Activities completed to improve a firm’s product and the processes used to manufacture it. Technological development takes many forms, such as process equipment, basic research and product design, and servicing procedures. Firm infrastructure includes activities such as general management, planning, finance, accounting, legal support, and governmental relations that are required to support the work of the entire value chain. Through its infrastructure, the firm strives to effectively and consistently identify external opportunities and threats, identify resources and capabilities, and support core competencies.

1. PowerPoint Presentation by Charlie Cook
PowerPoint Presentation by Charlie Cook
The University of West Alabama
The University of West Alabama
Strategic Management
Strategic Management
Competitiveness and Globalization:
Competitiveness and Globalization:
Concepts and Cases
Concepts and Cases
Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
Seventh edition
STRATEGIC
MANAGEMENT
INPUTS
© 2007 Thomson/South-Western.
© 2007 Thomson/South-Western.
All rights reserved.
All rights reserved.
CHAPTER 2
CHAPTER 2
The External Environment:
The External Environment:
Opportunities, Threats,
Opportunities, Threats,
Industry Competition,
Industry Competition,
and Competitor Analysis
and Competitor Analysis

2. © 2007 Thomson/South-Western. All rights reserved. 2–2
K
KNOWLEDGE
NOWLEDGE O
OBJECTIVES
BJECTIVES
1.
1. Explain the importance of analyzing and understanding
Explain the importance of analyzing and understanding
the firm’s external environment.
the firm’s external environment.
2.
2. Define and describe the general environment and the
Define and describe the general environment and the
industry environment.
industry environment.
3.
3. Discuss the four activities of the external environmental
Discuss the four activities of the external environmental
analysis process.
analysis process.
4.
4. Name and describe the general environment’s six
Name and describe the general environment’s six
segments.
segments.
5.
5. Identify the five competitive forces and explain how they
Identify the five competitive forces and explain how they
determine an industry’s profit potential.
determine an industry’s profit potential.
Studying this chapter should provide you with the strategic
management knowledge needed to:

3. © 2007 Thomson/South-Western. All rights reserved. 2–3
K
KNOWLEDGE
NOWLEDGE O
OBJECTIVES
BJECTIVES (cont’d)
(cont’d)
6.
6. Define strategic groups and describe their influence on
Define strategic groups and describe their influence on
the firm.
the firm.
7.
7. Describe what firms need to know about their
Describe what firms need to know about their
competitors and different methods (including ethical
competitors and different methods (including ethical
standards) used to collect intelligence about them.
standards) used to collect intelligence about them.
Studying this chapter should provide you with the strategic
management knowledge needed to:

4. © 2007 Thomson/South-Western. All rights reserved. 2–4
FIGURE
FIGURE 2.1
2.1 The External Environment
The External Environment

5. © 2007 Thomson/South-Western. All rights reserved. 2–5
General Environment
General Environment
• Dimensions in the broader society that influence
Dimensions in the broader society that influence
an industry and the firms within it:
an industry and the firms within it:
 Demographic
Demographic
 Economic
Economic
 Political/legal
Political/legal
 Sociocultural
Sociocultural
 Technological
Technological
 Global
Global

6. © 2007 Thomson/South-Western. All rights reserved. 2–6
TABLE
TABLE 2.1
2.1 The General Environment: Segments and Elements
The General Environment: Segments and Elements

7. © 2007 Thomson/South-Western. All rights reserved. 2–7
Industry Environment
Industry Environment
• The set of factors directly influencing a firm and
The set of factors directly influencing a firm and
its competitive actions and competitive
its competitive actions and competitive
responses
responses
 Threat of new entrants
Threat of new entrants
 Power of suppliers
Power of suppliers
 Power of buyers
Power of buyers
 Threat of product substitutes
Threat of product substitutes
 Intensity of rivalry among competitors
Intensity of rivalry among competitors

8. © 2007 Thomson/South-Western. All rights reserved. 2–8
Competitor Analysis
Competitor Analysis
• Gathering and interpreting
Gathering and interpreting
information about all of the
information about all of the
companies that the firm
companies that the firm
competes against.
competes against.
• Understanding the firm’s
Understanding the firm’s
competitor environment
competitor environment
complements the insights
complements the insights
provided by studying the
provided by studying the
general and industry
general and industry
environments.
environments.

9. © 2007 Thomson/South-Western. All rights reserved. 2–9
Analysis of the External Environments
Analysis of the External Environments
• General environment
General environment
 Focused on the future
Focused on the future
• Industry environment
Industry environment
 Focused on factors and conditions influencing a firm’s
Focused on factors and conditions influencing a firm’s
profitability within an industry
profitability within an industry
• Competitor environment
Competitor environment
 Focused on predicting the dynamics of competitors’
Focused on predicting the dynamics of competitors’
actions, responses and intentions
actions, responses and intentions

10. © 2007 Thomson/South-Western. All rights reserved. 2–10
TABLE
TABLE 2.2
2.2 Components of the External Environmental Analysis
Components of the External 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

11. © 2007 Thomson/South-Western. All rights reserved. 2–11
Opportunities and Threats
Opportunities and Threats
• Opportunity
Opportunity
 A condition in the general
A condition in the general
environment that, if exploited,
environment that, if exploited,
helps a company achieve
helps a company achieve
strategic competitiveness.
strategic competitiveness.
• Threat
Threat
 A condition in the general
A condition in the general
environment that may hinder a
environment that may hinder a
company’s efforts to achieve
company’s efforts to achieve
strategic competitiveness.
strategic competitiveness.

12. © 2007 Thomson/South-Western. All rights reserved. 2–12
Segments of the General Environment
Segments of the General Environment
• The Demographic Segment
The Demographic Segment
 Population size
Population size
 Age structure
Age structure
 Geographic distribution
Geographic distribution
 Ethnic mix
Ethnic mix
 Income distribution
Income distribution

13. © 2007 Thomson/South-Western. All rights reserved. 2–13
Segments of the General Environment
Segments of the General Environment
(cont’d)
(cont’d)
• The Economic Segment
The Economic Segment
 Inflation rates
Inflation rates
 Interest rates
Interest rates
 Trade deficits or surpluses
Trade deficits or surpluses
 Budget deficits or surpluses
Budget deficits or surpluses
 Personal savings rate
Personal savings rate
 Business savings rates
Business savings rates
 Gross domestic product
Gross domestic product

14. © 2007 Thomson/South-Western. All rights reserved. 2–14
Segments of the General Environment
Segments of the General Environment
(cont’d)
(cont’d)
• The Political/Legal Segment
The Political/Legal Segment
 Antitrust laws
Antitrust laws
 Taxation laws
Taxation laws
 Deregulation philosophies
Deregulation philosophies
 Labor training laws
Labor training laws
 Educational philosophies and
Educational philosophies and
policies
policies

15. © 2007 Thomson/South-Western. All rights reserved. 2–15
Segments of the General Environment
Segments of the General Environment
(cont’d)
(cont’d)
• The Sociocultural Segment
The Sociocultural Segment
 Women in the workplace
Women in the workplace
 Workforce diversity
Workforce diversity
 Attitudes about quality of worklife
Attitudes about quality of worklife
 Concerns about environment
Concerns about environment
 Shifts in work and career preferences
Shifts in work and career preferences
 Shifts in product and service preferences
Shifts in product and service preferences

16. © 2007 Thomson/South-Western. All rights reserved. 2–16
Segments of the General Environment
Segments of the General Environment
(cont’d)
(cont’d)
• The Technological Segment
The Technological Segment
 Product innovations
Product innovations
 Applications of knowledge
Applications of knowledge
 Focus of private and government-supported R&D
Focus of private and government-supported R&D
expenditures
expenditures
 New communication technologies
New communication technologies

17. © 2007 Thomson/South-Western. All rights reserved. 2–17
Segments of the General Environment
Segments of the General Environment
(cont’d)
(cont’d)
• The Global Segment
The Global Segment
 Important political events
Important political events
 Critical global markets
Critical global markets
 Newly industrialized countries
Newly industrialized countries
 Different cultural and institutional
Different cultural and institutional
attributes
attributes

18. © 2007 Thomson/South-Western. All rights reserved. 2–18
Industry Environment Analysis
Industry Environment Analysis
• Industry Defined
Industry Defined
 A group of firms producing products that are close
A group of firms producing products that are close
substitutes
substitutes
• Firms that influence one another
Firms that influence one another
• Includes a rich mix of competitive strategies that
Includes a rich mix of competitive strategies that
companies use in pursuing strategic
companies use in pursuing strategic
competitiveness and above-average returns
competitiveness and above-average returns

19. © 2007 Thomson/South-Western. All rights reserved. 2–19
FIGURE
FIGURE 2.2
2.2 The Five Forces of Competition Model
The Five Forces of Competition Model

20. © 2007 Thomson/South-Western. All rights reserved. 2–20
Threat of New Entrants: Barriers to Entry
Threat of New Entrants: Barriers to Entry
• Economies of scale
Economies of scale
• Product differentiation
Product differentiation
• Capital requirements
Capital requirements
• Switching costs
Switching costs
• Access to distribution channels
Access to distribution channels
• Cost disadvantages independent of scale
Cost disadvantages independent of scale
• Government policy
Government policy
• Expected retaliation
Expected retaliation

21. © 2007 Thomson/South-Western. All rights reserved. 2–21
Barriers to Entry
Barriers to Entry
• Economies of Scale
Economies of Scale
 Marginal improvements in efficiency that a firm
Marginal improvements in efficiency that a firm
experiences as it incrementally increases its size
experiences as it incrementally increases its size
• Factors (advantages and disadvantages) related
Factors (advantages and disadvantages) related
to large- and small-scale entry
to large- and small-scale entry
 Flexibility in pricing and market share
Flexibility in pricing and market share
 Costs related to scale economies
Costs related to scale economies
 Competitor retaliation
Competitor retaliation

22. © 2007 Thomson/South-Western. All rights reserved. 2–22
Barriers to Entry (cont’d)
Barriers to Entry (cont’d)
• Product differentiation
Product differentiation
 Unique products
Unique products
 Customer loyalty
Customer loyalty
 Products at competitive
Products at competitive
prices
prices
• Capital Requirements
Capital Requirements
 Physical facilities
Physical facilities
 Inventories
Inventories
 Marketing activities
Marketing activities
 Availability of capital
Availability of capital
• Switching Costs
Switching Costs
 One-time costs customers
One-time costs customers
incur when they buy from a
incur when they buy from a
different supplier
different supplier
• New equipment
New equipment
• Retraining employees
Retraining employees
• Psychic costs of ending a
Psychic costs of ending a
relationship
relationship
• Access to Distribution
Access to Distribution
Channels
Channels
 Stocking or shelf space
Stocking or shelf space
 Price breaks
Price breaks
 Cooperative advertising
Cooperative advertising
allowances
allowances

23. © 2007 Thomson/South-Western. All rights reserved. 2–23
Barriers to Entry (cont’d)
Barriers to Entry (cont’d)
• Cost Disadvantages
Cost Disadvantages
Independent of Scale
Independent of Scale
 Proprietary product
Proprietary product
technology
technology
 Favorable access to raw
Favorable access to raw
materials
materials
 Desirable locations
Desirable locations
• Government policy
Government policy
 Licensing and permit
Licensing and permit
requirements
requirements
 Deregulation of industries
Deregulation of industries
• Expected retaliation
Expected retaliation
 Responses by existing
Responses by existing
competitors may depend
competitors may depend
on a firm’s present stake in
on a firm’s present stake in
the industry (available
the industry (available
business options)
business options)

24. © 2007 Thomson/South-Western. All rights reserved. 2–24
Bargaining Power of Suppliers
Bargaining Power of Suppliers
• Supplier power increases when:
Supplier power increases when:
 Suppliers are large and few in number.
Suppliers are large and few in number.
 Suitable substitute products are not available.
Suitable substitute products are not available.
 Individual buyers are not large customers of suppliers
Individual buyers are not large customers of suppliers
and there are many of them.
and there are many of them.
 Suppliers’ goods are critical to the buyers’
Suppliers’ goods are critical to the buyers’
marketplace success.
marketplace success.
 Suppliers’ products create high switching costs.
Suppliers’ products create high switching costs.
 Suppliers pose a threat to integrate forward into
Suppliers pose a threat to integrate forward into
buyers’ industry.
buyers’ industry.

25. © 2007 Thomson/South-Western. All rights reserved. 2–25
Bargaining Power of Buyers
Bargaining Power of Buyers
• Buyer power increases when:
Buyer power increases when:
 Buyers are large and few in number.
Buyers are large and few in number.
 Buyers purchase a large portion of an industry’s total
Buyers purchase a large portion of an industry’s total
output.
output.
 Buyers’ purchases are a significant portion of a
Buyers’ purchases are a significant portion of a
supplier’s annual revenues.
supplier’s annual revenues.
 Buyers’ switching costs are low.
Buyers’ switching costs are low.
 Buyers can pose threat to integrate backward into the
Buyers can pose threat to integrate backward into the
sellers’ industry.
sellers’ industry.

26. © 2007 Thomson/South-Western. All rights reserved. 2–26
Threat of Substitute Products
Threat of Substitute Products
• The threat of substitute products increases
The threat of substitute products increases
when:
when:
 Buyers face few switching costs.
Buyers face few switching costs.
 The substitute product’s price is lower.
The substitute product’s price is lower.
 Substitute product’s quality and performance are
Substitute product’s quality and performance are
equal to or greater than the existing product.
equal to or greater than the existing product.
• Differentiated industry products that are valued
Differentiated industry products that are valued
by customers reduce this threat.
by customers reduce this threat.

27. © 2007 Thomson/South-Western. All rights reserved. 2–27
Intensity of Rivalry Among Competitors
Intensity of Rivalry Among Competitors
• Industry rivalry increases when:
Industry rivalry increases when:
 There are numerous or equally balanced competitors.
There are numerous or equally balanced competitors.
 Industry growth slows or declines.
Industry growth slows or declines.
 There are high fixed costs or high storage costs.
There are high fixed costs or high storage costs.
 There is a lack of differentiation opportunities or low
There is a lack of differentiation opportunities or low
switching costs.
switching costs.
 When the strategic stakes are high.
When the strategic stakes are high.
 When high exit barriers prevent competitors from
When high exit barriers prevent competitors from
leaving the industry.
leaving the industry.

28. © 2007 Thomson/South-Western. All rights reserved. 2–28
Low entry barriers
Interpreting Industry Analyses
Interpreting Industry Analyses
Unattractive
Unattractive
Industry
Industry
Suppliers and buyers
have strong positions
Strong threats from
substitute products
Intense rivalry
among competitors
Low profit potential

29. © 2007 Thomson/South-Western. All rights reserved. 2–29
Interpreting Industry Analyses (cont’d)
Interpreting Industry Analyses (cont’d)
Attractive
Attractive
Industry
Industry
High entry barriers
Suppliers and buyers
have weak positions
Few threats from
substitute products
Moderate rivalry
among competitors High profit potential

30. © 2007 Thomson/South-Western. All rights reserved. 2–30
Strategic Groups
Strategic Groups
• Strategic Group Defined
Strategic Group Defined
 A set of firms emphasizing similar strategic
A set of firms emphasizing similar strategic
dimensions and using similar strategies
dimensions and using similar strategies
• Internal competition between strategic group firms
Internal competition between strategic group firms
is greater than between firms outside that strategic
is greater than between firms outside that strategic
group.
group.
• There is more heterogeneity in the performance of
There is more heterogeneity in the performance of
firms within strategic groups.
firms within strategic groups.
– Similar market positions
Similar market positions
– Similar products
Similar products
– Similar strategic actions
Similar strategic actions

31. © 2007 Thomson/South-Western. All rights reserved. 2–31
Strategic Groups
Strategic Groups
• Strategic Dimensions
Strategic Dimensions
 Extent of technological leadership
Extent of technological leadership
 Product quality
Product quality
 Pricing Policies
Pricing Policies
 Distribution channels
Distribution channels
 Customer service
Customer service

32. © 2007 Thomson/South-Western. All rights reserved. 2–32
Competitor Analysis
Competitor Analysis
• Competitor Intelligence
Competitor Intelligence
 The ethical gathering of needed information and data
The ethical gathering of needed information and data
that provides insight into:
that provides insight into:
• A competitor’s direction (
A competitor’s direction (future objectives
future objectives)
)
• A competitor’s capabilities and intentions (
A competitor’s capabilities and intentions (current
current
strategy
strategy)
)
• A competitor’s beliefs about the industry (
A competitor’s beliefs about the industry (its
its
assumptions
assumptions)
)
• A competitor’s
A competitor’s capabilities
capabilities

33. © 2007 Thomson/South-Western. All rights reserved. 2–33
FIGURE
FIGURE 2.2
2.2
Competitor
Competitor
Analysis
Analysis
Components
Components

34. © 2007 Thomson/South-Western. All rights reserved. 2–34
Competitor Analysis (cont’d)
Competitor Analysis (cont’d)
• How do our goals
How do our goals
compare with our
compare with our
competitors’ goals?
competitors’ goals?
• Where will the emphasis
Where will the emphasis
be placed in the future?
be placed in the future?
• What is the attitude
What is the attitude
toward risk?
toward risk?
Future Objectives
Future Objectives

35. © 2007 Thomson/South-Western. All rights reserved. 2–35
Competitor Analysis (cont’d)
Competitor Analysis (cont’d)
• How are we currently
How are we currently
competing?
competing?
• Does this strategy
Does this strategy
support changes in the
support changes in the
competitive structure?
competitive structure?
Future Objectives
Future Objectives
Current Strategy
Current Strategy

36. © 2007 Thomson/South-Western. All rights reserved. 2–36
Competitor Analysis (cont’d)
Competitor Analysis (cont’d)
• Do we assume the
Do we assume the
future will be volatile?
future will be volatile?
• Are we operating under
Are we operating under
a status quo?
a status quo?
• What assumptions do
What assumptions do
our competitors hold
our competitors hold
about the industry and
about the industry and
themselves?
themselves?
Future Objectives
Future Objectives
Current Strategy
Current Strategy
Assumptions
Assumptions

37. © 2007 Thomson/South-Western. All rights reserved. 2–37
Competitor Analysis (cont’d)
Competitor Analysis (cont’d)
• What are our strengths
What are our strengths
and weaknesses?
and weaknesses?
• How do we rate
How do we rate
compared to our
compared to our
competitors?
competitors?
Future Objectives
Future Objectives
Current Strategy
Current Strategy
Assumptions
Assumptions
Capabilities
Capabilities

38. © 2007 Thomson/South-Western. All rights reserved. 2–38
Competitor Analysis (cont’d)
Competitor Analysis (cont’d)
• What will our
What will our
competitors do in the
competitors do in the
future?
future?
• Where do we hold an
Where do we hold an
advantage over our
advantage over our
competitors?
competitors?
• How will this change
How will this change
our relationship with
our relationship with
our competitors?
our competitors?
Response
Response
Future Objectives
Future Objectives
Current Strategy
Current Strategy
Assumptions
Assumptions
Capabilities
Capabilities

39. © 2007 Thomson/South-Western. All rights reserved. 2–39
Complementors
Complementors
• Complementors
Complementors
 The network of companies that sell complementary
The network of companies that sell complementary
products or services or are compatible with the focal
products or services or are compatible with the focal
firm’s own product or service.
firm’s own product or service.
• If a complementor’s product or service adds value
If a complementor’s product or service adds value
to the sale of the focal firm’s product or service, it
to the sale of the focal firm’s product or service, it
is likely to create value for the focal firm.
is likely to create value for the focal firm.
• However, if a complementor’s product or service is
However, if a complementor’s product or service is
in a market into which the focal firm intends to
in a market into which the focal firm intends to
expand, the complementor can represent a
expand, the complementor can represent a
formidable competitor.
formidable competitor.

40. © 2007 Thomson/South-Western. All rights reserved. 2–40
Ethical Considerations
Ethical Considerations
• Practices considered both legal and ethical:
Practices considered both legal and ethical:
 Obtaining publicly available information
Obtaining publicly available information
 Attending trade fairs and shows to obtain competitors’
Attending trade fairs and shows to obtain competitors’
brochures, view their exhibits, and listen to
brochures, view their exhibits, and listen to
discussions about their products
discussions about their products
• Practices considered both unethical and illegal:
Practices considered both unethical and illegal:
 Blackmail
Blackmail
 Trespassing
Trespassing
 Eavesdropping
Eavesdropping
 Stealing drawings, samples, or documents
Stealing drawings, samples, or documents