5/11/2022

STRATEGIC
MANAGEMENT
Lecturers in charge: Nguyễn Hiệp and Lê Gia Phúc

CHAPTER
2

The External Environment:

Opportunities, Threats, Industry Competition, and
Competitor Analysis

LEARNING OBJECTIVES

 Explain the importance of analyzing and understanding the firm’s

external environment.
 Define and describe the general environment and the industry
environment.
 Discuss the four parts of the external environmental analysis process.
 Name and describe the general environment’s seven segments.
 Identify the five competitive forces and explain how they determine an
industry’s profitability potential.
 Define strategic groups and describe their influence on firms.
 Describe what firms need to know about their competitors and different
methods used to collect intelligence about them.

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The External Environment

Analysis of
The General, Industry, and Competitor Environments
 An analysis of the general environment focuses on environmental trends and their
implications.
 An analysis of the industry environment focuses on the factors and conditions
influencing an industry’s profitability potential.
 An analysis of competitors is focused on predicting competitors’ actions, responses,
and intentions.
 In combination, the results of these three analyses influence the firm’s:
• Vision
• Mission
• Choice of strategies
• Competitive actions and responses it will take to implement those strategies.

General Environmental Analysis

 General environment is dimensions in the broader society that influence an

industry and the firms within it.
 To cope with often ambiguous and incomplete environmental data and to
increase understanding of the general environment, firms complete an general
environmental analysis.
 Identifying opportunities and threats is an important objective of studying the
general environment.
• An opportunity is a condition in the general environment that, if exploited
effectively, helps a company reach strategic competitiveness.
• A threat is a condition in the general environment that may hinder a
company’s efforts to achieve strategic competitiveness.
 Effective scanning, monitoring, forecasting, and assessing are vital to the
firm’s efforts to recognize and evaluate opportunities and threats.

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Four Parts of General Environmental Analysis

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

Scanning

 Scanning entails the study of all segments in the general environment.

 Through scanning, firms:

• Identify early signals of potential changes in the general environment
• Detect changes that are already under way.

 Scanning activities must be aligned with the organizational context.

 The Internet provides a wealth of opportunities for scanning.

Monitoring

 When monitoring, analysts observe environmental changes to see if an

important trend is emerging from among those spotted through scanning.

 Effective monitoring requires the firm to identify important stakeholders and

understand its reputation among these stakeholders as the foundation for
serving their unique needs.

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Forecasting

 When forecasting, analysts develop feasible projections of what might

happen, and how quickly, as a result of the events and trends detected
through scanning and monitoring.

 Forecasting events and outcomes accurately is challenging.

 Forecasting demand for new technological products is difficult because

technology trends are continually shortening product life cycles.

Assessing

 The objective is to determine the timing and significance of the effects of

environmental changes and trends that have been identified.

 The intent of assessment is to specify the implications of understanding the

general environment.

 Although gathering and organizing information is important, appropriately

interpreting that information to determine if an identified trend in the general
environment is an opportunity or threat is critical.

Segments of the General Environment

 Seven environmental segments that are external to the firm

• Demographic
• Economic
• Political/legal
• Sociocultural
• Technological
• Global
• Sustainable physical environment
 These environmental segments affect all industries and the firms competing in
them
• For each segment, firms have to determine the strategic relevance of
environmental changes and trends.

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Elements of Segments of General Environment

Demographic • Population size • Ethnic mix

segment • Age structure • Income distribution
• Geographic distribution
Economic • Inflation rates • Personal savings rate
segment • Interest rates • Business savings rates
• Trade deficits or surpluses • Gross domestic product
• Budget deficits or surpluses
Political/Legal • Antitrust laws • Labor training laws
segment • Taxation laws • Educational philosophies and
• Deregulation philosophies policies
Sociocultural • Women in the workforce • Shifts in work and career
segment • Workforce diversity preferences
• Attitudes about the quality of work • Shifts in preferences regarding
life product and service characteristics

Elements of Segments of General Environment (cont.)

Technological • Product innovations • Focus of private and government-

segment • Applications of knowledge supported research and
development (R&D) expenditures
• New communication technologies
Global segment • Important political events • Newly industrialized countries
• Critical global markets • Different cultural and institutional
attributes
Sustainable • Energy consumption • Availability of water as a resource
physical • Practices used to develop energy • Producing environmentally
environment sources friendly products
segment • Renewable energy efforts • Reacting to natural or man-made
• Minimizing a firm’s disasters
environmental footprint

The Demographic Segment

 The demographic segment is concerned with a population’s size, age

structure, geographic distribution, ethnic mix, and income distribution.
 Population Size
• It is projected that population growth will continue in the twenty-first
century, but at a slower pace.
• Firms may want to recognize the market potential that may exist for
them in the following five nations, which are expected to be the most
populous nations in the world by 2050: India; China; United States;
Indonesia and Pakistan

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The Demographic Segment

 Age Structure
• The world’s population is rapidly aging.
• The aging of the population:
o Has significant implications for availability of qualified labor, health care,
retirement policies, and business opportunities among others.
o Threatens the ability of firms to hire and retain a workforce that meets their needs.
 Geographic Distribution
• How a population is distributed within countries and regions is subject to change
over time.
o Examples: In the United States, the shift from states in the Northeast and Great
Lakes region to states in the West, South, and Southwest; in China, the shift from
rural areas to urban communities

The Demographic Segment

 Ethnic Mix
• The ethnic mix of countries’ populations continues to change.
o Example: The increase in the Hispanic population in the United States
• The ethnic diversity of the population is important because of:
o Consumer needs
o The labor force composition
 Income Distribution
• Income distribution within and across populations informs firms of different groups’
purchasing power and discretionary income.
o Example: The rise in domestic consumption of consumer goods by India’s
middle class has positioned it as a market of interest.
o Of particular interest are the average incomes of households and individuals.

The Economic Segment

 The economic environment refers to the nature and direction of the economy in
which a firm competes or may compete.
 In general, firms seek to compete in relatively stable economies with strong growth
potential.
 It is challenging for firms studying the economic environment to predict economic
trends that may occur and their effects on them.
 When facing economic uncertainty, firms especially want to study closely the
economic environment in multiple regions and countries throughout the world.

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The Political/Legal Segment

 The political / legal segment 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 interactions among nations as well as between firms and various
local governmental agencies.
 Essentially, this segment is concerned with:
• How organizations try to influence governments
• How they try to understand the current and projected influences of those
governments on their competitive actions and responses
 The relationship between national, regional, and local laws and regulations creates a
highly complex environment within which businesses must navigate.

The Sociocultural Segment

 The sociocultural segment is concerned with a society’s attitudes and cultural values.
• Attitudes and values
o Form the cornerstone of a society
o Often drive demographic, economic, political / legal, and technological
conditions and changes
o Are relatively stable, but can and often do change over time. Firms must
identify these changes in order to stay ahead of their competitors and stay
relevant in the minds of their consumers.

The Technological Segment

 The technological segment includes the institutions and activities involved in

creating new knowledge and translating that knowledge into new outputs, products,
processes, and materials.
 Firms should continuously scan the general environment to identify:
• Potential substitutes for technologies that are in current use
• Newly emerging technologies from which their firm could derive competitive
advantage
 New technology and innovations are changing many industries.
• Examples: The Internet and wireless communication technology
• Thus, firms in all industries must become more innovative in order to survive.

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The Global Segment

 The global segment includes relevant new global markets and their critical cultural
and institutional characteristics, existing markets that are changing, and important
international political events.
 When studying the global segment, firms should recognize that globalization of business
markets may create opportunities to enter new markets, as well as threats that
competitors from other economies may enter their market.
• Global focusing:
• Is a more cautious approach to globalization in which firms focus on global
niche markets.
• Allows firms to build onto and use their competencies while limiting their
risks within the niche market.

The Global Segment

 Firms competing in global markets should recognize each market’s

sociocultural and institutional attributes.
• Examples: Korean ideology emphasizes communitarism; Chinese
ideology emphasizes guanxi—personal connections; Japanese
ideology emphasizes wa—group harmony and social cohesion.
 The informal economy is another aspect of the global segment requiring
analysis.

The Sustainable Physical Environment Segment

 The sustainable physical environment segment refers to potential and

actual changes in the physical environment and business practices that are
intended to positively respond to those changes in order to create a
sustainable environment.
 Concerned with trends oriented to sustaining the world’s physical
environment, firms recognize that ecological, social, and economic
systems interactively influence what happens in this particular segment
and that they are part of an interconnected global society.
 An increasing number of companies are investing in sustainable
development.

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Industry Environment Analysis

 The industry environment is a set of factors that directly influences a

firm and its competitive actions and responses (the model of five
competitive forces):
• The threat of new entrants
• The power of suppliers
• The power of buyers
• The threat of product substitutes
• The intensity of rivalry among competing firms

Industry Environment Analysis

 An industry is a group of firms producing products that are close substitutes.

 The industry environment is a set of factors that directly influences a firm and
its competitive actions and responses
 Companies use a mix of different competitive strategies to pursue above-
average returns when competing in a particular industry.
• An industry’s structural characteristics influence a firm’s choice of strategies.
 Compared with the general environment, the industry environment has a more
direct effect on firms’ competitive actions and responses.
 To study an industry, the firm examines five forces that affect the ability of all
firms to operate profitably within a given industry.

The Five Forces of Competition Model

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Threat of New Entrants

 Identifying new entrants is important because they can threaten the market share of
existing competitors.
 How likely firms will enter an industry is a function of two factors:
• Barriers to entry
• The retaliation expected from current industry participants
 Barriers to Entry
• Companies competing within a particular industry study entry barriers to
determine the degree to which their competitive position reduces the likelihood of
new competitors being able to enter the industry to compete against them.
• Firms considering entering an industry study entry barriers to determine the
likelihood of being able to identify an attractive competitive position within the
industry.

Threat of New Entrants

• There are several significant entry barriers:

o Economies of scale
o Product differentiation
o Capital requirements
o Switching costs
o Access to distribution channels
o Cost disadvantages independent of scale
o Government policy

Threat of New Entrants

o Economies of Scale
 With economies of scale, the cost of producing each unit declines as
the quantity of a product produced during a given period increases.
 A new entrant is unlikely to quickly generate the level of demand
for its product that would allow it to develop economies of scale.

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Threat of New Entrants

o Product Differentiation
 Over time, customers may come to believe that a firm’s product is unique
and consistently purchase that firm’s product.
 To combat the perception of uniqueness, new entrants frequently offer
products at lower prices. However, this may result in lower profits or even
losses.

o Capital Requirements
 Competing in a new industry requires a firm to have capital for physical
facilities, inventories, marketing activities, and other critical business
functions.
 The capital required for successful market entry may not be available to
pursue the market opportunity.

Threat of New Entrants

o Switching Costs
 Switching costs are the one-time costs customers incur when they buy from a
different supplier.
 If switching costs are high, a new entrant must attract buyers by offering either:
• A substantially lower price
• A much better product

o Access to Distribution Channels

 After building a relationship with its distributors, a firm will nurture it, thus
creating switching costs for the distributors.
 New entrants may use price breaks and cooperative advertising allowances to
persuade distributors to carry their products. However, those practices can reduce
new entrants’ profit potential.

Threat of New Entrants

o Cost Disadvantages Independent of Scale

 Successful competition requires new entrants to reduce the strategic relevance
of cost advantages held by established competitors that cannot be duplicated.
• Examples: Proprietary product technology, favorable access to raw materials,
desirable locations, and government subsidies

o Government Policy
 Governmental decisions and policies that can control entry into an industry
include:
• The granting of licenses and permits
• Deregulation
• Antitrust issues

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Bargaining Power of Suppliers

o Suppliers can exert power over firms competing within an industry by:
 Increasing prices
 Reducing the quality of their products
o A supplier group is powerful when:
 It is dominated by a few large companies and is more concentrated than the
industry to which it sells.
 Satisfactory substitute products are not available to industry firms.
 Industry firms are not a significant customer for the supplier group.
 Suppliers’ goods are critical to buyers’ marketplace success.
 The effectiveness of suppliers’ products has created high switching costs for
industry firms.
 It poses a credible threat to integrate forward into the buyers’ industry.

Bargaining Power of Buyers

o To reduce their costs, buyers bargain for:

 Higher quality
 Greater levels of service
 Lower prices
o Customers (buyer groups) are powerful when:
 They purchase a large portion of an industry’s total output.
 The sales of the product being purchased account for a significant portion of the
seller’s annual revenues.
 They could switch to another product at little, if any, cost.
 The industry’s products are undifferentiated or standardized, and the buyers pose
a credible threat if they were to integrate backward into the sellers’ industry.

Threat of Substitute Products

o 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.
o In general, product substitutes present a strong threat to a firm when:
 Customers face few, if any, switching costs
 The substitute product’s price is lower
 The substitute product’s quality and performance capabilities are equal to or
greater than those of the competing product
o To reduce a substitute’s attractiveness, a firm can differentiate a product along
dimensions that are valuable to customers, such as:
 Quality
 Service after the sale
 Location

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Intensity of Rivalry among Competitors

o Competitive rivalry intensifies when:
 A firm is challenged by a competitor’s actions
 A company recognizes an opportunity to improve its market position
o Common dimensions on which rivalry is based include:
 Price
 Service after the sale
 Innovation
o Factors that increase the intensity of rivalries among firms include:
 Numerous or equally balanced competitors
 Slow industry growth
 High fixed costs or high storage costs
 Lack of differentiation or low switching costs
 High strategic stakes
 High exit barriers

Interpreting Industry Analyses

 Analysis of the five forces within a given industry allows the firm to determine the industry’s
attractiveness in terms of the potential to earn average or above-average returns.
• Stronger competitive forces usually mean a lower potential to earn profits.
 An unattractive industry has:
• Low entry barriers
• Suppliers and buyers with strong bargaining positions
• Strong competitive threats from product substitutes
• Intense rivalry among competitors
 An attractive industry has:
• High entry barriers
• Suppliers and buyers with little bargaining power
• Few competitive threats from product substitutes
• Relatively moderate rivalry

Strategic Groups

 A set of firms emphasizing similar strategic dimensions and using a

similar strategy is called a strategic group.
 Competitive rivalry is greater within a strategic group than between
strategic groups.

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Strategic Groups

 Analyzing strategic groups can be helpful in diagnosing competition,

positioning, and the profitability of firms competing within an industry.
• Using strategic groups to understand an industry’s competitive
structure requires the firm to plot companies’ competitive actions and
responses along strategic dimensions, such as:
oPricing decisions
oProduct quality
oDistribution channels
• This shows the firm how certain companies are competing similarly in
terms of how they use similar strategic dimensions.

Strategic Groups

 Strategic groups have several implications:

• Because firms within a group offer similar products to the same
customers, the competitive rivalry among them can be intense.
oThe more intense the rivalry, the greater is the threat to each firm’s
profitability.
• The strengths of the five forces differ across strategic groups.
• The closer the strategic groups are in terms of their strategies, the
greater is the likelihood of rivalry between the groups.

Competitor Analysis

 How companies gather and interpret information about their competitors is called
competitor analysis.
• Understanding the firm’s competitor environment complements the insights
provided by studying the general and industry environments.
 Competitor analysis focuses on each company against which a firm competes directly.
 In a competitor analysis, the firm seeks to understand the following:
• What drives the competitor, as shown by its future objectives
• What the competitor is doing, 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
 Knowledge about these four dimensions helps the firm prepare an anticipated
response profile for each competitor.

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Competitor Analysis Components

Competitor Analysis

 Competitor intelligence is the set of data and information the firm

gathers to better understand and anticipate competitors’ objectives,
strategies, assumptions, and capabilities.
 When gathering competitive intelligence, a firm must pay attention to the
complementors of its products and strategy.
• Complementors are companies or networks of companies that sell
complementary goods or services that are compatible with the focal
firm’s good or service.
• Example: Intel and Microsoft

Ethical Considerations

 Firms must follow laws, regulations, and ethical guidelines when gathering competitor
intelligence.
• Practices considered both legal and ethical include:
o Obtaining publicly available information
 Examples: Court records and annual reports
o Attending trade fairs and shows to obtain competitors’ brochures, view their
exhibits, and listen to discussions about their products
• Practices widely viewed as unethical include:
o Blackmail
o Trespassing
o Eavesdropping
o Stealing drawings, samples, or documents

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