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

Chapter 2
The External Environment:

Opportunities, Threats, Industry
Competition, and Competitor Analysis
Components of the General Environment
Economic
Demographic
Sociocultural
Industry
Environment
Competitive
Environment
Political/
Legal Global
Technological
SWOT Analysis
 Strengths
 Weaknesses
 Opportunities
 Threats
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
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.
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
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
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.
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.
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Threat of New Entrants
Economies of Scale
Barriers to Product Differentiation

Entry Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent

of Scale
Government Policy
Expected Retaliation
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Supplier industry is dominated by a

Suppliers exert power
few firms
in the industry by:
Suppliers’ products have few substitutes
* Threatening to raise
prices or to reduce quality Buyer is not an important customer to
supplier
Powerful suppliers
can squeeze industry Suppliers’ product is an important
profitability if firms input to buyers’ product
are unable to recover
cost increases Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases

are large relative to seller’s sales Buyers compete
Purchase accounts for a significant with the supplying
fraction of supplier’s sales industry by:
Products are undifferentiated * Bargaining down prices
Buyers face few switching costs * Forcing higher quality

* Playing firms off of
Buyers’ industry earns low profits each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Bargaining
Power of Power of
Suppliers Buyers
Threat of
Substitute
Products
Threat of Substitute Products
Keys to evaluate substitute products:
Products Products with improving

with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers
Threat of
Substitute
Products
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
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.
Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors
Industry
Environment
Competitive
Environment
Competitor Analysis
Assumptions
What assumptions do our
competitors hold about the future Response
of industry and themselves?
What will our
Current Strategy competitors do in the
Does our current strategy support future?
changes in the competitive Where do we have a
environment? competitive
Future Objectives advantage?
How do our goals compare to our How will this change
competitors’ goals? our relationship with
our competition?
Capabilities
How do our capabilities compare
to our competitors?
Competitor Analysis
Future Objectives What Drives the
How do our goals competitor?
compare to our
competitors’
Where will emphasis
goals? be
placed in the future?
What is the attitude
toward risk?
Competitor Analysis
Future Objectives What is the competitor doing?
How do our goals What can the competitor do?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed inHow
the future?
are we currently
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?
Competitor Analysis
Future Objectives What does the competitor believe
How do our goals about itself and the industry?
compare to our
Where Current
will emphasis be
How are we currently
competing?
toward risk? Assumptions
Does thisDo
strategy
we assume the future
support will
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
Competitor Analysis
Future Objectives What are the competitor’s
How do our goals capabilities?
compare to our
Where Current
will emphasis be
competing?
toward risk? Assumptions
Does this
Dostrategy
we assume the future
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
Capabilities
competitors hold about the
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
Competitor Analysis
Future Objectives Response
How do our goals What will our competitors
compare to our do in the future?
Where Current
will emphasis be Where do we have a
placed in the future? competitive advantage?
competing? How will this change our
toward risk? Assumptions relationship with our
Does this
Dostrategy
we assume the future competition?
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitorsCapabilities
hold about the
What are my competitors’
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
SWOT Analysis
 Strengths
 Weaknesses
 Opportunities
 Threats
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
Strengths
 A STRENGTH is something a company is
good at doing or a characteristic that gives
it an important capability.
 Possible Strengths:
 Name recognition
 Proprietary technology
 Cost advantages
 Skilled employees
 Loyal Customers
Weaknesses
 A WEAKNESS is something a company
lacks or does poorly (in comparison to
others) or a condition that places it at a
disadvantage
 Possible Weaknesses:
 Poor market image
 Obsolete facilities
 Internal operating problems
 Poor marketing skills
Strengths and Weakness
form a basis for INTERNAL
analysis
 By examining strengths, you can discover
untapped potential or identify distinct

competencies that helped you succeed in
the past.
 By examining weaknesses, you can
identify gaps in performance,
vulnerabilities, and erroneous assumptions
about existing strategies.
Competitive
Discovering Core Advantage
Gained through
Competencies Core Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns
Core
Competencies
Competencies
Sources of
Competitive
Advantage
Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Tangible
* Valuable * Outsource
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable
Key Questions for Managers
in Internal Analysis
How do we assemble bundles of Resources,
Capabilities and Core Competencies to create
VALUE for customers?
And...
Will environmental changes make our core
competencies obsolete?
Are substitutes available for our core

competencies?
Are our core competencies easily imitated?
Discovering Core
Competencies
Resources
* Tangible
* Intangible
Resources What a firm Has...
What a firm has to work with:

its assets, including its people and
the value of its brand name
its assets, including its people
and the value of its brand name
Resources represent inputs into a

firm’s production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers
Resources represent inputs into a

firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers
“Some genius invented the Oreo. We’re just

living off the inheritance.” F. Ross Johnson,
Former President & CEO,
RJR Nabisco
Tangible Resources
* Financial
* Physical Resources represent inputs into a
* Human Resources firm’s production process...
* Organizational
such as capital equipment, skills
of employees, brand names,
finances and talented managers
Intangible Resources
* Technological
“Some genius invented the Oreo.
* Innovation We’re just living off the inheritance.”
* Reputation F. Ross Johnson,
Former President & CEO, RJR Nabisco
Discovering Core
Competencies
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate
individual firm resources to achieve a desired
objective.
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex

interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that
are based on the development, transmission and
exchange or sharing of information and knowledge as
carried out by the firm's employees.
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex
interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that are
based on the development, transmission and exchange or
sharing of information and knowledge as carried out by the
firm's employees.
Capabilities become important when they are combined
in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage.
Discovering Core
Competencies
Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Core Competencies What a firm Does...
that is Strategically
Valuable
“…are the essence of what makes an organization

unique in its ability to provide value to
customers.”
Leonard-Barton, Bowen, Clark, Holloway & Wheelwright
McKinsey & Co. recommends identifying three to four

competencies to use in framing strategic actions.
Discovering Core
Competencies
Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage
Capabilities Criteria of
Teams of Sustainable
Resources Advantages
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource
that is Strategically
For a strategic capability to be a
Valuable
Core Competency, it must be:
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Core Competencies must be: that is Strategically
Valuable
Valuable
Capabilities that either help a firm to exploit opportunities to
create value for customers or to neutralize threats in the
environment
Rare
Capabilities that are possessed by few, if any, current or potential
competitors
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to
unique historical conditions, causal ambiguity or social complexity
Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firm-
specific knowledge or trust-based relationships
Discovering Core
Competencies
Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage

Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities
Support
Activities
Logistics
Inbound
Primary Activities
Support
Activities
Operations
Logistics
Inbound
Primary Activities
Support
Activities
Operations
Outbound
Logistics
Logistics
Inbound
Primary Activities
Support
Activities
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Primary Activities
Support
Activities
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Primary Activities
Support
Activities
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Primary Activities
Support
Activities
Technological Development
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Primary Activities
Support
Human Resource Management
Activities
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Primary Activities
Firm Infrastructure
Support
Activities
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
Primary Activities
Firm Infrastructure
Human Resource Management M
Support A
R
Activities G
Technological Development IN
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
IN
RG
A
M
Primary Activities
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Support A
R
Activities G
Technological Development IN
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
IN
RG
A
M
Primary Activities
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure

Support A
Firms often purchase a portion
Technological Development R activities
Activities G
of their value-creating
Technological Development IN suppliers
from specialty external
Procurement
who can perform these functions
Procurement more efficiently
Service
Operations
Outbound
Marketing
Service
Logistics
Inbound
& Sales
Logistics
IN
RG
Outbound
Inbound Operations Logistics Marketing
A
& Sales
M
Logistics
Primary Activities
Strategic Rationales for Outsourcing
Improve Business Focus
Lets company focus on broader business issues by having outside
experts handle various operational details
Provide Access to World-Class Capabilities
The specialized resources of outsourcing providers makes world-
class capabilities available to firms in a wide range of applications
Accelerate Business Re-Engineering Benefits
Achieves re-engineering benefits more quickly by having outsiders--
who have already achieved world-class standards--take over process
Share Risks
Reduces investment requirements and makes firm more flexible,
dynamic and better able to adapt to changing opportunities
Free Resources for Other Purposes

Permits firm to redirect efforts from non-core activities toward those
that serve customers more effectively
Core Competencies--Cautions and Reminders
Never take for granted that core competencies will
continue to provide a source of competitive advantage
All core competencies have the potential to become

Core Rigidities
Core Rigidities are former core competencies that sow
the seeds of organizational inertia and prevent the firm
from responding appropriately to changes in the
external environment
Strategic myopia and inflexibility can strangle the firm’s
ability to grow and adapt to environmental change or
competitive threats
Competitive
Discovering Core Advantage
Gained through
Competencies Core Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns
Core
Competencies
Competencies
Sources of
Competitive
Advantage

Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate * Outsource
* Nonsubstitutable

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

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Chapter 2

The External Environment:

Barriers to Product Differentiation

Cost Disadvantages Independent

Supplier industry is dominated by a

Buyers are concentrated or purchases

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

Products Products with improving

Bargaining Rivalry Among Bargaining

Occurs when a firm is pressured or sees an opportunity

untapped potential or identify distinct

Capabilities Criteria of Value

Are substitutes available for our core

What a firm has to work with:

Resources represent inputs into a

Resources represent inputs into a

“Some genius invented the Oreo. We’re just

Capabilities develop over time as a result of complex

“…are the essence of what makes an organization

McKinsey & Co. recommends identifying three to four

Capabilities Criteria of Value

Human Resource Management M

Free Resources for Other Purposes

All core competencies have the potential to become

Capabilities Criteria of Value

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