External Environmental Analysis
Macro-environment, Industry, and
Competitive Analysis
Macro-environmental Forces
General Environment
• Dimensions in the broader society that
influence and industry and the firms within it
− Economic
− Sociocultural
− Global
− Technological
− Political/legal
− Demographic
Industry Environment
• Set of factors directly influencing a firm and
its competitive actions and competitive
responses
Competitor Environment
• All of the companies that the firm competes against.
Analysis of the External Environments
• General environment
− Focused on the future
• Industry environment
− Focused on factors and conditions influencing a
firm’s profitability within an industry
• Competitor environment
− Focused on predicting the dynamics of competitors’
actions, responses and intentions
Opportunities and Threats
• Opportunity
− A condition in the general environment that if
exploited, helps a company achieve strategic
competitiveness
• Threat
− A condition in the general environment that may
hinder a company’s efforts to achieve strategic
competitiveness
External Environmental Analysis
• A continuous process which includes
− Scanning for early signals of potential
changes and trends in the general environment
− Monitoring changes to see if a trend emerges from
among those spotted by scanning
− Forecasting projections of outcomes based on
monitored changes and trends
− Assessing the timing and significance of changes
and trends on the strategic management of the
firm
General Environment
•The Economic Segment
•The Socio-cultural Segment
−Inflation rates
−Women in the workplace
−Interest rates
−Workforce diversity
−Trade deficits or surpluses
−Budget deficits or surpluses
−Attitudes about quality of
work-life
−Personal savings rate
−Concerns about environment
−Business savings rates
−Shifts in work and career
preferences
−Gross domestic product
−Shifts in product and service
preferences
General Environment
•The Global Segment
•The Technological Segment
− Important political events
−Product innovations
− Critical global markets
−Applications of knowledge
− Newly industrialized countries
and emerging markets
−Focus of private and
government-supported R&D
expenditures
− Different cultural and
institutional attributes
−New communication
technologies
General Environment
•The Political/Legal Segment
•The Demographic Segment
−Antitrust laws
−Population size
−Taxation laws
−Age structure
−Deregulation philosophies
−Geographic distribution
−Labor training laws
−Ethnic mix
−Educational philosophies and
policies
−Income distribution
Industry Environment
• Industry Defined
− A group of firms producing products that are close
substitutes
• Firms that influence one another
• Includes a rich mix of competitive strategies
that companies use in pursuing strategic
competitiveness and above-average returns
The Five Forces of Competition Model
Barriers to entry
• A barrier to entry is any factor that
− Increases the costs born by potential entrants
(relative to incumbents), after they enter the
market
− Decreases the market share potential entrants
might receive upon entering the industry
− Other factors
• Trade restrictions (tariffs, quotas, voluntary
export restraints, infant industry protection,
embargoes)
• Government regulation of industries
• Industry certification boards (CPAs, Actuaries)
Barriers that Increase Cost
• Capital markets (requires inefficient capital
markets)
• Proprietary technology (patents, copyrights,
trade secrets)
• Know-how (knowledge, routines, capabilities)
• Access to raw materials (unanticipated value)
• Geographic locations
• Economies of scale
• Learning by doing
Barriers Limiting Market Share
• Product differentiation
• Advertising/Brand image
• Access to distribution
• Customer switching costs
• Expected retaliation
Barriers to Entry
o Economies of Scale
o Marginal improvements in efficiency that a firm experiences as it
incrementally increases its size
•Product differentiation
•Capital Requirements
−Unique products
−Physical facilities
−Customer loyalty
−Inventories
−Products at competitive prices
−Marketing activities
•Switching Costs
−One-time costs customers
incur when they buy from a
different supplier
−New equipment
−Retraining employees
−Psychic costs of ending a
relationship
−Availability of capital
•Access to Distribution Channels
−Stocking or shelf space
−Price breaks
−Cooperative advertising
allowances
Barriers to Entry (cont’d)
•Cost Disadvantages Independent of
Scale
−Proprietary product technology
−Favorable access to raw
materials
−Desirable locations
•Government policy
−Licensing and permit
requirements
−Deregulation of industries
•Expected retaliation
−Responses by existing
competitors may depend on a
firm’s present stake in the
industry (available business
options)
Power of Suppliers
• Suppliers deliver inputs such as
− Labor
− Management
− Technology
− Materials
• Suppliers influence our costs through the
strength of their bargaining power
Bargaining Power of Suppliers
• Supplier power increases when:
− Suppliers are large and few in number
− Suitable substitute products are not available
− Individual buyers are not large customers of
suppliers and there are many of them
− Suppliers’ goods are critical to buyers’ marketplace
success
− Suppliers’ products create high switching costs.
− Suppliers pose a threat to integrate forward into
buyers’ industry
Buyer/Customer Power &
Preferences
• Buyers/Customers influence our prices
through:
− Their ability to exercise bargaining power
over us – industrial markets with few buyers
− The strength of their preferences – consumer
sovereignty and elasticity of demand
Bargaining Power of
Buyers/Customers
• Buyer power increase when:
− Buyers are large and few in
number
− Buyers purchase a large portion of an industry’s
total output
− Buyers’ purchases are a significant portion of a
supplier’s annual revenues
− Buyers can switch to another product without
incurring high switching costs
− Buyers pose threat to integrate backward into the
sellers’ industry
Threat of Substitute Products
• Substitutes are defined by product function, not
by product form
• The threat of substitute products increases when:
− Buyers face few switching costs
− The substitute product’s price is lower
− Substitute product’s quality and performance are
equal to or greater than the existing product
− Consumer tastes and preferences
• Differentiated industry products that are valued by
customers reduce this threat
Intensity of Rivalry/Threat of Rivalry
• Rivalry is the threat of established firms
competing away their economic profits
− Price competition
− Frequent introduction of new products
− Intense advertising campaigns
− Rapid competitive response
Intensity of Rivalry Among
Competitors
• Industry rivalry increases when:
− There are numerous or equally balanced
competitors
− Industry growth slows or declines
− There are high fixed costs or high storage costs
− There is a lack of differentiation opportunities or
low switching costs
− When the strategic stakes are high
− When high exit barriers prevent competitors from
leaving the industry
Interpreting Industry Analyses
Suppliers and buyers have strong positions
Low entry barriers
Strong threats from substitute products
Intense rivalry among competitors
Unattractive
Industry
Low profit potential
Interpreting Industry Analyses
High entry barriers
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors
Attractive
Industry
High profit potential
Competitor Analysis
• Competitor Intelligence
− The ethical gathering of needed information and
data that provides insight into:
• A competitor’s direction (future objectives)
• A competitor’s capabilities and intentions
(current strategy)
• A competitor’s beliefs about the industry (its
assumptions)
• A competitor’s capabilities
Competitor Analysis
Components