chapter 2 external environment
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2004 by South-Western/Thomson Learning 1
The External Environment: Opportunities,The External Environment: Opportunities,
Threats, Industry Competition, andThreats, Industry Competition, and
Competitor AnalysisCompetitor Analysis
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
Chapter 2Chapter 2
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Chapter 2Chapter 2Strategic LeadershipStrategic Leadership
Chapter 1Chapter 1
Introduction toIntroduction to
Strategic ManagementStrategic ManagementStrategicThinking
The Strategic Management ProcessThe Strategic Management Process
Chapter 6Chapter 6
Competitive Rivalry andCompetitive Rivalry and
Competitive DynamicsCompetitive Dynamics
Chapter 9Chapter 9
International StrategyInternational Strategy
Chapter 3Chapter 3
The ExternalThe External
EnvironmentEnvironment
Chapter 5Chapter 5
BusinessBusiness--LevelLevel
StrategyStrategy
Chapter 8Chapter 8Acquisition andAcquisition and
Restructuring StrategiesRestructuring Strategies
Chapter 11Chapter 11
Corporate GovernanceCorporate Governance
Chapter 7Chapter 7
CorporateCorporate--Level StrategyLevel Strategy
Chapter 10Chapter 10
Cooperative StrategyCooperative Strategy
Chapter 12Chapter 12
Strategic EntrepreneurshipStrategic Entrepreneurship
Strategic
Analysis
Creating
Competitive
Advantage
Monitoring
And Creating
Entrepreneurial
Opportunities
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Discussion QuestionsDiscussion Questions1. What are the components of thegeneral environment? How does each
affect the strategy of a firm?
2. What are the five competitive forcesin an industry environment?
3. What attributes make each of the five
competitive forces intense?
4. What is a strategic group and why is
it an important concept?
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Discussion Questions (cont.)Discussion Questions (cont.)5. How do you conduct a competitoranalysis?
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Discussion Question 1Discussion Question 1
What are the components of thegeneral environment? How doeseach affect the strategy of a firm?
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6General
EnvironmentEconomicEconomic
TechnologicalTechnological
The External EnvironmentThe External Environment
IndustryIndustry
EnvironmentEnvironment
Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliers
Power of buyersPower of buyers
Product substitutesProduct substitutes
Intensity of rivalryIntensity of rivalry
CompetitorCompetitorEnvironmentEnvironment
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External Environmental AnalysisExternal Environmental AnalysisA continuous process which includesA continuous process which includes Scanning: Identifying early signals of environmental
changes and trends
Monitoring: Detecting meaning through ongoingobservations of environmental changes and trends
Forecasting: Developing projections of anticipated
outcomes based on monitored changes and trends
Assessing: Determining the timing and importanceof environmental changes and trends for firms
strategies and their management
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External Environmental AnalysisExternal Environmental Analysis
Strategic IntentStrategic Intent
Strategic MissionStrategic Mission
The ExternalThe External
EnvironmentEnvironment
Analysis of general environmentAnalysis of general environment
Analysis of industry environmentAnalysis of industry environment
Analysis of competitor environmentAnalysis of competitor environment
The ExternalThe External
EnvironmentEnvironment
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General Environment
General Environment
Sociocultural segmentSociocultural segment Women in the workplaceWomen in the workplace
Workforce diversityWorkforce diversity
Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment
Shifts in work and career preferencesShifts in work and career preferences
Shifts in product and service preferencesShifts in product and service preferences
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Economic segmentEconomic segment
General Environment
General Environment
Inflation ratesInflation rates
Interest ratesInterest rates
Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses
Personal savings ratePersonal savings rate
Business savings ratesBusiness savings rates
Gross domestic productGross domestic product
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General Environment
General Environment
Political/Legal SegmentPolitical/Legal Segment Antitrust lawsAntitrust laws
Taxation lawsTaxation laws
Deregulation philosophiesDeregulation philosophies
Labor training lawsLabor training laws
Educational philosophies and policiesEducational philosophies and policies
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General Environment
General Environment
Technological SegmentTechnological Segment Product innovationsProduct innovations
Applications of knowledge
Applications of knowledge
Focus of private and governmentFocus of private and government--supportedsupported
R&D expendituresR&D expenditures
New communication technologiesNew communication technologies
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General Environment
General Environment
Global SegmentGlobal Segment Important political eventsImportant political events
Critical global marketsCritical global markets
Newly industrialize countriesNewly industrialize countries
Different cultural and institutional attributesDifferent cultural and institutional attributes
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General Environment
General Environment
Demographic SegmentDemographic Segment Population sizePopulation size
Age structureAge structure
GeographicGeographic
distributiondistribution
Ethnic mixEthnic mix
Income distributionIncome distribution
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Discussion Question2
Discussion Question2
What are the five competitive forcesin an industry environment?
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Industry EnvironmentIndustry Environment A set of factors that directly influencesA set of factors that directly influences
a company and its competitive actionsa company and its competitive actionsand responsesand responses
Interaction among these factorsInteraction among these factorsdetermine an industrys profit potentialdetermine an industrys profit potential
Threat of new entrantsThreat of new entrants
Power of suppliersPower of suppliers Power of buyersPower of buyers
Product substitutesProduct substitutes
Intensity of rivalryIntensity of rivalry
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Five Forces Model of CompetitionFive Forces Model of Competition
Identify current and potential competitorsIdentify current and potential competitors
and determine which firms serve themand determine which firms serve them
Conduct competitive analysisConduct competitive analysis Recognize that suppliers and buyers canRecognize that suppliers and buyers can
become competitorsbecome competitors
Recognize that producers of potentialRecognize that producers of potential
substitutes may become competitorssubstitutes may become competitors
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Bargaining Power ofBargaining Power of
BuyersBuyers
Five Forces Model of CompetitionFive Forces Model of Competition
Five Forces ofFive Forces of
CompetitionCompetition
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Discussion Question3
Discussion Question3
What attributes make each of the
five competitive forces intense?
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Threat of New EntrantsThreat of New Entrants Barriers to entryBarriers to entry Economies of scaleEconomies of scale
Product differentiationProduct differentiation Capital requirementsCapital requirements
Switching costsSwitching costs
Access to distribution channelsAccess to distribution channels
Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy
Expected retaliationExpected retaliation
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Bargaining Power of SuppliersBargaining Power of Suppliers A supplier group is powerful when:A supplier group is powerful when: it is dominated by a few large companiesit is dominated by a few large companies
satisfactory substitute products are not availablesatisfactory substitute products are not available
to industry firmsto industry firms
industry firms are not a significant customer forindustry firms are not a significant customer for
the supplier groupthe supplier group
suppliers goods are critical to buyerssuppliers goods are critical to buyers
marketplace successmarketplace success
effectiveness of suppliers products has createdeffectiveness of suppliers products has created
high switching costshigh switching costs
suppliers are a credible threat to integratesuppliers are a credible threat to integrate
forward into the buyers industryforward into the buyers industry
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Bargaining Power of BuyersBargaining Power of Buyers Buyers (customers) are powerful when:Buyers (customers) are powerful when:
they purchase a large portion of an industrysthey purchase a large portion of an industrys
total outputtotal output
the sales of the product being purchasedthe sales of the product being purchased
account for a significant portion of the sellersaccount for a significant portion of the sellers
annual revenuesannual revenues
they could easily switch to another productthey could easily switch to another product
the industrys products are undifferentiated orthe industrys products are undifferentiated or
standardized, and buyers pose a credible threatstandardized, and buyers pose a credible threat
if they were to integrate backward into theif they were to integrate backward into the
sellers industrysellers industry
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Threat of Substitute ProductsThreat of Substitute Products Product substitutes are strong threatProduct substitutes are strong threat
when:when: customers face few switching costscustomers face few switching costs
substitute products price is lowersubstitute products price is lower
substitute products quality and performancesubstitute products quality and performance
capabilities are equal to or greater than those ofcapabilities are equal to or greater than those of
the competing productthe competing product
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Intensity of RivalryIntensity of Rivalry Intensity of rivalry is stronger whenIntensity of rivalry is stronger when
competitors:competitors:
are numerous or equally balancedare numerous or equally balanced
experience slow industry growthexperience slow industry growth
have high fixed costs or high storage costshave high fixed costs or high storage costs
lack differentiation or low switching costslack differentiation or low switching costs
experience high strategic stakesexperience high strategic stakes have high exit barriershave high exit barriers
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High Exit BarriersHigh Exit Barriers Common exit barriers include:Common exit barriers include: specialized assets (assets with values linked tospecialized assets (assets with values linked to
a particular business or location)a particular business or location)
fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements
strategic interrelationships (relationships ofstrategic interrelationships (relationships of
mutual dependence between one business andmutual dependence between one business and
other parts of a companys operation, such asother parts of a companys operation, such as
shared facilities and access to financial markets)shared facilities and access to financial markets) emotional barriers (career concerns, loyalty toemotional barriers (career concerns, loyalty to
employees, etc.)employees, etc.)
government and social restrictionsgovernment and social restrictionsClick
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Discussion Question4
Discussion Question4
What is a strategic group and whyis it an important concept?
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StrategicG
roupsStrategicG
roupsStrategic group: a group of firms in anStrategic group: a group of firms in an
industry following the same or similarindustry following the same or similar
strategy along the same strategicstrategy along the same strategicdimensionsdimensions
The strategy followed by a strategicThe strategy followed by a strategic
group differs from strategies beinggroup differs from strategies beingimplemented by other companies inimplemented by other companies in
the industrythe industry
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Discussion Question5
Discussion Question5
How do you conduct a competitoranalysis?
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Competitor EnvironmentCompetitor EnvironmentCompetitor intelligenceCompetitor intelligence is the ethicalis the ethicalgathering of needed information andgathering of needed information anddata about competitors objectives,data about competitors objectives,
strategies, assumptions, and capabilitiesstrategies, assumptions, and capabilities what drives the competitor as shown by itswhat drives the competitor as shown by its futurefuture
objectivesobjectives
what the competitor is doing and can do aswhat the competitor is doing and can do as
revealed by itsrevealed by its current strategycurrent strategy What the competitor believes about itself and theWhat the competitor believes about itself and the
industry, as shown by itsindustry, as shown by its assumptionsassumptions
What the the competitor may be able to do, asWhat the the competitor may be able to do, as
shown by itsshown by its capabilitiescapabilities
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Competitor AnalysisCompetitor AnalysisFuture Objectives:
Future objectivesFuture objectives How do our goals compare
with our competitors
goals? Where will the emphasis
be placed in the future?
What is the attitude toward
risk?
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Competitor AnalysisCompetitor Analysis
Current strategyCurrent strategy
Current Strategy: How are we currently
competing?
Does this strategy support
changes in the competitive
structure?
Future objectivesFuture objectives
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Competitor AnalysisCompetitor Analysis
AssumptionsAssumptions
Assumptions: Do we assume the future
will be volatile?
Are we operating under a
status quo?
What assumptions do our
competitors hold about
the industry andthemselves?
Current strategyCurrent strategy
Future objectivesFuture objectives
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Competitor AnalysisCompetitor Analysis
CapabilitiesCapabilities
Capabilities: What are our strengths
and weaknesses?
How do we rate compared
to our competitors?
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives
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Competitor AnalysisCompetitor AnalysisResponseResponse
Response: What will our competitors
do in the future?
Where do we hold an
advantage over ourcompetitors?
How will this change our
relationship with our
competitors?
CapabilitiesCapabilities
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives