Chapter-2 Strategic Management- External Environment

© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.All rights reserved.All rights reserved.

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Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

Seventh edition

STRATEGIC

MANAGEMENT

INPUTS

STRATEGIC

MANAGEMENT

INPUTS

Student VersionStudent Version

CHAPTER 2CHAPTER 2

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

© 2007 Thomson/South-Western. All rights reserved. 2–2

General EnvironmentGeneral Environment

• Dimensions in the broader society that influence Dimensions in the broader society that influence an industry and the firms within it:an industry and the firms within it:

DemographicDemographic

EconomicEconomic

Political/legalPolitical/legal

SocioculturalSociocultural

TechnologicalTechnological

GlobalGlobal


Industry EnvironmentIndustry Environment

• The set of factors directly influencing a firm and The set of factors directly influencing a firm and its competitive actions and competitive its competitive actions and competitive responsesresponses

Threat of new entrantsThreat of new entrants

Power of suppliersPower of suppliers

Power of buyersPower of buyers

Threat of product substitutesThreat of product substitutes

Intensity of rivalry among competitorsIntensity of rivalry among competitors


Competitor AnalysisCompetitor Analysis

• Gathering and interpreting Gathering and interpreting information about all of the information about all of the companies that the firm companies that the firm competes against.competes against.

• Understanding the firm’s Understanding the firm’s competitor environment competitor environment complements the insights complements the insights provided by studying the provided by studying the general and industry general and industry environments.environments.


Analysis of the External EnvironmentsAnalysis of the External Environments

• General environmentGeneral environment Focused on the futureFocused on the future

• Industry environmentIndustry environment Focused on factors and conditions influencing a firm’s Focused on factors and conditions influencing a firm’s

profitability within an industryprofitability within an industry

• Competitor environmentCompetitor environment Focused on predicting the dynamics of competitors’ Focused on predicting the dynamics of competitors’

actions, responses and intentionsactions, responses and intentions


Opportunities and ThreatsOpportunities and Threats

• OpportunityOpportunity

A condition in the general A condition in the general environment that, if exploited, environment that, if exploited, helps a company achieve helps a company achieve strategic competitiveness.strategic competitiveness.

• ThreatThreat

A condition in the general A condition in the general environment that may hinder a environment that may hinder a company’s efforts to achieve company’s efforts to achieve strategic competitiveness.strategic competitiveness.


Threat of New Entrants: Barriers to Threat of New Entrants: Barriers to EntryEntry• 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


Bargaining Power of SuppliersBargaining Power of Suppliers

• Supplier power increases when:Supplier power increases when: Suppliers are large and few in number.Suppliers are large and few in number.

Suitable substitute products are not available.Suitable substitute products are not available.

Individual buyers are not large customers of suppliers Individual buyers are not large customers of suppliers and there are many of them.and there are many of them.

Suppliers’ goods are critical to the buyers’ Suppliers’ goods are critical to the buyers’ marketplace success.marketplace success.

Suppliers’ products create high switching costs.Suppliers’ products create high switching costs.

Suppliers pose a threat to integrate forward into Suppliers pose a threat to integrate forward into buyers’ industry.buyers’ industry.


Bargaining Power of BuyersBargaining Power of Buyers

• Buyer power increases when:Buyer power increases when:

Buyers are large and few in number.Buyers are large and few in number.

Buyers purchase a large portion of an industry’s total Buyers purchase a large portion of an industry’s total output.output.

Buyers’ purchases are a significant portion of a Buyers’ purchases are a significant portion of a supplier’s annual revenues.supplier’s annual revenues.

Buyers’ switching costs are low.Buyers’ switching costs are low.

Buyers can pose threat to integrate backward into the Buyers can pose threat to integrate backward into the sellers’ industry.sellers’ industry.


Threat of Substitute ProductsThreat of Substitute Products

• The threat of substitute products increases The threat of substitute products increases when:when:

Buyers face few switching costs.Buyers face few switching costs.

The substitute product’s price is lower.The substitute product’s price is lower.

Substitute product’s quality and performance are Substitute product’s quality and performance are equal to or greater than the existing product.equal to or greater than the existing product.

• Differentiated industry products that are valued Differentiated industry products that are valued by customers reduce this threat.by customers reduce this threat.


Intensity of Rivalry Among CompetitorsIntensity of Rivalry Among Competitors

• Industry rivalry increases when:Industry rivalry increases when: There are numerous or equally balanced competitors.There are numerous or equally balanced competitors.

Industry growth slows or declines.Industry growth slows or declines.

There are high fixed costs or high storage costs.There are high fixed costs or high storage costs.

There is a lack of differentiation opportunities or low There is a lack of differentiation opportunities or low switching costs.switching costs.

When the strategic stakes are high.When the strategic stakes are high.

When high exit barriers prevent competitors from When high exit barriers prevent competitors from leaving the industry.leaving the industry.


Low entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

UnattractiveUnattractiveIndustryIndustry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential


Interpreting Industry Analyses (cont’d)Interpreting Industry Analyses (cont’d)

AttractiveAttractiveIndustryIndustry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential


Strategic GroupsStrategic Groups

• Strategic Group DefinedStrategic Group Defined A set of firms emphasizing similar strategic A set of firms emphasizing similar strategic

dimensions and using similar strategiesdimensions and using similar strategies• Internal competition between strategic group firms Internal competition between strategic group firms

is greater than between firms outside that strategic is greater than between firms outside that strategic group.group.

• There is more heterogeneity in the performance of There is more heterogeneity in the performance of firms within strategic groups.firms within strategic groups.

– Similar market positionsSimilar market positions– Similar productsSimilar products– Similar strategic actionsSimilar strategic actions


Strategic GroupsStrategic Groups

• Strategic DimensionsStrategic Dimensions

Extent of technological leadershipExtent of technological leadership

Product qualityProduct quality

Pricing PoliciesPricing Policies

Distribution channelsDistribution channels

Customer serviceCustomer service


Competitor AnalysisCompetitor Analysis

• Competitor IntelligenceCompetitor Intelligence The ethical gathering of needed information and data The ethical gathering of needed information and data

that provides insight into:that provides insight into:

• A competitor’s direction (A competitor’s direction (future objectivesfuture objectives))

• A competitor’s capabilities and intentions (A competitor’s capabilities and intentions (current current strategystrategy))

• A competitor’s beliefs about the industry (A competitor’s beliefs about the industry (itsits assumptionsassumptions))

• A competitor’s A competitor’s capabilitiescapabilities


ComplementorsComplementors

• ComplementorsComplementors The network of companies that sell complementary The network of companies that sell complementary

products or services or are compatible with the focal products or services or are compatible with the focal firm’s own product or service.firm’s own product or service.

• If a complementor’s product or service adds value If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it to the sale of the focal firm’s product or service, it is likely to create value for the focal firm.is likely to create value for the focal firm.

• However, if a complementor’s product or service is However, if a complementor’s product or service is in a market into which the focal firm intends to in a market into which the focal firm intends to expand, the complementor can represent a expand, the complementor can represent a formidable competitor.formidable competitor.


Ethical ConsiderationsEthical Considerations

• Practices considered both legal and ethical:Practices considered both legal and ethical: Obtaining publicly available informationObtaining publicly available information

Attending trade fairs and shows to obtain competitors’ Attending trade fairs and shows to obtain competitors’ brochures, view their exhibits, and listen to brochures, view their exhibits, and listen to discussions about their productsdiscussions about their products

• Practices considered both unethical and illegal:Practices considered both unethical and illegal: BlackmailBlackmail

TrespassingTrespassing

EavesdroppingEavesdropping

Stealing drawings, samples, or documentsStealing drawings, samples, or documents

Chapter-2 Strategic Management- External Environment

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