1. Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis
Overview:
The firm’s external environment
External environmental analysis
General environmental segments
Industry environment (and analysis)
Porter’s 5 Competitive Forces
Strategic groups: Definition and influence
Competitors and competitive intelligence

2. External Environment Analysis
4 components
Scanning – the study of all segments in the general environment
Monitoring – observing environmental changes to see if an important trend is emerging
Forecasting – the development of feasible projections of what might happen and how quickly as a result of the changes and trends detected
Assessing – determining the timing and significance of the effects of environmental changes and trends on the firm

3. External Environment Analysis
Major part of external analysis is the identification of opportunities and threats
Opportunity
Environment condition that, if exploited effectively, helps a company achieve strategic competitiveness
Threat
Environment condition that may hinder a company's efforts to achieve strategic competitiveness

4. The External Environment: General, Industry, and Competitor

5. The General Environment
The broader society dimensions that influence an industry and the firms within it
Grouped into 7 dimensions OR ‘environmental segments’
Demographic – population’s size, age structure, geographic distribution, ethnic mix, and income distribution
Economic – nature and direction of economy
Political/Legal – laws and regulations
Sociocultural – society’s attitudes and cultural values
Technological – new technologies and firms that create them
Global – new global markets, existing markets that are changing, and their characteristics
Physical – potential and actual changes in physical environment and business practices

6. The Industry Environment
Set of factors directly influencing a firm’s competitive actions/responses
Industry (Product Market)
Definition: Group of firms producing products that are close substitutes
Industry environment, in comparison to the general environment, has more direct effect on firm’s
Strategic competitiveness and
Above-average returns
Intensity of industry competition and industry’s profit potential are a function of 5 forces

7. The Five Forces of Competition Model

8. Industry Environment Analysis
Threat of New Entrants
Deals with the likelihood that new firms will enter an industry or that an existing member of an industry will enter an additional segment within the larger industry
Can threaten the market share of existing competitors and may bring additional production capacity
New entry is often via an acquisition
A stronger force when…
Barriers to entry are weak or nonexistent
The expected retaliation by current industry participants is low

9. Industry Environment Analysis
Bargaining power of suppliers
Usually other business organizations that provide the industry with products and services
A supplier group is powerful when …
It is dominated by a few large companies and is more concentrated than the industry to which they sell
No satisfactory substitutes exist
Industry firms not significant customer to supplier group
Supplier’s goods are critical to buyer’s success
High switching costs due to effectiveness of supplier’s products
Poses credible threat of forward integration

10. Industry Environment Analysis
Bargaining power of buyers
Usually other business organizations that purchase the outputs of an industry
Buyer groups are powerful when …
They purchase a large portion of industry’s total output
Product sales accounts for a significant portion of seller’s annual revenue
Low switching costs (to other industry product)
Industry products are undifferentiated or standardized and buyers pose a credible threat of backward integration

11. Industry Environment Analysis
Threat of substitute products
Goods or services from outside a given industry that perform similar or the same functions as the product the industry produces
Examples
Sugar vs. sugar substitutes
Aspirin vs. Ibuprofen
Aluminum cans vs. plastic bottles
A strong force when…
Low switching costs
The substitute product’s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product

12. Industry Environment Analysis
Intensity of Rivalry Among Competitors
Firms operating in the same market, offering similar products, and targeting similar customers
A stronger force when…
Numerous or equally balanced competitors
Slow industry growth
High fixed costs or high storage costs
Lack of differentiation or low switching costs
High strategic stakes
High exit barriers

13. Industry Environment Analysis
Interpreting Industry Analyses
Five force analysis helps determine an industry’s attractiveness for above average returns
Stronger forces = Lower profit potential
Weaker forces = Higher profit potential
Attractive industry characterized by
Low threat of new entry
Suppliers and buyers with weak bargaining positions
Low threat from substitute products
Less intense rivalry among competitors

14. Industry Analysis: Strategic Groups
Strategic Group Mapping
Strategic Group – a set of firms emphasizing similar strategic dimensions and using a similar strategy
Can be useful for analyzing an industry and an industry’s competitive structure
Can also be helpful in diagnosing competition, positioning, and the profitability of firm’s within an industry

15. Strategic Group Map of Selected Automobile Manufacturers

16. Strategic Group Map of Selected Retail Chains

17. Industry Analysis: Strategic Groups
Implications
Because firms within a group compete (offer similar products) rivalry can be intense – the greater the rivalry the greater the threat to each firm’s profitability
Strengths of the 5 forces can differ across strategic groups
The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry
Helps with positioning and in the identification of direct and indirect competitors

18. The Competitor Environment and Competitor Analysis
Gives details about
A firm’s direct and indirect competitors
The competitive dynamics (Ch. 5) expected to impact a firm's efforts to generate above-average returns
Competitor analysis
Focused on predicting the dynamics of competitor's actions, responses, and intentions
Focuses on a firms direct comptitors
Seeks to understand each competitors future objectives, current strategy, assumptions, and capabilities

19. Competitor Analysis Components

20. Competitor Intelligence
Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities
Scanning, monitoring, forecasting, and assessing
Follow ethical practices when gathering competitor intelligence
Obtain public information
Attend trade fairs and shows and collect brochures, view exhibits, listen to their discussions
Some practices may be legal, but unethical
Unethical tactics can include
Blackmail, Trespassing, Eavesdropping, Stealing