels Cost disadvantages independent of scale Cost disadvantages independent of scale Government policy Government policy Expected retaliation Expected retaliation

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

22 Bargaining Power of Buyers Buyers (customers) are powerful when: Buyers (customers) are powerful when: they purchase a large portion of an industry’s total output 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 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 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 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

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

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

25 High Exit Barriers Common exit barriers include: Common exit barriers include: specialized assets (assets with values linked to a particular business or location) specialized assets (assets with values linked to a particular business or location) fixed costs of exit such as labor agreements 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) 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.) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions government and social restrictions Click Here Return to Discussion Questions

26 Discussion Question 4 What is a strategic group and why is it an important concept?

27 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 Click Here Return to Discussion Questions

28 Discussion Question 5 How do you conduct a competitor analysis?

29 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 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 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 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 What the the competitor may be able to do, as shown by its capabilities

30 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?

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

32 Competitor Analysis Assumptions Current strategy Future objectives Assumptions: 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?

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

34 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?