External internal and competitive advantage

1. Ch. 5 - The External Environment, the
Industry, and competitive analysis

2.  It is not the strongest species that survive, nor
the most intelligent, but the one most responsive
to change.
Charles Darwin
 Nothing focuses the mind better than the
constant sight of a competitor who wants to wipe
you off the map.
Wayne Calloway

3. Focus questions
 What is the general environment?
 What does external environmental analysis
include?
 What is an industry? What forces shape an
industry’s competition?
 What is a strategic group? How it influences the
firm’s competitive actions?
 What do firms need to know about their
competitors?

4. External Environmental analysis
 In addition to increasing a firm’s awareness
and understanding of an increasingly
turbulent, complex and global general
environment, external environmental analysis
also is necessary to enable the firm’s
managers to interpret information to identify
opportunities and threats.

5. Nature of an External Analysis
 It is not aimed at developing an exhausting
list of every possible factor that could
influence the business, rather, it is aimed at
identifying key variables that offer actionable
responses.
 Firms should response:
 Offensively or defensively

6. The external environment

7.  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
External environmental analysis

8. The Process of Performing an
External Analysis
 Gather relevant information
 Identify the most important opportunities and
threats
 Rank factors from 1 (the most important) to
20 (the least important)
 Relationships with suppliers and buyers is a
critical factor
 Other variables vary

9. The Key Factors should be
 Important to achieve long-term and annual
objectives
 Measurable
 Applicable to all competing firms
 Hierarchical ( some – for the overall
company, some – for divisions)

10. Key Economic Variables to Be
Monitored
 Availability of credit
 Level of disposable income
 Interest rates
 Inflation rates
 Federal Government budget
deficits
 Unemployment trends
 Consumption patterns
 Value of the dollar in world
markets
 Stock market trends
 Import/Export factors
 Demand shifts
 Price fluctuations
 Fiscal policies
 Tax rates
 European Economic
Community (EEC) policies
 Organisation of Petroleum
Exporting Countries (OPEC)
policies

11. Key Social, Cultural, Demographic and
Environmental Variables
 Childbearing rates
 Number of births/ deaths
 Immigration and immigration
rates
 Lifestyles
 Attitudes towards business
 Trust in Government
 Disposable income
 Average level of Education
 Attitudes towards leisure time
 Pollution control
 Number of church members
 Population changes
 Regional changes in tastes and
preferences
 Waste management
 Recycling
 Air pollution
 Government regulation

12. Some Political, Governmental, and
Legal Variables
 Tax laws
 Political action committees
 Voter participation rates
 Environmental protection laws
 Level of government subsidies
 Antitrust legislation
 Import/Export regulations
 Fiscal and monetary policies
 Lobbying activities
 Size of Government budget
 Local, state and national
elections
 Terrorist activities

13.  Definition
– An industry is a group of firms producing products that
are close substitutes
 Firms that influence one another
 Includes a rich mix of competitive strategies that
companies use in pursuing strategic competitiveness
and above-average returns
 Compared to the general environment, the
industry environment has a more direct effect on
the firm’s strategic competitiveness and above-
average returns
Industry environmental analysis

14. The five forces model of competition

15. 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

16.  Economies of scale
– Marginal improvements in efficiency that a firm
experiences as it incrementally increases in size
– Advantages and disadvantages of large-scale and
small-scale entry
 Product differentiation
– Unique products, customer loyalty, products at
competitive prices
 Capital requirements
– Physical facilities, inventories, marketing activities,
availability of capital
Barriers to entry (cont’d)

17.  Switching costs
– One-time costs customers incur when they
buy from a different supplier
– New equipment
– Retraining employees
– Psychic costs of ending a relationship
 Access to distribution channels
– Stocking or shelf space
– Price breaks
– Cooperative advertising allowances
Barriers to entry (cont’d)

18.  Cost disadvantages independent of scale
– Proprietary product technology
– Favorable access to raw materials
– Desirable locations
 Government policy
– Licensing and permit requirements
– Deregulation of industries
 Expected retaliation
– Responses by existing competitors may
depend on a firm’s present stake in the
industry and available business options
Barriers to entry (cont’d)

19. Bargaining power of suppliers
 Supplier power increases when:
– Suppliers are large and few in number
– Suitable substitute products are not available
– Individual buyers are not large customers of suppliers
and there are many buyers
– Suppliers’ goods are critical to buyers’ marketplace
success
– Suppliers’ products create high switching costs
– Suppliers pose a threat to integrate forward into
buyers’ industry

20. Bargaining power of buyers
 Buyer power increases when:
– Buyers are large and few in number
– Buyers purchase a large portion of an industry’s total
output
– Buyers’ purchases are a significant portion of a
supplier’s annual revenues
– Buyers can switch to another product without incurring
high switching costs
– Buyers pose threat to integrate backward into the
sellers’ industry

21. Threat of substitute products
 The threat of substitute products increases
when:
– Buyers face few switching costs
– The substitute product’s price is lower
– Substitute product’s quality and performance are
equal to or greater than the existing product
 Differentiated industry products that are valued
by customers reduce this threat

22. 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
– When the strategic stakes are high
– When high exit barriers prevent competitors from
leaving the industry

23. Low entry barriers
Interpreting industry analyses
Unattractive
industry
Suppliers and buyers
have strong positions
Strong threats
from substitute
products
Intense rivalry
among
competitors
Low profit
potential

24. Attractive
industry
High entry barriers
Interpreting industry analyses
(cont’d)
Suppliers and buyers
have weak positions
Few threats from
substitute products
Moderate rivalry
among competitors High profit
potential

25.  Definition
– A group of firms in an industry following the
same or a similar strategy along the same
strategic dimensions
 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
 Strategic dimensions
– Extent of technological leadership
– Product quality
– Pricing policies
– Distribution channels
– Customer service
Strategic groups

26.  Competitor intelligence
– The ethical gathering of needed information and data that
provides insight into the competitor’s:
 Future objectives
– What drives the competitor?
 Current strategy
– What the competitor is doing and can do
 Assumptions
– What the competitor believes about its own firm and the
industry
 Capabilities
– Competitor firm’s capabilities, strengths and weaknesses
Competitor analysis

27. Competitor analysis components

28. The end
 Questions?

29. More reading
 Michael Porter. Competitive strategy.
Competitive advantage: Creating and
Sustaining Superior performance, 1985.