1. The External Environment: 0
Opportunities, Threats,
Industry Competition and
Competitor Analysis
Chapter Three
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2. Chapter 3
External The Strategic
Strategic
.
Inputs
Environment Strat. Intent
Chapter 4 Strat. Mission Management .
Internal
Environment Process
Strategy Formulation Strategy Implementation
Strategic Actions
Chapter 5 Chapter 6 Chapter 7 Chapter 11 Chapter 12
Bus. - Level Competitive Corp. - Level Corporate Structure
Strategy Dynamics Strategy Governance & Control
Chapter 8 Chapter 9 Chapter 10 Chapter 13 Chapter 14
Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic
Chapter 2 Chapter 1 Feedback
Above Average Strategic
Returns Competitiveness
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3. The External Environment: Opportunities,
Threats, Industry Competition and Competitor
Analysis
Knowledge Objectives
1. Explain the importance of analyzing and
understanding the firm’s external environment.
2. Defining and describing the general
environment and the industry environment.
3. Discuss the four activities of the external
environmental analysis process.
4. Name and describe the general environment’s
six segments.
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4. The External Environment: Opportunities,
Threats, Industry Competition and Competitor
Analysis
Knowledge Objectives – continued…
5. Identifying five competitive forces and
how they determine an industry’s profit potential.
6. Define strategic groups and their influence on
the firm.
7. Describe what firms need to know about their
competitors and different methods used to
collect intelligence about them.
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5. The External Environment
Environment
Sociocultural
al
Ge nomiic
ic
ner Industry
ph
Ec
Eco
n era
gr a Environment
ono
Ge
Threat of new entrants
mo
l
m
Power of suppliers
De
c
Power of buyers
Product substitutes
Intensity of rivalry
l
ga
nt
En
/Le
Competitor
Gll
Go
e
vir
nm
ca l
oba
Environment
bal
li ti
on
l
o
vi r
Po
me
En
nt
Technological
General
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6. General Environment Components
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7. General Environment Components
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8. The Industry Environment
The set of factors that directly influences a firm, it’s
competitive actions & competitive responses:
2. The threat of new entrants
3. The power of suppliers
4. The power of buyers
5. The threat of product substitutes
6. The intensity of rivalry among competitors
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9. Competitor Analysis
Predicting the dynamics of competitor actions,
responses and intentions.
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10. The I/O Model of Superior Returns
The Industrial Organization Model suggests
that above-average returns for any firm are
largely determined by characteristics outside
the firm.
I
O
The I/O model largely focuses on
industry attractiveness or structure of the
external environment rather than internal
characteristics of the firm.
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11. The I/O Model of Superior Returns
Action required:
Study the external
External
environment,
Environment
especially the
General Environment industry environment.
Industry Environment
Competitive
Environment
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*
an

12. The I/O Model of Superior Returns
Action required:
Locate an industry with
External
An Attractive high potential for
Environment
Industry above-average returns.
General Environment
Industry Environment
An industry whose
Competitive characteristics
structural
Environment above-average
suggest
returns are possible
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*
an

13. The I/O Model of Superior Returns
Action required:
I.d. strategy called for
External
by the industry to earn
Environment
An Attractive above-average returns.
Industry
General Environment
Strategy
Industry industry whose
An Environment
Formulation
Competitive Selection of a strategy
structural characteristics
Environment above-average
suggest linked with above-
returns are possible
average returns in a
particular industry
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*
an

14. The I/O Model of Superior Returns
Action required:
Develop / acquire assets
External
and skills needed to
Environment
An Attractive implement the strategy.
Industry Strategy
General Environment
Industry industry whose
An Environment
Formulation and Skills
Assets
Competitive
structural characteristicsstrategy
Selection of a
Environment above-average
suggest linked with above- skills
Assets and
returns areaverage returns into
possiblerequired a
particular industry a chosen
implement
strategy
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an

15. The I/O Model of Superior Returns
Action required:
Use the firm’s strengths
External
(its assets or skills) to
Environment
An Attractive implement the strategy.
Industry Strategy
General Environment
Industry Environment
Formulation
An industry whose Assets and Skills
Competitive
structural characteristicsstrategy
Selection of a
Environment above-average
Strategy
suggest linked with above- skills
Assets and
possiblerequired Implementation
returns areaverage returns into a
particular industry a chosen
implementSelecting strategic actions
strategylinked with effective
implementation of the
chosen strategy
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an

16. The I/O Model of Superior Returns
Action required:
Maintain selected
External
strategy in order to out-
Environment
An Attractive perform industry rivals.
Industry Strategy
General Environment
Industry industry whose
An Environment
Formulation and Skills
Assets
Competitive
structural characteristicsstrategy
Selection of a
Environment above-average
Strategy
suggest linked with above- skills
Assets and
possiblerequired Implementation
returns areaverage returns into a Superior
particular industry a chosen
implement Returns
Selecting strategic actions
strategylinked withEarning of above-
effective
implementation of the
average returns
chosen strategy
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17. External Environmental Analysis
The external environmental analysis process
should be conducted on a continuous basis.
This process includes four activities:
 Scanning Identifying early signals of environmental
changes and trends
 Monitoring Detect meaning by ongoing observations of
environmental changes and trends
 Forecasting Developing projections of anticipated
outcomes based on monitored changes and
trends
 Assessing Determining the timing & importance of
environmental changes and trends for
firms' strategies & their management
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18. Porter’s 5 Forces Model of Competition
Threat
Threat of
ofNew
New
Entrants
Entrants
The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved.
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19. Threat of New Entrants
Economies of Scale
*
Barriers
Barriers * Product Differentiation
to to Entry
Entry * Capital Requirements
* Switching Costs
Access to Distribution Channels
*
Cost Disadvantages Independent of Scale
*
Government Policy
*
* Expected Retaliation
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20. Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
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*

21. Bargaining Power of Suppliers 0
Suppliers are likely to be powerful if:
Suppliers exert Supplier industry is dominated by a few
*
power in the firms.
industry by:
* Suppliers’ products have few
* Threatening to raise substitutes.
prices or to reduce * Buyer is not an important customer to
quality supplier.
Powerful suppliers * Suppliers’ product is an important
can squeeze industry input to buyers’ product.
profitability if firms
are unable to * Suppliers’ products are differentiated.
recover cost * Suppliers’ products have high
increases switching costs.
* Supplier poses credible threat of
forward integration.
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*

22. Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
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*

23. Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
* Buyers are concentrated or purchases are
large relative to seller’s sales
* Purchase accounts for a significant Buyers compete
fraction of supplier’s sales with supplying
* Products are undifferentiated industry by:
* Buyers face few switching costs
* Bargaining down prices
* Buyers’ industry earns low profits
* Forcing higher quality
* Buyer presents a credible threat of
backward integration
* Playing firms off of
each other
* Product unimportant to quality
* Buyer has full information
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24. Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
Threat of
Substitute
Products
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*

25. Threat of Substitute Products
Keys to evaluating substitute products:
Products with improving price /
* performance tradeoffs relative to
Products
present industry products
with similar
function
limit the For Example:
prices firms Electronic security systems in
can charge place of security guards
Fax machines or e-mailed
attachments in place of
overnight mail delivery
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26. Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Bargaining
Rivalry Among Competing
Power of Power of
Firms in Industry
Suppliers Buyers
Threat of
Substitute
Products
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*

27. Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways
* Jockeying for strategic position
* Using price competition
* Staging advertising battles
* Increasing consumer warranties or service
* Making new product introductions
Occurs when a firm is pressured or sees an opportunity
* Price competition often leaves entire industry worse off
* Advertising battles may increase total industry
demand, but may be costly to smaller competitors
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28. Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when
* Numerous or equally balanced competitors
* Slow growth industry
* High fixed costs
* High storage costs
* Lack of differentiation or switching costs
* Capacity added in large increments
* Diverse competitors
* High strategic stakes
High exit barriers
*
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29. Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic and
emotional factors which cause companies to
remain in an industry even when future profitability
is questionable.
Specialized assets
*
* Fixed cost of exit (e.g., labour agreements)
* Strategic interrelationships
* Emotional barriers
* Government and social restrictions
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30. Strategic Groups
A set of firms emphasizing similar strategic
dimensions to use a similar strategy
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31. Strategic Groups
• The more intense the rivalry of competitors
within a group the greater the threat to each
firms profitability.
• The strengths of the 5 competitive forces differ
across strategic groups. Thus firms within
various strategic groups have different pricing
policies.
• The closer groups are in terms of their
strategies & dimensions emphasized, the
greater the chance competitive rivalry between
groups.
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32. 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 shown
by its capabilities.
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33. Competitor Analysis
Future Objectives:
Future 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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34. Competitor Analysis
Current Strategy:
Future objectives
• How are we currently
competing?
Current strategy • Does this strategy support
changes in the competitive
structure?
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35. Competitor Analysis
Assumptions:
Future objectives
• Do we assume the future will
be volatile?
• Are we operating under a
Current strategy
status quo?
• What assumptions do our
Assumptions competitors hold about the
industry and themselves?
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36. Competitor Analysis
Capabilities:
Future objectives
• What are our strengths and
weaknesses?
Current strategy • How do we rate compared to
our competitors?
Assumptions
Capabilities
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37. Competitor Analysis
Future objectives Response
Response:
Current strategy • What will our competitors do
in the future?
• Where do we hold an
Assumptions advantage over our
competitors?
• How will this change our
Capabilities relationship with our
competitors?
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