021 analysis of the external environment

©© 2007 Thomson/South2007 Thomson/South--Western.Western.All rights reserved.All rights reserved.

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic ManagementStrategic ManagementCompetitiveness and Globalization:Competitiveness and Globalization:Concepts and CasesConcepts and Cases

Michael A. Hitt •R. Duane Ireland •Robert E. Hoskisson

Seventh edition

STRATEGIC

MANAGEMENT

INPUTS

STRATEGIC

MANAGEMENT

INPUTS

Chapter 2Chapter 2

Analysis of the ExternalAnalysis of the ExternalEnvironmentEnvironment

Management of StrategyManagement of StrategyConcepts and CasesConcepts and Cases

© 2007 Thomson/South-Western. All rights reserved. 2–2

KKNOWLEDGENOWLEDGE OOBJECTIVESBJECTIVES

1.1. Explain the importance of analyzing and understandingExplain the importance of analyzing and understandingthe firmthe firm’’s external environment.s external environment.

2.2. Define and describe the general environment and theDefine and describe the general environment and theindustry environment.industry environment.

3.3. Discuss the four activities of the external environmentalDiscuss the four activities of the external environmentalanalysis process.analysis process.

4.4. Name and describe the general environmentName and describe the general environment’’s sixs sixsegments.segments.

5.5. Identify the five competitive forces and explain how theyIdentify the five competitive forces and explain how theydetermine an industrydetermine an industry’’s profit potential.s profit potential.

Studying this chapter should provide you with the strategicmanagement knowledge needed to:


KKNOWLEDGENOWLEDGE OOBJECTIVESBJECTIVES (cont(cont’’d)d)

6.6. Define strategic groups and describe their influence onDefine strategic groups and describe their influence onthe firm.the firm.

7.7. Describe what firms need to know about theirDescribe what firms need to know about theircompetitors and different methods (including ethicalcompetitors and different methods (including ethicalstandards) used to collect intelligence about them.standards) used to collect intelligence about them.

Studying this chapter should provide you with the strategicmanagement knowledge needed to:


FIGUREFIGURE 2.12.1 The External EnvironmentThe External Environment


TABLETABLE 2.12.1 The General Environment: Segments and ElementsThe General Environment: Segments and Elements


Industry EnvironmentIndustry Environment

••The set of factors directly influencing a firm andThe set of factors directly influencing a firm andits competitive actions and competitiveits competitive actions and competitiveresponsesresponses

Threat of new entrantsThreat of new entrants

Power of suppliersPower of suppliers

Power of buyersPower of buyers

Threat of product substitutesThreat of product substitutes

Intensity of rivalry among competitorsIntensity of rivalry among competitors


Competitor AnalysisCompetitor Analysis

••Gathering and interpretingGathering and interpretinginformation about all of theinformation about all of thecompanies that the firmcompanies that the firmcompetes against.competes against.

••Understanding the firmUnderstanding the firm’’sscompetitor environmentcompetitor environmentcomplements the insightscomplements the insightsprovided by studying theprovided by studying thegeneral and industrygeneral and industryenvironments.environments.


Analysis of the External EnvironmentsAnalysis of the External Environments

••General environmentGeneral environmentFocused on the futureFocused on the future

••Industry environmentIndustry environmentFocused on factors and conditions influencing a firmFocused on factors and conditions influencing a firm’’ss

profitability within an industryprofitability within an industry

••Competitor environmentCompetitor environmentFocused on predicting the dynamics of competitorsFocused on predicting the dynamics of competitors’’

actions, responses and intentionsactions, responses and intentions


TABLETABLE 2.22.2 Components of the External Environmental AnalysisComponents of the External Environmental Analysis

Scanning • Identifying early signals of environmentalchanges and trends

Monitoring •Detecting meaning through ongoingobservations of environmental changesand trends

Forecasting •Developing projections of anticipatedoutcomes based on monitored changesand trends

Assessing •Determining the timing and importance ofenvironmental changes and trends forfirms’strategies and their management


Opportunities and ThreatsOpportunities and Threats

••OpportunityOpportunity

A condition in the generalA condition in the generalenvironment that, if exploited,environment that, if exploited,helps a company achievehelps a company achievestrategic competitiveness.strategic competitiveness.

••ThreatThreat

A condition in the generalA condition in the generalenvironment that may hinder aenvironment that may hinder acompanycompany’’s efforts to achieves efforts to achievestrategic competitiveness.strategic competitiveness.


Segments of the General EnvironmentSegments of the General Environment

••The Demographic SegmentThe Demographic Segment

Population sizePopulation size

Age structureAge structure

Geographic distributionGeographic distribution

Ethnic mixEthnic mix

Income distributionIncome distribution


Segments of the General EnvironmentSegments of the General Environment(cont(cont’’d)d)••The Economic SegmentThe Economic Segment

Inflation ratesInflation rates

Interest ratesInterest rates

Trade deficits or surplusesTrade deficits or surpluses

Budget deficits or surplusesBudget deficits or surpluses

Personal savings ratePersonal savings rate

Business savings ratesBusiness savings rates

Gross domestic productGross domestic product


Segments of the General EnvironmentSegments of the General Environment(cont(cont’’d)d)••The Political/Legal SegmentThe Political/Legal Segment

Antitrust lawsAntitrust laws

Taxation lawsTaxation laws

Deregulation philosophiesDeregulation philosophies

Labor training lawsLabor training laws

Educational philosophies andEducational philosophies andpoliciespolicies


Segments of the General EnvironmentSegments of the General Environment(cont(cont’’d)d)••TheThe SocioculturalSociocultural SegmentSegment

Women in the workplaceWomen in the workplace

Workforce diversityWorkforce diversity

Attitudes about quality of worklifeAttitudes about quality of worklife

Concerns about environmentConcerns about environment

Shifts in work and career preferencesShifts in work and career preferences

Shifts in product and service preferencesShifts in product and service preferences


Segments of the General EnvironmentSegments of the General Environment(cont(cont’’d)d)••The Technological SegmentThe Technological Segment

Product innovationsProduct innovations

Applications of knowledgeApplications of knowledge

Focus of private and governmentFocus of private and government--supported R&Dsupported R&Dexpendituresexpenditures

New communication technologiesNew communication technologies


Segments of the General EnvironmentSegments of the General Environment(cont(cont’’d)d)••The Global SegmentThe Global Segment

Important political eventsImportant political events

Critical global marketsCritical global markets

Newly industrialized countriesNewly industrialized countries

Different cultural and institutionalDifferent cultural and institutionalattributesattributes


Industry Environment AnalysisIndustry Environment Analysis

••Industry DefinedIndustry DefinedA group of firms producing products that are closeA group of firms producing products that are close

substitutessubstitutes••Firms that influence one anotherFirms that influence one another••Includes a rich mix of competitive strategies thatIncludes a rich mix of competitive strategies that

companies use in pursuing strategiccompanies use in pursuing strategiccompetitiveness and abovecompetitiveness and above--average returnsaverage returns


FIGUREFIGURE 2.22.2 The Five Forces of Competition ModelThe Five Forces of Competition Model


Threat of New Entrants: Barriers to EntryThreat of New Entrants: Barriers to Entry

••Economies of scaleEconomies of scale••Product differentiationProduct differentiation••Capital requirementsCapital requirements••Switching costsSwitching costs••Access to distribution channelsAccess to distribution channels••Cost disadvantages independent of scaleCost disadvantages independent of scale••Government policyGovernment policy••Expected retaliationExpected retaliation


Barriers to EntryBarriers to Entry

••Economies of ScaleEconomies of ScaleMarginal improvements in efficiency that a firmMarginal improvements in efficiency that a firm

experiences as it incrementally increases its sizeexperiences as it incrementally increases its size

••Factors (advantages and disadvantages) relatedFactors (advantages and disadvantages) relatedto largeto large-- and smalland small--scale entryscale entryFlexibility in pricing and market shareFlexibility in pricing and market share

Costs related to scale economiesCosts related to scale economies

Competitor retaliationCompetitor retaliation


Barriers to Entry (contBarriers to Entry (cont’’d)d)••Product differentiationProduct differentiation

Unique productsUnique productsCustomer loyaltyCustomer loyaltyProducts at competitiveProducts at competitive

pricesprices

••Capital RequirementsCapital RequirementsPhysical facilitiesPhysical facilities InventoriesInventoriesMarketing activitiesMarketing activitiesAvailability of capitalAvailability of capital

••Switching CostsSwitching CostsOneOne--time costs customerstime costs customers

incur when they buy from aincur when they buy from adifferent supplierdifferent supplier••New equipmentNew equipment••Retraining employeesRetraining employees••Psychic costs of ending aPsychic costs of ending a

relationshiprelationship

••Access to DistributionAccess to DistributionChannelsChannelsStocking or shelf spaceStocking or shelf spacePrice breaksPrice breaksCooperative advertisingCooperative advertising

allowancesallowances


Barriers to Entry (contBarriers to Entry (cont’’d)d)••Cost DisadvantagesCost Disadvantages

Independent of ScaleIndependent of ScaleProprietary productProprietary product

technologytechnologyFavorable access to rawFavorable access to raw

materialsmaterialsDesirable locationsDesirable locations

••Government policyGovernment policyLicensing and permitLicensing and permit

requirementsrequirementsDeregulation of industriesDeregulation of industries

••Expected retaliationExpected retaliationResponses by existingResponses by existing

competitors may dependcompetitors may dependon a firmon a firm’’s present stake ins present stake inthe industry (availablethe industry (availablebusiness options)business options)


Bargaining Power of SuppliersBargaining Power of Suppliers

••Supplier power increases when:Supplier power increases when:Suppliers are large and few in number.Suppliers are large and few in number.

Suitable substitute products are not available.Suitable substitute products are not available.

Individual buyers are not large customers of suppliersIndividual buyers are not large customers of suppliersand there are many of them.and there are many of them.

SuppliersSuppliers’’goods are critical to the buyersgoods are critical to the buyers’’marketplace success.marketplace success.

SuppliersSuppliers’’products create high switching costs.products create high switching costs.

Suppliers pose a threat to integrate forward intoSuppliers pose a threat to integrate forward intobuyersbuyers’’industry.industry.


Bargaining Power of BuyersBargaining Power of Buyers

••Buyer power increases when:Buyer power increases when:

Buyers are large and few in number.Buyers are large and few in number.

Buyers purchase a large portion of an industryBuyers purchase a large portion of an industry’’s totals totaloutput.output.

BuyersBuyers’’purchases are a significant portion of apurchases are a significant portion of asuppliersupplier’’s annual revenues.s annual revenues.

BuyersBuyers’’switching costs are low.switching costs are low.

Buyers can pose threat to integrate backward into theBuyers can pose threat to integrate backward into thesellerssellers’’industry.industry.


Threat of Substitute ProductsThreat of Substitute Products

••The threat of substitute products increasesThe threat of substitute products increaseswhen:when:

Buyers face few switching costs.Buyers face few switching costs.

The substitute productThe substitute product’’s price is lower.s price is lower.

Substitute productSubstitute product’’s quality and performance ares quality and performance areequal to or greater than the existing product.equal to or greater than the existing product.

••Differentiated industry products that are valuedDifferentiated industry products that are valuedby customers reduce this threat.by customers reduce this threat.


Intensity of Rivalry Among CompetitorsIntensity of Rivalry Among Competitors

••Industry rivalry increases when:Industry rivalry increases when:There are numerous or equally balanced competitors.There are numerous or equally balanced competitors.

Industry growth slows or declines.Industry growth slows or declines.

There are high fixed costs or high storage costs.There are high fixed costs or high storage costs.

There is a lack of differentiation opportunities or lowThere is a lack of differentiation opportunities or lowswitching costs.switching costs.

When the strategic stakes are high.When the strategic stakes are high.

When high exit barriers prevent competitors fromWhen high exit barriers prevent competitors fromleaving the industry.leaving the industry.


Low entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

UnattractiveUnattractiveIndustryIndustry

Suppliers and buyershave strong positions

Strong threats fromsubstitute products

Intense rivalryamong competitors

Low profit potential


Interpreting Industry Analyses (contInterpreting Industry Analyses (cont’’d)d)

AttractiveAttractiveIndustryIndustry

High entry barriers

Suppliers and buyershave weak positions

Few threats fromsubstitute products

Moderate rivalryamong competitors High profit potential


Strategic GroupsStrategic Groups

••Strategic Group DefinedStrategic Group DefinedA set of firms emphasizing similar strategicA set of firms emphasizing similar strategic

dimensions and using similar strategiesdimensions and using similar strategies••Internal competition between strategic group firmsInternal competition between strategic group firms

is greater than between firms outside that strategicis greater than between firms outside that strategicgroup.group.

••There is more heterogeneity in the performance ofThere is more heterogeneity in the performance offirms within strategic groups.firms within strategic groups.––Similar market positionsSimilar market positions––Similar productsSimilar products––Similar strategic actionsSimilar strategic actions


Strategic GroupsStrategic Groups

••Strategic DimensionsStrategic Dimensions

Extent of technological leadershipExtent of technological leadership

Product qualityProduct quality

Pricing PoliciesPricing Policies

Distribution channelsDistribution channels

Customer serviceCustomer service


Competitor AnalysisCompetitor Analysis

••Competitor IntelligenceCompetitor IntelligenceThe ethical gathering of needed information and dataThe ethical gathering of needed information and data

that provides insight into:that provides insight into:

••A competitorA competitor’’s direction (s direction (future objectivesfuture objectives))

••A competitorA competitor’’s capabilities and intentions (s capabilities and intentions (currentcurrentstrategystrategy))

••A competitorA competitor’’s beliefs about the industry (s beliefs about the industry (itsitsassumptionsassumptions))

••A competitorA competitor’’ss capabilitiescapabilities


FIGUREFIGURE 2.22.2

CompetitorCompetitorAnalysisAnalysisComponentsComponents


Competitor Analysis (contCompetitor Analysis (cont’’d)d)

••How do our goalsHow do our goalscompare with ourcompare with ourcompetitorscompetitors’’goals?goals?

••Where will the emphasisWhere will the emphasisbe placed in the future?be placed in the future?

••What is the attitudeWhat is the attitudetoward risk?toward risk?

Future ObjectivesFuture Objectives



••How are we currentlyHow are we currentlycompeting?competing?

••Does this strategyDoes this strategysupport changes in thesupport changes in thecompetitive structure?competitive structure?


Current StrategyCurrent Strategy



••Do we assume the futureDo we assume the futurewill be volatile?will be volatile?

••Are we operating underAre we operating undera status quo?a status quo?

••What assumptions doWhat assumptions doour competitors holdour competitors holdabout the industry andabout the industry andthemselves?themselves?



AssumptionsAssumptions



••What are our strengthsWhat are our strengthsand weaknesses?and weaknesses?

••How do we rateHow do we ratecompared to ourcompared to ourcompetitors?competitors?




CapabilitiesCapabilities



••What will ourWhat will ourcompetitors do in thecompetitors do in thefuture?future?

••Where do we hold anWhere do we hold anadvantage over ouradvantage over ourcompetitors?competitors?

••How will this changeHow will this changeour relationship withour relationship withour competitors?our competitors?

ResponseResponseFuture ObjectivesFuture Objectives



CapabilitiesCapabilities


ComplementorsComplementors

••ComplementorsComplementorsThe network of companies that sell complementaryThe network of companies that sell complementary

products or services or are compatible with the focalproducts or services or are compatible with the focalfirmfirm’’s own product or service.s own product or service.

••If aIf a complementorcomplementor’’ss product or service adds valueproduct or service adds valueto the sale of the focal firmto the sale of the focal firm’’s product or service, its product or service, itis likely to create value for the focal firm.is likely to create value for the focal firm.

••However, if aHowever, if a complementorcomplementor’’ss product or service isproduct or service isin a market into which the focal firm intends toin a market into which the focal firm intends toexpand, theexpand, the complementorcomplementor can represent acan represent aformidable competitor.formidable competitor.


Ethical ConsiderationsEthical Considerations

••Practices considered both legal and ethical:Practices considered both legal and ethical:Obtaining publicly available informationObtaining publicly available information

Attending trade fairs and shows to obtain competitorsAttending trade fairs and shows to obtain competitors’’brochures, view their exhibits, and listen tobrochures, view their exhibits, and listen todiscussions about their productsdiscussions about their products

••Practices considered both unethical and illegal:Practices considered both unethical and illegal:BlackmailBlackmail

TrespassingTrespassing

EavesdroppingEavesdropping

Stealing drawings, samples, or documentsStealing drawings, samples, or documents

021 analysis of the external environment

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