CHAPTER

CHAPTER 22

THE
THE EXTERNAL
EXTERNAL ENVIRONMENT:
ENVIRONMENT:
OPPORTUNITIES,
OPPORTUNITIES, THREATS,
THREATS, INDUSTRY
INDUSTRY
COMPETITION,
COMPETITION, AND
AND COMPETITOR
COMPETITOR
ANALYSIS
ANALYSIS

Michael
Michael A.
A. Hitt
Hitt
R.
R. Duane
Duane Ireland
Ireland
Robert
Robert E.
E. Hoskisson
Hoskisson
©2000 South-Western College Publishing
 Chapter 2
Strategic External
Environment
The Strategic
Management
Inputs
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Process

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Feedback Above Average
Returns
Components of the General Environment
Economic

Demographic
Sociocultural

Industry Environment

Competitive
Environment

Political/Le
gal Global

Technological
Components of the General Environment
 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 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
 External Environmental Analysis
Top 10 U.S. States Moving
States in the top 10 of Toward Digital Economy
those that are trying to
transform themselves to
the realities and needs of
a digital economy may
experience an influx of
high-tech companies and
skilled workers as well as
increases in tax revenues
Porter’s Five Forces
Model of Competition
Threat of
Threat
New of New
Entrants
Entrants
 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry
Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

Expected Retaliation
 Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New
Entrants
Entrants

Bargaining
Power of
Suppliers
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers exert power
in the industry by:
Suppliers’ products have few substitutes
* Threatening to raise
prices or to reduce quality Buyer is not an important customer to supplier

Powerful suppliers
can squeeze industry Suppliers’ product is an important input to
buyers’ product
profitability if firms
are unable to recover
Suppliers’ products are differentiated
cost increases
Suppliers’ products have high switching costs

Supplier poses credible threat of forward

integration
 Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large

relative to seller’s sales Buyers compete with the
supplying industry by:
Purchase accounts for a significant fraction of
supplier’s sales

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

Buyers’ industry earns low profits * Playing firms off of

each other
Buyer presents a credible threat of backward
integration

Product unimportant to quality

Buyer has full information

 Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
 Threat of Substitute Products
Keys to evaluate substitute products:

Products with Products with improving

similar function price/performance tradeoffs relative to
limit the prices present industry products
firms can charge

Example:

Electronic security systems in place of

security guards

Fax machines in place of overnight mail

delivery
 Porter’s Five Forces
Model of Competition
Threat of
Threat of New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Suppliers Industry Buyers

Threat of
Substitute
Products
 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 the entire industry worse off

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
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
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., labor agreements)
Strategic interrelationships
Emotional barriers
Government and social restrictions
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low

Entry
Barriers

High
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable
Low
Returns
Entry
Barriers

High
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable
Low
Returns
Entry
Barriers

High
High, Stable
Returns
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable Low, Risky

Low
Returns Returns
Entry
Barriers

High
High, Stable
Returns
 Effects of Entry Barriers and Exit
Barriers on Industry Profits
Exit Barriers
Low High

Low, Stable Low, Risky

Low
Returns Returns
Entry
Barriers

High, Stable High, Risky

High
Returns Returns
 Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors

Industry Environment

Competitive
Environment
 Competitor Analysis
Assumptions
What assumptions do our competitors hold
about the future of industry and themselves?
Response
What will our competitors do
in the future?
Current Strategy
Does our current strategy support
changes in the competitive Where do we have a
environment? competitive advantage?

Future Objectives
How do our goals compare to our How will this change our
competitors’ goals? relationship with our
competition?

Capabilities
How do our capabilities compare
to our competitors?
 Competitor Analysis
Future Objectives What Drives the
How do our goals competitor?
compare to our
competitors’
Where will emphasis
goals? be
placed in the future?
What is the attitude
toward risk?
 Competitor Analysis
Future Objectives What is the competitor doing?
How do our goals What can the competitor do?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed inHow
the future?
are we currently
What is the attitude
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?
 Competitor Analysis
Future Objectives What does the competitor believe
How do our goals about itself and the industry?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does thisDo
strategy
we assume the future
support changes in the
will be volatile?
competition
What structure?
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
 Competitor Analysis
Future Objectives What are the competitor’s
How do our goals capabilities?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does this
Dostrategy
we assume the future
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitorsCapabilities
hold about the
industry and themselves?
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
 Competitor Analysis
Future Objectives Response
How do our goals What will our competitors
compare to our do in the future?
Where Current
competitors’ goals?Strategy
will emphasis be Where do we have a
placed in the future? competitive advantage?
How are we currently
What is the attitude
competing? How will this change our
toward risk? Assumptions relationship with our
Does this
Dostrategy
we assume the future competition?
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors Capabilities
hold about the
industry and themselves?
What are my competitors’
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?