1. Robert E. Hoskisson Michael A. Hitt R. Duane Ireland
Chapter 3
The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
The External Environment: Opportunities, Threats, Industry Competition,
and Competitor Analysis
Detailed instructor notes on three topics have been included for this chapter:
• How do firms maintain growth during difficult economic times? Bank of America
and Nation’s Bank are given as examples with notes regarding past performance and
current strategies. These notes begin with the first slide on “External Environment.”
• How firms anticipate and deal with new entrants to the market. Wal-Mart’s entrance
into the retail grocery business is detailed. These notes begin with the slide titles “Industry
Environment,” which is the initial discussion of the five forces of competition.
• How firms respond to new competitors (lead, follow, or ignore). Examples of leading,
following, and ignoring include:
o Universal Studios and Disney
o Amazon.com and Barnes and Nobles
o Amazon.com and Borders Books
o CNN and NBC
o CNN and ABC
o CNN and CBS
These notes begin with the first slide titled “Competitor Analysis.”
©2004 by South-Western/Thomson Learning

2. The Strategic Management Process
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Thinking
Chapter 3
The External
Environment
Strategic
Analysis
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Creating
Competitive
Advantage
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship

3. 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
The External Environment (cont.)
Where do firms find growth in poor economic times?
Example: Financial Services Industry (Bank of America and
NationsBank) (cont.)
Major Threat
Bank of America has had very slow revenue growth the past three years. The goal is to
have greater than 10% growth going forward:
$30.8 billion
$32.5 billion (rate 5.5%)
$33.2 billion (rate 3.1%
$34.9 billion (rate 5.1%)
Key Strategy
Leverage demographic and socioeconomic changes in the United States:
• Powerful branch network (4,208 as of 12/02)
• Powerful ATM network (13,013 as of 12/02)
• Do business in states with high minority populations (especially Latin-Americans),
namely California, Texas, Florida, Maryland, Arizona, and so on)
(Continued next slide.)

4. External Environmental Analysis
Sources of information
External: printed materials, trade shows, external network contacts, etc.
Internal: employees in boundary spanning positions, etc.
The External Environment (cont.)
Where do firms find growth in poor economic times?
Example: Financial Services Industry (Bank of America and
NationsBank) (cont.)
Major Threat
Bank of America has had very slow revenue growth the past three years. The goal is to
have greater than 10% growth going forward:
$30.8 billion
$32.5 billion (rate 5.5%)
$33.2 billion (rate 3.1%
$34.9 billion (rate 5.1%)
Key Strategy
Leverage demographic and socioeconomic changes in the United States:
• Powerful branch network (4,208 as of 12/02)
• Powerful ATM network (13,013 as of 12/02)
• Do business in states with high minority populations (especially Latin-Americans),
namely California, Texas, Florida, Maryland, Arizona, and so on)
(Continued next slide.)

5. The External Environment
Economic
General
Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
General
Demographic
Sociocultural
The External Environment
Where do firms find growth in poor economic times?
Example: Financial Services Industry (Bank of America and
NationsBank)
Past Strategies
In the 1990s, NationsBank and Bank of America expanded through asset gathering, diversification
(i.e., inter-state banking, geographic, product, etc.). In less that ten years they went
from a roughly $8 billion to more than $620 billion on $35 billion in revenue in 2001.
M&A History
1992 NCNB and C&S Sovran form NationsBank
1994 NationsBank acquires MNC
1995 NationsBank acquires BankSouth
1996 NationsBank acquires Boatman’s Bank & Montgomery Securities
1997 NationsBank acquires Barnet Bank
1998 NationsBank and Bank of America merge
Major thrust
U.S.-based retail banking: Consumer banking accounts for over 61% of Bank of America
revenue and NI.
(Continued next slide.)
Political/Legal
Competitor
Environment
Global
Environment
Environment
Technological
General

6. General Environment
Degree of impact varies across industries and firms
Six segments:
Political/Legal
Sociocultural
Demographic
Economic
Technological
Global

7. Industry Environment
A set of factors that directly influences a company and its competitive actions and responses
Has a more direct effect on a firm’s value creation and above-average returns when compared with the general environment
Industry Environment
Can firms anticipate new entrants to the market? (Grocery Retailing)
Example 1: Wal-Mart
Question
How do we (Wal-Mart) leverage our strengths (fast turnover of goods, low-cost volume
buying, etc.) to increase traffic and volume at our stores? In 2000 U.S. grocery sales grew
by 3.4%, reaching $570 billion.
Answer
• Create and expand shelf space for groceries and dry good products.
• Expand Supercenter Format to leverage additional shelf space: in 2001, grocery sales
accounted for $17.1 billion in sales or 30% of total sales:
o First Supercenter store opened in 1988; by 2000 Wal-Mart had 721 Supercenters
o Supercenter openings consist of 60%-70% of new store openings within Wal-Mart
o Wal-Mart projects 1,400 Supercenters by 2005
Fast Forward
What share of the grocery market will Wal-Mart control in 2010?

8. Five Forces Model of Competition
An industry-level analytical model
An industry is a group of firms producing products that are close substitutes.
However…..
Analysis goes beyond direct competitors to include potential competitors such as suppliers, customers, etc.
Five Forces Model of Competition
Can firms anticipate new entrants to the market? (Grocery Retailing)
Example 2: Traditional Supermarkets
Question
Given the low margins and relatively low growth of this industry, should we (traditional
supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by
3.4%, reaching $570 billion.
Answer
No new entrants are likely. Thus prepare for continued industry consolidation.
Specific Case
Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states,
primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s
challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores
(112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million
restructuring charge.
Strategic Reaction I
Crank up M&A activity to gain economies of scale and lower its cost structure:
• In 2000 WD acquired the Gooding’s Markets chain in Orlando.
• In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle.
(Continued on next slide.)

9. 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
Five Forces Model of Competition (cont.)
Can firms anticipate new entrants to the market? (Grocery Retailing)
Example 2: Traditional Supermarkets (cont.)
Strategic Reaction II
Expand private label items: WD brand items carry higher profit margins than comparable
national brands. Fifty-one percent of buying public purchase private label brands “every
time” or “fairly often” when they shop. WD can leverage this trend. For example, its WD
Chek soda is a market leader in many of WD’s core markets.
Fast Forward
Will WD still be in existence as an independent company in 2010?
Bargaining Power of Buyers

10. 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

11. 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

12. 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

13. 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

14. 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

15. Five Forces Model of Competition
Identify attractive industries to compete in (I/O Model)
Which industries are considered attractive?
High entry barriers
Suppliers and buyers with weak bargaining positions
Weak competitive threats from substitute products
Low competitive rivalry
Five Forces Model of Competition
Can firms anticipate new entrants to the market? (Grocery Retailing)
Example 2: Traditional Supermarkets
Question
Given the low margins and relatively low growth of this industry, should we (traditional
supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by
3.4%, reaching $570 billion.
Answer
No new entrants are likely. Thus prepare for continued industry consolidation.
Specific Case
Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states,
primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s
challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores
(112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million
restructuring charge.
Strategic Reaction I
Crank up M&A activity to gain economies of scale and lower its cost structure:
• In 2000 WD acquired the Gooding’s Markets chain in Orlando.
• In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle.
(Continued on next slide.)

16. Strategic Groups
Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions. What dimensions?
Pricing policies
Product quality
Customer service
Technological leadership
etc.
Five Forces Model of Competition
Can firms anticipate new entrants to the market? (Grocery Retailing)
Example 2: Traditional Supermarkets
Question
Given the low margins and relatively low growth of this industry, should we (traditional
supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by
3.4%, reaching $570 billion.
Answer
No new entrants are likely. Thus prepare for continued industry consolidation.
Specific Case
Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states,
primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s
challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores
(112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million
restructuring charge.
Strategic Reaction I
Crank up M&A activity to gain economies of scale and lower its cost structure:
• In 2000 WD acquired the Gooding’s Markets chain in Orlando.
• In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle.
(Continued on next slide.)

17. Strategic Groups Implications:
Strength of the five industry forces differ across strategic groups
Competitive rivalry within strategic groups is greater than between strategic groups
The greater the similarity between strategic groups, the greater the likelihood of rivalry between groups
Five Forces Model of Competition
Can firms anticipate new entrants to the market? (Grocery Retailing)
Example 2: Traditional Supermarkets
Question
Given the low margins and relatively low growth of this industry, should we (traditional
supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by
3.4%, reaching $570 billion.
Answer
No new entrants are likely. Thus prepare for continued industry consolidation.
Specific Case
Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states,
primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s
challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores
(112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million
restructuring charge.
Strategic Reaction I
Crank up M&A activity to gain economies of scale and lower its cost structure:
• In 2000 WD acquired the Gooding’s Markets chain in Orlando.
• In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle.
(Continued on next slide.)

18. Competitor Environment
Focuses on direct competitors
Process includes the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities
Objective: Understand, interpret, and predict competitors’ actions and responses
Five Forces Model of Competition
Can firms anticipate new entrants to the market? (Grocery Retailing)
Example 2: Traditional Supermarkets
Question
Given the low margins and relatively low growth of this industry, should we (traditional
supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by
3.4%, reaching $570 billion.
Answer
No new entrants are likely. Thus prepare for continued industry consolidation.
Specific Case
Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states,
primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s
challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores
(112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million
restructuring charge.
Strategic Reaction I
Crank up M&A activity to gain economies of scale and lower its cost structure:
• In 2000 WD acquired the Gooding’s Markets chain in Orlando.
• In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle.
(Continued on next slide.)

19. Competitor Analysis Response: Response Future objectives
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