The External Environment:

1
Chapter 2

• The External Environment
• Opportunities, Threats, Industry Competition, and
  Competitor Analysis

2
Chapter 2
The Strategic Management Process
External
Environment
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Strategy Formulation
Strategy Implementation
Chapter 4
Chapter 5
Chapter 6
Chapter 10
Chapter 11
Business-Level
Competitive
Corporate-Level
Corporate
Structure
Strategy
Dynamics
Strategy
Governance
Control
Strategic
Actions
Chapter 8
Chapter 7
Chapter 9
Chapter 12
Chapter 13
International
Entrepreneurship Innovation
Cooperative
Acquisitions
Strategic
Strategy
Strategies
Restructuring
Leadership
Strategic
Above Average
Feedback
Returns
3
External Environment Analysis

• General Environment
• Components
• Strategic Issue
• Analysis Process
• Scanning
• Monitoring
• Forecasting
• Assessing

4
Components of the General Environment
Demographic
Economic
Industry Environment
Political/Legal
Global
Competitive Environment
Technological
Sociocultural
5
External Environment Analysis

• Competitive Environment
• Industry Environment
• Five Forces Analysis
• Key Success Factors
• Strategic Group Analysis
• Competitor Analysis

6
Porters Five Forces Model of Competition
Threat of New Entrants
Threat of New Entrants
7
Threat of New Entrants
Economies of Scale

Product Differentiation

Barriers to Entry
Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

8
Threat of New Entrants
Economies of Scale

Product Differentiation

Barriers to Entry
Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

Expected Retaliation

9
Porters Five Forces Model of Competition
Threat of New Entrants
Threat of New Entrants
Bargaining Power of Suppliers
10
Bargaining Power of Suppliers
Suppliers exert power in the industry by
Threatening to raise
prices or to reduce quality
Powerful suppliers can squeeze industry
profitability if firms are unable to recover cost
increases
11
Porters Five Forces Model of Competition
Threat of New Entrants
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
12
Bargaining Power of Buyers
13
Porters Five Forces Model of Competition
Threat of New Entrants
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute Products
14
Threat of Substitute Products
Keys to evaluate substitute products
Products with improving price/performance
tradeoffs relative to present industry products
Products with similar function limit the prices
firms can charge

For Example
Electronic security systems in place of security
guards
Fax machines in place of overnight mail delivery
15
Porters Five Forces Model of Competition
Threat of New Entrants
Threat of New Entrants
Rivalry Among Competing Firms in Industry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute Products
16
Intensity of Rivalry Among Existing Competitors
Intense rivalry often plays out in the following
ways
Jockeying for strategic position

Using price competition

Staging advertising battles

Increasing consumer warranties or service

Making new product introductions

Occurs when a firm is pressured or sees an
opportunity
Price competition often leaves the entire
industry worse off

Advertising battles may increase total industry
demand, but may be costly to smaller competitors

17
Intensity of Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur
when
Numerous or equally balanced competitors

Slow growth industry

High fixed costs

High storage costs

Lack of differentiation or switching costs

Capacity added in large increments

Diverse competitors

High strategic stakes

High exit barriers

18
Intensity of Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic and
emotional factors which cause companies to remain
in an industry even when future profitability is
questionable.
Specialized assets

Fixed cost of exit (e.g., labor agreements)

Strategic interrelationships

Emotional barriers

Government and social restrictions

19
Which Companies are in Strongest / Weakest
Positions?

• One technique for revealing the different
  competitive positions of industry rivals is
  strategic group mapping
• A strategic group consists of those rivals with
  similar competitive approaches in an industry

20
Strategic Group Mapping

• Firms in the same Strategic Group have two or
  more competitive characteristics in common . . .
• Sell in same price/quality range
• Cover same geographic areas
• Be vertically integrated to same degree
• Have comparable product line breadth
• Emphasize same types of distribution channels
• Offer buyers similar services
• Use identical technological approaches

21
Procedure Constructing aStrategic Group Map

• STEP 1 Identify competitive characteristics
  that differentiate firms in an industry from one
  another
• STEP 2 Plot firms on a two-variable map using
  pairs of these differentiating characteristics
• STEP 3 Assign firms that fall in about the same
  strategy space to same strategic group
• STEP 4 Draw circles around each group, making
  circles proportional to size of groups
  respective share of total industry sales

22
Strategic Group Retail Jewelry Industry
High
Small Independent Guild Jewelers
National, Regional, Local Guild - Fine
Jewelry Stores
Prestige Departmentalized Retailers
Upscale Department Stores
Price / Quality / Image
National Jewelry Chains Local Jewelers
Medium
Chains
Credit Jewelers
Catalog Showrooms Off-Price Retailers
Discounters
Outlet Mall Retailers
Low
Broad-category Retailers
Specialty Jewelers
Full-line Jewelers
Limited-category Retailers
Product Line / Merchandise Mix
23
Guidelines Strategic Group Maps

• Variables (axes) should not be highly correlated
• Variables should expose big differences in how
  rivals compete
• Variables do not have to be either quantitative
  or continuous
• Drawing sizes of circles proportional to combined
  sales of firms in each strategic group allows map
  to reflect relative sizes of each strategic group
• If more than two good competitive variables can
  be used, several maps can be drawn

24
Interpreting Strategic Group Maps

• Driving forces and competitive pressures often
  favor some strategic groups and hurt others
• Profit potential of different strategic groups
  varies due to strengths and weaknesses in each
  groups market position
• The closer strategic groups are on map, the
  stronger the competitive rivalry among member
  firms tends to be

25
Competitor Analysis
Performing a Detailed Analysis of the Firms
Main Competitors
Industry Environment
Competitive Environment
26
Competitor Analysis
Future Objectives
What Drives the competitor?
How do our goals compare to our competitors
goals?
Where will emphasis be placed in the future?
What is the attitude toward risk?
27
Competitor Analysis
Future Objectives
What is the competitor doing?
How do our goals compare to our competitors
goals?
What can the competitor do?
Current Strategy
Where will emphasis be placed in the future?
How are we currently competing?
What is the attitude toward risk?
Does this strategy support changes in the
competitive structure?
28
Competitor Analysis
What does the competitor believe about itself and
the industry?
Assumptions
Do we assume the future will be volatile?
What assumptions do our competitors hold about
the industry and themselves?
Are we assuming stable competitive conditions?
29
Competitor Analysis
What are the competitors capabilities?
Capabilities
What are my competitors strengths and weaknesses?
How do our capabilities compare to our
competitors?
30
Competitor Analysis
Response
What will our competitors do in the future?
Where do we have a competitive advantage?
How will this change our relationship with our
competition?