Strategic Management Concepts and Cases

Exploring the External Environment: Competition and Opportunities

Studying this chapter should provide you with the strategic management knowledge needed to: 1. Explain the importance of analyzing and understanding the firm’s external environment. 2. Define and describe the general environment and the industry environment. 3. Discuss the four activities of the external environmental analysis process. 4. Name and describe the general environment’s six segments. 5. Identify the five competitive forces and explain how they determine an industry’s profit potential. 6. Define strategic groups and describe their influence on the firm. 7. Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them.

Many U.S. airlines have filed bankruptcy in recent years.

The General, Industry, and Competitor Environments An integrated understanding of the external and internal environments is essential for firms to understand the present and predict the future.7 As shown in Figure 2.1, a firm’s external environment is divided into three major areas: the general, industry, and competitor environments.

The general environment is composed of dimensions in the broader society that influence an industry and the firms within it.

Components of the General Environment 10

The industry environment is the set of factors that directly influences a firm and its competitive actions and competitive responses: 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.

External Environmental Analysis The external environmental analysis process should be conducted on a continuous basis. This process includes four activities: Scanning Monitoring Forecasting Assessing Identifying early signals of environmental changes and trends Detecting meaning through ongoing observations of environmental changes and trends Developing projections of anticipated outcomes based on monitored changes and trends Determining the timing and importance of environmental changes and trends for firms' strategies and their management 10

External Environmental Analysis Top 10 U.S. States Moving Toward Digital Economy States in the top 10 of those that are trying to transform themselves to the realities and needs of a digital economy may experience an influx of high-tech companies and skilled workers as well as increases in tax revenues

Segments of the General Environment The demographic segment The economic segment The political segment The sociocultural segment The technological segment The global segment

CSI TV appeals to a changing Hispanic market.

Agencies such as the FDA are continually being swayed one way or another by external critics from the consumer side and from the drug industry side.

Global markets offer firms more opportunities to obtain the resources needed for success.The Kuwait Investment Authority is the second largest shareholder of DaimlerChrysler.

Bargaining Power of Suppliers Industry Environment Analysis Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products 23

Effects of Entry Barriers and Exit Barriers on Industry Profits Low High Low Entry Barriers High 28

Effects of Entry Barriers and Exit Barriers on Industry Profits High Low Low, Stable Returns Low Entry Barriers High 29

Effects of Entry Barriers and Exit Barriers on Industry Profits Low High Low, Stable Returns Low Entry Barriers High High, Stable Returns 30

Effects of Entry Barriers and Exit Barriers on Industry Profits High Exit Barriers Low Low, Risky Returns Low, Stable Returns Low Entry Barriers High, Stable Returns High 31

Effects of Entry Barriers and Exit Barriers on Industry Profits Low High Low, Stable Returns Low, Risky Returns Low Entry Barriers High, Stable Returns High, Risky Returns High 32

Competitor Analysis The follow-up to Industry Analysis is effective analysis of a firm’s Competitors Competitive Environment Industry Environment 33

Competitor Analysis Response Assumptions What assumptions do our competitors hold about the future of industry and themselves? Response What will our competitors do in the future? Current Strategy Does our current strategy support changes in the competitive environment? Where do we have a competitive advantage? Future Objectives How do our goals compare to our competitors’ goals? How will this change our relationship with our competition? Capabilities How do our capabilities compare to our competitors? 38

6. What is a strategic group? Of what value is knowledge of the REVIEW QUESTIONS 1. Why is it important for a firm to study and understand the external environment? 2. What are the differences between the general environment and the industry environment? Why are these differences important? 3. What is the external environmental analysis process? What does the firm want to learn when using this process? 4. What are the six segments of the general environment? Explain the differences among them. 5. How do the five forces of competition in an industry affect its profit potential? Explain. 6. What is a strategic group? Of what value is knowledge of the firm’s strategic group in formulating that firm’s strategy? 7. What is the importance of collecting and interpreting data and information about competitors? What practices should a firm use to gather competitor intelligence and why?