PART II
STRATEGIC ANALYSIS
Chapter 3
The External Environment:
Opportunities, Threats, Industry
Competition, and Competitor Analysis
1
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Key Terms

General environment
Composed of dimensions in the broader society that
influence an industry and the firms within it

Industry environment
Set of factors that directly influence a firm and its
competitive actions and competitive responses

Competitor environment
Details about direct and indirect competitors and the
competitive dynamics expected impact a firm's efforts to
generate above-average returns

Key Terms

Opportunity
Condition in the external environment that,
if exploited, helps a company achieve value
creation

Threat
Condition in the general environment that
may hinder a company's efforts to achieve
value creation

Key Terms

Scanning
Studying all segments in the general environment

Monitoring
Observing scanned environmental changes to identify
important emerging trends

Forecasting
Developing feasible projections of potential events

Assessing
Determining the timing and significance of the effects
of environmental changes and trends on the strategic
management of the firm

Key Terms

Demographic segment
Segment of the environment
concerned with a population's size,
age structure, geographic distribution,
ethnic mix, and income distribution

Population size

Age structure

Geographic distribution

Ethnic mix

Income distribution

Key Terms

Economic segment
Nature and direction of the
economy in which a firm
competes or may compete

Gross National Product (GNP)

Interest rates

Inflation/Deflation

Foreign exchange rates

Trade balances

Key Terms

Political/legal segment
Arena in which organizations and
interest groups compete for attention,
resources, and a voice in overseeing
the body of laws and regulations
guiding the interactions among
nations

Key Terms

Sociocultural segment
Segment of the environment concerned
with a society's attitudes and cultural
values
Healthcare
 Workforce diversity
 Changing attitudes toward work
 Saving and retirement planning
 Concern for the environment
 Concern for quality of work life
 Residential decisions
 Shifts in product/service preferences


Key Terms

Technological segment
Segment of the environment that
includes the institutions and activities
involved with creating new knowledge
and translating that knowledge into new
outputs, products, processes, and
materials

Rapid pace of technological change

Impact of the Internet on business
practices

Impact of wireless communications
on business practices.

Internal development versus
external sources of new technology

Key Terms

Global segment
Segment of the environment that
includes relevant new global markets,
existing markets that are changing,
important international political events,
and critical cultural and institutional
characteristics of global markets
Increase and ease in the flow of
goods, services, financial capital,
and knowledge across borders
 Opening of economically maturing
markets
 Extended reach and potential for
firms


The low cost of goods developed in
countries with extremely low wage rates
threatens industries in higher wage nations.

There are risks are associated with investing
in less economically mature markets.

Different sociocultural and institutional
attributes need to be recognized when
expanding into global markets.

Key Terms

Physical environment segment
Segment of the environment that involves
changes to the physical environment and
business practices to respond to or prevent
those changes

Key Terms

Industry
Group of firms producing products
that are close substitutes

Market microstructure
Term referring to competition for the
a group of customers who value
location and firm capabilities when
making buying decisions





Threat of new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Intensity of rivalry among
competitors

Threat to current competitors
Market share
 Production capacity
 Earnings


Likelihood of entry
Barriers
 Expected retaliation









Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost advantages independent of
scale
Government policy
Expected retaliation

Supplier concentration

No substitutes

Small customers

Critical product

High switching cost

Threat of forward integration

Large buyers in industry

Large portion of firm’s sales

Low switching costs

Standardized product

Threat of backward integration

Few switching costs

Lower price

Equal or higher quality and
performance capabilities
Intensifies when a firm is challenged or
recognizes an opportunity to improve its
market position
Visible dimensions:
- Price
- Quality
- Innovation






Numerous or equally-balanced
competitors
Slow industry growth
High fixed costs or high storage
costs
Lack of differentiation or low
switching costs
High strategic stakes
High exit barriers

Key Terms

Complementors
Companies that sell complementary
goods or services that are compatible
with the focal firm's own product or
services
Unattractive
Industry
Attractive
Industry
Low entry barriers
High entry barriers
Powerful buyers
Limited buyer power
Powerful suppliers
Limited supplier power
Good product substitutes
Poor product substitutes
Intense rivalry
Moderate rivalry
The five forces competitive analysis
suggests the attractiveness of an
industry and determines the
potential for above-average returns
over the long-term based on the
level of competition observed.

Key Terms

Strategic group
Set of firms emphasizing similar strategic
dimensions which result in the use of similar
strategies

Strategic dimensions
Areas that firms in a strategic group treat
similarly




The strengths of the five industry
forces differ across strategic groups.
Strategic groups differ in performance.
Strategic group membership remains
relatively stable over time, enhancing
analysis.
Patterns of competition are evident
within strategic groups.


Intra-strategic group rivalry is more intense
than inter-strategic group rivalry.
Organizations in a strategic group:
Occupy similar positions in the market
 Offer similar goods to a similar set of customers
 Often use similar production technology and
organizational processes


The more similar strategies are across
strategic groups, the greater the level of
expected rivalry.

Key Terms

Competitor intelligence
Set of data and information the firm
gathers to better understand and better
anticipate competitors' objectives,
strategies, assumptions, and capabilities
How can a firm use its “code of ethics” as it
analyzes the external environment?
What ethical issues, if any, may be relevant
to a firm’s monitoring of its external
environment? Does use of the Internet to
monitor the environment lead to additional
ethical issues? If so, what are they?
What is an ethical issue associated with
each segment of a firm’s general
environment? Are firms across the globe
doing enough to deal with this issue?
Why are ethical practices critical in the
relationships between a firm and its
suppliers?
In an intense rivalry, especially one that
involves competition in the global
marketplace, how can the firm gather
competitor intelligence ethically while
maintaining its competitiveness?
What do you believe determines whether an
intelligence-gathering practice is or is not
ethical? Do you see this changing as the
world’s economies become more
interdependent? If so, why? Do you see this
changing because of the Internet? If so, how?