The external environment: Opportunities, Threats, industry competition and Competitor analysis

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Chap. 2: External Environment: Opportunities, Threats, Industry, Competition & Competitor Analysis

The external environment (includes industry in which firm competes as well as those against whom it

competes) affects competitive actions and responses firms take to outperform competitors and earn

above-average returns.

oCharacteristics of today’s external environment differ from historical concerns.

oFirms understand external environment by acquiring info about competitors, customers, and

other stakeholders to build their own base of knowledge and capabilities.

On basis of new info, firms take actions in hope of buffering themselves from any

negative environmental effects and to pursue opportunities as basis for better serving

their stakeholders’ needs.

oFirm’s competitive actions and responses are influenced by conditions in three parts (general,

industry, and competitor) of its external environment and its understanding of those conditions.

2.1 The General, Industry, and Competitor Environments

General environment: composed of dimensions in broader society that influences industry and firms

within it.

oGroup dimensions into seven environmental segments: demographic, economic, political/legal,

sociocultural, technological, global and sustainable physical.

oFirms can’t directly control general environment’s segments.

What company seeks to do is recognize trends in each segment of general environment

and then predict each trend’s effect on it.

No firm can control where growth in potential customers may take place in next decade

or two. Firms must study anticipated trend as foundation for predicting its effects on their

ability to identify strategies to use that will allow them to remain successful as market

conditions change.

Industry environment: set of factors that directly influences a firm and its competitive

actions/responses: threat of new entrants, power of suppliers, power of buyers, and threat of product

substitutes, and intensity of rivalry among competing firms.

oInteractions among these five factors determine industry’s profitability potential; industry’s

profitability potential influences choices each firm makes about its competitive actions/responses

Challenge for firm is to locate position within industry where it can favorably influence

the five factors or where it can successfully defend itself against their influence.

The greater a firm’s capacity to favorably influence its industry environment, the

greater the likelihood it will earn above-average returns.

Competitor analysis: how companies gather and interpret info about their competitors

oUnderstanding firm’s competitor environment complements insights provided by studying

general and industry environments.

Analysis of general environment focuses on environment trends and their implications, an analysis of

industry environment focuses on factors and conditions influencing an industry’s profitability potential,

and an analysis of competitors is focused on predicting competitors’ actions, responses, and intentions.

oResults of the three analyses influences firm’s vision, mission, choice of strategies, and

competitive actions/responses it takes to implement strategies.

Firm can develop and implement a more effective strategy when it effectively integrates

insights provided by analyses of general environment, industry environment, and

competitor environment.

2.3 Segments of General Environment

Is competitor analysis an external environment?

Which environment where the company analyzed competitors focused on predicting the dynamics of competitors actions responses and intentions?

What is competitive environment analysis?

Are competitors part of the external environment?