This chapter discusses analyzing a company's external environment including its industry and competitors. It introduces the SWOT analysis tool for assessing strengths, weaknesses, opportunities, and threats. Porter's Five Forces model is presented for industry analysis, examining the competitive rivalry, threat of substitutes and new entrants, and bargaining power of suppliers and buyers. Competitor analysis involves understanding competitors' objectives, strategies, assumptions, capabilities, and likely responses to strategic moves. Conducting external and competitor analysis provides insights into a company's strategic situation.

1. Ch2
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

2. Ch2
Political/
Legal
Economic
Technological
Global
Demographic
Sociocultural
CompetitiveCompetitive
EnvironmentEnvironment
Industry
Environment
Components of the General Environment

3. Ch2
SWOT Analysis
• Strengths
• Weaknesses
• Opportunities
• Threats

4. Ch2
The purpose of SWOT Analysis
• It is an easy-to-use tool for developing
an overview of a company’s strategic
situation
– It forms a basis for matching your
company’s strategy to its situation

5. Ch2
SWOT is the starting point
• It provides an overview of the strategic
situation.
• It provides the “raw material” to do more
extensive internal and external analysis.

6. Ch2
Opportunities
• An OPPORTUNITY is a chance for firm
growth or progress due to a favorable
juncture of circumstances in the
business environment.
• Possible Opportunities:
– Emerging customer needs
– Quality Improvements
– Expanding global markets
– Vertical Integration

7. Ch2
Threats
• A THREAT is a factor in your
company’s external environment that
poses a danger to its well-being.
• Possible Threats:
– New entry by competitors
– Changing demographics/shifting demand
– Emergence of cheaper technologies
– Regulatory requirements

8. Ch2
Opportunities and Threats form a
basis for EXTERNAL analysis
• By examining opportunities, you can
discover untapped markets, and new
products or technologies, or identify
potential avenues for diversification.
• By examining threats, you can identify
unfavorable market shifts or changes in
technology, and create a defensive
posture aimed at preserving your
competitive position.

9. Ch2
The purpose of
Five-Forces Analysis
• The five forces are environmental
forces that impact on a company’s
ability to compete in a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.

10. Ch2-
Threat of
New
Entrants
Threat of
New
Entrants
Porter’s Five Forces
Model of Competition

11. Ch2-
Threat of New Entrants
Barriers to
Entry
Expected RetaliationExpected Retaliation
Government PolicyGovernment Policy
Economies of ScaleEconomies of Scale
Product DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching CostsSwitching Costs
Access to Distribution ChannelsAccess to Distribution Channels
Cost Disadvantages IndependentCost Disadvantages Independent
of Scaleof Scale

12. Ch2-
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Threat of
New
Entrants
Porter’s Five Forces
Model of Competition

13. Ch2-
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:Suppliers are likely to be powerful if:
Supplier industry is dominated by aSupplier industry is dominated by a
few firmsfew firms
Suppliers’ products have few substitutesSuppliers’ products have few substitutes
Buyer is not an important customer toBuyer is not an important customer to
suppliersupplier
Suppliers’ product is an importantSuppliers’ product is an important
input to buyers’ productinput to buyers’ product
Suppliers’ products are differentiatedSuppliers’ products are differentiated
Suppliers’ products have highSuppliers’ products have high
switching costsswitching costs
Supplier poses credible threat ofSupplier poses credible threat of
forward integrationforward integration

14. Ch2-
Bargaining
Power of
Buyers
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Porter’s Five Forces
Model of Competition

15. Ch2-
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:Buyer groups are likely to be powerful if:
Buyers are concentrated or purchasesBuyers are concentrated or purchases
are large relative to seller’s salesare large relative to seller’s sales
Purchase accounts for a significantPurchase accounts for a significant
fraction of supplier’s salesfraction of supplier’s sales
Products are undifferentiatedProducts are undifferentiated
Buyers face few switching costsBuyers face few switching costs
Buyers’ industry earns low profitsBuyers’ industry earns low profits
Buyer presents a credible threat ofBuyer presents a credible threat of
backward integrationbackward integration
Product unimportant to qualityProduct unimportant to quality
Buyer has full informationBuyer has full information

16. Ch2-
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Porter’s Five Forces
Model of Competition

17. Ch2-
Threat of Substitute Products
Products
with similar
function
limit the
prices firms
can charge
Keys to evaluate substitute products:Keys to evaluate substitute products:
Products with improvingProducts with improving
price/performance tradeoffsprice/performance tradeoffs
relative to present industryrelative to present industry
productsproducts
Example:Example:
Electronic security systems inElectronic security systems in
place of security guardsplace of security guards
Fax machines in place ofFax machines in place of
overnight mail deliveryovernight mail delivery

18. Ch2-
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Porter’s Five Forces
Model of Competition

19. Ch2-
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:
Jockeying for strategic positionJockeying for strategic position
Using price competitionUsing price competition
Staging advertising battlesStaging advertising battles
Making new product introductionsMaking new product introductions
Increasing consumer warranties or serviceIncreasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, butAdvertising battles may increase total industry demand, but
may be costly to smaller competitorsmay be costly to smaller competitors

20. Ch2-
CutthroatCutthroat competitioncompetition is more likely to occur when:is more likely to occur when:
Rivalry Among Existing Competitors
Numerous or equally balanced competitorsNumerous or equally balanced competitors
Slow growth industrySlow growth industry
High fixed costsHigh fixed costs
Lack of differentiation or switching costsLack of differentiation or switching costs
High storage costsHigh storage costs
Capacity added in large incrementsCapacity added in large increments
High strategic stakesHigh strategic stakes
High exit barriersHigh exit barriers
Diverse competitorsDiverse competitors

21. Ch2-
The Five Forces are Unique to
Your Industry
• Five-Forces Analysis is a framework for
analyzing a particular industry.
– Yet, the five forces affect all the other
businesses in that industry.

22. Ch2-
Competitor Analysis
The follow-up to Industry Analysis isThe follow-up to Industry Analysis is
effective analysis of a firm’seffective analysis of a firm’s CompetitorsCompetitors
CompetitiveCompetitive
EnvironmentEnvironment
Industry
Environment

23. Ch2-
Competitor Analysis
AssumptionsAssumptions
What assumptions do our
competitors hold about the future
of industry and themselves?
Current StrategyCurrent Strategy
Does our current strategy support
changes in the competitive
environment?
Future ObjectivesFuture Objectives
How do our goals compare to our
competitors’ goals?
CapabilitiesCapabilities
How do our capabilities compare
to our competitors?
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?

24. Ch2-
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

25. Ch2-
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

26. Ch2-
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

27. Ch2-
What are the competitor’s
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?
CapabilitiesCapabilities
Competitor Analysis

28. Ch2-
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