HITT Chapter 03 [Compatibility Mode]

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

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The I/O Model of Above‐Average ReturnsExplains the external environment’s dominant influence on a firm’s

strategic actions.

The model specifies that the industry in which a company chooses tocompete has a stronger influence on performance than do the choicesmanagers make inside their organizations.

The firm’s performance is believed to be determined primarily by arange of industry properties, including economies of scale, barriers tomarket entry, diversification, product differentiation, and the degree ofconcentration of firms in the industry.

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The General, Industry, and Competitor Environments

General environment Composed of dimensions in the broader society that influence an industry and the firms within it

Industry environment Set of factors that directly influences a firmand its competitive actions and competitive responses: the threat of new entrants,the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competitors

Competitor analysis How companies gather and interpret information about their competitors

Figure 3.1 The External Environment

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Table 3.1 The General Environment: Segments and Elements

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Industry Environment Analysis


Economies of Scale

Barriers to Entry Capital Requirements

Product Differentiation Switching Costs

Access to Distribution Channels Cost Disadvantages Independent of Scale

Government Policy Expected Retaliation


Industry Environment Analysis: Threat of New Entrants

Bargaining Power of SuppliersIt is dominated by a few large companies and is more concentrated than the industry to which it sells.Satisfactory substitute products are not available to industry firms.Industry firms are not a significant customer for the supplier group.Suppliers’ goods are critical to buyers’ marketplace success.The effectiveness of suppliers’ products has created high switching costs for industry firms.It poses a credible threat to integrate forward into the buyers’ industry. Credibility is enhanced when suppliers have substantial resources and provide a highly differentiated product.


Bargaining Power of BuyersThey purchase a large portion of an industry’s total output.The sales of the purchased product account for a significant portion of the seller’s annual revenues.They could switch to another product at little, if any, cost.The industry’s products are undifferentiated or standardized.The buyers pose a credible threat if they were to integrate backward into the sellers’ industry.


Threat of Substitute Productsproduct substitutes present a strong threat to a firm when customers face few if any, switching costs

when the substitute product’s price is lower or its quality and performance are equal to or greater than those of the competing product.


Intensity of Rivalry among CompetitorsNumerous or Equally Balanced CompetitorsSlow Industry GrowthHigh Fixed Costs or High Storage CostsLack of Differentiation or Low Switching CostsHigh Strategic StakesHigh Exit Barriers


Interpreting Industry AnalysesStrategic Group

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

• The competitive rivalry among them can be intense. • The more intense the rivalry, the greater the threat to each

firm’s profitability.• the strengths of the five industry forces (the threats posed

by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors) differ across strategic groups.

• The closer the strategic groups are in terms of their strategies, the greater is the likelihood of rivalry between the groups.


Figure 3.4 Competitor Analysis Components


Competitor AnalysisCompetitor intelligence Set of data and information the firm

gathers to better understand and better anticipate competitors’ objectives, strategies,assumptions, and capabilities.

Complementors network of companies that sell complementary goods or services or are compatible with the focal firm’s own product or service.


HITT Chapter 03 [Compatibility Mode]

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