HCAD 5390
The External Environment:
Opportunities, Threats, Industry
Competition, and Competitor Analysis
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The External
Environment
Environment
Economic
Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
Competitor
Environment
Technological
General
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External Environmental Analysis
A continuous process which includes
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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
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External Environmental Analysis
Analysis of general environment
Analysis of industry environment
Analysis of competitor environment
The External
Environment
Strategic Intent
Strategic Mission
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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
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Threat of new entrants
Power of suppliers
Power of buyers
 Product substitutes
 Intensity of rivalry
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Analyzing Industry Environment
• Opportunities and threats are competitive
challenges arising for changes in industry
conditions.
• Analytic tools such as the
five forces model help
managers formulate
appropriate strategic
responses.
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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
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Five Forces Model of
Competition
Five Forces of
Competition
Bargaining Power of
Buyers
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Potential Competitors
•New entrants into an industry threaten
incumbent companies.
•Entry barriers reduce the threat
of new and additional competition.
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Threat of New Entrants
• Barriers to entry
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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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Rivalry Among Established
Companies
• The intensity of competitive rivalry in an
industry arises from:
– Industry’s competitive structure.
– Demand (growth or decline) conditions in
industry.
– Height of industry exit barriers.
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Rivalry Among
Established Companies
Industry Competitive Structure
Fragmented
Consolidated
Many firms.
No dominant
firm
One firm or one
dominant firm.
(monopoly)
Few firms,
Shared
dominance
(Oligopoly)
The Continuum of Industry Structures
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Rivalry Among Established
Companies (Continued)
Demand Conditions
vs.
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Rivalry Among Established
Companies (Continued)
Height of Exit
Barriers in the
Industry
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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
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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
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into the buyers’ industry
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
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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
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Substitute Products
• The competitive threat of substitute products
increases as they come closer to serving similar
customer needs.
Far
Close
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A Sixth Force: Complementors
• Complementors:
– Companies whose products are sold in tandem with
another company’s products.
– Increased supply of a complementary product
collaterally increases demand for the primary product.
• Example:
– Faster CPU chips fuel sales
of personal computers.
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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
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Strategic Groups Within
Industries
•The concept of strategic groups
– Within an industry, a competitor grouping using similar
strategies that differ from other industry groups.
•Implications of strategic groups
– The closest industry competitors are those in the
group.
– The various industry groups are differentially and
competitively advantaged and positioned.
– Mobility barriers inhibit the movement of competitors
from one strategic group to another.
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Strategic Groups in the Pharmaceutical
Industry
Prices Charged
High
Low
Low
R&D Spending
High
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Strategic Groups in the Pharmaceutical
Industry
Prices Charged
High
• Marion Labs
• Carter Wallace
• INC Pharmaceut’l
Generic
Group
Low
Low
R&D Spending
High
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Strategic Groups in the Pharmaceutical
Industry
High
Prices Charged
Proprietary
Group
• Marion Labs
• Carter Wallace
• INC Pharmaceut’l
• Merck
• Pfizer
• Eli Lilly
Generic
Group
Low
Low
R&D Spending
High
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Limitations of the Five Forces and
Strategic Group Models
•Both models are static and ignore innovation.
•Their focus is on industry and group structures
rather than individual companies.
– Innovation creates change in
industry structures, altering the
competitive environment.
– Industry structure cannot
fully explain the performance
differences between industry
competitors.
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Competitor Environment
Competitor intelligence is 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
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by its capabilities
Competitor Analysis
Future Objectives:
Future objectives
• How do our goals compare
with our competitors’ goals?
• Where will the emphasis be
placed in the future?
• What is the attitude toward
risk?
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Competitor Analysis
Current Strategy:
Future objectives
Current strategy
• How are we currently
competing?
• Does this strategy support
changes in the competitive
structure?
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Competitor Analysis
Assumptions:
Future objectives
Current strategy
Assumptions
• 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?
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Competitor Analysis
Capabilities:
Future objectives
Current strategy
• What are our strengths and
weaknesses?
• How do we rate compared to
our competitors?
Assumptions
Capabilities
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Competitor Analysis
Future objectives
Response
Response:
Current strategy
Assumptions
Capabilities
• 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?
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The Role of the General Environment
Potential
competitors
Supplier
power
Rivalry
Substitutes
Buyer
power
Economic
Environment
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General Environment
• Economic segment
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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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The Role of the General Environment
Technological
Environment
Potential
competitors
Supplier
power
Rivalry
Substitutes
Buyer
power
Economic
Environment
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General Environment
• Technological Segment
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Product innovations
Applications of knowledge
Focus of private and government-supported
R&D expenditures
New communication technologies
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The Role of the General Environment
Technological
Environment
Potential
competitors
Supplier
power
Rivalry
Substitutes
Social Environment
Buyer
power
Economic
Environment
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General Environment
• Sociocultural segment
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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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The Role of the General Environment
Technological
Environment
Potential
competitors
Supplier
power
Demographic
Environment
Social Environment
Rivalry
Substitutes
Buyer
power
Economic
Environment
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General Environment
• Demographic Segment
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Population size
Age structure
Geographic
distribution
Ethnic mix
Income distribution
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The Role of the General Environment
Political and Legal
Environment
Supplier
power
Demographic
Environment
Social Environment
Technological
Environment
Potential
competitors
Rivalry
Substitutes
Buyer
power
Economic
Environment
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General Environment
• Political/Legal Segment
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Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies
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The Role of the General Environment
Political and Legal
Environment
Global
Environment
Supplier
power
Demographic
Environment
Social Environment
Technological
Environment
Potential
competitors
Rivalry
Substitutes
Buyer
power
Economic
Environment
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General Environment
• Global Segment
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Important political events
Critical global markets
Newly industrialize countries
Different cultural and institutional attributes
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Globalization and Industry
Structure
Globalization
of Markets
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Globalization and Industry
Structure
• Globalization
– Globally dispersed production lowers
costs and increases quality.
– Global markets are replacing
national markets.
• Trend implications
– No isolated national markets
– More competitors, more intense competition
– More rapid innovation and shorter product life cycles
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Competitive Changes During
Industry Evolution
Demand
Stages of the Industry Life Cycle
Embryonic
Time
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Competitive Changes During
Industry Evolution (Continued)
Demand
Stages of the Industry Life Cycle
Embryonic
Growth
Time
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Competitive Changes During
Industry Evolution (Continued)
Demand
Stages of the Industry Life Cycle
Embryonic
Growth
Shakeout
Time
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Competitive Changes During
Industry Evolution (Continued)
Growth in Demand and Capacity
Capacity
Excess
Capacity
Units
Demand
t1
t2
Time
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Competitive Changes During
Industry Evolution (Continued)
Demand
Stages of the Industry Life Cycle
Embryonic
Growth
Shakeout
Time
Maturity
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Competitive Changes During
Industry Evolution (Continued)
Demand
Stages of the Industry Life Cycle
Embryonic
Growth
Shakeout
Time
Maturity
Decline
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Strategies in Fragmented
Industries
• Fragmented industry characteristics:
– Localized markets with low entry
barriers (e.g., Mom’s Diner).
– Few economies of scale
opportunities exist.
– High transportation costs
(e.g., sand) for products.
– Focus strategies predominate
(e.g., customer group, region).
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Strategies in Fragmented
Industries
• Competing in fragmented industries
requires strategic consolidation by:
– Chaining (Wal-Mart)
– Franchising (Pearl Vision)
– Horizontal mergers
– Using the Internet (Lens.com)
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Strategies in Embryonic and
Growth Industries
• Three strategies for an innovator
competing in a newly emerging
market/industry:
– Develop and market the technology itself.
– Develop and market the technology jointly with
another company through a strategic alliance.
– License the technology to existing companies and let
them develop the market.
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Strategies in Embryonic and
Growth Industries
• An innovator’s optimal choice of growth
industry strategy depends on:
– Complementary assets the innovator has that
can be used to exploit and market the
innovation.
– High barriers to imitation by competitors (e.g.,
patents).
– The capability of competitors to quickly imitate
the pioneering company.
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Strategy in Embryonic and
Growth Industries (Continued)
Strategies Available to Innovator:
• Develop and Market the Innovation
Itself
• Develop and Market the Innovation
Jointly
• License the Innovation to Others
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Strategy in Mature
Industries
 Mature
Industries
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Strategies to Manage Rivalry in
Mature Industries
• Price leadership
– One company sets the industry price; other competitors
reference their prices to that price.
• Nonprice competition
– Competition by any means other than price.
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Strategies for Deterring Entry in
Mature Industries
Strategies for
Deterring
Entry
Product
Proliferation
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Strategies for Deterring Entry in
Mature Industries
Strategies for
Deterring
Entry
Product
Proliferation
Price
Cutting
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Strategies for Deterring Entry in
Mature Industries
Strategies for
Deterring
Entry
Product
Proliferation
Price
Cutting
Maintain
Excess
Capacity
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Strategy in Declining
Industries
 Leadership
 Niche
 Harvest
 Divestment
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Strategies in Declining
Industries
•Leadership strategy
– A firm seeks to become dominant in the industry.
•Niche strategy
– Focuses on demand pockets declining more slowly
than the industry as a whole.
•Harvest strategy
– Limits investment and optimizes cash flow.
•Divestment strategy
– Company exits the industry by selling out early to
others, avoiding liquidation.
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Factors That Determine the
Intensity of Competition in
Declining Industries
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Strategy Selection in a Declining
Industry
Intensity of Competition
in Declining Industry
High
Low
Few
Company Strengths Relative to
Remaining Pockets of Demand
Many
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Strategy Selection in a Declining
Industry
Intensity of Competition
in Declining Industry
High
Leadership
or Niche
Low
Few
Company Strengths Relative to
Remaining Pockets of Demand
Many
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Strategy Selection in a Declining
Industry
Intensity of Competition
in Declining Industry
High
Niche or
Harvest
Leadership
or Niche
Low
Few
Company Strengths Relative to
Remaining Pockets of Demand
Many
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Strategy Selection in a Declining
Industry
Intensity of Competition
in Declining Industry
High
Niche or
Harvest
Harvest
or Divest
Leadership
or Niche
Low
Few
Company Strengths Relative to
Remaining Pockets of Demand
Many
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Strategy Selection in a Declining
Industry
Intensity of Competition
in Declining Industry
High
Niche or
Harvest
Harvest
or Divest
Leadership
or Niche
Low
Few
Company Strengths Relative to
Remaining Pockets of Demand
Many
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Strategy Selection in a Declining
Industry
Intensity of Competition
in Declining Industry
High
Divest
Niche or
Harvest
Harvest
or Divest
Leadership
or Niche
Low
Few
Company Strengths Relative to
Remaining Pockets of Demand
Many
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