Competing For Advantage
Part II – Strategic Analysis
Chapter 3 – The External Environment:
Opportunities, Threats, Industry Competition, and Competitor Analysis

The Strategic
Management
Process

External Environments
 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 a firm’s direct and indirect competitors and the competitive dynamics expected to impact a firm's efforts to generate above-average returns

 Threat of new entrants
 Bargaining power of suppliers
 Bargaining power of buyers
 Threat of substitute products
 Intensity of rivalry among competitors

 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 – study of all segments in the general environment
 Monitoring – observance of environmental changes to identify important emerging trends from among those spotted by scanning
 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

Segments of the General Environment

 Key Terms
 Demographic Segment – the section of the environment concerned with a population's size, age structure, geographic distribution, ethnic mix, and income distribution

The Demographic Segment –
Characteristics
 Population size
 Age structure
 Geographic distribution
 Ethnic mix
 Income distribution

 Key Terms
 Economic Segment – the nature and direction of the economy in which a firm competes or may compete

The Economic Segment –
Aspects
 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 order to oversee the body of laws and regulations guiding the interactions among nations

The Political Segment –
Affects Competition
 Laws
 Regulations
 Policies

 Key Terms
 Sociocultural Segment – the part of the environment concerned with a society's attitudes and cultural values

The Sociocultural Segment –
Considerations
 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 – part 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

The Technological Segment –
Issues
 Rapid pace of technological change
 Promise of greater returns for early adopters of new technologies
 Impact of the Internet on business practices
 Impact of wireless communications on business practices

 Key Terms
 Global Segment – part 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

The Global Segment –
Interdependence and Opportunities
 The flow of goods, services, financial capital, and knowledge is increasing, and is easier than at any time in the past
 Economically maturing markets are opening up
 Reaching beyond national borders extends potential and increases the likelihood of earning a return on new innovations
 Current demographic changes and trends need to be understood by businesses

The Global Segment –
Challenges
 The low cost of goods developed in countries with extremely low wage rates threatens industries in higher wage nations
 There are risks associated with investing in less economically mature markets
 Different sociocultural and institutional attributes need to be recognized when expanding into global markets

 Key Terms
 Industry – group of firms producing products that are close substitutes

 Factors that affect the likelihood that firms will enter an industry:
 Barriers to entry
 Expected retaliation from current industry participants

 Barriers to entry are desired by existing competitors in an industry
 Barriers to entry reduce the likelihood that new competitive firms will enter their market and threaten their market share by adding new production capacity, holding down consumer costs, lowering revenue, and reducing returns for competing firms

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Economies of scale yields high volume, low cost production advantages for existing firms
Mass customization can result in quick responsiveness to customer demands
Perceived product differentiation can generate a strong customer following that is difficult to overcome
Capital requirements can demand substantial investment resources to compete
Customer switching costs to change products can make it undesirable for consumers to try new products

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Access to distribution channels may be restricted by existing relationships between manufacturers and their distribution networks
Existing competitors may have a lock on other
(independent of scale) cost advantages that are difficult for new businesses to replicate
Some government policies control entry into an industry through licensing, regulation, and other requirements
An expectation of vigorous competitive response from existing industry participants can interfere with decisions to enter a market, with the exception of underserved market niches or neglected segments

 Supplier concentration
 No substitutes
 Small customers
 Critical product
 High switching cost
 Threat of forward integration

 Large buyers in industry
 Large buyer to seller
 Low switching costs
 Standardized product
 Threat of backward integration

 Few switching costs
 Lower price
 Quality and performance capabilities meet or exceed product

 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

The ways in which competitive analysis provides insight into the attractiveness of an industry by determining its potential for aboveaverage returns over the long term

 Key Terms
 Strategic Group – set of firms emphasizing similar strategic dimensions to use a similar strategy
 Strategic Dimensions – areas that firms in a strategic group treat similarly

Implications from Strategic Group
Dynamics
 Intra-strategic group rivalry is more intense than inter-strategic group rivalry
 Membership in a strategic group partially defines the essential characteristics of firms' strategies
 The more similar strategies are seen across strategic groups, the greater the level of expected rivalry
 The strengths of industries' five forces differ across strategic groups

Understanding Competitors and Their
Intentions
 Key Terms
 Competitor Intelligence – set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities

Ethical Questions
How can a firm use its “code of ethics” as it analyzes the external environment?

Ethical Questions
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?

Ethical Questions
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?

Ethical Questions
Why are ethical practices critical in the relationships between a firm and its suppliers?

Ethical Questions
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?

Ethical Questions
What makes an intelligence-gathering practice ethical or 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?