Chapter 2
The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
Diane M. Sullivan, Ph.D., 2011
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
Step 1in the Strategic Management Process

Collect information/
knowledge to help
you determine what
type of strategy
would be effective
and how it could best
be implemented

One starting place is
to examine the
strategic inputs
important in the I/O
model
Insert figure 1.1 graphic
A reminder:
I/O Model of
Firm Performance

I/O Model says

The industry in which a
firm chooses to
compete has a stronger
influence on firm
performance than do
the choices managers
make inside their
organizations
What’s the External Environment

External environment is composed of three major areas
1.
The General Environment

2.
The Industry Environment

3.
Deals with dimensions in the broader society that influence and industry and the firms
within it
Deals with the industry (e.g., the group of firms producing products that are close
substitutes)
The Competitor Environment

Deals with the direct, indirect and potential future competitors of the firm

Understanding the external environment is essential for firms to understand the
present and predict the future

Knowledge of the external environment and internal environment helps inform
our vision/mission, our strategy, and how we implement the strategy
External Environment:
The General Environment


Six environmental segments within the general environment
1.
Demographic
2.
Sociocultural
3.
Economic
4.
Political/legal
5.
Technological
6.
Global
Important to understand each segment and how they may impact your
selection/implementation of appropriate strategies

To develop this understanding, firms engage in external environmental analysis:

Scanning: identify early signs of changes/trends

Monitoring: use ongoing observations of the changes/trends

Forecasting: anticipate outcomes based on monitored changes/trends

Assessing: determine timing/importance of changes/trends relative to strategies
The General Environment:
Demographic

Concerned with a population’s:

Size

Age structure

Geographic distribution

Ethnic mix

Income distribution

What types of firms would need to pay special
attention to this segment?

How might they need to adjust their strategies?
The General Environment:
Sociocultural


Concerned with society’s lifestyles, attitudes, and values
These preferences often related to demographic, economic, political/legal
and technological changes
• Family/work patterns impact
• Childcare
• Scheduling
• Increasing diversity in the workplace
• Training
• Globalization of industry
• Transportation
• Taxation
• Regulatory compliance
• Online shopping
• Focus on health care and fitness
• Weight management
• Trainers
• Technology and technology adoption
• Hardware/software/training
• Websites
• Telecommuting
• New forms of entertainment
• Video games
• DVR/online entertainment
• Laser tag
• Fantasy sport teams
Sociocultural Trend:
Health Conscious Consumers
Inside Story: 10 Candy Trends
“Fueled by popularity of the Atkins diet and a health-conscious
uprising in America, products that are low in fat, carbs, sugar and
calories are hitting retail shelves at lightening speed.”
“ACNielsen reports that in 2002, diet candies grew the fastest,
claiming 23 percent of the $24 billion candy market.”
Source: Carneal (2004), American Wholesale Marketers Association
Sociocultural Trend: `Tween Market
Kiddie calls are on the horizon for the growing 'tween market
“’Tweens [ages 8-12] constitute a lucrative retail market … 23 million
members … Retail studies say this demographic is on the leading edge of the
most-consumer-oriented generation in history. They increasingly have
disposable income, and their voice now factors heavily into family purchases.”
“ … when they shop for themselves, ‘tweens ignore toys … preferring clothes,
video games and electronics.”
“ The world's No. 2 toymaker [Hasbro, Inc.] is going after the … 'tween
market with a walkie-talkie-like device that resembles a mobile phone.”
Source: St. Louis Tribune, February 12, 2005
The General Environment:
Economic
Concerned with the nature and direction of the
economy in which a firm competes
 Affects consumers level of disposable income


Evaluate who has money to spend and who’s cutting costs
and why



Interest rates
Inflation
Fuel costs
Economic Trend: Teen Affluence
•
Economic and Sociocultural Trends:
•
Last year teenage shoppers spent over $170 billion —
double the amount just 10 years earlier (ABC news, 2003).
•
Over the past five years, teen purchases … have
grown [more] than the teen population, rising from
$122 billion annually in 1997 to $170 billion last year
(The Sun Herald, 2003).
Economic Trend: Fuel Prices
Higher Gas Prices: The Next Motorcycle Sales Boom Is In
Sight
“…it’s evident we’ll see motorcycle sales continue to increase in
the coming months.”
Source: Mehren, 2004
The General Environment:
Political/Legal

Concerned with how firms try to influence government
and how government influences firms

Political action and regulatory changes

EPA laws create opportunities to start firms that help other firms
comply with environmental laws and regulations

Non-smoking legislation in Ohio and other states

Legalization of gambling in some states

Periods of war/conflict
Legal/Political Force: Legal Unrest
Source: CBSnews.com
High Condition
(Orange). A High
Condition is declared
when there is a high risk
of terrorist attacks.
Visitors wait in line to be fingerprinted
and photographed at the U.S. Customs
check point at San Francisco
International Airport in San Francisco.
Source: US Department of
Homeland Security
Legal/Political Trend:
FCC Indecency Regulations Breached
Legal Trend
FCC to investigate incident at end of halftime show
Social Trend
Howard Stern Show Taken
Off Clear Channel Stations
Whoops!
Source: CNN.com
Tuesday, February 3, 2004 Posted: 7:58 AM
Source: Clear Channel
Communications, Inc. Press Release
Wednesday February 25, 2004
The General Environment:
Technological

Concerned with institutions and activities involved with creating
new knowledge and translating knowledge into new outputs,
products, processes and materials

Basically, new technologies affect current and future business operations

Industries have emerged due to technological advances


Computer industry, Internet, biotechnology, digital photography
Then, technologies can pose the potential for firms to form new strategies
to take technology to higher level

RealNetworks was started to add video capability to the Internet

Massively Multiplayer Online Role Playing Games (MMORPG)
 EverQuest
 World of Warcraft
 Second Life
Technological Trend: Computers
Economics of MMORPGs
“…supply-and-demand market exists for virtual items … that it
crosses over with the real world. [This includes:] …
• The purchase of in-game items for real-world currency
• Exchanges of real-world currencies for virtual currencies
Source: Castronova, E. Synthetic Worlds: The Business and Culture of
Online Games. University Of Chicago Press.
The General Environment:
Global

Concerned with new global markets, existing markets
that are changing, international political events, and
critical cultural and institutional characteristics of
global markets

Global outsourcing

Transition economies

Technology creating borderless firms
Objective of Analyzing the
General Environment


Based on analyzing the segments:

Demographic

Sociocultural

Economic

Political/Legal

Technological

Global
Firms can anticipate changes and trends

Changes and trends should inform initial strategy choices and
implementation decisions

Changes and trends should be monitored by existing firms to allow them
anticipate changes in strategic decisions