Strategic Management Chapter 2

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

Firms need to understand the external environments by acquiring information about competitors, customers and other stakeholders.

The General, Industry and Competitor Environments

The general environment, is composed of dimensions in the broader society that influence an industry and the firms in it. It is broken down into six segments:

• Demographic – information about the people in the segment

• Economic – Monetary information

• Political/Legal – laws that affect firm

• Sociocultural Cultural things in the Environment

• Technological – Changes in technology

• Global – changes in the world Environment

The industry environment is the set of factors that directly influence a firm and how it competes. They include the threat of new entrants, power of suppliers and customers, the threat of substitution and the intensity of rivalries. The firm also needs to do competitor analysis, study the things that make a competitor be able to do the job as well as they do.

External Environmental Analysis

Firms need to analyze things that can give them an opportunity, a condition that if exploited will give them a strategic advantage, and threats, things that can hinder a firm's efforts to gain the same. This is done with the following four things.

Scanning

Scanning is a study of all the segments of the general environment. It allows for a firm to see changes that will affect its business model. Volatile scanning systems will not work in a stable environment and vice-versa.

Monitoring

Monitoring allows firms to observe changes to see if important trends are coming. A firm needs to know who its stakeholders (or potential ones) to be able to use this information to its best advantage.

Forecasting

Forecasting deals with things that will take place in the future. While it can be helpful, it is not a perfect science, things can happen (9/11 for example) that are beyond an forecaster's control

Assessing

Assessing has to do with understanding why the other things mentioned here brought about the results that they did. If we cannot understand why we will just make more mistakes.

Segments of the General Environment

The Demographic Segment

Population size

Firms need to understand how fast a nation is growing (or not growing). This will give them an idea of the markets they need to enter.

Age Structure

As populations shift, marketing to new groups will need to be adjusted for the changing age structure.

Geographic Distribution

Population shifts affect where workers are and people are that will purchace the product.

Ethic Mix

The diversity of a people in a country effect how things are done. What is a majority today, white or male for example in the USA, is not what it is in other countries, nor what it may be shortly in the USA.

Income Distribution

Where are the people that have the money to spend.

The Economic Segment

Economic environment refers to the nature and direction of the economy in which a firm competes or may compete. Nations are now interconnected and what happens economically to one county can affect many others.

The Political/Legal Segment

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 the interaction among nations. Business will try to influence governments and if they can not they need to see how their policies will affect their business. International organizations can also affect how things are done as well.

The Sociocultural Segment

The sociocultural segment is concerned with a society's attitudes and cultural values. These will differ between countries. Cultural differences can affect employees and purchases and need to be understood.

The Technological Segment

The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. Technology is constantly changing and can be a cause of crossing boundaries that we thought were not breakable.

The Global Segment

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. Firms need to know what markets they can enter and have a reasonable success in. They also need to understand that some jobs may be able to done more cost effectively in other countries.

Industry Environment Analysis

An industry is a group of firms producing products that are close substitutes. This will have a more direct effect than the general environment. Firms need to know this for not only what they feel is their industry but what also could be a future entry in the industry as lines are now getting blurred.

Threat of New Entrants

New competitors seem to be the hardest for companies to recognize. This can be dangerous because it will take their market share unless the industry is growing. Barriers to entry and fear of retaliation keeps new entrants out sometimes.

Barriers to Entry

• Economies of scale – Smaller firms entering an industry may need to have prices higher that normal as they can not produce a product as cheep as their largest competitor.

• Product Differentiation – A firm needs to spend money to show what makes their product different than what exists already.

• Capital Requirements – without finances it may be hard to enter a field

• Switching cost – many buyers will entail a cost to switch to a new product from what they normally use. If these costs are high, then it may present a problem in selling to them.

• Access to Distribution Channels – existing firms have access to well established distribution channels, doing the job cheaply, new firms have to start from scratch with these.

• Cost disadvantages Independent of Scale – proprietary technology and bad location are things that a new firm may need to overcome.

• Government Policy – licensing and laws can affect how a company enters a market.

Expected Retaliation

Trying to take a part of a market share is sure to bring retaliation to a new firm. But if you establish a niche that they are not serving, you may exist long enough to take them on in the non-niche market.

Bargaining Power of Suppliers

Suppliers can raise prices or lower quality and affect an industry. This is effective for them if they are one of the few suppliers or substitutes are not readily available.

Bargaining Powers of Buyers

Buyers want the lowest price possible and cause a competition to take place for their finances.

Threat of Substitute Products

Availability of substitutes can affect an industry, even if they are not direct substitutes.

Intensity of Rivalry among Competitors

Steps taken by one firm in an industry can affect what others do to compete. Some things are:

• Numerous or Equally Balances Competitors

• Slow industry growth

• High Fixed Cost or High Storage Cost

• Lack of differentiation or low switching costs

• High strategic stakes

• High exit barriers – laws, emotional, specialized assets, etc.

Interpreting Industry Analysis

Much information is available for each industry. Firms need to use this information to help them get a competitive advantage.

Strategic Groups

A strategic group is a set of firms emphasizing similar strategic dimensions to use a similar strategy. Competition between members of this group will be stronger than with those outside the group. Where there are strategic groups their tends to be more stability. Being a member of a group will help you understand your competition better.

Competitor Analysis

Competitor intelligence is the set of data and information the firm gathers to better understand and better anticipate competitors' objectives, strategies, assumptions and capabilities. In collecting this information, companies need to follow ethical standards.