1 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis...

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The External Environment: Opportunities, Threats, Industry

Competition, and Competitor Analysis

HCAD 5390HCAD 5390

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General

Env

iron

men

t

General

Environment

Gen

eral

Environm

ent

EconomicEconomic

Political/Legal

Political/Legal

TechnologicalTechnologicalG

loba

lG

loba

l

Dem

ogra

phic

Dem

ogra

phic Sociocultural

Sociocultural

The External Environment

IndustryIndustryEnvironmentEnvironment

Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliersPower of buyersPower of buyers

Product substitutesProduct substitutesIntensity of rivalryIntensity of rivalry

CompetitorCompetitorEnvironmentEnvironment

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External Environmental Analysis

A continuous process which includesA continuous process which includes Scanning: Identifying early signals of environmental

changes and trends Monitoring: Detecting meaning through ongoing

observations of environmental changes and trends 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

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External Environmental Analysis

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

The ExternalThe ExternalEnvironmentEnvironment

Analysis of general environmentAnalysis of general environment

Analysis of industry environmentAnalysis of industry environment

Analysis of competitor environmentAnalysis of competitor environment

The ExternalThe ExternalEnvironmentEnvironment

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Industry Environment

• A set of factors that directly influences a A set of factors that directly influences a company and its competitive actions and company and its competitive actions and responsesresponses

• Interaction among these factors determine Interaction among these factors determine an industry’s profit potentialan industry’s 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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Analyzing Industry Environment

• Opportunities and threats are competitive challenges arising for changes in industry conditions.

• Analytic tools such as the five forces model help

managers formulate appropriate strategic

responses.

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Five Forces Model of Competition

• Identify current and potential competitors and Identify current and potential competitors and determine which firms serve themdetermine which firms serve them

• Conduct competitive analysisConduct competitive analysis• Recognize that suppliers and buyers can Recognize that suppliers and buyers can

become competitorsbecome competitors• Recognize that producers of potential substitutes Recognize that producers of potential substitutes

may become competitorsmay become competitors

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Threat of New Entrants


Bar

gain

ing

Pow

er o

f

Bar

gain

ing

Pow

er o

f Su

pplie

rsSu

pplie

rs

Bargaining Power of Bargaining Power of BuyersBuyers

Threat of Substitute

Threat of Substitute

Products

Products

Rivalry A

mong

Rivalry A

mong

Competing Firm

s

Competing Firm

s

Five Forces Model of Competition

Five Forces ofFive Forces ofCompetitionCompetition

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Potential Competitors

•New entrants into an industry threaten incumbent companies.

•Entry barriers reduce the threat of new and additional competition.

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• 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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Rivalry Among Established Companies

• The intensity of competitive rivalry in an industry arises from:– Industry’s competitive structure.– Demand (growth or decline) conditions in

industry.– Height of industry exit barriers.

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Rivalry Among Established Companies

Industry Competitive Structure

Consolidated

One firm or onedominant firm.

(monopoly)

Fragmented

Many firms.No dominant

firmFew firms,Shared

dominance(Oligopoly)

The Continuum of Industry StructuresThe Continuum of Industry Structures

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Rivalry Among Established Companies (Continued)

Demand Conditions

vs.

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Rivalry Among Established Companies (Continued)

Height of Exit Barriers in the Industry

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High Exit Barriers

• Common exit barriers include:Common exit barriers include:• specialized assets (assets with values linked to a specialized assets (assets with values linked to a

particular business or location)particular business or location)• fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements• strategic interrelationships (relationships of mutual strategic interrelationships (relationships of mutual

dependence between one business and other parts dependence between one business and other parts of a company’s operation, such as shared facilities of a company’s operation, such as shared facilities and access to financial markets)and access to financial markets)

• emotional barriers (career concerns, loyalty to emotional barriers (career concerns, loyalty to employees, etc.)employees, etc.)

• government and social restrictionsgovernment and social restrictions

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Bargaining 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 available to satisfactory substitute products are not available to

industry firmsindustry firms• industry firms are not a significant customer for the industry firms are not a significant customer for the

supplier groupsupplier group• suppliers’ goods are critical to buyers’ marketplace suppliers’ goods are critical to buyers’ marketplace

successsuccess• effectiveness of suppliers’ products has created high effectiveness of suppliers’ products has created high

switching costsswitching costs• suppliers are a credible threat to integrate forward suppliers are a credible threat to integrate forward

into the buyers’ industryinto the buyers’ industry

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Bargaining Power of Buyers

• Buyers (customers) are powerful when:Buyers (customers) are powerful when:

• they purchase a large portion of an industry’s total they purchase a large portion of an industry’s total outputoutput

• the sales of the product being purchased account the sales of the product being purchased account for a significant portion of the seller’s annual for a significant portion of the seller’s annual revenuesrevenues

• they could easily switch to another productthey could easily switch to another product• the industry’s products are undifferentiated or the industry’s products are undifferentiated or

standardized, and buyers pose a credible threat if standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s they were to integrate backward into the seller’s industryindustry

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Threat of Substitute Products

• Product substitutes are strong threat when:Product substitutes are strong threat when:

• customers face few switching costscustomers face few switching costs• substitute product’s price is lowersubstitute product’s price is lower• substitute product’s quality and performance substitute product’s quality and performance

capabilities are equal to or greater than those of the capabilities are equal to or greater than those of the competing productcompeting product

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Substitute Products

• The competitive threat of substitute products increases as they come closer to serving similar customer needs.

CloseCloseFarFar

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A Sixth Force: Complementors

• Complementors:– Companies whose products are sold in tandem with

another company’s products.– Increased supply of a complementary product

collaterally increases demand for the primary product.

• Example:– Faster CPU chips fuel sales

of personal computers.

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Strategic Groups

Strategic group: a group of firms in an Strategic group: a group of firms in an industry following the same or similar industry following the same or similar strategy along the same strategic strategy along the same strategic dimensionsdimensions

The strategy followed by a strategic group The strategy followed by a strategic group differs from strategies being implemented by differs from strategies being implemented by other companies in the industryother companies in the industry

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Strategic Groups Within Industries

•The concept of strategic groups– Within an industry, a competitor grouping using similar

strategies that differ from other industry groups.

•Implications of strategic groups– The closest industry competitors are those in the

group.– The various industry groups are differentially and

competitively advantaged and positioned.– Mobility barriers inhibit the movement of competitors

from one strategic group to another.

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Strategic Groups in the Pharmaceutical Industry

High

HighLow

Low

Pri

ces

Ch

arg

edP

rice

s C

har

ged

R&D SpendingR&D Spending

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High

HighLow

Low

Pri

ces

Ch

arg

edP

rice

s C

har

ged


Generic Generic GroupGroup

• Marion Labs• Carter Wallace

• INC Pharmaceut’l

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• Merck• Pfizer

• Eli Lilly

High

HighLow

Low

Pri

ces

Ch

arg

edP

rice

s C

har

ged


Proprietary Proprietary GroupGroup

Generic Generic GroupGroup

• Marion Labs• Carter Wallace

• INC Pharmaceut’l

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Limitations of the Five Forces and Strategic Group Models

•Both models are static and ignore innovation.•Their focus is on industry and group structures rather than individual companies.

– Innovation creates change in industry structures, altering thecompetitive environment.

– Industry structure cannot fully explain the performance differences between industry competitors.

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Competitor Environment

Competitor intelligenceCompetitor intelligence is the ethical is the ethical gathering of needed information and data gathering of needed information and data about competitors’ objectives, strategies, about competitors’ objectives, strategies, assumptions, and capabilitiesassumptions, and capabilities• what drives the competitor as shown by its what drives the competitor as shown by its future future

objectivesobjectives• what the competitor is doing and can do as revealed what the competitor is doing and can do as revealed

by its by its current strategycurrent strategy• What the competitor believes about itself and the What the competitor believes about itself and the

industry, as shown by its industry, as shown by its assumptionsassumptions• What the the competitor may be able to do, as shown What the the competitor may be able to do, as shown

by its by its capabilitiescapabilities

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Competitor Analysis

Future 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 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 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 and themselves?



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Competitor Analysis

CapabilitiesCapabilities

Capabilities:

• What are our strengths and weaknesses?

• How do we rate compared to our competitors?




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Competitor Analysis

ResponseResponse

Response:• What will our competitors do

in the future?• Where do we hold an

advantage over our competitors?

• How will this change our relationship with our competitors?

CapabilitiesCapabilities




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The Role of the General Environment

Potential competitors


RivalryRivalry

Substitutes

Substitutes

Supplier power

Supplier power

Buyer power

Buyer power

EconomicEnvironment

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• Economic segmentEconomic segment

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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RivalryRivalry

Substitutes

Substitutes

Supplier power

Supplier power

TechnologicalEnvironment

Buyer power

Buyer power

EconomicEnvironment

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General Environment

• Technological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported Focus of private and government-supported

R&D expendituresR&D expenditures New communication technologiesNew communication technologies

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RivalryRivalry

Substitutes

Substitutes

Supplier power

Supplier power


Social Environment

Buyer power

Buyer power

EconomicEnvironment

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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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RivalryRivalry

Substitutes

Substitutes

Supplier power

Supplier power


DemographicEnvironment

Social Environment

Buyer power

Buyer power

EconomicEnvironment

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General Environment

• Demographic SegmentDemographic Segment Population sizePopulation size Age structureAge structure Geographic Geographic

distributiondistribution Ethnic mixEthnic mix Income distributionIncome distribution

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RivalryRivalry

Substitutes

Substitutes

Supplier power

Supplier power

Political and LegalEnvironment



Social Environment

Buyer power

Buyer power

EconomicEnvironment

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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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RivalryRivalry

Substitutes

Substitutes

Supplier power

Supplier power

Political and LegalEnvironment



Social Environment

Buyer power

Buyer power

EconomicEnvironment

GlobalEnvironment

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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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Globalization and Industry Structure

Globalization of Markets

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Globalization and Industry Structure

• Globalization– Globally dispersed production lowers

costs and increases quality.– Global markets are replacing

national markets.

• Trend implications– No isolated national markets– More competitors, more intense competition– More rapid innovation and shorter product life cycles

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Stages of the Industry Life Cycle

Time

De

ma

nd

Embryonic

Competitive Changes During Competitive Changes During Industry EvolutionIndustry Evolution

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Competitive Changes During Competitive Changes During Industry Evolution Industry Evolution (Continued)(Continued)

Time

Embryonic

Growth

De

ma

nd

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Time

Embryonic

Growth Shakeout

De

ma

nd

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Growth in Demand and Capacity


Un

its

Timet1t2

CapacityCapacity

DemandDemand

ExcessCapacity

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Time

Embryonic

Growth Shakeout Maturity


De

ma

nd

52



Time

Embryonic

Growth Shakeout Maturity Decline

De

ma

nd

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Strategies in Fragmented Industries

• Fragmented industry characteristics:– Localized markets with low entry

barriers (e.g., Mom’s Diner).– Few economies of scale

opportunities exist.– High transportation costs

(e.g., sand) for products.– Focus strategies predominate

(e.g., customer group, region).

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Strategies in Fragmented Industries

• Competing in fragmented industries requires strategic consolidation by:– Chaining (Wal-Mart)– Franchising (Pearl Vision)– Horizontal mergers– Using the Internet (Lens.com)

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Strategies in Embryonic and Growth Industries

• Three strategies for an innovator competing in a newly emerging market/industry:– Develop and market the technology itself.– Develop and market the technology jointly with

another company through a strategic alliance.– License the technology to existing companies and let

them develop the market.

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Strategies in Embryonic and Growth Industries

• An innovator’s optimal choice of growth industry strategy depends on:– Complementary assets the innovator has that

can be used to exploit and market the innovation.

– High barriers to imitation by competitors (e.g., patents).

– The capability of competitors to quickly imitate the pioneering company.

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Strategy in Embryonic and Growth Industries (Continued)

• Develop and Market the Innovation Itself

• Develop and Market the Innovation Jointly

• License the Innovation to Others

Strategies Available to Innovator:Strategies Available to Innovator:

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Strategy in Mature Industries

Mature Industries

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Strategies to Manage Rivalry in Mature Industries

• Price leadership– One company sets the industry price; other competitors

reference their prices to that price.

• Nonprice competition– Competition by any means other than price.

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Strategies for Deterring Entry in Mature Industries

ProductProductProliferationProliferation

Strategies forStrategies forDeterringDeterring

EntryEntry

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EntryEntry

Price Price CuttingCutting

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EntryEntry

Price Price CuttingCutting

Maintain Maintain ExcessExcess

CapacityCapacity

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Strategy in Declining Industries

Leadership Niche Harvest Divestment

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Strategies in Declining Industries

•Leadership strategy– A firm seeks to become dominant in the industry.

•Niche strategy– Focuses on demand pockets declining more slowly

than the industry as a whole.

•Harvest strategy– Limits investment and optimizes cash flow.

•Divestment strategy– Company exits the industry by selling out early to

others, avoiding liquidation.

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Factors That Determine the Intensity of Competition in

Declining Industries

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Strategy Selection in a Declining Industry

Company Strengths Relative toCompany Strengths Relative toRemaining Pockets of DemandRemaining Pockets of Demand

Inte

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ity

of

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in D

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Ind

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try

High

LowFew Many

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LeadershipLeadershipor Nicheor Niche

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Niche orNiche orHarvestHarvest

Inte

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Low



HarvestHarvestor Divestor Divest


Inte

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Few Many

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Low





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Low





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DivestDivest

1 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis...

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