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7/31/2019 Potter 5 Force
1/30
Ch2-1
Chapter 2
The External Environment:
Opportunities, Threats, Industry
Competition, and Competitor Analysis
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
2000 South-Western College Publishing
7/31/2019 Potter 5 Force
2/30
Ch2-2
The Strategic
Management
Process
Chapter 3
Internal
Environment
Chapter 2
External
EnvironmentStrategic Intent
Strategic Mission
Strategy Formulation Strategy Implementation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 7
Acquisitions &
Restructuring
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 12
Strategic
Leadership
Chapter 13
Entrepreneurship
& Innovation
Strategic
Inputs
FeedbackStrategic
Outcomes
Strategic
Actions
Strategic
Competitiveness
Above Average
Returns
7/31/2019 Potter 5 Force
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Ch2-3
Political/
Legal
Economic
Technological
Global
DemographicSociocultural
Competitive
Environment
Industry
Environment
Components of the General Environment
7/31/2019 Potter 5 Force
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Ch2-4
Components of the General EnvironmentDemographicSegment
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
EconomicSegment
Inflation rates
Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Business savings rates
Gross domestic product
Political/Legal
Segment Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and
policies
SocioculturalSegment
Women in the workforce
Workforce diversity
Attitudes about work lifequality
Concerns about theenvironment
Shifts in work and careerpreferences
Shifts in preferences regarding
product and service
characteristicsTechnological
Segment Product innovations
Applications of knowledge
Focus of private and
government-supported R&Dexpenditures
New communicationtechnologies
GlobalSegment
Important political events
Critical global markets
Newly industrialized countries
Different cultural andinstitutional attributes
7/31/2019 Potter 5 Force
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Ch2-5
External Environmental Analysis
The external environmental analysis process should be
conducted on a continuous basis. This process includesfour activities:
Scanning
Monitoring
Forecasting
Assessing
Identifying early signals of environmental
changes and trends
Detecting meaning through ongoing observationsof environmental changes and trends
Developing projections of anticipated outcomesbased on monitored changes and trends
Determining the timing and importance of
environmental changes and trends for firms'strategies and their management
7/31/2019 Potter 5 Force
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Ch2-6
Rank State
1 Massachusetts
2 California
3 Colorado
4 Washington
5 Connecticut
6 Utah
7 New Hampshire
8 New Jersey
9 Delaware
10 Arizona
Top 10 U.S. States MovingToward Digital EconomyStates in the top 10 ofthose that are trying totransform themselves tothe realities and needs of
a digital economy mayexperience an influx ofhigh-tech companies andskilled workers as well asincreases in tax revenues
External Environmental Analysis
7/31/2019 Potter 5 Force
7/30Ch2-7
Threat ofNew
Entrants
Threat of
New
Entrants
Porters Five Forces
Model of Competition
7/31/2019 Potter 5 Force
8/30Ch2-8
Threat of New Entrants
Barriers to
Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
7/31/2019 Potter 5 Force
9/30Ch2-9
Bargaining
Power of
Suppliers
Threat ofNew
Entrants
Threat of
New
Entrants
Porters Five Forces
Model of Competition
7/31/2019 Potter 5 Force
10/30Ch2-10
Bargaining Power of Suppliers
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers are likely to be powerful if:
Supplier industry is dominated by afew firms
Suppliers products have few substitutes
Buyer is not an important customer tosupplier
Suppliers product is an importantinput to buyers product
Suppliers products are differentiated
Suppliers products have highswitching costs
Supplier poses credible threat of
forward integration
7/31/2019 Potter 5 Force
11/30Ch2-11
Bargaining
Power of
Buyers
Threat ofNew
Entrants
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
7/31/2019 Potter 5 Force
12/30Ch2-12
Bargaining Power of Buyers
Buyers compete
with the supplying
industry by:
*Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases
are large relative to sellers sales
Purchase accounts for a significantfraction of suppliers sales
Products are undifferentiated
Buyers face few switching costs
Buyers industry earns low profits
Buyer presents a credible threat ofbackward integration
Product unimportant to quality
Buyer has full information
7/31/2019 Potter 5 Force
13/30Ch2-13
Threat of
Substitute
Products
Threat ofNew
Entrants
Threat of
New
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
7/31/2019 Potter 5 Force
14/30Ch2-14
Threat of Substitute Products
Products
with similar
functionlimit the
prices firms
can charge
Keys to evaluate substitute products:
Products with improving
price/performance tradeoffs
relative to present industryproducts
Example:
Electronic security systems inplace of security guards
Fax machines in place of
overnight mail delivery
7/31/2019 Potter 5 Force
15/30Ch2-15
Threat of
Substitute
Products
Threat ofNew
Entrants
Threat of
New
Entrants
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
7/31/2019 Potter 5 Force
16/30Ch2-16
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Making new product introductions
Increasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
7/31/2019 Potter 5 Force
17/30Ch2-17
Cutthroatcompetition is more likely to occur when:
Rivalry Among Existing Competitors
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
Lack of differentiation or switching costs
High storage costs
Capacity added in large increments
High strategic stakes
High exit barriers
Diverse competitors
7/31/2019 Potter 5 Force
18/30Ch2-18
High exit barriersare economic, strategic and
emotional factors which cause companies to remain
in an industry even when future profitability is
questionable.
Specialized assets
Fixed cost of exit (e.g., labor agreements)
Emotional barriers
Government and social restrictions
Strategic interrelationships
Rivalry Among Existing Competitors
7/31/2019 Potter 5 Force
19/30Ch2-19
Effects of Entry Barriers and Exit
Barriers on Industry Profits
Entry
Barriers
Exit Barriers
High
Low
HighLow
7/31/2019 Potter 5 Force
20/30Ch2-20
Low, Stable
Returns
Entry
Barriers
Exit Barriers
High
Low
HighLow
Effects of Entry Barriers and Exit
Barriers on Industry Profits
7/31/2019 Potter 5 Force
21/30Ch2-21
High, Stable
Returns
Entry
Barriers
Exit Barriers
High
Low
HighLow
Low, Stable
Returns
Effects of Entry Barriers and Exit
Barriers on Industry Profits
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Ch2-22
Low, Risky
Returns
Entry
Barriers
Exit Barriers
High
Low
HighLow
Low, Stable
Returns
High, Stable
Returns
Effects of Entry Barriers and Exit
Barriers on Industry Profits
7/31/2019 Potter 5 Force
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Ch2-23
High, Risky
Returns
Entry
Barriers
Exit Barriers
High
Low
HighLow
Low, Stable
Returns
High, Stable
Returns
Low, Risky
Returns
Effects of Entry Barriers and Exit
Barriers on Industry Profits
7/31/2019 Potter 5 Force
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Ch2-24
Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firms Competitors
Competitive
Environment
Industry
Environment
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Ch2-25
Competitor Analysis
Assumptions
What assumptions do ourcompetitors hold about the futureof industry and themselves?
Current Strategy
Does our current strategy supportchanges in the competitiveenvironment?
Future ObjectivesHow do our goals compare to our
competitors goals?
CapabilitiesHow do our capabilities compare
to our competitors?
Response
What will ourcompetitors do in thefuture?
Where do we have acompetitiveadvantage?
How will this changeour relationship withour competition?
7/31/2019 Potter 5 Force
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Ch2-26
Future Objectives
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
What Drives the competitor?
Competitor Analysis
7/31/2019 Potter 5 Force
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Ch2-27
What is the competitor doing?
What can the competitor do?
Future Objectives
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
Current Strategy
How are we currently
competing?
Does this strategy
support changes in the
competitive structure?
Competitor Analysis
7/31/2019 Potter 5 Force
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Ch2-28
What does the competitor believe
about itself and the industry?
Future Objectives
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
Current Strategy
How are we currently
competing?Does this strategy
support changes in the
competition structure?
Do we assume the future
will be volatile?
Are we assuming stable
competitive conditions?
What assumptions do our
competitors hold about the
industry and themselves?
Assumptions
Competitor Analysis
7/31/2019 Potter 5 Force
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Ch2-29
What are the competitors
capabilities?
Future Objectives
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
Current Strategy
How are we currently
competing?Does this strategy
support changes in the
competition structure?
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?
Assumptions
What are my competitors
strengths and weaknesses?
How do our capabilities
compare to our
competitors?
Capabilities
Competitor Analysis
C i A i
7/31/2019 Potter 5 Force
30/30
Future Objectives
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
Current Strategy
How are we currently
competing?Does this strategy
support changes in the
competition structure?
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?
Assumptions
Response
What will our competitors
do in the future?
Where do we have a
competitive advantage?
How will this change our
relationship with our
competition?
Capabilities
What are my competitors
strengths and weaknesses?
How do our capabilities
compare to our
competitors?
Competitor Analysis
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