Chapter 3

© 2006 by Nelson, a division of Thomson Canada Limited. 3-1

The External Environment: Opportunities, Threats,

Industry Competition and Competitor Analysis

Chapter Three


Chapter 5Bus. - Level

Strategy

Chapter 6Competitive

Dynamics

Chapter 7Corp. - Level

Strategy

Chapter 9International

Strategy

Chapter 10CooperativeStrategies

Chapter 8Acquisitions &Restructuring

Chapter 11

CorporateGovernance

Chapter 12Structure& Control

Chapter 13Strategic

Leadership

Chapter 14Entrepreneurship & Innovation

Str

ateg

icIn

pu

ts

Str

ateg

icA

ctio

ns

Str

ateg

ic O

utc

om

esChapter 4Internal

Environment

Chapter 3External

Environment Strat. Intent

Strat. Mission

The Strategic .

Management .

Process

Strategy Formulation Strategy Implementation

Strategic Competitiveness

Chapter 1 FeedbackFeedback

Above Average Returns

Chapter 2Above Average

Returns

Chapter 2

Chapter 3External

Environment


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

Analysis

Knowledge Objectives1. 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.


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.


General

Environment

General

Environment

General

Environm

ent

SocioculturalSociocultural

GlobalGlobal

TechnologicalTechnologicalPolitical/Legal

Political/Legal

Demographic

Demographic E

conomic

Econom

ic

The 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


General Environment Components


General Environment Components


The Industry Environment

The set of factors that directly influences a firm, it’s competitive actions & competitive responses:

1. The threat of new entrants

2. The power of suppliers

3. The power of buyers

4. The threat of product substitutes

5. The intensity of rivalry among competitors


Competitor Analysis

Predicting the dynamics of competitor actions, responses and intentions.


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.

The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm. IOIO



External Environment

Competitive Environment

General Environment

Industry Environment

an *

Action required:

Study the external environment, especially the industry environment.


The I/O Model of Superior ReturnsAction required:Action required:Locate an industry with high potential for above-average returns.


General Environment



An Attractive Industry

An industry whose structural characteristics suggest above-average returns are possible

an *




General Environment





Action required:Action required:I.d. strategy called for by the industry to earn above-average returns.

Selection of a strategy linked with above-average returns in a particular industry

StrategyFormulation

an *




General Environment



Action required:Action required:Develop / acquire assets and skills needed to implement the strategy.An Attractive

Industry



StrategyFormulationAssets and Skills

Assets and skills required to implement a chosen strategy

an *




General Environment








Action required:Action required:Use the firm’s strengths (its assets or skills) to implement the strategy.

Strategy Implementation

Selecting strategic actions linked with effective implementation of the chosen strategy

an *




General Environment








Strategy Implementation

Selecting strategic actions linked with effective implementation of the chosen strategy

Action required:Action required:Maintain selected strategy in order to out-perform industry rivals.

Superior ReturnsEarning of above-average returns

an *


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

External Environmental Analysis


Porter’s 5 Forces Model of Competition

The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved.

Threat of New Entrants

Threat of New

Entrants


Product Differentiation** Capital Requirements**

Switching Costs**Access to Distribution Channels**

Cost Disadvantages Independent of Scale** Government Policy**

Expected Retaliation**

Economies of Scale**Barriers to Entry

Barriers to Entry

Threat of New Entrants

*


Threat of New

Entrants

Threat of New

Entrants


Bargaining Power of Suppliers

*


** Supplier industry is dominated by a few firms.

** Buyer is not an important customer to supplier.

** Suppliers’ product is an important input to buyers’ product.

** Suppliers’ products are differentiated.

Suppliers are likely to be powerful if:

** Suppliers’ products have high switching costs.

** Supplier poses credible threat of forward integration.

Suppliers exert power in the industry by:

** Threatening to raise prices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers’ products have few substitutes.

**


*


Threat of New

Entrants

Threat of New

Entrants



Bargaining Power of Buyers

*


** Playing firms off ofeach other

Buyers compete with supplying

industry by:

** Bargaining down prices

** Forcing higher quality

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 fraction of supplier’s sales

** Products are undifferentiated

** Buyers face few switching costs

** Buyers’ industry earns low profits

** Buyer presents a credible threat of backward integration

** Product unimportant to quality

** Buyer has full information



Threat of Substitute Products


Threat of New

Entrants

Threat of New

Entrants



*


Products with similar function limit the prices firms can charge

** Products with improving price / performance tradeoffs relative to present industry products

Keys to evaluating substitute products:

For Example:For Example:

Electronic security systems in place of security guards

Fax machines or e-mailed attachments in place of overnight mail delivery



Threat of New

Entrants


Threat of New

Entrants




Rivalry Among Competing Firms in Industry

*


Occurs when a firm is pressured or sees an opportunity

** Price competition often leaves entire industry worse off

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**

Advertising battles may increase total industry demand, but may be costly to smaller competitors

**

Rivalry Among Existing Competitors


Cutthroat competition is more likely to occur when

** Numerous or equally balanced competitors

** Slow growth industry

** High fixed costs

** Lack of differentiation or switching costs** High storage costs

** Capacity added in large increments

** High strategic stakes

**High exit barriers

** Diverse competitors



** Specialized assets

High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.

Fixed cost of exit (e.g., labour agreements)**Strategic interrelationships**Emotional barriers**Government and social restrictions**



Strategic Groups

A set of firms emphasizing similar strategic dimensions to use a similar strategy


Strategic Groups

1. The more intense the rivalry of competitors within a group the greater the threat to each firms profitability.

2. The strengths of the 5 competitive forces differ across strategic groups. Thus firms within various strategic groups have different pricing policies.

3. The closer groups are in terms of their strategies & dimensions emphasized, the greater the chance competitive rivalry between groups.


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 What the competitor is doing and can do as revealed by its 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 What the the competitor may be able to do, as shown by its by its capabilities.


Competitor 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?


Competitor Analysis

Current strategyCurrent strategy

Current Strategy:Future objectivesFuture objectives

• How are we currently competing?

• Does this strategy support changes in the competitive structure?


Competitor Analysis

AssumptionsAssumptions


Future objectivesFuture objectivesAssumptions:• 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?


Competitor Analysis

CapabilitiesCapabilities



Future objectivesFuture objectivesCapabilities:• What are our strengths and

weaknesses?

• How do we rate compared to our competitors?


Competitor Analysis

CapabilitiesCapabilities



Future objectivesFuture objectives 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?

Chapter 3

Business

division of thomson

industry competition

externalexternal environment

firms external environment

industry attractiveness

aparticular industry

industry environmentthe

general environment