1. © 2006 by Nelson, a division of Thomson Canada Limited.
The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis
Chapter Three
© 2006 by Nelson, a division of Thomson Canada Limited.

2. Strategic Competitiveness
Chapter 5
Bus. - Level
Strategy
Chapter 6
Competitive
Dynamics
Chapter 7
Corp. - Level
Chapter 9
International
Chapter 10
Cooperative
Strategies
Chapter 8
Acquisitions &
Restructuring
Chapter 11
Corporate
Governance
Chapter 12
Structure
& Control
Chapter 13
Strategic
Leadership
Chapter 14
Entrepreneurship
& Innovation
Inputs
Actions
Outcomes
Chapter 4
Internal
Environment
Chapter 3
External
Strat. Intent
Strat. Mission
The Strategic
Management .
Process
Strategy Formulation
Strategy Implementation
Strategic Competitiveness
Chapter 1
Feedback
Above Average Returns
Chapter 2
Chapter 3
External
Environment
Chapter 2
Above Average Returns
© 2006 by Nelson, a division of Thomson Canada Limited.

3. © 2006 by Nelson, a division of Thomson Canada Limited.
The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis
Knowledge Objectives
1. Explain the importance of analyzing and understanding the firm’s external environment.
2. Defining and describing 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.
© 2006 by Nelson, a division of Thomson Canada Limited.

4. © 2006 by Nelson, a division of Thomson Canada Limited.
The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis
Knowledge Objectives – continued…
5. Identifying five competitive forces and
how they determine an industry’s profit potential.
6. Define strategic groups and their influence on the firm.
7. Describe what firms need to know about their competitors and different methods used to collect intelligence about them.
© 2006 by Nelson, a division of Thomson Canada Limited.

5. 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
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6. General Environment Components
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7. General Environment Components
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8. The Industry Environment
The set of factors that directly influences a firm, it’s competitive actions & competitive responses:
The threat of new entrants
The power of suppliers
The power of buyers
The threat of product substitutes
The intensity of rivalry among competitors
© 2006 by Nelson, a division of Thomson Canada Limited.

9. © 2006 by Nelson, a division of Thomson Canada Limited.
Competitor Analysis
Predicting the dynamics of competitor actions, responses and intentions.
© 2006 by Nelson, a division of Thomson Canada Limited.

10. The I/O Model of Superior Returns
The Industrial Organization Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm. I O
The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm.
© 2006 by Nelson, a division of Thomson Canada Limited.

11. The I/O Model of Superior Returns
Action required:
Study the external
environment,
especially the
industry environment.
External Environment
Competitive Environment
General Environment
Industry Environment
© 2006 by Nelson, a division of Thomson Canada Limited. * an

12. The I/O Model of Superior Returns
Action required:
Locate an industry with high potential for above-average returns.
External Environment
General Environment
Competitive
Environment
Industry Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
© 2006 by Nelson, a division of Thomson Canada Limited. * an

13. The I/O Model of Superior Returns
Action required:
I.d. strategy called for by the industry to earn above-average returns.
External Environment
General Environment
Competitive Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
Selection of a strategy linked with above-average returns in a particular industry
Strategy
Formulation
Industry Environment
© 2006 by Nelson, a division of Thomson Canada Limited. * an

14. The I/O Model of Superior Returns
Action required:
Develop / acquire assets and skills needed to implement the strategy.
External Environment
General Environment
Competitive Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
Selection of a strategy linked with above-average returns in a particular industry
Strategy
Formulation
Assets and Skills
Assets and skills required to implement a chosen strategy
Industry Environment
© 2006 by Nelson, a division of Thomson Canada Limited. * an

15. The I/O Model of Superior Returns
Action required:
Use the firm’s strengths (its assets or skills) to implement the strategy.
External Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
Selection of a strategy linked with above-average returns in a particular industry
Strategy
Formulation
General Environment
Assets and Skills
Assets and skills required to implement a chosen strategy
Industry Environment
Competitive Environment
Strategy Implementation
Selecting strategic actions linked with effective implementation of the chosen strategy
© 2006 by Nelson, a division of Thomson Canada Limited. * an

16. The I/O Model of Superior Returns
Action required:
Maintain selected strategy in order to out-perform industry rivals.
External Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
Selection of a strategy linked with above-average returns in a particular industry
Strategy
Formulation
General Environment
Assets and Skills
Assets and skills required to implement a chosen strategy
Industry Environment
Competitive Environment
Strategy Implementation
Selecting strategic actions linked with effective implementation of the chosen strategy
Superior Returns
Earning of above-average returns
© 2006 by Nelson, a division of Thomson Canada Limited. * an

17. External Environmental Analysis
The external environmental analysis process should be conducted on a continuous basis.
This process includes four activities:
Scanning
Identifying early signals of environmental changes and trends 
Monitoring
Detect meaning by ongoing observations of environmental changes and trends 
Forecasting
Developing projections of anticipated outcomes based on monitored changes and trends 
Assessing
Determining the timing & importance of environmental changes and trends for firms' strategies & their management 
© 2006 by Nelson, a division of Thomson Canada Limited. 10

18. Porter’s 5 Forces Model of Competition
Threat of New Entrants
The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved.
© 2006 by Nelson, a division of Thomson Canada Limited. 11

19. © 2006 by Nelson, a division of Thomson Canada Limited.
Threat of New Entrants
Economies of Scale *
Barriers to Entry
Product Differentiation *
Capital Requirements *
Switching Costs *
Access to Distribution Channels *
Cost Disadvantages Independent of Scale *
Government Policy *
Expected Retaliation *
© 2006 by Nelson, a division of Thomson Canada Limited. * 12

20. Porter’s 5 Forces Model of Competition
Threat of New Entrants
Porter’s 5 Forces Model of Competition
Bargaining Power of Suppliers
© 2006 by Nelson, a division of Thomson Canada Limited. * 14

21. Bargaining Power of Suppliers
Suppliers exert power in the industry by:
* Threatening to raise
prices or to reduce quality
Suppliers are likely to be powerful if: *
Supplier industry is dominated by a few firms.
Suppliers’ products have few substitutes. * *
Buyer is not an important customer to supplier. *
Suppliers’ product is an important input to buyers’ product.
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases *
Suppliers’ products are differentiated. *
Suppliers’ products have high switching costs. *
Supplier poses credible threat of forward integration.
© 2006 by Nelson, a division of Thomson Canada Limited. * 16

22. Porter’s 5 Forces Model of Competition
Threat of New Entrants
Bargaining Power of Suppliers
Porter’s 5 Forces Model of Competition
Bargaining Power of Buyers
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23. Bargaining Power of Buyers
Buyer groups are likely to be powerful if: *
Buyers are concentrated or purchases are large relative to seller’s sales *
Purchase accounts for a significant fraction of supplier’s sales
Buyers compete with supplying industry by:
* Bargaining down prices *
Products are undifferentiated *
Buyers face few switching costs *
Buyers’ industry earns low profits
* Forcing higher quality *
Buyer presents a credible threat of backward integration
* Playing firms off of
each other *
Product unimportant to quality *
Buyer has full information
© 2006 by Nelson, a division of Thomson Canada Limited. 18

24. Porter’s 5 Forces Model of Competition
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Porter’s 5 Forces Model of Competition
Threat of Substitute Products
© 2006 by Nelson, a division of Thomson Canada Limited. * 23

25. Threat of Substitute Products
Products with similar function limit the prices firms can charge *
Products with improving price / performance tradeoffs relative to present industry products
Keys to evaluating substitute products:
For Example:
Electronic security systems in place of security guards
Fax machines or ed attachments in place of overnight mail delivery
© 2006 by Nelson, a division of Thomson Canada Limited. 21

26. Porter’s 5 Forces Model of Competition
Threat of Substitute Products
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Rivalry Among Competing Firms in Industry
© 2006 by Nelson, a division of Thomson Canada Limited. * 23

27. Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways
Jockeying for strategic position *
Using price competition *
Staging advertising battles *
Increasing consumer warranties or service *
Making new product introductions *
Occurs when a firm is pressured or sees an opportunity *
Price competition often leaves entire industry worse off
Advertising battles may increase total industry demand, but may be costly to smaller competitors *
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28. Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when *
Numerous or equally balanced competitors
Rivalry Among Existing Competitors *
Slow growth industry *
High fixed costs *
High storage costs *
Lack of differentiation or switching costs *
Capacity added in large increments *
Diverse competitors *
High strategic stakes *
High exit barriers
© 2006 by Nelson, a division of Thomson Canada Limited. 24

29. Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. *
Specialized assets
Fixed cost of exit (e.g., labour agreements) *
Strategic interrelationships *
Emotional barriers *
Government and social restrictions *
© 2006 by Nelson, a division of Thomson Canada Limited. 27

30. © 2006 by Nelson, a division of Thomson Canada Limited.
Strategic Groups
A set of firms emphasizing similar strategic dimensions to use a similar strategy
© 2006 by Nelson, a division of Thomson Canada Limited.

31. © 2006 by Nelson, a division of Thomson Canada Limited.
Strategic Groups
The more intense the rivalry of competitors within a group the greater the threat to each firms profitability.
The strengths of the 5 competitive forces differ across strategic groups. Thus firms within various strategic groups have different pricing policies.
The closer groups are in terms of their strategies & dimensions emphasized, the greater the chance competitive rivalry between groups.
© 2006 by Nelson, a division of Thomson Canada Limited.

32. 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.
© 2006 by Nelson, a division of Thomson Canada Limited.

33. © 2006 by Nelson, a division of Thomson Canada Limited.
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?
© 2006 by Nelson, a division of Thomson Canada Limited.

34. © 2006 by Nelson, a division of Thomson Canada Limited.
Competitor Analysis
Current Strategy:
Future objectives
How are we currently competing?
Does this strategy support changes in the competitive structure?
Current strategy
© 2006 by Nelson, a division of Thomson Canada Limited.

35. © 2006 by Nelson, a division of Thomson Canada Limited.
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
© 2006 by Nelson, a division of Thomson Canada Limited.

36. © 2006 by Nelson, a division of Thomson Canada Limited.
Competitor Analysis
Future objectives
Capabilities:
What are our strengths and weaknesses?
How do we rate compared to our competitors?
Current strategy
Assumptions
Capabilities
© 2006 by Nelson, a division of Thomson Canada Limited.

37. © 2006 by Nelson, a division of Thomson Canada Limited.
Competitor Analysis
Future objectives
Response
Response:
Current strategy
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
© 2006 by Nelson, a division of Thomson Canada Limited.