CHAPTER 2
The External Environment:
Opportunities, Threats, Industry
Competition, & Competitor Analysis
WANIWAN
VEÑEGAS
The General, Industry, and Competitor
Environment
•General Environment (7 segments)
MACRO
dimensions in the broader society that influence an
industry and the firms within it
•Industry Environment (5 forces of competition model)
set of factors that directly influences a firm and its
competitive actions and response
•Competitor Environment
MICRO
focuses on each company against which a firm
directly competes
The External Environment Analysis
➢Collectively, opportunities and threats affect a firm’s strategic actions.
A firm’s external environment creates:
-Opportunities
-Threats
➢This analysis has four parts:
-Scanning
-Forecasting
-Monitoring
-Assessing
❑ Scanning
• The study of all segments in the general environment. Firms identify
early signals of potential changes in the general environment and
detect changes that are already underway.
❑ Monitoring
• Analysts observe meaningful environmental changes to if an
important trend is emerging from among those spotted through
scanning.
❑ Forecasting
• Feasibility projections developed for what might happen, and how
quickly, as a result of the changes and trends detected through
scanning and monitoring, both of which focus on events at a point in
time.
❑ Assessing
• Determining the timing and significance of the effects of
environmental trends that have been identified; specifying the
implications of the understanding gathered in the previous stages.
Segments of General Environment
1. The Demographic Segment
are commonly analyzed on a global basis because of their
potential effects across countries’ borders and because many firms
compete in global markets
2. The Economic Segment
refers to the nature and direction of the economy in which a firm
competes or may compete. Firms generally seek to compete in
relatively stable economies with strong growth potential.
3. The Political/Legal Segment
represents how organizations and governments mutually try to
influence each other, and how firms try to understand these influences
(current and projected) on their strategic actions.
4. The Sociocultural Segment
concerned with a society’s attitudes and cultural values because
it form the cornerstone of a society, they often drive demographic,
economic, political/legal, and technological conditions and changes.
5. The Technological Segment
includes the activities involved in creating new knowledge and
translating that knowledge into new outputs, products, processes, and
materials. Given the rapid pace of technological change and risk of
disruption, it is vital for firms to study this segment.
6. The Global Segment
includes relevant new global markets, existing markets that are
changing, important international political events, and critical cultural
and institutional characteristics of global markets.
7. The Sustainable Physical Environment Segment
refers to potential and actual changes in the physical environment
and business practices that are intended to positively respond to and
deal with those changes.
Industry Environment Analysis
The Five Forces of Competition Model
1. Threat of New Entrants: New entrants can threaten market share of
existing competitors. It brings additional production capacity to the
industry. This is a function of two factors namely:
◦ Barriers to Entry: Economies of scale, Product differentiation, Capital
requirements, Switching costs, Access to distribution channels, Cost
disadvantage, Government policy are the various barriers to entry
faced by a new entrant into an industry.
◦ Expected Retaliation: An expectation of vigorous and swift retaliation
reduces the likelihood of entry. Retaliation is vigorous when the
existing firm has a large stake in the industry, invested substantial
resources and when industry growth is slow.
2. Bargaining Power of Suppliers: Suppliers can exercise their
power by reducing quality or increasing price. Suppliers are powerful
when there are very few large suppliers and are they are more
concentrated than the industry they sell to, there are no substitutes for
the supplier’s product, the firms are not a significant customer to the
supplier group, the supplier’s goods are critical to a buyer’s success,
there is a high switching cost due to effectiveness of a suppliers
products. and there exists a threat of forward integration.
3. Bargaining Power of Buyers: Buyers want to buy at the lowest
price and demand higher levels of service at the best quality. They are
powerful when they purchase a substantial proportion of the industries
output. The products sales accounts for a significant portion of the
seller’s annual revenue. The industries products are undifferentiated
and standardized raising the threat of backward integration.
4. Threat of Substitute Products is the threat when goods or
services outside of the given industry perform the same or similar
functions at a competitive price or have low switching costs. Product
and service differentiation helps overcome the threat of substitute
products. E.g. Plastic has replaced steel and other materials in many
applications at an extremely competitive price and value preposition.
5. Intensity of Rivalry Among Competing Firms: The intensity of
rivalry in an industry is the extent to which competitors within an
industry compete with one another and limit other profit potential. If
rivalry is fierce the profit potential in the industry declines for all firms.
Low intensity of rivalry increases profit potential and makes the
industry less competitive.
Intensity of Rivalry is high if
Intensity of Rivalry is Low if
•Competitors are numerous.
•Competitors have equal size.
•Competitors have equal size.
•Competitors have equal market share.
•Industry growth is slow.
•Fixed costs are high.
•Products are undifferentiated.
•Brand loyalty is insignificant.
•Consumer switching costs are low.
•Competitors are strategically diverse.
•There is excess production capacity.
•Exit barriers are high
•Competitors are few.
•Competitors have unequal size.
•Competitors have unequal market
share.
•Industry growth is fast.
•Fixed costs are low.
•Products are differentiated.
•Brand loyalty is significant.
•Consumer switching costs are high.
•Competitors are not strategically
diverse.
•There is no excess production capacity.
•Exit barriers are low.
Interpreting Industry Analysis
•The ways in which competitive analysis provides insight
into the attractiveness of an industry by determining its
potential for above-average returns over the long term.
Strategic Groups
•Set of firms emphasizing similar strategic dimensions to
use a similar strategy.
•Implications
Competitors Analysis
•Is the data and information that a firm gathers to better
understanding and anticipate its competitor’s objectives,
strategies, assumptions and capabilities.
FUTURE OBJECTIVES
• How do your goals compare with our
competitor’s goals?
• Where will emphasis be place in the future?
• What is the attitude toward risk?
CURRENT STRATEGY
• How are we currently competing?
• Does their strategy support changes in the
competitive structure?
ASSUMPTIONS
• Do we assume the future will be volatile?
• Are we operating under a status quo?
• What assumption do our competitor’s hold
about the industry and themselves?
CAPABILITIES
• What are the strengths and weaknesses?
• How do we rate compared to our
competitors?
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?
Ethical Consideration
•Obtain public information
•Attend trades fairs and shows and collect brochures, view
exhibits, listen to their discussions
Thank You ☺ ☺ ☺