Ch02 Hitt Lecture

7/30/2019 Ch02 Hitt Lecture

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PowerPoint slides by:

R. Dennis MiddlemistColorado State University

Copyright 2004 South-Western

All rights reserved.

Chapter 2

The ExternalEnvironment


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Copyright 2004 South-Western. All rights reserved. 22

Knowledge Objectives

Studying this chapter should provide you with thestrategic management knowledge needed to:

Explain the importance of analyzing and understanding thefirms external environment.

Define and describe the general environment and theindustry environment.

Discuss the four activities of the external environmentalanalysis process.

Name and describe the general environments sixsegments.

Identify the five competitive forces and explain how theydetermine an industrys profit potential.


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Knowledge Objectives (contd)

Studying this chapter should provide you with thestrategic management knowledge needed to:

Define strategic groups and describe their influence on thefirm.

Describe what firms need to know about their competitorsand different methods used to collect intelligence aboutthem.


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Figure 1.1

Copyright 2004 South-Western. All rights reserved.

The StrategicManagement

Process


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The ExternalEnvironment

Figure 2.1


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General Environment

Dimensions in the broader society thatinfluence and industry and the firms within it

Economic

Sociocultural

Global

Technological

Political/legal

Demographic


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Industry Environment

Set of factors directly influencing a firm andits competitive actions and competitiveresponses

Threat of new entrants

Power of suppliers

Power of buyers

Threat of product

substitutes Intensity of rivalry

among competitors


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Competitor Environment

All of the companies that the firm competesagainst.


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Analysis of the External Environments

General environmentFocused on the future

Industry environment

Focused on factors and conditions influencing afirms profitability within an industry

Competitor environment

Focused on predicting the dynamics of

competitors actions, responses and intentions


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Opportunities and Threats

OpportunityA condition in the general environment that if

exploited, helps a company achieve strategiccompetitiveness

ThreatA condition in the general environment that may

hinder a companys efforts to achieve strategic

competitiveness


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External Environmental Analysis

A continuous process which includes

Scanningfor early signals of potentialchanges and trends in the general environment

Monitoringchanges to see if a trend emergesfrom among those spotted by scanning

Forecastingprojections of outcomes based onmonitored changes and trends

Assessingthe timing and significance ofchanges and trends on the strategicmanagement of the firm


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Components of the External Environmental Analysis

Table 2.2


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General Environment (contd)

The Economic Segment Inflation rates

Interest rates

Trade deficits orsurpluses

Budget deficits orsurpluses

Personal savings rate

Business savings rates

Gross domesticproduct


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The Sociocultural SegmentWomen in the workplace

Workforce diversity

Attitudes about qualityof worklife

Concerns aboutenvironment

Shifts in work andcareer preferences

Shifts in product andservice preferences


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The Global Segment

Product innovations

Applications ofknowledge

Focus of private andgovernment-supportedR&D expenditures

New communicationtechnologies


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The TechnologicalSegment

Product innovations

Applications ofknowledge

Focus of private andgovernment-supportedR&D expenditures

New communicationtechnologies


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The Political/LegalSegment

Antitrust laws

Taxation laws

Deregulationphilosophies

Labor training laws

Educationalphilosophies andpolicies


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General Environment

The DemographicSegment

Population size

Age structure

Geographicdistribution

Ethnic mix

Income distribution


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Industry Environment

Industry DefinedA group of firms producing products that are

close substitutes

Firms that influence one another

Includes a rich mix of competitive strategies that

companies use in pursuing strategic

competitiveness and above-average returns


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The Five Forces ofCompetition Model

Figure 2.2


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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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Barriers to Entry

Economies of ScaleMarginal improvements in efficiency that a firm

experiences as it incrementally increases its size

Advantages and disadvantages of large-scale and small-scale entry


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Barriers to Entry (contd)

Productdifferentiation

Unique products

Customer loyalty

Products atcompetitive prices

CapitalRequirements

Physical facilities

Inventories

Marketing activities

Availability of capital


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Switching CostsOne-time costs customers incur when they buy

from a different supplier

New equipment

Retraining employees

Psychic costs of ending a relationship


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Access to Distribution ChannelsStocking or shelf space

Price breaks

Cooperative advertising allowances

Cost Disadvantages Independent of Scale

Proprietary product technology

Favorable access to raw materialsDesirable locations


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Cost disadvantages independent of scaleProprietary product technology

Favorable access to raw materials

Desirable locations

Government policy

Licensing and permit requirements

Deregulation of industries


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Expected retaliationResponses by existing competitors may depend

on a firms present stake in the industry

(available business options)


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Bargaining Power of Suppliers

Supplier power increases when:

Suppliers are large and few innumber

Suitable substitute products arenot available

Individual buyers are not largecustomers of suppliers and there are many ofthem

Suppliers goods are critical to buyers

marketplace success

Suppliers products create high switching costs.

Suppliers pose a threat to integrate forward intobuyers industry


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Bargaining Power of Buyers

Buyer power increase when:Buyers are large and few in

number

Buyers purchase a large portion

of an industrys total outputBuyers purchases are a significant

portion of a suppliers annual revenues

Buyers can switch to another product without

incurring high switching costsBuyers pose threat to integrate backward into the

sellers industry


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Threat of Substitute Products

The threat of substitute productsincreases when:

Buyers face few switching costs

The substitute products price is

lower

Substitute products quality and performance are

equal to or greater than the existing product

Differentiated industry products that are valued bycustomers reduce this threat


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Intensity of Rivalry Among Competitors

Industry rivalry increases when:There are numerous or equally

balanced competitors

Industry growth slows or

declinesThere are high fixed costs or high

storage costs

There is a lack of differentiation opportunities or

low switching costsWhen the strategic stakes are high

When high exit barriers prevent competitors fromleaving the industry


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Low entry barriers

Interpreting Industry Analyses

UnattractiveIndustry

Suppliers and buyershave strong positions

Strong threats fromsubstitute products

Intense rivalryamong competitors

Low profit potential


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AttractiveIndustry

High entry barriers

Interpreting Industry Analyses

Suppliers and buyershave weak positions

Few threats fromsubstitute products

Moderate rivalryamong competitors

High profit potential


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Strategic Groups Defined

A set of firms emphasizing similar strategicdimensions and using similar strategies

Internal competition between strategic groupfirms is greater than between firms outside that

strategic groupThere is more heterogeneity in the performance

of firms within strategic groups


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Strategic Groups

Strategic DimensionsExtent of technological leadership

Product quality

Pricing PoliciesDistribution channels

Customer service


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Competitor Analysis

Competitor IntelligenceThe ethical gathering of needed information and

data that provides insight into:

A competitors direction (future objectives)

A competitors capabilities and intentions

(current strategy)

A competitors beliefs about the industry (its

assumptions)A competitors capabilities

Ch02 Hitt Lecture

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