1. Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
Chapter 2
The External Environment: Opportunities, Threats, and Industry Competition, and Competitor Analysis
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2003 Southwestern Publishing Company

2. Strategy Implementation
The Strategic Management Process
Chapter 2
The External
Environment
Strategic Intent
Strategic Mission
Strategic Inputs
Chapter 3
The Internal
Environment
Strategy Formulation
Strategy Implementation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive Rivalry
and Competitive
Dynamics
Chapter 6
Corporate-
Level Strategy
Chapter 10
Corporate
Governance
Chapter 11
Organizational
Structure and
Controls
Strategic Actions
Chapter 7
Acquisition and
Restructuring
Strategies
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategy
Chapter 12
Strategic
Leadership
Chapter 13
Strategic
Entrepreneurship
Strategic
Competitiveness
Above-Average
Returns
Strategic Outcomes
Feedback

3. The External Environment
Sociocultural
General
Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
General
Demographic
Economic
Global
Competitor
Environment
Political/Legal
Environment
Environment
Technological
General

4. External Environmental Analysis
A continuous process which includes
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

5. External Environmental Analysis
Analysis of general environment
Analysis of industry environment
Analysis of competitor environment
The External
Environment
The External
Environment
Strategic Intent
Strategic Mission

6. General Environment Sociocultural segment Women in the workplace
Workforce diversity
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences

7. General Environment Economic segment Inflation rates Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Business savings rates
Gross domestic product

8. General Environment Political/Legal Segment Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies

9. General Environment Technological Segment Product innovations
Applications of knowledge
Focus of private and government-supported R&D expenditures
New communication technologies

10. General Environment Global Segment Important political events
Critical global markets
Newly industrialize countries
Different cultural and institutional attributes

11. General Environment Demographic Segment Population size Age structure
Geographic distribution
Ethnic mix
Income distribution

12. Industry Environment
A set of factors that directly influences a company and its competitive actions and responses.
Interaction among these factors determine an industry’s profit potential.
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry

13. Five Forces Model of Competition
Identify current and potential competitors and determine which firms serve them.
Conduct competitive analysis.
Recognize that suppliers and buyers can become competitors.
Recognize that producers of potential substitutes may become competitors.

14. Five Forces Model of Competition
Five Forces of
Competition
Rivalry Among Competing Firms
Threat of New Entrants
Threat of Substitute Products
Bargaining Power of Suppliers
Bargaining Power of Buyers

15. Threat of New Entrants Barriers to entry Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation

16. Bargaining Power of Suppliers
A supplier group is powerful when:
it is dominated by a few large companies
satisfactory substitute products are not available to industry firms
industry firms are not a significant customer for the supplier group
suppliers’ goods are critical to buyers’ marketplace success
effectiveness of suppliers’ products has created high switching costs
suppliers are a credible threat to integrate forward into the buyers’ industry

17. Bargaining Power of Buyers
Buyers (customers) are powerful when:
they purchase a large portion of an industry’s total output
the sales of the product being purchased account for a significant portion of the seller’s annual revenues
they could easily switch to another product
the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry

18. Threat of Substitute Products
Product substitutes are strong threat when:
customers face few switching costs
substitute product’s price is lower
substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

19. Intensity of Rivalry
Intensity of rivalry is stronger when competitors:
are numerous or equally balanced
experience slow industry growth
have high fixed costs or high storage costs
lack differentiation or low switching costs
experience high strategic stakes
have high exit barriers

20. High Exit Barriers Common exit barriers include:
specialized assets (assets with values linked to a particular business or location)
fixed costs of exit such as labor agreements
strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets)
emotional barriers (career concerns, loyalty to employees, etc.)
government and social restrictions

21. Strategic Groups
Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions.
The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry.

22. Competitor Environment
Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities
what drives the competitor as shown by its future objectives
what the competitor is doing and can do as revealed by its current strategy
What the competitor believes about itself and the industry, as shown by its assumptions
What the the competitor may be able to do, as shown by its capabilities

23. Competitor Analysis Future Objectives: Future objectives
How do our goals compare with our competitors’ goals?
Where will the emphasis be placed in the future?
What is the attitude toward risk?

24. Competitor Analysis Current Strategy: Future objectives
How are we currently competing?
Does this strategy support changes in the competitive structure?
Current strategy

25. Competitor Analysis Assumptions: Future objectives
Do we assume the future will be volatile?
Are we operating under a status quo?
What assumptions do our competitors hold about the industry and themselves?
Current strategy
Assumptions

26. Competitor Analysis Capabilities: Future objectives
What are our strengths and weaknesses?
How do we rate compared to our competitors?
Current strategy
Assumptions
Capabilities

27. Competitor Analysis Response: Future objectives Response
Current strategy
Response:
What will our competitors do in the future?
Where do we hold an advantage over our competitors?
How will this change our relationship with our competitors?
Assumptions
Capabilities