1. Chapter 2
The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis
Hitt, Ireland, and Hoskisson
The external environment has a tremendous affect on a firm’s growth and profitability. In chapter 2 we will discuss what firms do to analyze and understand their dynamic and complex external environment.

2. 3 parts of external environment
The external environment has three major parts.
The general environment includes elements in the broader society that affect industries and their firms. These elements include demographic, economic, political/legal, technological, and global dimensions.
The industry environment includes factors that influence a firm, its competitive actions and responses, and the industry’s profit potential. This includes the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competitors. The challenge is to locate a position within an industry where a firm can favorably influence those factors or where it can successfully defend against their influence.
The competitor environment is that in which the firm analyzes each major competitor’s objectives, strategies, assumptions, and capabilities.
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3. Opportunities and Threats
Opportunity
A condition in the general environment that, if exploited, helps a company achieve strategic competitiveness.
Threat
A condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.
When firms study their external environment, they identify opportunities and threats for their business within industries. An opportunity is a condition in the external environment that the company could exploit to achieve strategic competitiveness. A threat is the opposite – a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.
Copyright © 2008 Cengage

4. External environmental analysis process
Scanning
Identify early signals of environmental changes and trends
Monitoring
Detect meaning through ongoing observations of environmental changes and trends
Forecasting
Project anticipated outcomes based on monitored changes and trends
Assessing
Determine the timing and importance of environmental changes and trends for firms’ strategies and their management
The external environmental analysis process has four steps: scanning, monitoring, forecasting, and assessing. Firms use this four-step process to analyze the environment in order to identify opportunities and threats.
Scanning includes studying all segments of the general environment, identifying early signs of potential changes and those already in progress. Oftentimes this includes dealing with ambiguous, incomplete, or unconnected data.
Monitoring is observing environmental changes in order to see important trends emerging in the industry.
In forecasting, analysts develop feasible projections of what might happen and when as a result of emerging changes and trends.
Assessing is determining the timing and importance of environmental changes and trends for firms’ strategies and their management.
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5. The external environment
The external environment can be divided into six segments for analysis: demographic, economic, sociocultural, global, political/legal, and technological.
Demographics include characteristics about the population such as size, age, geographic distribution, ethnicity, and income.
Economic environment deals with the nature and direction of the economy in which a firm competes or may compete. In includes economic variables such as inflation rates, interest rates, trade deficits or surpluses, budget deficits or surpluses, personal savings rate, business savings rates, and gross domestic product. Because a global economy consists of interdependent economies, the health of one country’s economy can influence the economy of other countries.
The political/legal segment is that in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding the interactions among nations. It includes antitrust laws, taxation laws, deregulation philosophies, labor training laws, and educational philosophies and policies.
Sociocultural is concerned with a society’s attitudes and cultural values. It includes concepts such as women in the workplace, workforce diversity, attitudes about quality of work life, concerns about environment, shifts in work and career preferences, and shifts in product and service preferences. Attitudes regarding sociocultural issues often drives changes in the other segments of the external environment.
Technological includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products processes, and materials. It includes product innovations, applications of knowledge, focus of private and government-supported R&D expenditures, and new communication technologies.
Global includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets.
For each segment, the firm wants to determine the strategic relevance of environmental changes and trends.
Copyright © 2008 Cengage
Figure 2.1

6. Five forces of competition model
Compared with the general environment, the industry environment has a more direct effect on the firm’s strategic actions.
An industry is defined as a group of firms producing products that are close substitutes. They are firms that influence one another. The general environment includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns.
The five forces model of competition includes the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intense rivalry among competitors. By studying these forces, the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to earn above-average returns.
The threat of new entrants depends largely on economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, government policy, and expected retaliation.
The bargaining power of suppliers: the power of suppliers increases when suppliers are large and few in number, suitable substitute products are not available, individual buyers are not large customers of suppliers and there are many of them, suppliers’ goods are critical to the buyers’ marketplace success, suppliers’ products create high switching costs, and suppliers pose a threat to integrate forward into buyers’ industry.
The power of buyers increases when buyers are large and few in number, buyers purchase a large portion of an industry’s total output, buyers’ purchases are a significant portion of a supplier’s annual revenues, buyers’ switching costs are low, and buyers can pose threat to integrate backward into the sellers’ industry.
The threat of substitute products increases when buyers face few switching costs, the substitute product’s price is lower, or the substitute product’s quality and performance are equal to or greater than the existing product. Differentiated industry products that are valued by customers reduce this threat.
Industry rivalry increases when there are numerous or equally balanced competitors, industry growth slows or declines, there are high fixed costs or high storage costs, there is a lack of differentiation opportunities or low switching costs, when the strategic stakes are high, and when high exit barriers prevent competitors from leaving the industry.
Copyright © 2008 Cengage
Figure 2.2

7. Strategic groups
Industries are populated with different strategic groups.
A strategic group is a collection of firms that follow similar strategies along similar dimensions.
Competitive rivalry is greater within a strategic group than it is between strategic groups.
A set of firms emphasizing similar strategic dimensions to use a similar strategy is called a strategic group. The competition within this group of firms is more intense that is the competition between a member of the strategic group and another firm outside of the group.
Copyright © 2008 Cengage

8. Competitor analysis A competitor analysis
Informs the firm about the objectives, strategies, assumptions, and capabilities of competitors
Examines complementors that sustain a competitor’s strategy and major networks or alliances in which competitors participate.
Attempts to identify and carefully monitor major actions taken by firms with performance below the industry norm.
A competitor analysis gives a firm information and insight into their competitors. Specifically, firms need to understand what drives their competitors (future objectives), what their competitors are doing and can do (strategies), what their competitors believe about the industry (their assumptions), and what their competitors’ capabilities are (strengths and weaknesses).
Copyright © 2008 Cengage

9. Competitive intelligence
Different techniques are used to create competitor intelligence: the set of data, information, and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions.
Firms should use only legal and ethical practices to gather intelligence.
The Internet enhances firms’ capabilities to gather insights about competitors and their strategic intentions.
Competitor intelligence is the set of data and information the firm gathers to better understand and better anticipate competitors’ objectives, strategies, assumptions, and capabilities. Having this knowledge allows a firm to determine what competitors will do in the future, where the firm has an advantage over a competitor, and how competitors can affect the industry and the firm.
Professional associations such as the Society of Competitive Intelligence Professionals (SCIP) prescribe ethical practices for obtaining information about competitors. Two important sources of competitive information are legal documents (including annual reports, financial reports, and public information) and information about products and services shared at trade shows and through marketing communications materials.
Copyright © 2008 Cengage