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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. Components of the General Environment. Economic. Demographic. Sociocultural.
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Slide 1

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

Slide 2

Components of the General Environment

Economic

Demographic

Sociocultural

Industry Environment

Competitive

Environment

Political/Legal

Global

Technological

Slide 3

Strengths

Weaknesses

Opportunities

Threats

SWOT Analysis

Slide 4

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

The purpose of SWOT Analysis

Slide 5

It provides an overview of the strategic situation.

It provides the “raw material” to do more extensive internal and external analysis.

SWOT is the starting point

Slide 6

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

Opportunities

Slide 7

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

Threats

Slide 8

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.

Opportunities and Threats form a basis for EXTERNAL analysis

Slide 9

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.

The purpose of Five-Forces Analysis

Slide 10

Porter’s Five Forces

Model of Competition

Threat of New Entrants

Threat of New Entrants

Slide 11

Economies of Scale

Product Differentiation

Barriers to Entry

Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

Threat of New Entrants

Expected Retaliation

Slide 12

Porter’s Five Forces

Model of Competition

Bargaining Power of Suppliers

Threat of New Entrants

Threat of New Entrants

Slide 13

Supplier industry is dominated by a few firms

Suppliers exert power 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 profitability if firms are unable to recover cost increases

Suppliers’ product is an important input to buyers’ product

Suppliers’ products are differentiated

Suppliers’ products have high switching costs

Supplier poses credible threat of forward integration

Bargaining Power of Suppliers

Suppliers are likely to be powerful if:

Slide 14

Porter’s Five Forces

Model of Competition

Bargaining Power of Buyers

Threat of New Entrants

Threat of New Entrants

Bargaining Power of Suppliers

Slide 15

Buyers are concentrated or purchases are large relative to seller’s sales

Buyers compete with the supplying industry by:

Purchase accounts for a significant fraction of supplier’s sales

Products are undifferentiated

* Bargaining down prices

* Forcing higher quality

Buyers face few switching costs

* 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

Bargaining Power of Buyers

Buyer groups are likely to be powerful if:

Slide 16

Porter’s Five Forces

Model of Competition

Threat of Substitute Products

Threat of New Entrants

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Slide 17

Products with similar functionlimit the prices firms can charge

Products with improving price/performance tradeoffs relative to present industry products

Example:

Electronic security systems in place of security guards

Fax machines in place of overnight mail delivery

Threat of Substitute Products

Keys to evaluate substitute products:

Slide 18

Porter’s Five Forces

Model of Competition

Rivalry Among Competing Firms in Industry

Threat of New Entrants

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Slide 19

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

Slide 20

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

Rivalry Among Existing Competitors

Cutthroatcompetition is more likely to occur when:

Slide 21

Five-Forces Analysis is a framework for analyzing a particular industry.

Yet, the five forces affect all the other businesses in that industry.

The Five Forces are Unique to Your Industry

Slide 22

Industry Environment

Competitive

Environment

Competitor Analysis

The follow-up to Industry Analysis is effective analysis of a firm’s Competitors

Slide 23

Assumptions

What assumptions do our competitors hold about the future of industry and themselves?

Response

Current Strategy

What will our competitors do in the future?

Does our current strategy support changes in the competitive environment?

Where do we have a competitive advantage?

Future Objectives

How will this change our relationship with our competition?

How do our goals compare to our competitors’ goals?

Capabilities

How do our capabilities compare to our competitors?

Competitor Analysis

Slide 24

Competitor Analysis

Future Objectives

What Drives the competitor?

How do our goals compare to our competitors’ goals?

Where will emphasis be placed in the future?

What is the attitude toward risk?

Slide 25

Competitor Analysis

Future Objectives

What is the competitor doing?

How do our goals compare to our competitors’ goals?

What can the competitor do?

Current Strategy

Where will emphasis be placed in the future?

How are we currently competing?

What is the attitude toward risk?

Does this strategy support changes in the competitive structure?

Slide 26

Future Objectives

How do our goals compare to our competitors’ goals?

Current Strategy

Where will emphasis be placed in the future?

How are we currently competing?

What is the attitude toward risk?

Does this strategy support changes in the competition structure?

Competitor Analysis

What does the competitor believe about itself and the industry?

Assumptions

Do we assume the future will be volatile?

What assumptions do our competitors hold about the industry and themselves?

Are we assuming stable competitive conditions?

Slide 27

Future Objectives

How do our goals compare to our competitors’ goals?

Current Strategy

Where will emphasis be placed in the future?

How are we currently competing?

What is the attitude toward risk?

Assumptions

Does this strategy support changes in the competition structure?

Do we assume the future will be volatile?

What assumptions do our competitors hold about the industry and themselves?

Are we operating under a status quo?

Competitor Analysis

What are the competitor’s capabilities?

Capabilities

What are my competitors’ strengths and weaknesses?

How do our capabilities compare to our competitors?

Slide 28

Future Objectives

How do our goals compare to our competitors’ goals?

Current Strategy

Where will emphasis be placed in the future?

How are we currently competing?

What is the attitude toward risk?

Assumptions

Does this strategy support changes in the competition structure?

Do we assume the future will be volatile?

What assumptions do our competitors hold about the industry and themselves?

Capabilities

What are my competitors’ strengths and weaknesses?

Are we operating under a status quo?

How do our capabilities compare to our competitors?

Competitor Analysis

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?


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