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Ch2-1
Chapter 2Chapter 2
The External Environment:
Opportunities, Threats, IndustryCompetition, and Competitor Analysis
The External Environment:
Opportunities, Threats, IndustryCompetition, and Competitor Analysis
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
2000 South-Western College Publishing2000 South-Western College Publishing
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Ch2-2
Political/
Legal
Political/
Legal
EconomicEconomic
TechnologicalTechnological
GlobalGlobal
DemographicDemographicSocioculturalSociocultural
CompetitiveCompetitive
EnvironmentEnvironment
IndustryEnvironment
IndustryEnvironment
Components of the General EnvironmentComponents of the General Environment
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Ch2-3
SWOT Analysis Strengths
Weaknesses Opportunities
Threats
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Ch2-4
The purpose of SWOT Analysis
It is an easy-to-use tool for developing
an overview of a companys strategic
situation
It forms a basis for matching your
companys strategy to its situation
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Ch2-5
SWOT is the starting point
It provides an overview of the strategic
situation.
It provides the raw material to do more
extensive internal and external analysis.
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Ch2-6
Opportunities
An OPPORTUNITY is a chance for firmgrowth or progress due to a favorable
juncture of circumstances in thebusiness environment.
Possible Opportunities:
Emerging customer needs Quality Improvements
Expanding global markets
Vertical Integration
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Ch2-7
Threats
A THREAT is a factor in yourcompanys external environment that
poses a danger to its well-being. Possible Threats:
New entry by competitors
Changing demographics/shifting demand Emergence of cheaper technologies
Regulatory requirements
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Ch2-8
Opportunities and Threats form a
basis for EXTERNAL analysis
By examining opportunities, you can
discover untapped markets, and newproducts or technologies, or identifypotential avenues for diversification.
By examining threats, you can identify
unfavorable market shifts or changes intechnology, and create a defensiveposture aimed at preserving yourcompetitive position.
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Ch2-9
The purpose of
Five-Forces Analysis
The five forces are environmental forces
that impact on a companys ability tocompete in a given market.
The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
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Ch2-10
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Ch2-11
Threat of New EntrantsThreat of New Entrants
Barriers to
Entry
Barriers to
Entry
Expected RetaliationExpected Retaliation
Government PolicyGovernment Policy
Economies of ScaleEconomies of Scale
Product DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching CostsSwitching Costs
Access to Distribution ChannelsAccess to Distribution Channels
Cost Disadvantages IndependentCost Disadvantages Independent
of Scaleof Scale
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Ch2-12
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Ch2-13
Bargaining Power of SuppliersBargaining Power of Suppliers
Suppliers exert power
in the industry by:
Suppliers exert power
in the industry by:
* Threatening to raise* Threatening to raise
prices or to reduce qualityprices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:
Supplier industry is dominated by aSupplier industry is dominated by afew firmsfew firms
Suppliers products have few substitutesSuppliers products have few substitutes
Buyer is not an important customer toBuyer is not an important customer tosuppliersupplier
Suppliers product is an importantSuppliers product is an importantinput to buyers productinput to buyers product
Suppliers products are differentiatedSuppliers products are differentiated
Suppliers products have highSuppliers products have highswitching costsswitching costs
Supplier poses credible threat ofSupplier poses credible threat of
forward integrationforward integration
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Ch2-14
Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Ch2-15
Bargaining Power of BuyersBargaining Power of Buyers
Buyers compete
with the supplying
industry by:
Buyers compete
with the supplying
industry by:
* Bargaining down prices* Bargaining down prices
* Forcinghigherquality* Forcinghigherquality
* Playing firms off of* Playing firms off of
each othereach other
Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:
Buyers are concentrated or purchasesBuyers are concentrated or purchases
are large relative to sellers salesare large relative to sellers sales
Purchase accounts for a significantPurchase accounts for a significant
fraction of suppliers salesfraction of suppliers sales
Products are undifferentiatedProducts are undifferentiated
Buyers face few switching costsBuyers face few switching costs
Buyers industry earns low profitsBuyers industry earns low profitsBuyer presents a credible threat ofBuyer presents a credible threat of
backward integrationbackward integration
Product unimportant to qualityProduct unimportant to quality
Buyer has full informationBuyer has full information
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Ch2-16
Threat of
Substitute
Products
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Ch2-17
Threat of Substitute ProductsThreat of Substitute Products
Products
with similar
functionlimit the
prices firms
can charge
Products
with similar
functionlimit the
prices firms
can charge
Keys to evaluate substitute products:Keys to evaluate substitute products:
Products with improvingProducts with improving
price/performance tradeoffsprice/performance tradeoffs
relative to present industryrelative to present industryproductsproducts
Example:Example:
Electronic security systems inElectronic security systems inplace of security guardsplace of security guards
Fax machines in place ofFax machines in place of
overnight mail deliveryovernight mail delivery
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Ch2-18
Threat of
Substitute
Products
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Rivalry Among
Competing Firms
in Industry
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Ch2-19
Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:
Jockeying for strategic positionJockeying for strategic position
Using price competitionUsing price competition
Staging advertising battlesStaging advertising battles
Making new product introductionsMaking new product introductions
Increasing consumer warranties or serviceIncreasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, butAdvertising battles may increase total industry demand, but
may be costly to smaller competitorsmay be costly to smaller competitors
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Ch2-20
CutthroatCutthroat competitioncompetition is more likely to occur when:is more likely to occur when:
Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Numerous or equally balanced competitorsNumerous or equally balanced competitors
Slow growth industrySlow growth industry
High fixed costsHigh fixed costs
Lack of differentiation or switching costsLack of differentiation or switching costs
High storage costsHigh storage costs
Capacity added in large incrementsCapacity added in large increments
High strategic stakesHigh strategic stakes
High exit barriersHigh exit barriers
Diverse competitorsDiverse competitors
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Ch2-21
The Five Forces are Unique to
Your Industry
Five-Forces Analysis is a framework for
analyzing a particular industry. Yet, the five forces affect all the other
businesses in that industry.
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Ch2-22
Competitor AnalysisCompetitor Analysis
The followThe follow--up to Industry Analysis isup to Industry Analysis iseffective analysis of a firmseffective analysis of a firms CompetitorsCompetitors
CompetitiveCompetitive
EnvironmentEnvironment
IndustryEnvironmentIndustryEnvironment
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Ch2-23
Competitor AnalysisCompetitor Analysis
AssumptionsAssumptions
What assumptions do ourcompetitors hold about the futureof industry and themselves?
Current StrategyCurrent Strategy
Does our current strategy supportchanges in the competitiveenvironment?
Future ObjectivesFuture Objectives
How do our goals compare to ourcompetitors goals?
CapabilitiesCapabilities
How do our capabilities compare
to our competitors?
ResponseResponse
What will ourcompetitors do in the
future?
What will ourcompetitors do in the
future?Where do we have acompetitiveadvantage?
Where do we have acompetitiveadvantage?
How will this changeour relationship withour competition?
How will this changeour relationship withour competition?
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Ch2-24
Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
What Drives the competitor?
Competitor AnalysisCompetitor Analysis
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Ch2-25
What is the competitor doing?What can the competitor do?
Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
Current StrategyCurrent Strategy
How are we currently
competing?
How are we currently
competing?
Does this strategy
support changes in the
competitive structure?
Does this strategy
support changes in the
competitive structure?
Competitor AnalysisCompetitor Analysis
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Ch2-26
What does the competitor believeabout itself and the industry?
Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
Current StrategyCurrent Strategy
How are we currently
competing?
How are we currently
competing?
Does this strategy
support changes in the
competition structure?
Does this strategy
support changes in the
competition structure?
Do we assume the future
will be volatile?
Do we assume the future
will be volatile?
Are we assuming stable
competitive conditions?
Are we assuming stable
competitive conditions?
What assumptions do our
competitors hold about the
industry and themselves?
What assumptions do our
competitors hold about the
industry and themselves?
AssumptionsAssumptions
Competitor AnalysisCompetitor Analysis
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Ch2-27
What are the competitorscapabilities?
Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
Current StrategyCurrent Strategy
How are we currently
competing?
How are we currently
competing?
Does this strategy
support changes in the
competition structure?
Does this strategy
support changes in the
competition structure?
Do we assume the future
will be volatile?
Do we assume the future
will be volatile?
Are we operating under
a status quo?
Are we operating under
a status quo?
What assumptions do our
competitors hold about the
industry and themselves?
What assumptions do our
competitors hold about the
industry and themselves?
AssumptionsAssumptions
What are my competitors
strengths and weaknesses?
What are my competitors
strengths and weaknesses?
How do our capabilities
compare to our
competitors?
How do our capabilities
compare to our
competitors?
CapabilitiesCapabilities
Competitor AnalysisCompetitor Analysis
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Ch2-28
Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
Current StrategyCurrent Strategy
How are we currently
competing?
How are we currently
competing?
Does this strategy
support changes in the
competition structure?
Does this strategy
support changes in the
competition structure?
Do we assume the future
will be volatile?
Do we assume the future
will be volatile?
Are we operating under
a status quo?
Are we operating under
a status quo?
What assumptions do our
competitors hold about the
industry and themselves?
What assumptions do our
competitors hold about the
industry and themselves?
AssumptionsAssumptions
ResponseResponseWhat will our competitors
do in the future?
What will our competitors
do in the future?
Where do we have a
competitive advantage?
Where do we have a
competitive advantage?
How will this change ourrelationship with our
competition?
How will this change ourrelationship with our
competition?
CapabilitiesCapabilities
What are my competitors
strengths and weaknesses?
What are my competitors
strengths and weaknesses?
How do our capabilities
compare to our
competitors?
How do our capabilities
compare to our
competitors?
Competitor AnalysisCompetitor Analysis