II.
STRATEGIC PLANNING: IDENTIFYING FACTORS IN A FIRM’S EXTERNAL
ENVIRONMENT
The external environment has 3 major parts:
1. General Environment – composed of dimensions in the broader society that
influence an industry and the firms within it.
2. Industrial Environment – set of factors that directly influence a firm and its
competitive actions and competitive responses.
3. Competitor Environment - details about the direct and indirect competitors for a
firm and the competitive dynamics that are expected to impact a firm's efforts to
generate above-average returns.
I. External Environmental Analysis
An important objective of studying the general environment is identifying opportunities
and threats.
Opportunity is a condition in the general environment that, if exploited, helps a
company achieves strategic competitiveness.
Threat is a condition in the general environment that may hinder a company's
efforts to achieve strategic competitiveness.
Components of the External Environment Analysis
Scanning – through scanning, firms identify early signals of potential changes in
the general environment and detect changes that are already under way. The
Internet provides multiple opportunities for scanning. For example, Amazon.com,
similar to many Internet companies, records significant information about
individuals visiting its website, particularly if a purchase is made.
Monitoring – when monitoring, analysts observe environmental changes to see
if an important trend is emerging from among those spotted by scanning. Critical
to successful monitoring is the firm’s ability to detect meaning in different
environmental events and trends.
Forecasting – When forecasting, analysts develop feasible projections of what
might happen, and how quickly, as a result of the changes and trends detected
through scanning and monitoring. For example, analyst might forecast the time
that will be required for a new technology to reach the market place, the length of
time before different corporate training procedures are required to deal with
anticipated changes in the composition of the workforce, or how much time will
elapse before changes in government taxation policies affect consumers’
purchasing patterns.
Assessing – The objective of assessing is to determine the timing and
significance of the effects of environmental changes and trends on the strategic
management of the firm. Through scanning, monitoring, and forecasting, analysts
are able to understand the general environment.
Segments of the General Environment
1. Demographic Segment is concerned with population’s size, age structure,
geographic distribution, ethnic mix, and income distribution.
Population Size- observing demographic changes in population highlights
the importance of this environmental segment. For example, some
advanced nations have a negative population growth, after discounting the
effects of immigration.
Age Structure- In some countries, the population’s average is increasing.
For example, worldwide, the number of people aged 65 and older is
projected to grow by 88 percent, or almost million people per month, by
2025. This trend may suggest numerous opportunities for firms to develop
goods and services to meet the needs of an increasingly older population.
Geographic Distribution- The shifting of U.S. population from north and
east to the west and south and the trend of relocating from metropolitan to
non-metropolitan areas change local and state governments’ tax bases.
So in turn, business firms’ decisions regarding location are influenced by
the degree of support different taxing agencies offer as well as the rates at
which these agencies tax businesses.
Ethnic Mix- the ethnic mix of countries’ population continues to change.
Through this, companies can develop and market products that satisfy the
unique needs of different ethnic groups. Changes in the ethnic mix also
affect a workforce’s composition. In the United States, for example, the
population and labor force continue to diversify, as immigration accounts
for a sizable part of growth.
Income Distribution- Understanding how income is distributed within and
across populations informs firms of different groups’ purchasing power
and discretionary income.
2. The Economic Segment
The economic environment refers to the nature and direction of the economy in
which a firm competes or may compete. Because nations are interconnected as a result
of global economy, firms must scan, monitor, forecast, and asses the health of
economies outside their host nation. For example, many nations throughout the world
are affected by the U.S. economy.
3. The Political/Legal Segment
The political/legal is the arena in which organizations and interest groups
compete for attention, resources, and a voice in overseeing the body of laws and
regulations guiding the interactions among nations. Firms must carefully analyze a new
political administration’s business-related policies and philosophies. Antitrust laws,
taxation laws, industries chosen for deregulation, labor training laws, and the degree of
to educational institutions are areas in which an administration’s policies can affect the
operations and profitability of industries and individual firms.
4. The Sociocultural Segment
The sociocultural segment is concerned with a society’s attitudes and cultural
values. Companies must understand the implications of a society’s attitudes and its
cultural values to offer products that meet consumers’ needs.
5. The Technological Segment
The technological segment includes the institutions and activities involved with
creating new knowledge and translating that knowledge into new outputs, products,
processes, and materials
6. The Global Segment
The global segment includes relevant new global markets, existing markets that
are changing, important international political events, and critical cultural and
institutional characteristics of global markets. Globalization of business markets creates
both opportunities and challenges for firms. For example, firms can identify and enter
valuable new global markets.
II. Industry Environment Analysis
An industry is a group of firms producing products that are close substitutes.
Compared to the general environment, the industry environment has a more direct
effect on the firm’s strategic actions. The five forces model of competition includes the
threat of entry, the power of suppliers, the power of buyers, product substitutes, and the
intensity of rivalry among competitors. By studying these forces, the firm finds a position
in an industry where it can influence the forces in its favor or where it can buffer itself
from power of the forces in order to increase its ability to earn above-average returns.
Five Forces Model:
1. Threat of New Entrants
Identifying new entrants is important because they threaten the market share of
existing competitors. One reason new entrants pose such a threat is that they bring
additional production capacity. Unless the demand for a good service is increasing,
additional capacity holds consumers’ cost down, resulting in less revenue and lower
returns for competing firms. Often, new entrants have a keen interest in gaining a large
market share.
Barriers to Entry- existing competitors try to develop barriers to entry in
order that the new entrant cannot operate profitably. There are several
kinds of potentially significant entry barriers:
o Economies of Scale- the marginal improvements in efficiency that
a firm experiences as it incrementally increases its size. Therefore,
as the quantity of a product produced during a given period
increases, the cost of manufacturing each unit declines.
o Product Differentiation- Over time, customers may come to
believe that a firm’s product is unique. This belief can result from
the firm’s service to the customer, effective advertising campaigns,
or being the first to market a good or service. Companies such as
Coca-Cola, PepsiCo, and the world’s automobile manufacturers
spend a great deal of money on advertising to convince potential
customers of their products’ distinctiveness.
o Capital Requirements- Competing in a new industry requires a
firm to have resources to invest. In addition to physical facilities,
capital is needed for inventories, marketing activities, and other
critical business functions.
o Switching Costs- switching costs are the one-time costs
customers incur when they buy from different supplier. The cost of
buying new auxiliary equipment and of retraining employees, and
even the psychic costs of ending a relationship, may be incurred in
switching to a new supplier. If switching costs are high, a new
entrant must offer either a substantially lower price or a much better
product to attract buyers.
o Access to Distribution Channels- Over time, industry participants
typically develop effective means of distributing products. Once a
relationship with its distributors has been developed, a firm will
nurture it to create switching costs for the distributors. Access to
distribution channels can be a strong entry barrier for new entrants,
particularly in consumer nondurable goods industries (for example,
in grocery stores where shelf space is limited) and in international
markets. Thus, new entrants have to persuade distributors to carry
their products, either in addition to or in place of those currently
distributed.
o Cost Disadvantages Independent of Scale- Sometimes,
established competitors have cost advantages that new entrants
cannot duplicate. Proprietary product technology, favorable access
to raw materials, desirable locations, and government subsidies are
examples.
o Government Policy- through licensing and permit requirements,
governments can also control entry into an industry. Liquor
retailing, banking, and trucking are examples of industries in which
government decisions and actions affect entry possibilities. Also,
governments often restricts entry into some industries because of
the need to provide quality or service or the need to protect jobs.
Expected Retaliation- firms seeking to enter an industry also anticipate
the reactions of firms in the industry. An expectation of swift and vigorous
competitive responses reduces the likelihood of entry. Vigorous retaliation
can be expected when the existing firm has a major stake in the industry.
2. Bargaining Power of Suppliers
Increasing prices and reducing the quality of their products are potential means
used by suppliers to exert power over firms competing within an industry. (See slide 17).
The airline industry is an example of an industry in which suppliers’ bargaining power is
relatively low. While the number is low, the demand for the major aircraft is relatively
low.
3. Bargaining Power of Buyers
Firms seek to maximize the return on their invested capital, Alternatively, buyers
(customers of an industry or a firm) want to buy products at the lowest possible price-
the point at which the industry earns the lowest acceptable rate of return on its invested
capital. To reduce their costs, buyers bargain for higher quality, greater levels of
service, and lower prices. (see slide 18).
4. Threat of Substitute Products
Substitute products are goods or services from outside a given industry that
perform similar or the same functions as a product that the industry produces. For
example, as a sugar substitute, NutraSweet places an upper limit on sugar
manufacturers’ prices- NutraSweet and sugar perform the same function, but when
different characteristics. (See slide 19).
5. Intensity of Rivalry among Competitors
Because an industry’s firms are mutually dependent, actions taken by one
company usually invite competitive responses. Thus, in many industries, firms actively
compete against one another. Competitive rivalry is intensifies when a firm is
challenged by a competitor’s actions oe when a company recognizes an opportunity to
improve its market position.
Factors that influence the level of competitive rivalry within an industry:
1. Numerous or Equally Balanced Competitors- intense rivalries are common in
industries with many companies. With multiple competitors, it is common for a few firms
to believe that they can act without eliciting response.
2. Slow Industry Growth- when market is growing, firms try to effectively use
resources to serve an expanding customer base.
3. High Fixed Costs or High Storage Costs- when fixed costs account for a larger
part of total costs, companies try to maximize the use of their productive capacity. Doing
so allows the firm to spread costs across a larger volume of output.
4. Lack of Differentiation or Low Switching Costs- when buyers find a differentiated
product that satisfies their needs, they frequently purchase the product loyally over time.
Industries with many companies that have successfully differentiated their products
have less rivalry, resulting in lower competition for individual firms.
5. High Strategic Stake- competitive rivalry is likely to be high when it is important for
several of the competitors to perform well in the market. For example, although it is
diversified and is a market leader in other businesses, Samsung has targeted market
leadership in the consumer electronics market and is doing quite well. This market is
quite important to Sony and other major competitors, such as Hitachi, Matsushita, and
Mitsubishi.
6. High Exit Barriers- sometimes companies continue competing in an industry even
though the returns on invested capital are low or negative. Firms making this choice
likely face high exit barriers.
III. Competitor Analysis
In a competitor analysis, the firm seeks to understand:
• What drives the competitor, as shown by its future objectives.
• What the competitor is doing and can do, as revealed by its current strategy.
• What the competitor believes about the industry, as shown by its assumptions.
• What the competitor’s capabilities are, as shown by its strengths and
weaknesses.
Critical to an effective competitor analysis is gathering data and information that
can help the firm understand its competitors’ intentions and the strategic
implications resulting from them.
Useful data and information combine to form competitor intelligence.
Competitor Intelligence-the set of data and information the firm gathers to
better understand and better anticipate competitors’ objectives, strategies,
assumptions, and capabilities.
Firms should follow generally accepted ethical practices in gathering competitor
intelligence.
Practices considered both legal and ethical include:
1. Obtaining publicly available information (such as court records,
competitors’ help-wanted advertisements, annual reports, financial reports
of publicly held corporations, and Uniform Commercial Code filings).
2. Attending trade fairs and shows to obtain competitors’ brochures, view
their exhibits, and listen to discussions about their products.
REFRERENCES
Hill, Charles W.L. and Jones, Gareth R. 2004. Strategic Management Theory and
Integrated Approach. Thomson-South Western.
Hitt, Ireland, and Hoskisson. 2005. Strategic Management: Competitiveness and
Globalization: Concepts and Cases. 6th edition Thomson, South Western-Australia.
Pitts, Robert A. and Lei, David. 2007. Strategic Management: Building and
Sustaining Competitive Advantage. Thomson-South Western.
Divine Word College of Laoag
Graduate School
IDENTIFYING CRITICAL
FACTORS IN A FIRM’S
EXTERNAL ENVIRONMENT
PRESENTED BY:
LERRYBETH B. JUAREZ
KARA MAE PAGCANLUNGAN
MBA-STUDENTS
