Chapter2

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie Cook
The University of West AlabamaThe University of West Alabama
Strategic ManagementStrategic Management
Competitiveness and Globalization:Competitiveness and Globalization:
Concepts and CasesConcepts and Cases
Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
Seventh edition
STRATEGIC
MANAGEMENT
INPUTS
© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.
All rights reserved.All rights reserved.
CHAPTER 2CHAPTER 2
The External Environment:The External Environment:
Opportunities, Threats,Opportunities, Threats,
Industry Competition,Industry Competition,
and Competitor Analysisand Competitor Analysis

© 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 understanding
the firm’s external environment.the firm’s external environment.
2.2. Define and describe the general environment and theDefine and describe the general environment and the
industry environment.industry environment.
3.3. Discuss the four activities of the external environmentalDiscuss the four activities of the external environmental
analysis process.analysis process.
4.4. Name and describe the general environment’s sixName and describe the general environment’s six
segments.segments.
5.5. Identify the five competitive forces and explain how theyIdentify the five competitive forces and explain how they
determine an industry’s profit potential.determine an industry’s profit potential.
Studying this chapter should provide you with the strategic
management knowledge needed to:

KKNOWLEDGENOWLEDGE OOBJECTIVESBJECTIVES (cont’d)(cont’d)
6.6. Define strategic groups and describe their influence onDefine strategic groups and describe their influence on
the firm.the firm.
7.7. Describe what firms need to know about theirDescribe what firms need to know about their
competitors and different methods (including ethicalcompetitors and different methods (including ethical
standards) used to collect intelligence about them.standards) used to collect intelligence about them.
Studying this chapter should provide you with the strategic
management knowledge needed to:

FIGUREFIGURE 2.12.1 The External EnvironmentThe External Environment

General EnvironmentGeneral Environment
• Dimensions in the broader society that influenceDimensions in the broader society that influence
an industry and the firms within it:an industry and the firms within it:
 DemographicDemographic
 EconomicEconomic
 Political/legalPolitical/legal
 SocioculturalSociocultural
 TechnologicalTechnological
 GlobalGlobal

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 and
its competitive actions and competitiveits competitive actions and competitive
responsesresponses
 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 interpreting
information about all of theinformation about all of the
companies that the firmcompanies that the firm
competes against.competes against.
• Understanding the firm’sUnderstanding the firm’s
competitor environmentcompetitor environment
complements the insightscomplements the insights
provided by studying theprovided by studying the
general and industrygeneral and industry
environments.environments.

Analysis of the External EnvironmentsAnalysis of the External Environments
• General environmentGeneral environment
 Focused on the futureFocused on the future
• Industry environmentIndustry environment
 Focused on factors and conditions influencing a firm’sFocused on factors and conditions influencing a firm’s
profitability within an industryprofitability within an industry
• Competitor environmentCompetitor environment
 Focused on predicting the dynamics of competitors’Focused 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 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

Opportunities and ThreatsOpportunities and Threats
• OpportunityOpportunity
 A condition in the generalA condition in the general
environment that, if exploited,environment that, if exploited,
helps a company achievehelps a company achieve
strategic competitiveness.strategic competitiveness.
• ThreatThreat
 A condition in the generalA condition in the general
environment that may hinder aenvironment that may hinder a
company’s efforts to achievecompany’s efforts to achieve
strategic 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

(cont’d)(cont’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

• 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 and
policiespolicies

• The Sociocultural SegmentThe Sociocultural Segment
 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

• The Technological SegmentThe Technological Segment
 Product innovationsProduct innovations
 Applications of knowledgeApplications of knowledge
 Focus of private and government-supported R&DFocus of private and government-supported R&D
expendituresexpenditures
 New communication technologiesNew communication technologies

• 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 institutional
attributesattributes

Industry Environment AnalysisIndustry Environment Analysis
• Industry DefinedIndustry Defined
 A 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 strategic
competitiveness and above-average returnscompetitiveness and above-average 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 Scale
 Marginal 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) related
to large- and small-scale entryto large- and small-scale entry
 Flexibility 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 (cont’d)Barriers to Entry (cont’d)
• Product differentiationProduct differentiation
 Unique productsUnique products
 Customer loyaltyCustomer loyalty
 Products at competitiveProducts at competitive
pricesprices
• Capital RequirementsCapital Requirements
 Physical facilitiesPhysical facilities
 InventoriesInventories
 Marketing activitiesMarketing activities
 Availability of capitalAvailability of capital
• Switching CostsSwitching Costs
 One-time costs customersOne-time costs customers
incur when they buy from aincur when they buy from a
different supplierdifferent supplier
• New equipmentNew equipment
• Retraining employeesRetraining employees
• Psychic costs of ending aPsychic costs of ending a
relationshiprelationship
• Access to DistributionAccess to Distribution
ChannelsChannels
 Stocking or shelf spaceStocking or shelf space
 Price breaksPrice breaks
 Cooperative advertisingCooperative advertising
allowancesallowances

Barriers to Entry (cont’d)Barriers to Entry (cont’d)
• Cost DisadvantagesCost Disadvantages
Independent of ScaleIndependent of Scale
 Proprietary productProprietary product
technologytechnology
 Favorable access to rawFavorable access to raw
materialsmaterials
 Desirable locationsDesirable locations
• Government policyGovernment policy
 Licensing and permitLicensing and permit
requirementsrequirements
 Deregulation of industriesDeregulation of industries
• Expected retaliationExpected retaliation
 Responses by existingResponses by existing
competitors may dependcompetitors may depend
on a firm’s present stake inon a firm’s present stake in
the industry (availablethe industry (available
business 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 suppliers
and there are many of them.and there are many of them.
 Suppliers’ goods are critical to the buyers’Suppliers’ goods are critical to the buyers’
marketplace success.marketplace success.
 Suppliers’ products create high switching costs.Suppliers’ products create high switching costs.
 Suppliers pose a threat to integrate forward intoSuppliers pose a threat to integrate forward into
buyers’ industry.buyers’ 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 industry’s totalBuyers purchase a large portion of an industry’s total
output.output.
 Buyers’ purchases are a significant portion of aBuyers’ purchases are a significant portion of a
supplier’s annual revenues.supplier’s annual revenues.
 Buyers’ switching costs are low.Buyers’ switching costs are low.
 Buyers can pose threat to integrate backward into theBuyers can pose threat to integrate backward into the
sellers’ industry.sellers’ industry.

Threat of Substitute ProductsThreat of Substitute Products
• The threat of substitute products increasesThe threat of substitute products increases
when:when:
 Buyers face few switching costs.Buyers face few switching costs.
 The substitute product’s price is lower.The substitute product’s price is lower.
 Substitute product’s quality and performance areSubstitute product’s quality and performance are
equal 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 valued
by 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 low
switching 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 from
leaving the industry.leaving the industry.

Low entry barriers
Interpreting Industry AnalysesInterpreting Industry Analyses
UnattractiveUnattractive
IndustryIndustry
Suppliers and buyers
have strong positions
Strong threats from
substitute products
Intense rivalry
among competitors
Low profit potential

Interpreting Industry Analyses (cont’d)Interpreting Industry Analyses (cont’d)
AttractiveAttractive
IndustryIndustry
High entry barriers
Suppliers and buyers
have weak positions
Few threats from
substitute products
Moderate rivalry
among competitors High profit potential

Strategic GroupsStrategic Groups
• Strategic Group DefinedStrategic Group Defined
 A 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 strategic
group.group.
• There is more heterogeneity in the performance ofThere is more heterogeneity in the performance of
firms 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 Intelligence
 The ethical gathering of needed information and dataThe ethical gathering of needed information and data
that provides insight into:that provides insight into:
• A competitor’s direction (A competitor’s direction (future objectivesfuture objectives))
• A competitor’s capabilities and intentions (A competitor’s capabilities and intentions (currentcurrent
strategystrategy))
• A competitor’s beliefs about the industry (A competitor’s beliefs about the industry (itsits
assumptionsassumptions))
• A competitor’sA competitor’s capabilitiescapabilities

FIGUREFIGURE 2.22.2
CompetitorCompetitor
AnalysisAnalysis
ComponentsComponents

Competitor Analysis (cont’d)Competitor Analysis (cont’d)
• How do our goalsHow do our goals
compare with ourcompare with our
competitors’ goals?competitors’ goals?
• Where will the emphasisWhere will the emphasis
be placed in the future?be placed in the future?
• What is the attitudeWhat is the attitude
toward risk?toward risk?
Future ObjectivesFuture Objectives

• How are we currentlyHow are we currently
competing?competing?
• Does this strategyDoes this strategy
support changes in thesupport changes in the
competitive structure?competitive structure?
Current StrategyCurrent Strategy

• Do we assume theDo we assume the
future will be volatile?future will be volatile?
• Are we operating underAre we operating under
a status quo?a status quo?
• What assumptions doWhat assumptions do
our competitors holdour competitors hold
about the industry andabout the industry and
themselves?themselves?
AssumptionsAssumptions

• What are our strengthsWhat are our strengths
and weaknesses?and weaknesses?
• How do we rateHow do we rate
compared to ourcompared to our
competitors?competitors?
CapabilitiesCapabilities

• What will ourWhat will our
competitors do in thecompetitors do in the
future?future?
• Where do we hold anWhere do we hold an
advantage over ouradvantage over our
competitors?competitors?
• How will this changeHow will this change
our relationship withour relationship with
our competitors?our competitors?
ResponseResponseFuture ObjectivesFuture Objectives
CapabilitiesCapabilities

ComplementorsComplementors
• ComplementorsComplementors
 The 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 focal
firm’s own product or service.firm’s own product or service.
• If a complementor’s product or service adds valueIf a complementor’s product or service adds value
to the sale of the focal firm’s product or service, itto the sale of the focal firm’s product or service, it
is likely to create value for the focal firm.is likely to create value for the focal firm.
• However, if a complementor’s product or service isHowever, if a complementor’s product or service is
in a market into which the focal firm intends toin a market into which the focal firm intends to
expand, the complementor can represent aexpand, the complementor can represent a
formidable 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 competitors’Attending trade fairs and shows to obtain competitors’
brochures, view their exhibits, and listen tobrochures, view their exhibits, and listen to
discussions 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

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