The external-environment1

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

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

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

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

FIGUREFIGURE 2.12.1 The External EnvironmentThe External Environment


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


TABLETABLE 2.12.1 The General Environment: Segments and ElementsThe General Environment: Segments and Elements


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.


Industry Environment AnalysisIndustry Environment Analysis• Industry DefinedIndustry Defined

A group of firms producing products that are close A group of firms producing products that are close substitutessubstitutes• Firms that influence one another Firms that influence one another • Includes a rich mix of competitive strategies that Includes a rich mix of competitive strategies that

companies use in pursuing strategic companies use in pursuing strategic competitiveness and above-average returnscompetitiveness and above-average returns


FIGUREFIGURE 2.22.2 The Five Forces of Competition ModelThe Five Forces of Competition Model


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


Barriers to EntryBarriers to Entry• Economies of ScaleEconomies of Scale

Marginal improvements in efficiency that a firm Marginal improvements in efficiency that a firm experiences as it incrementally increases its sizeexperiences as it incrementally increases its size

• Factors (advantages and disadvantages) related Factors (advantages and disadvantages) related to large- and small-scale entryto large- and small-scale entry Flexibility in pricing and market shareFlexibility in pricing and market share Costs related to scale economiesCosts related to scale economies Competitor retaliationCompetitor retaliation


Barriers to Entry (cont’d)Barriers to Entry (cont’d)• Product differentiationProduct differentiation

Unique productsUnique products Customer loyaltyCustomer loyalty Products at competitive Products at competitive

pricesprices

• Capital RequirementsCapital Requirements Physical facilitiesPhysical facilities InventoriesInventories Marketing activitiesMarketing activities Availability of capitalAvailability of capital

• Switching CostsSwitching Costs One-time costs customers incur One-time costs customers incur

when they buy from a different when they buy from a different suppliersupplier

• New equipmentNew equipment• Retraining employeesRetraining employees• Psychic costs of ending a Psychic costs of ending a

relationshiprelationship

• Access to Distribution Access to Distribution ChannelsChannels Stocking or shelf spaceStocking or shelf space Price breaksPrice breaks Cooperative advertising Cooperative advertising

allowancesallowances


Barriers to Entry (cont’d)Barriers to Entry (cont’d)• Cost Disadvantages Cost Disadvantages

Independent of ScaleIndependent of Scale Proprietary product Proprietary product

technologytechnology Favorable access to raw Favorable access to raw

materialsmaterials Desirable locationsDesirable locations

• Government policyGovernment policy Licensing and permit Licensing and permit

requirementsrequirements Deregulation of industriesDeregulation of industries

• Expected retaliationExpected retaliation Responses by existing Responses by existing

competitors may depend competitors may depend on a firm’s present stake in on a firm’s present stake in the industry (available the industry (available business options)business options)


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.

Buyer has full information.Buyer has full information.


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 positionsStrong 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


FIGUREFIGURE 2.22.2

Competitor Competitor Analysis Analysis ComponentsComponents


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


What Are the Key Factors for What Are the Key Factors for Competitive Success?Competitive Success?

• KSFsKSFs are competitive elements that most affect are competitive elements that most affect every industry member’severy industry member’s ability to prosper in ability to prosper in the marketplacethe marketplace

Specific strategy elementsSpecific strategy elements Product attributesProduct attributes ResourcesResources CompetenciesCompetencies Competitive capabilitiesCompetitive capabilities

• KSFsKSFs spell difference betweenspell difference between Profit and lossProfit and loss Competitive success or failureCompetitive success or failure


Identifying IndustryIdentifying IndustryKey Success FactorsKey Success Factors• Answers to three questions pinpoint Answers to three questions pinpoint KSFsKSFs

On what basis do customers choose between competing On what basis do customers choose between competing brands of sellers?brands of sellers?

What must a seller do to be competitively successful -- What must a seller do to be competitively successful -- what resources and competitive capabilities does it need?what resources and competitive capabilities does it need?

What does it take for sellers to achieve a sustainable What does it take for sellers to achieve a sustainable competitive advantage?competitive advantage?

• KSFsKSFs consist of the consist of the 3 - 53 - 5 reallyreally majormajor determinants determinants of financial and competitive success in an industryof financial and competitive success in an industry


KSFs for Beer IndustryKSFs for Beer Industry• Utilization of brewing capacity -- to keep Utilization of brewing capacity -- to keep

manufacturing costs lowmanufacturing costs low• Strong network of wholesale distributors -- to Strong network of wholesale distributors -- to

gain access to retail outletsgain access to retail outlets• Clever advertising -- to induce beer drinkers Clever advertising -- to induce beer drinkers

to buy a particular brandto buy a particular brand


KSFs for Apparel Manufacturing KSFs for Apparel Manufacturing IndustryIndustry

• Fashion design -- to Fashion design -- to create buyer appealcreate buyer appeal

• Low-cost manufacturing Low-cost manufacturing efficiency -- to keep selling efficiency -- to keep selling

prices competitiveprices competitive


Example: KSFs for Tin and Example: KSFs for Tin and Aluminum Can IndustryAluminum Can Industry• Locating plants close to end-use Locating plants close to end-use

customers -- to keep costs of shipping customers -- to keep costs of shipping empty cans lowempty cans low

• Ability to market plant output within Ability to market plant output within economical shipping distanceseconomical shipping distances


Strategic Management PrincipleStrategic Management Principle

A sound strategy incorporates A sound strategy incorporates

efforts to be efforts to be competent on allcompetent on all

industry key success factors and industry key success factors and

to to excel on at least one excel on at least one factor!factor!

The external-environment1

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