Strategic Management

BUS 409

HANDOUT # 2
The External Environment:
Opportunities, Threats, Industry
Competition, and Competitor Analysis

https://lms.lc.ac.ae/ultra/stream
 Objectives of this course

CLO2: Analyze business’s internal and

external environment

2
 Learning objectives

 2.1 Explain the importance of analyzing and understanding the firm’s external environment.
 2.2 Define and describe the general environment and the industry environment.
 2.3 Discuss the four parts of the external environmental analysis process.
 2.4 Name and describe the general environment’s seven segments.
 2.5 Identify the five competitive forces and explain how they determine an industry’s profitability
potential.
 2.6 Define strategic groups and describe their influence on firms.

3
2-1 Understanding the Firm’s External
Environment
5 Document Title
 “To assure victory, always
carefully survey the field before
battle.”
Sun Tzu

6 Document Title
 Identifies strategic
opportunities & threats in an
organization’s operating environment
that will affect how it pursues its
mission.

7 Document Title
 Understanding the Firm’s External
Environment
• The external environment affects the competitive actions and responses
firms take to outperform competitors and earn above-average returns.
• Today’s external environment:
− Technological changes and the continuing growth of information gathering and
processing capabilities
− Rapid sociological changes occurring in many countries affect labor practices and
the products consumers demand
− Governmental policies and laws as well as financial regulatory systems affect
where and how firms choose to compete and increase the complexity of financial
transactions
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Layers of the business environment

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 Figure 2.1
The External
Environment

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 IMPORTANT
DEFINITIONS
● General Environment
MACRO Dimensions in the broader society that influence
an industry and the firms within it

● Industry Environment
Set of factors that directly influences a firm and its
competitive actions and response

● Competitor Environment
MICRO Focuses on each company against which a firm
directly competes
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• An analysis of the general environment • In combination, the results of these three
focuses on environmental trends and analyses influence the firm’s:
their implications.
− Vision
• An analysis of the industry environment − Mission
focuses on the factors and conditions − Values
influencing an industry’s profitability − Choice of strategies
potential. − Competitive actions and responses it will
take to implement those strategies
• An analysis of competitors is focused on
predicting competitors’ actions,
responses, and intentions.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
External Analysis: Opportunities and Threats

• Analyzing the dynamics of the industry in which an organization

competes to help identify:

Opportunities Threats
Conditions in the Conditions in the
environment a environment hinder a
company can take company’s efforts to
advantage of to achieve strategic
achieve strategic competitiveness
competitiveness
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXTERNAL ENVIRONMENTAL
ANALYSIS
External environments are:
• Turbulent
• Complex
• Global
• Uncertain
• Ambiguous
• Incomplete

• Firms engage in external environmental analysis to better

understand and cope with their environments.
• This analysis has four parts:
scanning, monitoring, forecasting, and assessing.
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 THE EXTERNAL ENVIRONMENT
GENERAL
● Firms cannot directly CONTROL the general environment’s
segments.

● However, these segments influence the actions that firms

take.

● Successful firms learn how to gather the information needed

to understand all segments and their implications for selecting
and implementing the firm’s strategies.

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 2-2 The General Environments (Macro)

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 The PESTEL framework
The PESTEL framework categorises environmental
factors into six key types:

Political Economic
Social Technological
Ecological Legal

PESTEL helps to provide a list of potentially

important issues influencing strategy. It is
important to assess the impact of each factor.
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
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 The General Environment

• The general environment is • The dimensions are grouped into

composed of dimensions in the seven environmental segments:
broader society that influence an 1. Demographic
industry and the firms within it.
2. Economic
3. Political/Legal
4. Sociocultural
5. Technological
6. Global
7. Sustainable physical environment

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 THE DEMOGRAPHIC SEGMENT
Demographic segments are commonly analyzed on a global basis because
of their potential effects across countries’ borders and because many firms
compete in global markets.

Demographic Segment
• Population size

• Age structure

• Geographic distribution

• Ethnic mix

• Income distribution

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 THE ECONOMIC SEGMENT
This segment refers to the nature and direction of the economy in which a firm
competes or may compete. Firms generally seek to compete in relatively stable
economies with strong growth potential. With globalization and the
interconnectedness of nations, firms must scan, monitor, forecast, and assess the
health of their host nation and the health of the economies outside their host
nation.

Economic Segment • Budget deficits or surpluses

• Inflation rates • Personal savings rate

• Interest rates • Business savings rates

• Trade deficits or surpluses • Gross domestic product

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THE POLITICAL/LEGAL SEGMENT
This segment represents how organizations and governments mutually try to
influence each other, and how firms try to understand these influences (current
and projected) on their strategic actions.

Political/Legal Segment
• Antitrust laws

• Taxation laws

• Deregulation philosophies

• Labor training laws

• Educational philosophies and policies

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 THE SOCIOCULTURAL SEGMENT
The sociocultural segment is concerned with a society’s attitudes and
cultural values. Because attitudes and values form the cornerstone of a
society, they often drive demographic, economic, political/legal, and
technological conditions and changes.

Sociocultural Segment
• Women in the workforce

• Workforce

• Diversity attitudes about the quality of work life

• Shifts in work and career preferences

• Shifts in product and service preference characteristics

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Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 THE TECHNOLOGICAL SEGMENT
Technological changes occur through new products, processes, and materials. The
technological segment includes the activities involved in creating new knowledge
and translating that knowledge into new outputs, products, processes, and
materials. Given the rapid pace of technological change and risk of disruption, it is
vital for firms to study this segment.

Technological Segment
• Product innovations • Applications of knowledge

• New communication • Focus of private and

technologies government-supported R&D
expenditures

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Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 THE GLOBAL SEGMENT
Markets and consumers are more global. This segment includes
relevant new global markets, existing markets that are changing,
important international political events, and critical cultural and
institutional characteristics of global markets.

Global Segment
• Important political events

• Critical global markets

• Newly industrialized countries

• Different cultural and institutional attributes

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 THE PHYSICAL ENVIRONMENT SEGMENT
Concerned with trends oriented to sustaining the world’s physical
environment, firms recognize that ecological, social, and economic systems
interactively influence what happens in this particular segment. This 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.
Physical Environment Segment
• Energy consumption
• Practices used to develop energy sources
• Renewable energy efforts
• Minimizing a firm’s environmental footprint
• Availability of water as a resource
• Producing environmentally friendly products
• Reacting to natural or man-made disasters

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Table 2.1 The General Environment:
Segments and Elements (1 of 3)
Demographic • Population size • Ethnic mix
segment • Age structure • Income distribution
• Geographic distribution
Economic segment • Inflation rates • Personal savings rate
• Interest rates • Business savings rates
• Trade deficits or surpluses • Gross domestic product
• Budget deficits or surpluses

Political / Legal • Antitrust laws • Labor training laws

segment • Taxation laws • Educational philosophies and
• Deregulation philosophies policies

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Table 2.1 The General Environment:
Segments and Elements (2 of 3)
Sociocultural • Women in the workforce • Shifts in work and career
segment • Workforce diversity preferences
• Attitudes about the quality of • Shifts in preferences regarding
work life product and service
characteristics

Technological • Product innovations • Focus of private and government-

segment • Applications of knowledge supported research and
development (R & D)
expenditures
• New communication technologies

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Table 2.1 The General Environment:
Segments and Elements (3 of 3)
Global segment • Important political events • Newly industrialized countries
• Critical global markets • Different cultural and institutional
attributes

Sustainable physical • Energy consumption • Availability of water as a resource

environment • Practices used to develop • Producing environmentally
segment energy sources friendly products
• Renewable energy efforts • Reacting to natural or man-made
• Minimizing a firm’s disasters
environmental footprint

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-3 External Environmental Analysis

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXTERNAL ENVIRONMENTAL
ANALYSIS
External environments are:
• Turbulent
• Complex
• Global
• Uncertain
• Ambiguous
• Incomplete

• Firms engage in external environmental analysis to better

understand and cope with their environments.
• This analysis has four parts:
scanning, monitoring, forecasting, and assessing.
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 EXTERNAL ENVIRONMENTAL
ANALYSIS
SCANNIN • Identifying early signals
of environmental changes
G and trends.

• Detecting meaning
MONITORIN through ongoing
observations of
G environmental changes
and trends.

l yzing
Ana rnal
• Developing projections of

ex te FORECASTIN anticipated outcomes

the nment
based on monitored
ro , G changes and trends.
envi difficult • Determining the timing
is a yet and importance of

ifi can t, ASSESSING environmental changes

and trends for firms’
sign tivity. strategies and
ac management.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EXTERNAL ENVIRONMENTAL ANALYSIS
Firms use several sources to analyze the general environment:

 trade publications
 newspapers
 business publications
 academic research
 public polls
 trade shows
 suppliers
 customers
 employees

People in boundary-spanning positions can obtain a great deal of this type of

information.

Examples: salespersons, purchasing managers, public relations directors, and

customer service representatives, each of whom interacts with external
constituents

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 External Environmental Analysis (1 of 2)
• To cope with often ambiguous and incomplete environmental data and to
increase understanding of the general environment, firms complete an external
environmental analysis.
• The four parts of an external environmental analysis are:
− Scanning
− Monitoring
− Forecasting
− Assessing

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Table 2.2 Parts of the External Environmental
Analysis
Scanning • Identifying early signals of environmental changes and trends

Monitoring • Detecting meaning through ongoing observations of

environmental changes and trends

Forecasting • Developing projections of anticipated outcomes based on

monitored changes and trends

Assessing • Determining the timing and importance of environmental

changes and trends for firms’ strategies and their management

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 External Environmental Analysis (2 of 2)
• Identifying opportunities and 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 reach strategic competitiveness.
− A threat is a condition in the general environment that may hinder a
company’s efforts to achieve strategic competitiveness.
• Effective scanning, monitoring, forecasting, and assessing are vital to the firm’s
efforts to recognize and evaluate opportunities and threats.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Scanning
• Scanning entails the study of all segments in the general environment.
• Through scanning, firms:
− Identify early signals of potential changes in the general environment.
− Detect changes that are already under way.
• Scanning activities must be aligned with the organizational context.
• The Internet provides a wealth of opportunities for scanning.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Monitoring and Forecasting
• When monitoring, analysts observe • When forecasting, analysts develop
environmental changes to see if an feasible projections of what might
important trend is emerging from among happen, and how quickly, as a result of
those spotted through scanning. the events and trends detected through
scanning and monitoring.
• Effective monitoring requires the firm to
identify important stakeholders and • Forecasting events and outcomes
understand its reputation among these accurately is challenging.
stakeholders as the foundation for
serving their unique needs. • Forecasting demand for new
technological products is difficult
because technology trends are
continually shortening product life cycles.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Assessing
• When assessing, the objective is to determine the timing and significance of
the effects of environmental changes and trends that have been identified.
• The intent of assessment is to specify the implications of understanding the
general environment.
• Although gathering and organizing information is important, appropriately
interpreting that information to determine if an identified trend in the general
environment is an opportunity or threat is critical.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-4 Industry Environment Analysis:
The Five Competitive Forces

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Competitive forces:
The five forces framework

Porter’s Five Forces Framework helps identify the attractiveness of an

industry in terms of five competitive forces:
• The threat of entry.
• The threat of substitutes.
• The bargaining power of buyers.
• The bargaining power of suppliers and.
• The extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
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 The five forces framework (1 of 6)

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E.Porter,
copyright © 1980, 1998 by The Free Press. All rights reserved.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Industry Environment Analysis:
The Five Competitive Forces
• An industry is a group of firms producing • To study an industry, the firm examines
products that are close substitutes. five forces that affect the ability of all
firms to operate profitably within a given
• Companies use a mix of different industry:
competitive strategies to pursue above-
average returns when competing in a − The threats posed by new entrants
particular industry. − The power of suppliers

• Compared with the general environment, − The power of buyers

the industry environment has a more − Product substitutes
direct effect on firms’ competitive actions
− The intensity of rivalry among
and responses.
competitors

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Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Figure 2.2
The Five Forces of
Competition Model

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Threat of New Entrants (1 of 7)

• Identifying new entrants is important because they can threaten the market
share of existing competitors.
− The likelihood that firms will enter an industry is a function of two factors:
 Barriers to entry
 The retaliation expected from current industry participants

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Threat of New Entrants (2 of 7)
• Barriers to Entry − There are several significant entry
barriers:
− Firms competing in an industry study
 Economies of scale
entry barriers to determine the
degree to which their competitive  Product differentiation
position reduces the likelihood of new
 Capital requirements
competitors being able to enter the
industry to compete against them.  Switching costs
− Firms considering entering an  Access to distribution channels
industry study entry barriers to  Cost disadvantages independent of
determine the likelihood of being able scale
to identify an attractive competitive
 Government policy
position within the industry.
 Expected retaliation
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Threat of New Entrants (3 of 7)
• Economies of Scale
− The cost of producing each unit declines as the quantity of a product produced
during a given period increases.
− A new entrant is unlikely to quickly generate the level of demand for its product that
would allow it to develop economies of scale.

• Product Differentiation
− Over time, customers may come to believe that a firm’s product is unique and
consistently purchase that firm’s product.
− To combat the perception of uniqueness, new entrants frequently offer products at
lower prices.

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Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Threat of New Entrants (4 of 7)

• Capital Requirements • Switching Costs

− Competing in a new industry requires − Switching costs are the one-time
a firm to have capital for physical costs customers incur when they buy
facilities, inventories, marketing from a different supplier.
activities, and other critical business
− If switching costs are high, a new
functions.
entrant must attract buyers by
− Even when a new industry is offering either:
attractive, the capital required for  A substantially lower price, or
successful market entry may not be
 A much better product
available to pursue the market
opportunity.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Threat of New Entrants (5 of 7)

• Access to Distribution Channels

− Over time, industry participants commonly learn how to effectively distribute their
products.
− New entrants must persuade distributors to carry their products, either in addition to
or in place of those currently distributed.
− Price breaks and cooperative advertising allowances may be used for this purpose.
 However, those practices reduce the new entrants’ profit potential.

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 Threat of New Entrants (6 of 7)

• Cost Disadvantages Independent of • Government Policy

Scale − Governmental decisions and policies
− Successful competition requires new that can control entry into an industry
entrants to reduce the strategic include:
relevance of cost advantages held by  The granting of licenses and permits
established competitors that cannot
 Regulation or deregulation
be duplicated.
 Antitrust issues

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Threat of New Entrants (7 of 7)

• Expected Retaliation
− An expectation of swift and vigorous competitive responses reduces the likelihood
of entry.
− Vigorous retaliation can be expected when the existing firm has a major stake in the
industry, when it has substantial resources, and when industry growth is slow or
constrained.
− Locating market niches not being served by incumbents allows the new entrant to
avoid entry barriers.
− Small entrepreneurial firms are generally best suited for identifying and serving
neglected market segments.

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 Bargaining Power of Suppliers
• Suppliers can exert power over firms competing within an industry by increasing prices
and reducing the quality of their products.
• A supplier group is powerful when:
− It is dominated by a few large companies and is more concentrated than the industry to which it sells.
− Satisfactory substitute products are not available to industry firms.
− Industry firms are not a significant customer for the supplier group.
− Suppliers’ goods are critical to buyers’ marketplace success.
− The effectiveness of suppliers’ products has created high switching costs for industry firms.
− It poses a credible threat to integrate forward into the buyers’ industry.

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Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Bargaining Power of Buyers
• To reduce their costs, buyers bargain for:
− Higher quality
− Greater levels of service
− Lower prices

• Customers (buyer groups) are powerful when:

− They purchase a large portion of an industry’s total output.
− The sales of the product being purchased account for a significant portion of the seller’s annual
revenues.
− They could switch to another product at little, if any, cost.
− The industry’s products are undifferentiated or standardized, and the buyers pose a credible threat if
they were to integrate backward into the sellers’ industry.

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 Threat of Substitute Products (1 of 2)

• 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 costs
− The substitute product’s price is lower
− The substitute product’s quality and performance capabilities are equal to or greater
than those of the competing product

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
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 Threat of Substitute Products (2 of 2)

• To reduce a substitute’s attractiveness, a firm can differentiate a product along

dimensions that are valuable to customers, such as:
− Quality
− Service after the sale
− Location

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 Intensity of Rivalry among Competitors
(1 of 4)
• Competitive rivalry intensifies when:
− A firm is challenged by a competitor’s actions
− A company recognizes an opportunity to improve its market position

• Firms differentiate their products from competitors’ offerings in ways that

customers value and in which they have a competitive advantage.
• Common dimensions on which rivalry is based include:
− Price
− Service after the sale
− Innovation
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Intensity of Rivalry among Competitors
(2 of 4)
• Factors that increase the intensity of rivalries among firms include:
− Numerous or Equally Balanced Competitors
 Evidence suggests that firms generally are aware of competitors’ actions, often choose
to respond to them.
 Industries with only a few firms of equivalent size and power tend to have strong
rivalries.
− Slow Industry Growth
 Rivalry in no-growth or slow-growth markets becomes more intense as firms battle to
increase their market shares by attracting competitors’ customers.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Intensity of Rivalry among Competitors
(3 of 4)
− High Fixed Costs or High Storage Costs
 When fixed costs account for a large part of total costs, companies try to maximize the
use of their productive capacity.
 When many firms attempt to maximize their productive capacity, excess capacity is
created on an industry-wide basis.
− Lack of Differentiation or Low Switching Costs
 Industries with many companies that have successfully differentiated their products
have less rivalry.
 When buyers view products as commodities, rivalry intensifies. In these instances,
buyers’ purchasing decisions are based primarily on price and, to a lesser degree,
service.
Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Intensity of Rivalry among Competitors
(4 of 4)
− High Strategic Stakes − Common exit barriers include:
 Competitive rivalry is likely to be high  Specialized assets
when it is important for several of the  Fixed costs of exit
competitors to perform well in the
market.  Strategic interrelationships
− High Exit Barriers  Emotional barriers
 Sometimes companies continue  Government and social restrictions
competing in an industry even
though the returns on their invested
capital are low or even negative—
likely because of high exit barriers

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Interpreting Industry Analyses
• Effective industry analyses are products of careful study and interpretation of data and
information from multiple sources.
• International markets and rivalries must be included in the firm’s analyses.

• Analysis of the five forces within a given industry allows the firm to determine the
industry’s attractiveness.
− An unattractive industry has low entry barriers, suppliers and buyers with strong bargaining
positions, strong competitive threats from product substitutes, and intense rivalry among
competitors.
− An attractive industry has high entry barriers, suppliers and buyers with little bargaining
power, few competitive threats from product substitutes, and relatively moderate rivalry.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-5 Strategic Groups and Their
Influence

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Strategic Groups and Their Influence
(1 of 3)
• A set of firms emphasizing similar strategic dimensions and using a similar
strategy is called a strategic group.
• Intra-strategic group competition is more intense than is inter-strategic group
competition.
• The performance leaders within groups can follow strategies similar to those of
other firms in the group and yet maintain strategic distinctiveness through
differentiating their products as a foundation for earning above-average returns.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Strategic Groups and Their Influence
(2 of 3)
• Analyzing strategic groups can be helpful in diagnosing competition, positioning,
and the profitability of firms competing within an industry.
− Using strategic groups to understand an industry’s competitive structure requires
the firm to plot companies’ competitive actions and responses along strategic
dimensions, such as:
 Pricing decisions
 Product quality
 Distribution channels
− This type of analysis shows the firm how certain companies are competing similarly
in terms of how they use similar strategic dimensions.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Strategic Groups and Their Influence
(3 of 3)
• Strategic groups have several implications:
− Because firms within a group offer similar products to the same customers, the
competitive rivalry among them can be intense.
 The more intense the rivalry, the greater is the threat to each firm’s profitability.
− The strengths of the five forces differ across strategic groups.
− The closer the strategic groups are in terms of their strategies, the greater is the
likelihood of rivalry between the groups.

Hitt, Ireland, Hoskisson, Harrison, Strategic Management: Concepts and Cases: Competitiveness and Globalization, 14 th Edition. © 2024
Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Thank you for your attention

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