Chapter 2
The External Environment: Opportunities,
Threats, and Industry Competition, and
Competitor Analysis
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2003 Southwestern Publishing Company
1
Strategic Inputs
The Strategic
Management
Process
Chapter 2
The External
Environment
Strategic Intent
Strategic Mission
Chapter 3
The Internal
Environment
Strategy Implementation
Strategic Outcomes
Strategic Actions
Strategy Formulation
Chapter 5
Chapter 4
Competitive Rivalry
Business-Level
and Competitive
Strategy
Dynamics
Chapter 7
Acquisition and
Restructuring
Strategies
Chapter 8
International
Strategy
Chapter 6
CorporateLevel Strategy
Chapter 10
Corporate
Governance
Chapter 11
Organizational
Structure and
Controls
Chapter 9
Cooperative
Strategy
Chapter 12
Strategic
Leadership
Chapter 13
Strategic
Entrepreneurship
Strategic
Competitiveness
Above-Average
Returns
Feedback
2
The External Environment
Environment
Sociocultural
Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
Competitor
Environment
Technological
General
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External Environmental Analysis
A continuous process which includes
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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 Analysis
Analysis of general environment
Analysis of industry environment
Analysis of competitor environment
The External
Environment
Strategic Intent
Strategic Mission
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General Environment

Sociocultural segment
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Women in the workplace
Workforce diversity
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences
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General Environment

Economic segment

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Inflation rates
Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic product
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General Environment

Political/Legal Segment
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Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies
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General Environment
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Technological Segment
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Product innovations
Applications of knowledge
Focus of private and government-supported
R&D expenditures
New communication technologies
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General Environment
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Global Segment
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Important political events
Critical global markets
Newly industrialize countries
Different cultural and institutional attributes
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General Environment

Demographic Segment
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Population size
Age structure
Geographic
distribution
Ethnic mix
Income distribution
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Industry Environment
A set of factors that directly influences
a company and its competitive actions
and responses.
 Interaction among these factors
determine an industry’s profit potential.
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Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
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Five Forces Model of Competition

Identify current and potential competitors
and determine which firms serve them.
 Conduct competitive analysis.
 Recognize that suppliers and buyers can
become competitors.
 Recognize that producers of potential
substitutes may become competitors.
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Five Forces Model of Competition
Five Forces of
Competition
Bargaining Power of
Buyers
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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
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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
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Bargaining Power of Buyers

Buyers (customers) are powerful
when:
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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
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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
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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
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High Exit Barriers
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Common exit barriers include:
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specialized assets (assets with values linked to
a particular business or location)
fixed costs of exit such as labor agreements
strategic interrelationships (relationships of
mutual dependence between one business and
other parts of a company’s operation, such as
shared facilities and access to financial markets)
emotional barriers (career concerns, loyalty to
employees, etc.)
government and social restrictions
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Strategic Groups
Strategic group: a group of firms in an
industry following the same or similar
strategy along the same strategic
dimensions.
The strategy followed by a strategic
group differs from strategies being
implemented by other companies in
the industry.
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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
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shown by its capabilities
Competitor Analysis
Future objectives
Future Objectives:
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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 Analysis
Future objectives
Current strategy
Current Strategy:


How are we currently
competing?
Does this strategy support
changes in the competitive
structure?
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Competitor Analysis
Future objectives
Assumptions:

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Current strategy

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?
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Competitor Analysis
Future objectives
Current strategy
Capabilities:
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
What are our strengths
and weaknesses?
How do we rate compared
to our competitors?
Assumptions
Capabilities
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Competitor Analysis
Future objectives
Current strategy
Assumptions
Response
Response:
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

Capabilities
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?
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