1. Chapter 2 The External Environment:
Opportunities, Threats, Industry Competition, and Competitor Analysis
©2000 South-Western College Publishing 1

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

3. External Environmental Analysis
The external environmental analysis process should be conducted on a continuous basis. This process includes four activities:
Scanning
Monitoring
Forecasting
Assessing
Identifying early signals of environmental changes and trends
Detecting meaning through ongoing observations of environmental changes and trends
Developing projections of anticipated outcomes based on monitored changes and trends
Determining the timing and importance of environmental changes and trends for firms' strategies and their management 10

4. Components of the General Environment
Economic
Demographic
Sociocultural
Competitive
Environment
Industry Environment
Political/Legal
Global
Technological 10

5. Components of the General Environment10

6. Porter’s Five Forces Model of Competition
Threat of New Entrants 11

7. Threat of New Entrants Economies of Scale Product Differentiation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Barriers to Entry
Expected Retaliation 12

8. Bargaining Power of Suppliers
Porter’s Five Forces
Model of Competition
Threat of New Entrants
Threat of New Entrants
Bargaining Power of Suppliers 14

9. Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
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
Supplier industry is dominated by a few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to supplier
Suppliers’ product is an important input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Supplier poses credible threat of forward integration 15

10. Bargaining Power of Buyers
Porter’s Five Forces
Model of Competition
Threat of New Entrants
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers 17

11. 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 the supplying industry by:
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other 18

12. Bargaining Power of Suppliers Bargaining Power of Buyers
Porter’s Five Forces
Model of Competition
Threat of New Entrants
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products 20

13. Threat of Substitute Products
Keys to evaluate substitute products:
Products with similar function limit the prices firms can charge
Products with improving price/performance tradeoffs relative to present industry products
Example:
Electronic security systems in place of security guards
Fax machines in place of overnight mail delivery 21

14. Bargaining Power of Suppliers
Porter’s Five Forces
Model of Competition
Threat of New Entrants
Threat of New Entrants
Bargaining Power of Suppliers
Rivalry Among Competing Firms in Industry
Bargaining Power of Buyers
Threat of Substitute Products 23

15. Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Making new product introductions
Increasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but may be costly to smaller competitors 25

16. Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
Lack of differentiation or switching costs
High storage costs
Capacity added in large increments
High strategic stakes
High exit barriers
Diverse competitors 26

17. 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., labor agreements)
Emotional barriers
Government and social restrictions
Strategic interrelationships 27

18. Effects of Entry Barriers and Exit Barriers on Industry Profits
Low
High
Low
Entry Barriers
High 28

19. Effects of Entry Barriers and Exit Barriers on Industry Profits
Low
High
Low, Stable Returns
Low
Entry Barriers
High 29

20. Effects of Entry Barriers and Exit Barriers on Industry Profits
Low
High
Low, Stable Returns
Low
Entry Barriers
High, Stable Returns
High 30

21. Effects of Entry Barriers and Exit Barriers on Industry Profits
Low
High
Low, Stable Returns
Low, Risky Returns
Low
Entry Barriers
High, Stable Returns
High 31

22. Effects of Entry Barriers and Exit Barriers on Industry Profits
Low
High
Low, Stable Returns
Low, Risky Returns
Low
Entry Barriers
High, Stable Returns
High, Risky Returns
High 32

23. Sources of Opportunities and Threats
Legal and Regulations
Technology
Social trends
Customer buying habits
Competition

24. Competitor Analysis
The follow-up to Industry Analysis is effective analysis of a firm’s Competitors
Competitive
Environment
Industry Environment 33

25. Competitor Analysis Response Assumptions
What assumptions do our competitors hold about the future of industry and themselves?
Response
What will our competitors do in the future?
Current Strategy
Does our current strategy support changes in the competitive environment?
Where do we have a competitive advantage?
Future Objectives
How do our goals compare to our competitors’ goals?
How will this change our relationship with our competition?
Capabilities
How do our capabilities compare to our competitors? 38

26. Competitor Analysis Future Objectives What Drives the competitor?
How do our goals compare to our competitors’ goals?
Where will emphasis be placed in the future?
What is the attitude toward risk? 34

27. Competitor Analysis Future Objectives Current Strategy
What is the competitor doing?
How do our goals compare to our competitors’ goals?
What can the competitor do?
Current Strategy
Where will emphasis be placed in the future?
How are we currently competing?
What is the attitude toward risk?
Does this strategy support changes in the competitive structure? 35

28. Competitor Analysis Future Objectives Current Strategy Assumptions
How do our goals compare to our competitors’ goals?
Where will emphasis be placed in the future?
What is the attitude toward risk?
What does the competitor believe about itself and the industry?
Current Strategy
How are we currently competing?
Does this strategy support changes in the competition structure?
Assumptions
Do we assume the future will be volatile?
What assumptions do our competitors hold about the industry and themselves?
Are we assuming stable competitive conditions? 36

29. Competitor Analysis Future Objectives Current Strategy Assumptions
How do our goals compare to our competitors’ goals?
Where will emphasis be placed in the future?
What is the attitude toward risk?
What are the competitor’s capabilities?
Current Strategy
How are we currently competing?
Does this strategy support changes in the competition structure?
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?
Assumptions
Capabilities
What are my competitors’ strengths and weaknesses?
How do our capabilities compare to our competitors? 37

30. Competitor Analysis Future Objectives Response Current Strategy
How do our goals compare to our competitors’ goals?
Where will emphasis be placed in the future?
What is the attitude toward risk?
Response
What will our competitors do in the future?
Current Strategy
How are we currently competing?
Does this strategy support changes in the competition structure?
Where do we have a competitive advantage?
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?
Assumptions
How will this change our relationship with our competition?
Capabilities
What are my competitors’ strengths and weaknesses?
How do our capabilities compare to our competitors? 38

31. Strategic Groups
Strategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases

32. Some characteristics for identifying strategic groups
Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160.
Exhibit 2.8

33. Identification of Strategic Groups (1)
Scope of activities
Product/service diversity
Geographical coverage
Number of market segments served
Distribution channels
I don’t think the MBA example for strategic groups is a very good one – food retail or cars would be easier for students to understand. In that case it would be worth an illustration.
Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160.

34. Identification of Strategic Groups (2)
Resource commitment
Extent of branding
Marketing effort
Extent of vertical integration
Product/service quality
Technological position (leader, follower)
Size of organisation
I don’t think the MBA example for strategic groups is a very good one – food retail or cars would be easier for students to understand. In that case it would be worth an illustration.
Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160.

35. Uses of Strategic Group Analysis
To understand who are the most direct competitors of an organisation
To establish the different bases of competitive rivalry within and between the strategic groups
To assess if an organisation could move from one group to another
Depends on barriers to entry
To identify opportunities and threats
Changes in the macro-environment may create strategic space

36. The Value Chain Exhibit 3.6
Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, Used with permission of The Free Press, a division of Simon & Schuster, Inc. © 1985, 1988 by Michael E. Porter. All rights reserved.
Exhibit 3.6

37. Value Chain and Value Network
To diagnose strategic capability
To understand how value is created or lost in terms of the activities undertaken
The value chain describes the activities within
and around an organisation which together
create a product or service

38. Value Chain Analysis
Identifies clusters of activities providing particular benefit to customers
Highlights activities which are less efficient and which might be de-emphasised or outsourced
Requires managers to think about the role of such activities
Can be used to identify the cost and value of activities

39. The Value Network Exhibit 3.7
Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, Used with permission of The Free Press, a division of Simon & Schuster Inc. © 1985, 1988 by Michael E. Porter. All rights reserved.
Exhibit 3.7

40. The Value Network The value network Specialisation of roles
Set of inter-organisational links/relationships necessary to create a product or service
Specialisation of roles
Underpins excellence in creating best-value products
Need to understand whole process
Where cost/value is created in supply/distribution chains
How to manage links to improve customer value
How product quality is a function of linked activities of manufacturer, suppliers and distributors

41. The Value Network – Key Questions (1)
Where are cost and value created?
Which activities are vital to an organisation?
Retain direct control of core capabilities
Outsource less important activities
Where are the profit pools?
Potential profits at different parts of the value network
Availability of competences to compete in these areas

42. The Value Network – Key Questions (2)
Make or buy?
Outsourcing
Develop competence in influencing performance of other organisations
Who are the best partners?
What kind of relationships are required?