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The External Environment: Opportunities, Threats, Competition, and Competitor Analysis

The external environment affects a firms strategic actions. For the example, when Philip Morris International (PMI) joint venture with Swedish Match AB, PMI distribute smokeless tobacco in multiple global market. A firms external environment creates the opportunities (opportunities PMI to enter the smokeless tobacco market) and threats (the regulation in its market reduces the consumption of PMIs tobacco products). Collectively, opportunities and threats affect a firms strategic actions. The external environment influences firm as they seek strategic competitiveness and the earning of above-average returns. The external environment is filled with uncertainty. Firms must be aware of and fully understand the different segments of the external environment to handle this uncertainty. Firms have to acquiring information about competitors, customers, and other stakeholders to build their own base of knowledge and capabilities.

External Environmental Analysis

The external environmental analysis has four parts: scanning, monitoring, forecasting and assessing. Scanning is identifying early signals of environmental changes and trends. Monitoring is detecting meaning through ongoing observations if environmental changes and trends. Forecasting is developing projections of anticipated outcomes based on monitored changes and trend. Assessing is determining the timing and importance environmental changes and trends for firms strategies and their management. Identifying the opportunities and the threats is an important objective of studying the general environment. An opportunity is a condition in the general environment that if exploited effectively, helps a company achieve strategic competitiveness. A threat is a condition in the general environment that may hinder a companys efforts to achieve strategic competitiveness.

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Summary Chapter 2 and RM 5

The General Environment

The general environment is composed of dimensions in the broader society that influence an industry and the firms within it. There are seven environmental segments for these dimension, they are demographic, economic, political/legal, socio cultural, technological, global, and physical. The firms that cannot control the segments of their external environment can get the bankruptcy. The demographic segment is concerned with a populations size, age structure, geographic distribution, ethnic mix, and income distribution. The economic segment refers to the nature and direction of the economy in which a firm competes or may compete. The political/legal segment is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between firms and various local governmental agencies. The socio cultural segment is concerned with a societys attitudes and cultural values. The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. The global segment includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. The physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes.

Industry Environment Analysis

The industry environment is the set of factors that directly influences a firm and its competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competitors. The greater of firms capacity to favorably influence its industry environment, the greater the likelihood that the firm will earn above-average returns.

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Summary Chapter 2 and RM 5

Identifying new entrants is important because they can threaten the market share of existing competitors. Often, new entrants have a keen interest in gaining a large market share. Increasing prices and reducing the quality of their products are potential means suppliers use to exert power over firms competing within an industry. If a firm is unable to recover cost increases by its suppliers through its own pricing structure, its profitability is reduced by its suppliers actions. Firms seek to maximize the return on their invested capital, but the buyers want to buy their products at the lowest price - the point at which the industry earns the lowest acceptable rate of return on its invested capital. Substitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces. In general, product substitutes present a strong threat to a firm when customers face few, if any, switching cost and when the substitute products price is lower or its quality and performance capabilities are equal to or greater than those of the competing product. Because an industrys firms are mutually depend, actions taken by one company usually invite competitive responses. In many industries, firms actively compete against one another. Competitive rivalry intensifies when a firm is challenged by a competitors actions or when a company recognizes an opportunity to improve its market position.

Competitor Analysis
How companies gather and interpret information about their competitors is called competitor analysis. Understanding the firms competitor environment complements the insights provided by studying the general and industry environments. The competitor environment is the final part of the external environment requiring study. Competitor analysis focuses on each company against which a firm directly competes. The results of an effective competitor analysis help a firm understand, interpret, and predict its competitors actions and responses.

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Summary Chapter 2 and RM 5

Understanding the actions of competitors clearly contributes to the firms ability to compete successfully within the industry.

RM5
This reading material based on the theory of external environment analysis. This reading material analyses the competitive advantages of Saudi Arabia in global petrochemical industry. Competitiveness in the global market demands an examination of competitive advantages and is the reason why Saudi Arabia is yet to succeed in the global market. The key strength of Saudi petrochemical industry lies in the low-cost of feed-stocks as well as low costs of utilities. Whilst this makes the average variable cost lower than that of its competitors, the average fixed cost also remains lower than the competitors die to the large scale of production. To do the industry analysis for Saudi petrochemical industry, this paper use Porters five forces model. The competitive forces analysis is made by the identification of five fundamental competitive forces. They are the entry of competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing players. This paper has examined the competitiveness of the petrochemical industry in Saudi Arabia. The petrochemical industry has helped Saudi Arabia to gain and maintain its competitiveness. However, with competition emerging globally, a careful selection of strategies is necessary to retain and enhance its competitiveness.