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
firms 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 companys 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
Inflation rates
Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Business savings rates
Gross domestic product

The Socio-cultural Segment
Women in the workplace
Workforce diversity
Attitudes about quality of
work-life
Concerns about environment
Shifts in work and career
preferences
Shifts in product and service
preferences

General Environment
The Global Segment
Important political events
Critical global markets
Newly industrialized countries
and emerging markets
Different cultural and
institutional attributes
The Technological Segment
Product innovations
Applications of knowledge
Focus of private and
government-supported R&D
expenditures
New communication
technologies

General Environment
The Political/Legal Segment
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and
policies

The Demographic Segment
Population size
Age structure
Geographic distribution
Ethnic mix
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
Product differentiation
Unique products
Customer loyalty
Products at competitive prices
Switching Costs
One-time costs customers
incur when they buy from a
different supplier
New equipment
Retraining employees
Psychic costs of ending a
relationship


Capital Requirements
Physical facilities
Inventories
Marketing activities
Availability of capital

Access to Distribution Channels
Stocking or shelf space
Price breaks
Cooperative advertising
allowances


o Economies of Scale
o Marginal improvements in efficiency that a firm experiences as it
incrementally increases its size



Barriers to Entry (contd)
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
firms 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 industrys
total output
Buyers purchases are a significant portion of a
suppliers 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 products price is lower
Substitute products 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





Low profit potential

Unattractive
Industry
Interpreting Industry Analyses
High entry barriers
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors















High profit potential

Attractive
Industry
Competitor Analysis
Competitor Intelligence
The ethical gathering of needed information and
data that provides insight into:
A competitors direction (future objectives)
A competitors capabilities and intentions
(current strategy)
A competitors beliefs about the industry (its
assumptions)
A competitors capabilities

Competitor Analysis
Components