2. Knowledge Objectives
• Studying this chapter should provide you with the strategic
management knowledge needed to:
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 activities of the external environmental analysis
process.
Name and describe the general environment’s six segments.
Identify the five competitive forces and explain how they determine
an industry’s profit potential.
Define strategic groups and describe their influence on the firm.
Describe what firms need to know about their competitors and
different methods used to collect intelligence about them.
4. Opening case of ITC Limited
• Political segment of ITS’s general environment affect how the
company conducts its business.
• Selling of tobacco products is highly restrictive in India
• Cigarettes – source of exercise duty by the government.
• Non priority sector
• It was difficult to expand its operations
• Consideration of public health, socio cultural segment was
affected and it effects strategic actions of the company.
• A. N. Haksar, made announcement in 1975, “I believe that
every company has two balance sheets. The one is accounts
and the other is related to obligations in the national interest
and thus to the public good.”
5. Case of ITC Limited
• The opportunity for ITC to enter other business and
threats; the possibility that additional regulations in its
market will reduce consumption of ITC’s tobacco
products.
• Collectively, opportunities and threats affect a firm’s
strategic actions.
• Regardless of the industry in which they compete,
the external environment influences firms as they
seek strategic competitiveness and the earning of
above average returns.
7. General Environment
• Dimensions in the broader society that
influence and industry and the firms within it
Economic
Sociocultural
Global
Technological
Political/legal
Demographic
Physical
8. General Environment
• Firms cannot directly control the general
environment’ segments. The bankruptcy filings by
General Motors and Chryster Corporation in the
United states during the 2008-2009 automotive crisis
highlight this fact.
9. Industry Environment
• Set of factors directly influencing a firm and
its competitive actions and competitive
responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product
substitutes
Intensity of rivalry
among competitors
11. Competitor Environment
• All of the companies that the firm competes against.
• How companies gather and interpret information
about their competitors is called competitors
analysis.
• It complements the insights provided by studying the
general and industry environments.
• JSW steel needs to learn as much as it can about its
major two competitors – SAIL and Tata Steel - while
also learning about general and
Industry environment.
12. Analysis of the External Environments
• General environment
Focused on the future
Environmental trends
• Industry environment
Focused on factors and conditions influencing a firm’s
profitability potential within an industry
• Competitor environment
Focused on predicting the dynamics of competitors’ actions,
responses and intentions
13. External environment analysis
• Opportunity
A condition in the general environment that if
exploited, helps a company achieve strategic
competitiveness
• Threat
A condition in the general environment that may
hinder a company’s efforts to achieve strategic
competitiveness
14. External Environmental Analysis
• A continuous process which includes
Scanning for early signals of potential
changes and trends in the general environment
Internet provides significant opportunities for scanning
Amazon.com, records individuals visiting its web site,
welcomes these customers by their names when they visit
again
Indian banks continuously scan external to detect interest
rates, Cash Reserve Ratio regulations, need to be
monitored for opening new branches and custommer
service norms. The reason is small changes of the policy
affects the business substantially
15. External Environmental Analysis
• A continuous process which includes
Monitoring changes to see if an important trend is
emerging among those spotted by scanning
Critical is to detect meaning in different
environmental events and trends
effective monitoring requires the firm to identify
important stakeholders as the foundation for serving
their unique needs
16. External Environmental Analysis
• A continuous process which includes
Forecasting projections of what might happen, and how
quickly as a result of the changes and trends detected
through scanning and monitoring.
Analysts might forecast the time that will be required for a
new technology to reach the marketplace, the period of time
before different corporate training procedures are required to
deal with anticipated changes in the composition of the
workforce, or how much time will escape before changes in
government taxation policies affect consumer’s purchasing
patterns.
17. External Environmental Analysis
• A continuous process which includes
Assessing: is to determine timing and significance of the
effects of environmental changes and trends that have been
identified.
After understanding general environment, further step is to
specify the implication of that understanding
19. TABLE 2.1 The General Environment: Segments and Elements
Physical Environment - Energy consumption, renewable energy efforts, minimizing firms
environmental foot print, anti pollution laws, producing environment
friendly products
.2–19
20. Segments of the General Environment
• The Demographic
Segment
Population size
Age structure
Geographic
distribution
Ethnic mix
Income distribution
21. Segments of the General Environment (cont’d)
• The Economic Segment
Inflation rates
Interest rates
Trade deficits or
surpluses
Budget deficits or
surpluses
Personal savings rate
Business savings rates
Gross domestic
product
22. Segments of the General Environment(cont’d)
• The Political/Legal
Segment
Antitrust laws
Taxation laws
Deregulation
philosophies
Labor training laws
Educational
philosophies and
policies
23. Segments of the General Environment(cont’d)
• The Sociocultural Segment
Women in the workplace
Workforce diversity
Attitudes about quality
of worklife
Concerns about
environment
Shifts in work and
career preferences
Shifts in product and
service preferences
24. Segments of the General Environment(cont’d)
• The Technological
Segment
Product innovations
Applications of
knowledge
Focus of private and
government-supported
R&D expenditures
New communication
technologies
25. Segments of the General Environment(cont’d)
• The Global Segment
Product innovations
Applications of knowledge
Focus of private and
government-supported R&D
expenditures
New communication
technologies
Important Political events
Critical global markets
Newly industrialized countries
Different cultural and institutional
attributes
26. Segments of the General Environment(cont’d)
• Physical Environment Segment
Energy consumption
Practices used to develop energy sources
Renewable energy efforts
Minimizing a firm’s environmental footprint
Anti pollution laws
Environmental clearance
Availability of water as a resource
Producing environmentally friendly products
27. Industry Environment
• Industry Defined
A group of firms producing products that are
close substitutes
Firms that influence one another
Includes of competitive strategies that companies
use in pursuing strategic competitiveness and
above-average returns
29. 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
30. Barriers to Entry
• Economies of Scale
Marginal improvements in efficiency that a firm experiences
as it incrementally increases its 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
31. Barriers to Entry (cont’d)
• 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
32. Barriers to Entry (cont’d)
• Cost disadvantages independent of scale
Patented 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 (available business options)
33. 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 of
them
Suppliers’ goods are critical to buyers’
marketplace success
Suppliers’ products create high switching costs.
Suppliers pose a threat to integrate forward into
buyers’ industry
34. Bargaining Power of Buyers
• Buyer power increase 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
35. 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
36. 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
37. 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
39. Strategic Groups
• Strategic Group Defined
A set of firms emphasizing similar strategic
dimensions and using similar strategies
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.
–Similar market positions
–Similar products
–Similar strategic actions
2–39
40. Strategic Groups
• Strategic Dimensions which are treated
similarly.
Extent of technological leadership
Product quality
Pricing Policies
Distribution channels
Customer service
2–40
41. Competitor Analysis
• Competitor Intelligence
The ethical gathering of needed
information and data that provides insight
into:
A competitor’s direction (future objectives)
A competitor’s capabilities and intentions (current
strategy)
A competitor’s beliefs about the industry (its
assumptions)
A competitor’s capabilities
2–41
43. Complementors
• Complementors
The network of companies that sell
complementary products or services or are
compatible with the focal firm’s own product or
service.
If a complementor’s product or service adds value to the sale
of the focal firm’s product or service, it is likely to create
value for the focal firm.
However, if a complementor’s product or service is in a
market into which the focal firm intends to expand, the
complementor can represent a formidable competitor.
44. Ethical Considerations
• Practices considered both legal and ethical:
Obtaining publicly available information
Attending trade fairs and shows to obtain
competitors’ brochures, view their exhibits, and listen
to discussions about their products
• Practices considered both unethical and illegal:
Blackmail
Trespassing
Eavesdropping
Stealing drawings, samples, or documents
45. What Are the Key Factors for Competitive
Success?
• KSFs are competitive elements that most
affect every industry member’s ability to
prosper in the marketplace
Specific strategy elements
Product attributes
Resources
Competencies
Competitive capabilities
• KSFs spell difference between
Profit and loss
Competitive success or failure
46. Identifying Industry : Key Success Factors
• Answers to three questions pinpoint KSFs
On what basis do customers choose between competing
brands of sellers?
What must a seller do to be competitively successful --
what resources and competitive capabilities does it need?
What does it take for sellers to achieve a sustainable
competitive advantage?
• KSFs consist of the 3 - 5 really major determinants
of financial and competitive success in an industry
47. KSFs for Apparel Manufacturing Industry
• Fashion design -- to
create buyer appeal
• Low-cost manufacturing
efficiency -- to keep selling
prices competitive
48. Example: KSFs for Tin and Aluminum Can
Industry
• Locating plants close to end-use
customers -- to keep costs of shipping
empty cans low
• Ability to market plant output within
economical shipping distances
49. KSFs for Beer Industry
• Utilization of brewing capacity -- to keep
manufacturing costs low
• Strong network of wholesale distributors
-- to gain access to retail outlets
• Clever advertising -- to induce beer
drinkers to buy a particular brand
50. Strategic Management Principle
A sound strategy incorporates
efforts to be competent on all
industry key success factors
and to excel on at least one
factor!