The External Environment

Hitt - Chapter 2

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 Analysis of the External Environments

• General environment
– Focused on the future
• Industry environment
– Focused on factors and conditions influencing
a firm’s profitability within an industry
• Competitor environment
– Focused on predicting the dynamics of
competitors’ actions, responses and intentions

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 Opportunities and Threats
• Opportunity
– A condition in the general environment that if
exploited, helps a company achieve strategic
competitiveness
• Threat
– A condition in the general environment that
may hinder a company’s efforts to achieve
strategic competitiveness

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General Environment (cont’d)
• The Economic
Segment
– Inflation rates
– Interest rates
– Trade deficits or
surpluses
– Budget deficits or
surpluses
– Personal savings rate
– Business savings rates
– Gross domestic product

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General Environment (cont’d)
• The Sociocultural
Segment
– 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
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General Environment (cont’d)
• The Global Segment
– Product innovations
– Applications of
knowledge
– Focus of private and
government-supported
R&D expenditures
– New communication
technologies

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General Environment (cont’d)
• The Technological
Segment
– Product innovations
– Applications of
knowledge
– Focus of private and
government-supported
R&D expenditures
– New communication
technologies

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General Environment (cont’d)
• The Political/Legal
Segment
– Antitrust laws
– Taxation laws
– Deregulation
philosophies
– Labor training laws
– Educational philosophies
and policies

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General Environment
• The Demographic
Segment
– Population size
– Age structure
– Geographic
distribution
– Ethnic mix
– Income distribution

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 The Industry Environment

• Industry Defined
– A 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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Porter’s Five Forces of
Competition 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 Scale
– Marginal 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 (cont’d)

• Product • Capital
differentiation Requirements
– Unique products – Physical facilities
– Customer loyalty – Inventories
– Products at – Marketing activities
competitive prices – Availability of
capital

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 Barriers to Entry (cont’d)

• Switching Costs
– One-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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 Barriers to Entry (cont’d)

• Access to Distribution Channels

– Stocking or shelf space
– Price breaks
– Cooperative advertising allowances
• Cost Disadvantages Independent of Scale
– Proprietary product technology
– Favorable access to raw materials
– Desirable locations
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 Barriers to Entry (cont’d)

• Cost disadvantages independent of scale

– Proprietary product technology
– Favorable access to raw materials
– Desirable locations
• Government policy
– Licensing and permit requirements
– Deregulation of industries

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 Barriers to Entry (cont’d)

• Expected retaliation
– Responses by existing competitors may
depend on a firm’s 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 in number
– Suitable substitute products are not
available
– Individual buyers are not large customers of
suppliers and there are many of them
– Suppliers’ goods are critical to buyers’ marketplace
success
– Suppliers’ products create high switching costs.
– Suppliers pose a threat to integrate forward into
buyers’ industry

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 Threat of Substitute Products
• The threat of substitute products
increases when:
– Buyers face few switching costs
– The substitute product’s price is lower
– Substitute product’s quality and performance are
equal to or greater than the existing product
• Differentiated industry products that are valued
by customers 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 declines
– There are high fixed costs or high
storage costs
– There is a lack of differentiation
opportunities or low switching costs
– When the strategic stakes are high
– When high exit barriers prevent
competitors from leaving the
industry
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 Interpreting Industry Analyses

Low entry barriers

Suppliers and buyers

have strong positions All suggest
an:
Strong threats from Unattractive
substitute products
Industry
Intense rivalry
Low profit potential
among competitors

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 Interpreting Industry Analyses

High entry barriers

Suppliers and buyers

have weak positions All suggest
an:
Few threats from Attractive
substitute products
Industry
Moderate rivalry
With high profit
among competitors
potential

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 Strategic Groups Defined

• A set of firms emphasizing similar strategic

dimensions and using similar strategies
– Internal competition between strategic group
firms is greater than between firms outside
that strategic group
– There is more heterogeneity in the
performance of firms within strategic groups

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 Strategic Groups

• Strategic Dimensions
– Extent of technological leadership
– Product quality
– Pricing Policies
– Distribution channels
– Customer service

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 Competitor Analysis
• Competitor (a.k.a. CI) Intelligence
– The ethical gathering of needed information
and data that provides insight into:
• A competitor’s direction (future
objectives)
• A competitor’s capabilities and
intentions (current strategy)
• A competitor’s beliefs about the industry
(its assumptions)
• A competitor’s capabilities

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 Components of
Competitor Analysis

Figure 2.3

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