Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis - PowerPoint PPT Presentation


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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis


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Title: Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis

Chapter 2 The External Environment
Opportunities, Threats, Industry Competition
and Competitor Analysis
  • Overview
  • The firms external environment
  • External environmental analysis
  • General environmental segments
  • Industry environment (and analysis)
  • Porters 5 Competitive Forces
  • Strategic groups Definition and influence
  • Competitors and competitive intelligence

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

External Environment Analysis
  • Opportunity
  • General environment condition that, if exploited
    effectively, helps a company achieve strategic
  • Threat
  • General environment condition that may hinder a
    company's efforts to achieve strategic

The External Environment General, Industry, and
The General Environment
  • The General Environment
  • The broader society dimensions that influence an
    industry and the firms within it
  • Grouped into 7 dimensions OR environmental
  • Demographic populations size, age structure,
    geographic distribution, ethnic mix, and income
  • Economic nature and direction of economy
  • Political/Legal laws and regulations
  • Sociocultural societys attitudes and cultural
  • 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

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

The Five Forces of Competition Model
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
  • 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

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
  • No satisfactory substitutes exist
  • Industry firms not significant customer to
    supplier group
  • Suppliers goods are critical to buyers success
  • High switching costs due to effectiveness of
    suppliers products
  • Poses credible threat of forward integration

Industry Environment Analysis
  • Bargaining power of buyers
  • Usually other business organizations that
    purchase the outputs of an industry
  • Customers are powerful when
  • They purchase a large portion of industrys total
  • Product sales accounts for a significant portion
    of sellers annual revenue
  • Low switching costs (to other industry product)
  • Industry products are undifferentiated or
    standardized and buyers pose a credible threat of
    backward integration

Industry Environment Analysis
  • Threat of substitute products
  • Goods or services from outside a given industry
    that perform similar or the same functions (i.e.,
    sugar vs. sugar substitute such as NutraSweet)
  • A strong force when
  • Low switching costs
  • The substitute products price is lower or its
    quality and performance capabilities are equal to
    or greater than those of the competing product

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

Industry Environment Analysis
  • Interpreting Industry Analyses
  • Five force analysis helps determine an industrys
    attractiveness for above average returns
  • Stronger forces Lower profit potential
  • Weaker forces Higher profit potential
  • Unattractive industry characterized by
  • Low entry barriers
  • Suppliers and buyers with strong bargaining
  • Strong threat from substitute products
  • Intense rivalry among competitors

Industry Analysis Strategic Groups
  • Strategic Groups
  • Set of firms emphasizing similar strategic
    dimensions and using a similar strategy
  • Can be useful for analyzing an industrys
    competitive structure
  • Can also be helpful in diagnosing competition,
    positioning, and the profitability of firms
    within an industry

Strategic Group Map of Selected Automobile
Strategic Group Map of Selected Retail Chains
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 firms 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

The Competitor Environment and Competitor
  • Competitor Environment
  • Gives details about
  • A firms direct and indirect competitors
  • The competitive dynamics 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 each company which a firm directly
  • Seeks to understand each competitors future
    objectives, current strategy, assumptions, and

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