BUSINESS

SCHOOL
WORK2210
Strategic Management
Week 2
The external environment: opportunities, threats, industry competition and
competitor analysis
BUSINESS
SCHOOL
Knowledge objectives
3
1 Explain the importance of analysing and
understanding the firms external environment
2 Define and describe the general environment
and the industry environment
3 Discuss the four activities of the external
environmental analysis process
4 Name and describe the general environments
six segments
Knowledge objectives (cont.)
5 Identify the five competitive forces and explain
how they determine an industrys profit
potential
6 Define strategic groups and describe their
influence on the firm
7 Describe what firms need to know about their
competitors and the different methods
(including ethical standards) used to collect
intelligence about them.
4
The External Environment
5
Components of external analysis
Scanning
identifying early signals of environmental changes
and trends.
Monitoring
detecting meaning through ongoing observations of
environmental changes and trends.
6
Components of external analysis
Forecasting
developing projections of anticipated outcomes
based on monitored changes and trends.
Assessing
determining the timing and importance of
environmental changes and trends for firms
strategies and their management.
7
The general environment
The general environment is composed of
dimensions in the broader society that influence an
industry and the firms within it.
Six segments of environmental analysis are:
demographic
economic
political/legal
socio-cultural
technological
global.
8
External environmental analysis
General environment
focused on the future.
Industry environment
industry specific
focused on factors and conditions threatening a firms
competitive position within an industry.
Competitor environment
focused on predicting the dynamics of competitors
actions, responses and intentions.
9
External environmental analysis
Opportunity
a condition in the general environment that, if exploited,
helps a company to achieve strategic competitiveness.
Threat
a condition in the general environment that may hinder a
companys efforts to achieve strategic competitiveness.
10
Segments of the general environment
The demographic segment
population size
age structure
geographic distribution
ethnic mix
income distribution.
11
Segments of the general environment (Cont.)
The economic segment
direction of the economy
membership of important trade and economic
organisations
inflation rates
interest rates
trade deficits or surpluses
budget deficits or surpluses
personal savings rates and business savings rates
gross domestic product.
12
Segments of the general environment (Cont.)
The political/legal segment
influence of government
influence of organisations on government
competition and anti-monopoly laws
taxation laws
deregulation philosophies
labour and employment laws
educational philosophies and policies.
13
Segments of the general environment (Cont.)
The socio-cultural segment
women in the workforce
workforce diversity
attitudes about the quality of work life
concerns about the environment
shifts in work and career preferences
shifts in preferences regarding product of work life and
service characteristics.
14
Segments of the general environment (Cont.)
The technological segment
product innovations
creation of new knowledge and new applications
focus of private and government-supported R&D
expenditures
Internet technology and global e-commerce
e-commerce and new business model.
15
Segments of the general environment (Cont.)
The global segment
new global markets
existing global markets that are changing
important international political events
critical cultural and institutional characteristics of global
markets.
16
Industry environment analysis
Definition
an industry is a group of firms producing products that are
close substitutes. It includes:
firms that influence one another
a rich mix of competitive strategies that companies use
in pursuing strategic competitiveness and above-
average returns.
the industry environment has a more direct effect on the
firms strategic competitiveness and above-average
returns than the general environment.
17
The industry environment
The industry environment is the set of factors that
directly influences its competitive actions and
competitive responses.
Five forces that influence the industry environment
are:
threat of new entrants
power of suppliers
power of buyers
threat of product substitutes
intensity of rivalry among competitors.
18
Porters Five Forces Model of Competition
Five forces model is a strategy tool
Identifies sources of threats and opportunities.
19
Threat of new entrants
Barriers to entry
economies of scale
product differentiation
capital requirements
switching costs
access to distribution channels
cost disadvantages independent of scale
government policy
expected retaliation.
20
Barriers to entry
Economies of scale
incremental improvements in efficiency through
experience as a firm increases in size
advantages and disadvantages of large-scale and small-
scale entry.
Product differentiation
unique products
customer loyalty
products at competitive prices.
21
Barriers to entry (Cont.)
Capital requirements
physical facilities
inventories
marketing activities
availability of capital.
Switching costs
one-time costs customers incur when they buy from a
different supplier
new equipment
retraining employees
psychic costs of ending a relationship.
22
Barriers to entry (Cont.)
Access to distribution channels
stocking or shelf space
price breaks
cooperative advertising allowances.
Cost disadvantages independent of scale
proprietary product technology
favourable access to raw materials
desirable locations
government subsidies.
23
Barriers to entry (Cont.)
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 and available business
options.
24
Bargaining power of suppliers
Supplier power increases when:
suppliers are large and few in number
satisfactory substitute products are not available
industry firms are not a significant customer for the
supplier
suppliers goods are critical to buyers marketplace
success
suppliers products create high switching costs
suppliers pose a threat to integrate forward into buyers
industry.
25
Bargaining power of buyers
Buyer power increases 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 a threat to integrate backward into the
sellers industry.
26
Threat of substitute products
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.
Differentiated industry products that are valued by
customers reduce this threat.
27
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
the strategic stakes are high
high exit barriers prevent competitors from leaving the
industry.
28
Interpreting industry analyses
29
Low entry barriers.
Unattractive
industry
Suppliers and buyers
have strong positions.
Strong threats from
substitute products.
Intense rivalry among
competitors.
Low profit potential
Interpreting industry analyses (Cont.)
30
Attractive
industry
High entry barriers.
Suppliers and buyers
have weak positions.
Few threats from
substitute products.
Moderate rivalry among
competitors.
High profit potential
Strategic groups
Definition
a group of firms emphasising similar strategic dimensions
to use the same or a similar strategy
internal competition between strategic group firms is
greater than between firms outside that strategic group
there is more heterogeneity in the performance of firms
within strategic groups than across the groups.
31
Strategic groups (Cont.)
Strategic dimensions
extent of technological leadership
product quality
pricing policies
distribution channels
customer service.
32
Competitor analysis
Competitor analysis
focuses on competitors moves, assumptions, capabilities
and strategies
helps to gather information and data that provides insight
into the competitors:
future objectives
current strategy
beliefs about the industry
strengths and weaknesses.
33
Competitor analysis components
34
35
WORK2210
Week 2 lecture: the external environment
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