©2004 by South-Western/Thomson Learning 1

The External Environment: Opportunities, The External Environment: Opportunities, Threats, Industry Competition, and Threats, Industry Competition, and

Competitor AnalysisCompetitor Analysis

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 3Chapter 3

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Chapter 2Chapter 2Strategic LeadershipStrategic Leadership

Chapter 1Chapter 1Introduction toIntroduction to

Strategic ManagementStrategic Management

StrategicThinking

The Strategic Management ProcessThe Strategic Management Process

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9International StrategyInternational Strategy

Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11Corporate GovernanceCorporate Governance

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

Chapter 10Chapter 10Cooperative StrategyCooperative Strategy

Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship

StrategicAnalysis

CreatingCompetitiveAdvantage

MonitoringAnd CreatingEntrepreneurialOpportunities

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Discussion QuestionsDiscussion Questions1. What are the components of the

general environment? How does each affect the strategy of a firm?

2. What are the five competitive forces in an industry environment?

3. What attributes make each of the five competitive forces intense?

4. What is a strategic group and why is it an important concept?

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Discussion Questions (cont.)Discussion Questions (cont.)5. How do you conduct a competitor

analysis?

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Discussion Question 1Discussion Question 1

What are the components of the general environment? How does each affect the strategy of a firm?

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General

Env

iron

men

t

General

Environment

Gen

eral

Environm

ent

EconomicEconomic

Political/Legal

Political/Legal

TechnologicalTechnologicalG

loba

lG

loba

l

Dem

ogra

phic

Dem

ogra

phic Sociocultural

Sociocultural

The External EnvironmentThe External Environment

IndustryIndustryEnvironmentEnvironment

Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliersPower of buyersPower of buyers

Product substitutesProduct substitutesIntensity of rivalryIntensity of rivalry

CompetitorCompetitorEnvironmentEnvironment

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External Environmental AnalysisExternal Environmental AnalysisA continuous process which includesA 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

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External Environmental AnalysisExternal Environmental Analysis

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

The ExternalThe ExternalEnvironmentEnvironment

Analysis of general environmentAnalysis of general environment

Analysis of industry environmentAnalysis of industry environment

Analysis of competitor environmentAnalysis of competitor environment

The ExternalThe ExternalEnvironmentEnvironment

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General EnvironmentGeneral Environment Sociocultural segmentSociocultural segment

Women in the workplaceWomen in the workplace Workforce diversityWorkforce diversity Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment Shifts in work and career preferencesShifts in work and career preferences Shifts in product and service preferencesShifts in product and service preferences

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Economic segmentEconomic segment

General EnvironmentGeneral Environment

Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product

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General EnvironmentGeneral EnvironmentPolitical/Legal SegmentPolitical/Legal Segment

Antitrust lawsAntitrust laws Taxation lawsTaxation laws Deregulation philosophiesDeregulation philosophies Labor training lawsLabor training laws Educational philosophies and policiesEducational philosophies and policies

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General EnvironmentGeneral Environment

Technological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported Focus of private and government-supported

R&D expendituresR&D expenditures New communication technologiesNew communication technologies

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General EnvironmentGeneral EnvironmentGlobal SegmentGlobal Segment

Important political eventsImportant political events Critical global marketsCritical global markets Newly industrialize countriesNewly industrialize countries Different cultural and institutional attributesDifferent cultural and institutional attributes

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General EnvironmentGeneral EnvironmentDemographic SegmentDemographic Segment

Population sizePopulation size Age structureAge structure Geographic Geographic

distributiondistribution Ethnic mixEthnic mix Income distributionIncome distribution

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Discussion Question 2Discussion Question 2

What are the five competitive forces in an industry environment?

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Industry EnvironmentIndustry EnvironmentA set of factors that directly influences A set of factors that directly influences

a company and its competitive actions a company and its competitive actions and responsesand responses

Interaction among these factors Interaction among these factors determine an industry’s profit potentialdetermine an industry’s profit potential Threat of new entrantsThreat of new entrants Power of suppliersPower of suppliers Power of buyersPower of buyers Product substitutesProduct substitutes Intensity of rivalryIntensity of rivalry

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Five Forces Model of CompetitionFive Forces Model of Competition

Identify current and potential competitors Identify current and potential competitors and determine which firms serve themand determine which firms serve them

Conduct competitive analysisConduct competitive analysis Recognize that suppliers and buyers can Recognize that suppliers and buyers can

become competitorsbecome competitors Recognize that producers of potential Recognize that producers of potential

substitutes may become competitorssubstitutes may become competitors

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Threat of New Entrants

Threat of New Entrants

Bar

gain

ing

Pow

er o

f

Bar

gain

ing

Pow

er o

f Su

pplie

rsSu

pplie

rs

Bargaining Power of Bargaining Power of BuyersBuyers

Threat of Substitute

Threat of Substitute

Products

Products

Rivalry A

mong

Rivalry A

mong

Competing Firm

s

Competing Firm

s

Five Forces Model of CompetitionFive Forces Model of Competition

Five Forces ofFive Forces ofCompetitionCompetition

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Discussion Questions

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Discussion Question 3Discussion Question 3

What attributes make each of the five competitive forces intense?

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Threat of New EntrantsThreat of New EntrantsBarriers to entryBarriers to entry

Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation

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Bargaining Power of SuppliersBargaining Power of SuppliersA supplier group is powerful when:A supplier group is powerful when:

it is dominated by a few large companiesit is dominated by a few large companies satisfactory substitute products are not available satisfactory substitute products are not available

to industry firmsto industry firms industry firms are not a significant customer for industry firms are not a significant customer for

the supplier groupthe supplier group suppliers’ goods are critical to buyers’ suppliers’ goods are critical to buyers’

marketplace successmarketplace success effectiveness of suppliers’ products has created effectiveness of suppliers’ products has created

high switching costshigh switching costs suppliers are a credible threat to integrate suppliers are a credible threat to integrate

forward into the buyers’ industryforward into the buyers’ industry

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Bargaining Power of BuyersBargaining Power of Buyers Buyers (customers) are powerful when:Buyers (customers) are powerful when:

they purchase a large portion of an industry’s they purchase a large portion of an industry’s total outputtotal output

the sales of the product being purchased the sales of the product being purchased account for a significant portion of the seller’s account for a significant portion of the seller’s annual revenuesannual revenues

they could easily switch to another productthey could easily switch to another product the industry’s products are undifferentiated or the industry’s products are undifferentiated or

standardized, and buyers pose a credible threat standardized, and buyers pose a credible threat if they were to integrate backward into the if they were to integrate backward into the seller’s industryseller’s industry

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Threat of Substitute ProductsThreat of Substitute Products Product substitutes are strong threat Product substitutes are strong threat

when:when: customers face few switching costscustomers face few switching costs substitute product’s price is lowersubstitute product’s price is lower substitute product’s quality and performance substitute product’s quality and performance

capabilities are equal to or greater than those of capabilities are equal to or greater than those of the competing productthe competing product

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Intensity of RivalryIntensity of Rivalry Intensity of rivalry is stronger when competitors:Intensity of rivalry is stronger when competitors:

are numerous or equally balancedare numerous or equally balanced experience slow industry growthexperience slow industry growth have high fixed costs or high storage costshave high fixed costs or high storage costs lack differentiation or low switching costslack differentiation or low switching costs experience high strategic stakesexperience high strategic stakes have high exit barriershave high exit barriers

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High Exit BarriersHigh Exit BarriersCommon exit barriers include:Common exit barriers include:

specialized assets (assets with values linked to specialized assets (assets with values linked to a particular business or location)a particular business or location)

fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements strategic interrelationships (relationships of strategic interrelationships (relationships of

mutual dependence between one business and mutual dependence between one business and other parts of a company’s operation, such as other parts of a company’s operation, such as shared facilities and access to financial markets)shared facilities and access to financial markets)

emotional barriers (career concerns, loyalty to emotional barriers (career concerns, loyalty to employees, etc.)employees, etc.)

government and social restrictionsgovernment and social restrictionsClick Here Return to Discussion Questions

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Discussion Question 4Discussion Question 4

What is a strategic group and why is it an important concept?

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Strategic GroupsStrategic Groups

Strategic group: a group of firms in an Strategic group: a group of firms in an industry following the same or similar industry following the same or similar strategy along the same strategic strategy along the same strategic dimensionsdimensions

The strategy followed by a strategic The strategy followed by a strategic group differs from strategies being group differs from strategies being implemented by other companies in implemented by other companies in the industrythe industry

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Discussion Question 5Discussion Question 5

How do you conduct a competitor analysis?

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Competitor EnvironmentCompetitor EnvironmentCompetitor intelligenceCompetitor intelligence is the ethical is the ethical gathering of needed information and gathering of needed information and data about competitors’ objectives, data about competitors’ objectives, strategies, assumptions, and capabilitiesstrategies, assumptions, and capabilities what drives the competitor as shown by its what drives the competitor as shown by its future future

objectivesobjectives what the competitor is doing and can do as what the competitor is doing and can do as

revealed by its revealed by its current strategycurrent strategy What the competitor believes about itself and the What the competitor believes about itself and the

industry, as shown by its industry, as shown by its assumptionsassumptions What the the competitor may be able to do, as What the the competitor may be able to do, as

shown by its shown by its capabilitiescapabilities

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Competitor AnalysisCompetitor Analysis

Future Objectives:Future objectivesFuture 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?

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Competitor AnalysisCompetitor Analysis

Current strategyCurrent strategy

Current Strategy: How are we currently

competing? Does this strategy support

changes in the competitive structure?

Future objectivesFuture objectives

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Competitor AnalysisCompetitor Analysis

AssumptionsAssumptions

Assumptions: 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 strategyCurrent strategy

Future objectivesFuture objectives

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Competitor AnalysisCompetitor Analysis

CapabilitiesCapabilities

Capabilities: What are our strengths

and weaknesses? How do we rate compared

to our competitors?

AssumptionsAssumptions

Current strategyCurrent strategy

Future objectivesFuture objectives

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Competitor AnalysisCompetitor Analysis

ResponseResponse

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?

CapabilitiesCapabilities

AssumptionsAssumptions

Current strategyCurrent strategy

Future objectivesFuture objectives