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

1. Chapter 3 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Robert E. Hoskisson Michael A. Hitt R. Duane Ireland ©2004 by South-Western/Thomson Learning

2. The Strategic Management Process Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Thinking Chapter 3 The External Environment Strategic Analysis Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Creating Competitive Advantage Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship

3. Sociocultural Economic Demographic Political/Legal Global Technological The External Environment Environment Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry General General Competitor Environment Environment Environment General

4. External Environmental Analysis A continuous process which includes • 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

5. External Environmental Analysis Analysis of general environment Analysis of industry environment Analysis of competitor environment The External Environment The External Environment Strategic Intent Strategic Mission

6. Sociocultural segment General Environment • Women in the workplace • Workforce diversity • Attitudes about quality of worklife • Concerns about environment • Shifts in work and career preferences • Shifts in product and service preferences

7. General Environment • Economic segment • Inflation rates • Interest rates • Trade deficits or surpluses • Budget deficits or surpluses • Personal savings rate • Business savings rates • Gross domestic product

8. Political/Legal Segment General Environment • Antitrust laws • Taxation laws • Deregulation philosophies • Labor training laws • Educational philosophies and policies

9. General Environment • Technological Segment • Product innovations • Applications of knowledge • Focus of private and government-supported R&D expenditures • New communication technologies

10. Global Segment General Environment • Important political events • Critical global markets • Newly industrialize countries • Different cultural and institutional attributes

11. General Environment • Demographic Segment • Population size • Age structure • Geographic distribution • Ethnic mix • Income distribution

12. Industry Environment • A set of factors that directly influences a company and its competitive actions and responses • Interaction among these factors determine an industry’s profit potential • Threat of new entrants • Power of suppliers • Power of buyers • Product substitutes • Intensity of rivalry

13. Five Forces Model of Competition • Identify current and potential competitors and determine which firms serve them • Conduct competitive analysis • Recognize that suppliers and buyers can become competitors • Recognize that producers of potential substitutes may become competitors

14. Five Forces Model of Competition Five Forces of Competition Rivalry Among Competing Firms Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products Bargaining Power of Buyers

15. 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

16. Bargaining Power of Suppliers • A supplier group is powerful when: • it is dominated by a few large companies • 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 • effectiveness of suppliers’ products has created high switching costs • suppliers are a credible threat to integrate forward into the buyers’ industry

17. Bargaining Power of Buyers • Buyers (customers) are powerful when: • they purchase a large portion of an industry’s total output • the sales of the product being purchased account for a significant portion of the seller’s annual revenues • they could easily switch to another product • the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry

18. Threat of Substitute Products • Product substitutes are strong threat when: • customers face few switching costs • substitute product’s price is lower • substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

19. Intensity of Rivalry • Intensity of rivalry is stronger when competitors: • are numerous or equally balanced • experience slow industry growth • have high fixed costs or high storage costs • lack differentiation or low switching costs • experience high strategic stakes • have high exit barriers

20. High Exit Barriers • Common exit barriers include: • specialized assets (assets with values linked to a particular business or location) • fixed costs of exit such as labor agreements • strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets) • emotional barriers (career concerns, loyalty to employees, etc.) • government and social restrictions

21. Strategic Groups Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry

22. Competitor Environment Competitor intelligenceis 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 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 by its capabilities

23. Future Objectives: Future objectives Competitor Analysis • How do our goals compare with our competitors’ goals? • Where will the emphasis be placed in the future? • What is the attitude toward risk?

24. Current Strategy: Future objectives Current strategy Competitor Analysis • How are we currently competing? • Does this strategy support changes in the competitive structure?

25. Assumptions: Future objectives Current strategy Assumptions Competitor Analysis • 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?

26. Capabilities: Future objectives Current strategy Assumptions Capabilities Competitor Analysis • What are our strengths and weaknesses? • How do we rate compared to our competitors?

27. Response Future objectives Current strategy Assumptions Capabilities Competitor Analysis 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?