Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
 Overview:
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The firm’s external environment
External environmental analysis
General environmental segments
Industry environment (and analysis)
Porter’s 5 Competitive Forces
Strategic groups: Definition and influence
Competitors and competitive intelligence
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External Environment Analysis
 4 components
 Scanning – the study of all segments in the
general environment
 Monitoring – observing environmental changes
to see if an important trend is emerging
 Forecasting – the development of feasible
projections of what might happen and how
quickly as a result of the changes and trends
detected
 Assessing – determining the timing and
significance of the effects of environmental
changes and trends on the firm
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External Environment Analysis
 Major part of external analysis is the
identification of opportunities and threats
 Opportunity
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Environment condition that, if exploited effectively,
helps a company achieve strategic competitiveness
 Threat
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Environment condition that may hinder a company's
efforts to achieve strategic competitiveness
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The External Environment:
General, Industry, and Competitor
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The General Environment
 The General Environment
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The broader society dimensions that influence an industry
and the firms within it
Grouped into 7 dimensions OR ‘environmental segments’
 Demographic – population’s size, age structure, geographic
distribution, ethnic mix, and income distribution
 Economic – nature and direction of economy
 Political/Legal – laws and regulations
 Sociocultural – society’s attitudes and cultural values
 Technological – new technologies and firms that create them
 Global – new global markets, existing markets that are
changing, and their characteristics
 Physical – potential and actual changes in physical
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environment and business practices
The Industry Environment
 Industry Environment
 Set of factors directly influencing a firm’s competitive
actions/responses
 Industry (Product Market)
 Definition: Group of firms producing products that are
close substitutes
 Industry environment, in comparison to the general
environment, has more direct effect on firm’s
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Strategic competitiveness and
Above-average returns
Intensity of industry competition and industry’s profit
potential are a function of 5 forces
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The Five Forces of Competition Model
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Industry Environment Analysis
 Threat of New Entrants
 Deals with the likelihood that new firms will enter an
industry or that an existing member of an industry will
enter an additional segment within the larger industry
 Can threaten the market share of existing competitors
and may bring additional production capacity
 New entry is often via an acquisition
 A stronger force when…
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Barriers to entry are weak or nonexistent
The expected retaliation by current industry participants is
low
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Industry Environment Analysis
 Bargaining power of suppliers
 Usually other business organizations that provide the
industry with products and services
 A supplier group is powerful when …
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It is dominated by a few large companies and is more
concentrated than the industry to which they sell
No satisfactory substitutes exist
Industry firms not significant customer to supplier group
Supplier’s goods are critical to buyer’s success
High switching costs due to effectiveness of supplier’s
products
Poses credible threat of forward integration
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Industry Environment Analysis
 Bargaining power of buyers
 Usually other business organizations that purchase
the outputs of an industry
 Buyer groups are powerful when …
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They purchase a large portion of industry’s total output
Product sales accounts for a significant portion of seller’s
annual revenue
Low switching costs (to other industry product)
Industry products are undifferentiated or standardized and
buyers pose a credible threat of backward integration
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Industry Environment Analysis
 Threat of substitute products
 Goods or services from outside a given industry that
perform similar or the same functions as the product
the industry produces
 Examples
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Sugar vs. sugar substitutes
Aspirin vs. Ibuprofen
Aluminum cans vs. plastic bottles
A strong force when…
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Low switching costs
The substitute product’s price is lower or its quality and
performance capabilities are equal to or greater than those of
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the competing product
Industry Environment Analysis
 Intensity of Rivalry Among Competitors
 Firms operating in the same market, offering similar
products, and targeting similar customers
 A stronger force when…
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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
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Industry Environment Analysis
 Interpreting Industry Analyses
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Five force analysis helps determine an industry’s
attractiveness for above average returns
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Stronger forces = Lower profit potential
Weaker forces = Higher profit potential
Attractive industry characterized by
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Low threat of new entry
Suppliers and buyers with weak bargaining positions
Low threat from substitute products
Less intense rivalry among competitors
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Industry Analysis: Strategic Groups
 Strategic Group Mapping
 Strategic Group – a set of firms emphasizing similar
strategic dimensions and using a similar strategy
 Can be useful for analyzing an industry and an
industry’s competitive structure
 Can also be helpful in diagnosing competition,
positioning, and the profitability of firm’s within an
industry
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Strategic Group Map of Selected
Automobile Manufacturers
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Strategic Group Map of Selected
Retail Chains
Industry Analysis: Strategic Groups
 Implications
 Because firms within a group compete (offer similar
products) rivalry can be intense – the greater the
rivalry the greater the threat to each firm’s profitability
 Strengths of the 5 forces can differ across strategic
groups
 The closer the strategic groups, in terms of strategy,
the greater the likelihood of rivalry
 Helps with positioning and in the identification of
direct and indirect competitors
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The Competitor Environment
and Competitor Analysis
 Competitor Environment
 Gives details about
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A firm’s direct and indirect competitors
The competitive dynamics (Ch. 5) expected to impact a
firm's efforts to generate above-average returns
 Competitor analysis
 Focused on predicting the dynamics of competitor's
actions, responses, and intentions
 Focuses on a firms direct comptitors
 Seeks to understand each competitors future objectives,
current strategy, assumptions, and capabilities
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Competitor Analysis Components
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Competitor Intelligence
 Competitor intelligence
 Set of data and information the firm gathers to better
understand and anticipate competitors' objectives,
strategies, assumptions, and capabilities
 Scanning, monitoring, forecasting, and assessing
 Follow ethical practices when gathering competitor
intelligence
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Obtain public information
Attend trade fairs and shows and collect brochures, view exhibits,
listen to their discussions
Some practices may be legal, but unethical
Unethical tactics can include
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Blackmail, Trespassing, Eavesdropping, Stealing
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