Chapter - 2 (Strategic Management)

IRELAND | HOSKISSON | HITT
THE
MANAGEMENT
OF STRATEGY
CONCEPTS AND CASES 10E
PART 1:
STRATEGIC
INPUTS
CHAPTER 2
THE EXTERNAL
ENVIRONMENT:
OPPORTUNITIES,
THREATS,
COMPETITION, AND
COMPETITOR ANALYSIS
Authored by:
Marta Szabo White. Ph.D
Georgia State University
THE STRATEGIC
MANAGEMENT PROCESS
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
KNOWLEDGE
OBJECTIVES
Explain the importance of analyzing and
understanding the firms external environment.
Define and describe the general environment
and the industry environment.
Discuss the four activities of the external
environmental analysis process.
Name and describe the general environments

seven segments.
KNOWLEDGE
OBJECTIVES
Identify the five competitive forces and
explain how they determine an industrys profit
potential.
Define strategic groups and describe their

influence on the firm.
Describe what firms need to know about their

competitors and different methods (including
ethical standards) used to collect intelligence
about them.
IMPORTANT
DEFINITIONS
A firms EXTERNAL
ENVIRONMENT is broken down
into three parts:
General
Industry
Competitor
A firms strategic actions are
influenced by the conditions in all
three parts.
IMPORTANT
DEFINITIONS
General Environment
MACRO
Dimensions in the broader society that

influence an industry and the firms
within it
Industry Environment
MICRO
Set of factors that directly influences a

firm and its competitive actions and
response
Competitor Environment
Focuses on each company against
which a firm directly competes
THE EXTERNAL
ENVIRONMENT
FIGURE 2.1
The External
Environment
OPENING CASE
BRITISH PETROLEUM (BP)
External environment affects a
firms strategic actions
BP seeks to expand its oil reserves after
the Deepwater Horizon oil and gas drilling
platform disaster in the Gulf of Mexico by
forming joint ventures in Russia with Rosneft
Corporation and in India with Reliance
Industries.
BPs strategic actions are also affected by
conditions in other segments of its general
environment: e.g., the political/legal,
social/cultural, and physical environment
segments.
THE EXTERNAL
ENVIRONMENT
A firms external environment creates:

OPPORTUNITIES
e.g., the opportunity for BP to enter other
global markets, and
THREATS
e.g., the possibility that additional
regulations in its markets will reduce
opportunities for BP to extract oil and gas
Collectively, opportunities and threats affect

a firms strategic actions.
MA
TC
HI
N
THE EXTERNAL
ENVIRONMENT
EXTERNAL
ENVIRONMENT
UNDERSTANDING
INTERNAL
ENVIRONMENT
KNOWLEDGE
VISION, MISSION,
AND STRATEGY
Table 2.1 The General

Environment: Segments and
Elements
THE EXTERNAL
ENVIRONMENT
The GeneralGENERAL
Environment is grouped into
seven environmental segments:
[1] Demographic
[2] Economic
[3] Political/Legal
[4] Sociocultural
[5] Technological
[6] Global
[7] Physical
To successfully deal with uncertainty in the
external environment and achieve strategic
competitiveness, firms must be aware of and
understand these segments.
THE EXTERNAL
ENVIRONMENT
GENERAL
Firms cannot directly CONTROL the

general environments 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 firms strategies.
THE EXTERNAL
ENVIRONMENT
GENERAL SEGMENTS AND
THE DEMOGRAPHIC
ELEMENTS
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
THE EXTERNAL
ENVIRONMENT
THE ECONOMIC
SEGMENT
ELEMENTS
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
Inflation rates
Interest rates
Trade deficits or surpluses
THE EXTERNAL
ENVIRONMENT
THE POLITICAL/LEGAL
ELEMENTS
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
THE EXTERNAL
ENVIRONMENT
THE SOCIOCULTURAL
ELEMENTS
SEGMENT
The sociocultural segment is concerned with a
societys 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

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Learning. in
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Reserved. May and
not be copied,
scanned, or duplicated,
in whole or in part, except for use as
Cengage
Shifts
product
service
preference
THE EXTERNAL
ENVIRONMENT
THE TECHNOLOGICAL
ELEMENTS
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
Technological
Segment
of disruption, it is vital
for firms to study this segment.
Product innovations
New communication technologies
Applications of knowledge
2013
Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
THE EXTERNAL
ENVIRONMENT
THE GLOBAL
SEGMENT
ELEMENTS
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
THE EXTERNAL
ENVIRONMENT
THE PHYSICAL
ENVIRONMENT
ELEMENTS
SEGMENT
Concerned with trends oriented to sustaining the worlds 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 firms environmental footprint
Availability of water as a resource
Producing environmentally friendly products
Reacting to natural or man-made disasters
THE EXTERNAL
ENVIRONMENT
THE PHYSICAL
ENVIRONMENT
ELEMENTS
EXAMP
LE
SEGMENT
Strategic Focus: Firms Efforts to Take Care of the Physical

Environment in Which They Compete
The examples noted in this Strategic Focus: Siemens AG,
McDonalds, Procter & Gamble, and GE signify a growing commitment
by firms around the globe in response to emerging trends in the
physical environment segment.
In addition to positively responding to the observed trends in this
segment of the general environment, there is some evidence that firms
engaging in these types of behaviors outperform those failing to do so.
This emerging evidence suggests that these behaviors benefit
companies, their stakeholders, and the physical environment in which
they operate.
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.
ANALYSIS
SCANNIN
G
MONITORI
NG
FORECAST
ING
ASSESSIN
G
ng
i
z
ly h e
a
n
t
A
al
n
r
e
ext onm
ir
v
n
e
is a
t
en ult,
c
f
i
d
y et
an
c
fi
ni
t,
g
i
s
ty.
i
v
i
act
Identifying
Identifying early
early
signals
of
signals of
environmental
environmental
changes
changes and
and trends.
trends.
Detecting
Detecting meaning
meaning
through
ongoing
through ongoing
observations
observations of
of
environmental
environmental
changes and
and trends.
trends.
changes
Developing
Developing
projections
projections of
of
anticipated
anticipated outcomes
outcomes
based
on
monitored
based on monitored
and
trends.
changes
changes
and the
trends.
Determining
Determining
the
timing
timing and
and importance
importance
of
environmental
of environmental
changes
changes and
and trends
trends
for
firms
strategies
for firms strategies
and
and management.
management.
ANALYSIS
ANALYSIS
Identifying opportunities and threats
is an important objective of studying
the general environment.
OPPORTUNITY is a condition in the
general environment that if exploited
effectively, helps a company achieve
strategic competitiveness.
EXAMPLE: Procter & Gamble (P&G) is
reorienting beauty products to better serve
both men and women.
ANALYSIS
THREAT is a condition in the
general environment that may hinder
a companys efforts to achieve
strategic competitiveness.
EXAMPLE: Microsoft is experiencing a
severe external threat as smartphones are
expected to surpass personal computer (PC)
sales in the near future.
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
ANALYSIS: SCANNING
Scanning often
Scanning: the study reveals ambiguous,
of all segments in the incomplete, or
general environment; unconnected data
through scanning,
and information.
firms identify early
Environmental
signals of potential
scanning is
changes in the
challenging but
general environment critically important
and detect changes
for firms, especially
that are already
those competing in
underway
highly volatile
environment.
Many firms use

special software to
reduce the trade-off
between an
important missed
event and false alarm
rates. Also, the
Internet provides
significant
opportunities for
scanning.
ANALYSIS: MONITORING
Monitoring:
analysts observe
MEANINGFUL
environmental
changes to see if an
important trend is
emerging from
among those spotted
through scanning
Effective monitoring
requires the firm to
identify important
stakeholders and
understand its
reputation among
these stakeholders
as the foundation for
serving their unique
needs.
Scanning and
monitoring are
particularly important
when a firm
competes in an
industry with high
technological
uncertainty.
ANALYSIS: FORECASTING
Forecasting:
feasibility projections
developed for what
might happen, and
how quickly, as a
result of the changes
and trends detected
through scanning
and monitoring, both
of which focus on
events at a point in
time
Technology trends
are continually
driving product life
cycles shorter, which
makes forecasting
demand for new
technological
products that much
more challenging.
During an economic
downturn,
forecasting becomes
more difficult and
more important.
ANALYSIS: ASSESSING
Assessing:
determining the
timing and
significance of the
effects of
environmental trends
that have been
identified; specifying
the implications of
the understanding
gathered in the
previous stages
INTERPRETATION IS
KEY. Even if formal
assessment is
inadequate, the
appropriate
interpretation of that
information is
important.
Gathering and
organizing
information is
important, BUT
appropriately
interpreting that
intelligence to
determine if an
identified trend in the
external environment
is an opportunity or
threat is
PARAMOUNT.
External Analysis
1. Analyze every segment from Table 2.1
2. Use a table to accommodate all of the
external analysis (The result of
Scanning and Monitoring processes)
INDUSTRY ENVIRONMENT
ANALYSIS
An INDUSTRY is a group of firms that
produce similar products or offer
similar services that are close
substitutes.
Compared with the general
environment, the industry environment
has a more direct effect on the firms:
Strategic competitiveness
Ability to earn above-average
returns
Competitors Analysis
An important part of an external audit
is identifying rival firms and
determining their :
strengths,
weaknesses,
capabilities,
opportunities,
threats,
objectives, and
strategies
1. Use below table to assess every competitor
of your assessed company.
2. Use the Scanning and Monitoring process to
fill in the table
ANALYSIS
An industrys profit potential is a function
of the five forces of competition:
The threats posed by new entrants
The power of suppliers
The power of buyers
Product substitutes
The intensity of rivalry among competitors
Strategies are chosen, in part, because

of the influence of an industrys
characteristics.
ANALYSIS
FIGURE 2.2
The Five
Forces of
Competition
Model
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
The five forces model of competition
expands the arena for competitive
analysis. Historically, firms concentrated
only on direct competitors.
Today, firms must study many
industries, as competitors are defined
more broadly. For example, the
communications industry now
encompasses media companies,
telecoms, entertainment companies,
ANALYSIS
THE FIVE FORCES OF

1/5
THREAT OF NEW ENTRANTS:
COMPETITION
MODELBARRIERS TO
ENTRY
Can threaten market share of existing

competitors
May stimulate additional production
capacity
New competitors may force existing firms
to be more efficient and to learn how to
compete on new dimensions
Entry barriers make it difficult for new
firms to enter an industry and often place
them at a competitive disadvantage even
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
High entry barriers tend to

increase the returns for existing
firms in the industry and may
allow some firms to dominate the
industry
Industry incumbents want to
maintain high entry barriers in
order to discourage potential
competitors from entering the
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
FUNCTION OF TWO FACTORS

1
BARRIERS TO ENTRY
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of
scale
Government policy
2 EXPECTED RETALIATION
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
ECONOMIES OF SCALE
Marginal improvements in
efficiency that a firm experiences as it
incrementally increases its size
Economies of scale can be
developed in most business functions,
such as marketing, manufacturing,
research and development, and
purchasing
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
ECONOMIES OF SCALE (contd)

FACTORS
(advantages/disadvantages) related
to large- and small-scale entry
Flexibility in pricing and market
share
Costs related to scale economies
Competitor retaliation
Flexible manufacturing systems
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
PRODUCT DIFFERENTIATION
Unique products
Customer loyalty
New entrants frequently offer
products at lower prices
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
CAPITAL REQUIREMENTS
Differ according to industry
Availability of capital
Physical
facilities/Inventories/Marketing
activities
Knowledge requirements
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
SWITCHING COSTS
One-time costs customers incur when
they buy from a different supplier
New equipment
Retraining employees
Psychological costs of ending a
supplier relationship
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
ACCESS TO DISTRIBUTION
CHANNELS
Stocking or shelf space
Price breaks/Cooperative
advertising allowances
Less of a barrier for products
that can be sold on the Internet
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
COST DISADVANTAGES
INDEPENDENT OF SCALE
Proprietary product technology
Favorable access to raw
materials
Desirable locations
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
GOVERNMENT POLICY
Licensing and permit
requirements
Regulation/Deregulation of
industries
Antitrust violations resulting
from industry dominance
ANALYSIS
THE FIVE FORCES OF

1/5
COMPETITION
MODELBARRIERS TO
ENTRY
EXPECTED RETALIATION
Vigorous retaliation can be expected when the
existing firm has a major stake in the industry.
It has fixed assets with few, if any, alternative
uses
It has substantial resources
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
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
2/5
BARGAINING POWER
OF SUPPLIERS
SUPPLIER POWER INCREASES
WHEN:
Suppliers are large and few in
number
Suitable substitute products are not
available
Industry firms are not a significant
customer for the suppliers
Suppliers goods are critical to
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
2/5
BARGAINING POWER
OF SUPPLIERS
SUPPLIER POWER INCREASES
WHEN (contd):
Suppliers products create high
switching costs
Suppliers have substantial resources
and provide a highly differentiated
product
Suppliers pose a credible threat to
integrate forward into the buyers
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
3/5
BARGAINING POWER
OF BUYERS
BUYER POWER INCREASES WHEN:
Buyers purchase a large portion of
an industrys total output
Buyers purchases are a
significant portion of a sellers
annual revenues
Switching costs are low (to other
industry product)
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
3/5
BARGAINING POWER
OF BUYERS
BUYER POWER INCREASES WHEN
(contd):
The industrys products are
undifferentiated or standardized
Buyers pose a credible threat to
integrate backward into the sellers
industry
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
4/5
THREAT OF SUBSTITUTE
PRODUCTS
PRODUCTS INCREASES WHEN:
Buyers face few switching costs
The substitute products price is
lower
Substitute products quality and
performance are equal to or greater
than the existing product
Differentiated industry products
that are
valued by customers reduce
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
4/5
PRODUCTS
FUNCTION OF A SUBSTITUTE
Places a ceiling on prices firms
can charge
Goods or services outside a given
industry perform the same or similar
functions at a competitive price (e.g.,
plastic has replaced steel in many
applications)
ANALYSIS
THE FIVE FORCES OF

5/5
INTENSITY OF RIVALRY
AMONG
COMPETITION
MODEL
COMPETITORS
INDUSTRY RESTRUCTURED THROUGH

COMPETITORS
STRATEGIC FOCUS: The Multi-Industry
Battle for Mobile and Home Digital
Computing and Entertainment
The process of new technology creation,
utilization, and commercialization ultimately
leads to changes in organizational patterns,
and in particular, strategic alliances and
mergers and acquisitions as firms restructure
themselves around the opportunities being
ANALYSIS
THE FIVE FORCES OF

5/5
AMONG
COMPETITION
MODEL
COMPETITORS
INDUSTRY RESTRUCTURED
THROUGH COMPETITORS (contd)
Competitor analysis must examine how
such technological changes will lead to
convergence
of competitors or other
firms and associated organizational
changes and the possible re-creation of a
new set of industry competitors, buyers,
and suppliers.
ANALYSIS
THE FIVE FORCES OF

5/5
AMONG
COMPETITION
MODEL
COMPETITORS
INDUSTRY RIVALRY
Competitors are rarely homogeneous; they differ
in resources and capabilities and seek to
differentiate themselves from competitors
Firms seek to differentiate their products in ways
that customers value and in which the firms have a
competitive advantage
Common rivalry dimensions:
Price
Service after the sale
Innovation
ANALYSIS
THE FIVE FORCES OF

5/5
AMONG
COMPETITION
MODEL
COMPETITORS
INDUSTRY RIVALRY INTENSIFIES

WITH:
Numerous or equally balanced
competitors
Slow industry growth
High fixed costs or high storage
costs
Lack of differentiation opportunities
or low switching costs
ANALYSIS
THE FIVE FORCES OF

5/5
AMONG
COMPETITION
MODEL
COMPETITORS
EXIT BARRIERS
High exit barriers prevent competitors
from leaving the industry
EXAMPLES
Specialized assets: assets with
values linked to a particular business
Fixed costs of exit: such as labor
agreements
ANALYSIS
THE FIVE FORCES OF

5/5
AMONG
COMPETITION
MODEL
COMPETITORS
EXIT BARRIERS (examples contd):

Strategic interrelationships:
relationships of mutual dependence,
such as those between one business
and other parts of a companys
operations, including shared facilities
and access to financial markets
ANALYSIS
THE FIVE FORCES OF

5/5
AMONG
COMPETITION
MODEL
COMPETITORS
EXIT BARRIERS (examples contd):

Emotional barriers: aversion to
economically justified business
decisions because of fear for ones own
career, loyalty to employees, etc.
Government and social
restrictions: often based on
government concerns for job losses and
regional economic effects; more
:
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
INTERPRETING
INDUSTRY
ANALYSES
Low entry
barriers
Suppliers and
buyers have
strong positions
Strong threats
from substitute
products
Intense rivalry
among competitors
Unattractive
Industry
LOW PROFIT
POTENTIAL
ANALYSIS
THE FIVE FORCES OF

COMPETITION
MODEL
INTERPRETING
INDUSTRY
ANALYSES
High entry
barriers
Suppliers and
buyers have weak
positions
Few threats from
substitute
products
Moderate rivalry
among competitors
Attractive
Industry
HIGH PROFIT
POTENTIAL
Do the Analysis from the Case

study
1. Analyze every pressure from each of the
force from the Porter 5 Forces Model
2. Use the below table for every force.
3. Probing Question: How to analyze the
competitive rivalry?
ANALYSIS: STRATEGIC
GROUPS
INTRASTRATEGIC
GROUP
COMPETITION
STRATEGIC GROUP DEFINED

A set of firms emphasizing similar
strategic dimensions and using similar
strategies
MORE INTENSE
THAN
The competition within a strategic

group is greater than the competition
between strategic groups
INTERSTRATEGIC
GROUP
COMPETITION
There is more heterogeneity in the

performance of firms within strategic
groups
Similar market positions
Similar products
Similar strategic actions
ANALYSIS: STRATEGIC
GROUPS
STRATEGIC DIMENSIONS
Extent of technological leadership

Product quality
Pricing policies
Distribution channels
Customer service
ANALYSIS: STRATEGIC
GROUPS
IMPLICATIONS
Firms within a strategic group are direct
competitors (offer similar products), thus
rivalry can be intense; the greater the rivalry
the greater the threat to each firms profitability
The strengths of the five forces differ across
strategic groups
The closer the strategic groups in terms of
strategy, the greater the likelihood of rivalry
Strategic Group Map
A Strategic Group
Is a cluster of industry rivals that have

similar competitive approaches and
market positions:
Have comparable product-line breadth

Sell in the same price/quality range
Emphasize the same distribution channels
Use the same product attributes to buyers
Depend on identical technological approaches
Offer similar services and technical assistance
Constructing a strategic group map:
Identify the competitive characteristics that

differentiate firms in the industry.
Plot the firms on a two-variable map using pairs

of differentiating competitive characteristics.
Assign firms occupying about the same map

location to the same strategic group.
Draw circles around each strategic group,

making the circles proportional to the size of the
groups share of total industry sales revenues.
Price/quality range (high, medium, low)
Geographic coverage (local, regional, national,

global)
Product-line breadth (wide, narrow)
Degree of service offered (no frills, limited, full)
Distribution channels (retail, wholesale, Internet,

multiple)
Degree of vertical integration (none, partial, full)
Degree of diversification into other industries

(none, some, considerable).
Variables selected as map axes:
Must not be highly correlated.

Must reflect key approaches to customer
value and expose sizable differences in
the marketplace positions of rivals.
May be quantitative, continuous, discrete
and\or defined in terms of distinct classes
and combinations.
Draw map circles proportional to the

combined sales of firms in each strategic
group to reflect the relative sizes of each
group to the total size of the industry.
Use different variable sets to show different

views of relationships among competitive
positions in the industrys structurethere
is no one best map for portraying how
competing firms are positioned.
2012 South-Western, Cengage Learning, Inc. All rights reserved.
COMPETITOR
ANALYSIS
COMPETITOR INTELLIGENCE
Set of data and information the firm gathers to better
understand and anticipate competitors' objectives,
strategies, assumptions, and capabilities
The ethical and legal gathering of needed information
and data that provides insight into:
What drives competitors
Shown by organization's future objectives
What the competitor is doing and can do
Revealed in organization's current strategy
What the competitor believes about the industry
Shown in organization's assumptions
What the competitors capabilities are
Shown by organization's strengths and weaknesses
COMPETITOR ANALYSIS
COMPONENTS
FIGURE 2.3
Competitor
Analysis
Components
COMPETITOR ANALYSIS:
COMPLEMENTORS
Complementors: The network of companies that sell
complementary products or services or are compatible with the
focal firms own product or service. Complementors expand the
set of competitors that firms must evaluate when completing a
competitor analysis
COMPLEMEN
TOR
COMPETITOR
If a complementors product or
service adds value to the sale of
the focal firms product or
service, it is likely to create
value for the focal firm
If a complementors product or
service is in a market into which
the focal firm intends to expand,
the complementor can
represent a formidable
competitor.
Un
e
ta thi
c
c
t
inc ics al
lu d c a
e: n
COMPETITOR ANALYSIS:
ETHICAL
CONSIDERATIONS
BLACKMAIL
TRESPASSING
EAVESDROPPING
STEALING DRAWINGS,
SAMPLES, OR
DOCUMENTS
Continuation of the External

Analysis
(1)
1. Develop List of Opportunities from the
General Environment Factors, and the
Competitors analysis
2. See an example below:
No
Opportunities ( Case Facts)
Economic Factors
Social factors
Political Factors
Technological Factors
Competitive analysis Results
Remarks
Continuation of the External

Analysis
(2)
1. Develop List of Threats from the General
Environment Factors, and the
Competitors analysis
No
Threats ( Case Facts)
Economic Factors
Social factors
Political Factors
Remarks
Proceed to Forecasting
Process
(1) opportunity as the
1. Analyze every
following:
a. When will it happen?
b. What and how much will be the impact for
the assessed company?
2. The higher impact for the company will be
having the higher priority.
No
Opportunities ( Case Facts)
Economic Factors
Social factors
Political Factors
Proirity
Proceed to Forecasting
Process
(2) threat as the following:
1. Analyze every
a. When will it happen?
b. What and how much will be the impact for
the assessed company?
2. The higher impact for the company will be
having the higher priority.
No
Threats ( Case Facts)
Economic Factors
Social factors
Political Factors
Priority
The External Factor Evaluation

(EFE) Matrix
1.
2.
3.
4.
5.
List key external factors

Weight from 0 to 1
Rate effectiveness of current
strategies
Multiply weight * rating
Sum weighted scores

(EFE) Matrix
3. Assign a rating between 1 to 4 to each key
external
factor to indicate how effectively the firms
current
strategies respond to the factor, where
4 = the response is superior,
3 = the response is above average,
2 = the response is average, and
1 = the response is poor.
Ratings are based on effectiveness of the
firms strategies. Ratings are thus companybased, where as the weights in step-2 are
industry based.
It is important to note that both threats and

(EFE) Matrix
4. Multiply each factors weight by its rating to
determine a weighted score.
5. Sum the weighed scores for each variable to
determine the total weighted score for the
organization.
Regardless the number of key opportunities
and threats included in the EFE Matrix,
the highest possible total weighted score for
organization is 4.0 and
the lowest possible total weighted score is
1.0.

(EFE) Matrix
The average total weighted score is 2.5.
A total weighted score of 4.0 indicates that
an organization is responding in an
outstanding way to existing opportunities
and minimize the potential adverse effects
of external threats.
A total weighted score of 1.0 indicates that
the firms strategies are not capitalizing on
opportunities or avoiding threats.
A total weighted score of an EFE Matrix
below 2.5, usually will not be accounted or
will not further analyzed.

(EFE) Matrix
COMPETITIVE PROFILE
MATRIX
Identifies firms major competitors and

their strengths & weaknesses in
relation to a sample firms strategic
positions
Critical success factors include
internal and external issues
COMPETITIVE PROFILE
MATRIX
Pre-requisites
for success
Pre-requisites
for
success
What do
customers want?
Analysis of demand
Who are our
customers?
What do they
want?
How does the firm

survive competition
Analysis of competition
What drives competition?
What What
drives
competition?
are the
main
Whatdimensions
are the main
of competition?
dimensions
of competition?
How intense
is competition?
How intense is competition?
How we
canobtain
we obtain
How can
a a superior
competitive
position?position?
superior
competitive
KEY SUCCESS FACTORS
COMPETITIVE PROFILE
MATRIX
No
1.
2.
3.
Key
Success
Factors
Price
Quality
Availability
Compani
es within
Industry
Case Facts
xxxx
yyyy
aaaa
bbbb
ccccc
dddd
COMPETITIVE PROFILE
MATRIX
The weights and total weighted scores
in both a CPM and an EFE have the same
meaning.
Critical Success Factors in a CPM
include both internal and external
issues; therefore the ratings refer to
strengths and weaknesses, where:
4 = major strengths,
3 = minor strengths,
2 = minor weakness, and
1 = major weakness.
The average score of a CPM is 2.50;
similar in an EFE, the CPM score lower
COMPETITIVE PROFILE
MATRIX
The Critical Success Factors in CPM are
not grouped into opportunities and
threats as they are in the EFE.
In CPM, the ratings and total weighted
scores for rival firms can be compared
to the sample firm.
This comparative analysis provides
important internal strategic
information.
Avoid assigning the same rating to firms
included in your CPM.
COMPETITIVE PROFILE
MATRIX

Chapter - 2 (Strategic Management)

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IRELAND | HOSKISSON | HITT

Name and describe the general environments

Define strategic groups and describe their

Describe what firms need to know about their

Dimensions in the broader society that

Set of factors that directly influences a

A firms external environment creates:

Collectively, opportunities and threats affect

Table 2.1 The General

Firms cannot directly CONTROL the

Demographic segments are commonly analyzed

This segment refers to the nature and direction of the

This segment represents how organizations and

Diversity attitudes about the quality of work life

Shifts in work and career preferences

Technological changes occur through new products,

New communication technologies

Important political events

Concerned with trends oriented to sustaining the worlds physical

Physical Environment Segment

Strategic Focus: Firms Efforts to Take Care of the Physical

Firms engage in external environmental

People in boundary-spanning positions can obtain a great deal

Many firms use

Strategies are chosen, in part, because

THE FIVE FORCES OF

THE FIVE FORCES OF

Can threaten market share of existing

THE FIVE FORCES OF

High entry barriers tend to

THE FIVE FORCES OF

FUNCTION OF TWO FACTORS

THE FIVE FORCES OF

THE FIVE FORCES OF

ECONOMIES OF SCALE (contd)

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

Locating market niches not being served by

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

INDUSTRY RESTRUCTURED THROUGH

THE FIVE FORCES OF

THE FIVE FORCES OF

THE FIVE FORCES OF

INDUSTRY RIVALRY INTENSIFIES

THE FIVE FORCES OF

THE FIVE FORCES OF

EXIT BARRIERS (examples contd):

THE FIVE FORCES OF

EXIT BARRIERS (examples contd):

THE FIVE FORCES OF

THE FIVE FORCES OF

Do the Analysis from the Case

STRATEGIC GROUP DEFINED