THE EXTERNAL ENVIRONMENT: OPPORTUNITIES, THREATS, INDUSTRY COMPETITION AND COMPETITOR ANALYSIS.
“It is not the strongest species that survive, nor the most intelligent, but the one most responsive to change.” Charles Darwin  Today, two types of strategies exist: proactive/reactive. Anticipation, change, adaptability is necessary nowadays so the proactive strategy (ex: Coca Cola). External environment conditions create both threats and opportunities for firms that have major implications for their strategic actions. Regardless of the industry, the external environment is critical to a firm’s survival success. The firm’s understanding of the external environment is matched with knowledge about its internal environment to form its vision, to develop its mission and to take actions that result in strategic competitiveness and above-average returns. Factors that can have an impact on business have to be taken in consideration. Companies sometimes have to have strategic scenario in case of an unexpected factors, which can affect the external environment: - The attacks of September 11, - The coalition invasion in Afghanistan in October 2001, - The outbreak of the Severe Acute Respiracy Syndrome (SARS) - The war in Iraq in 2003, - The Madrid (2004) and London (2005) bombings.

I. The general, industry and competitor environments.
The external environment Demographic

Global Industry environment
Threat of new entrant Power of suppliers Power of buyers Product substitutes Intensity of rivalry

Economic

Competitor environment

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Technological Socio-cultural

Political/Legal

A firm’s external environment is divided into three main areas: the general, industry and competitors. The general environment is composed of dimensions in broader society that influence an industry and, indirectly, the firms within in.  Focused on the future These dimensions are group into six environments segment: - demographic, - economic, - political/legal, - socio-cultural, - technological, - global. Firms cannot directly control the general environment’s segments and elements. Firms were challenged to understand the effects of the major general environment events on their current and future strategies. The industry environment is the set of factors that directly influences a firm and its competitive actions and competitive response: - the threat of new entrants, - the power of suppliers, - the power of buyers, - the threat of product substitutes, - and the intensity of rivalry.  Focused on factors and conditions influencing a firm’s profitability within an industry. The interactions among these five factors determine an industry’s attractiveness and profit potential (cf. Competitor analysis). The competitors firms operating in the same market, offering similar products and targeting similar customers.  Focused on predicting the dynamics of competitors’ actions, responses and intentions.

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 In combination, the result of the three analyses of the general environment, the firm uses to understand its external environment influence its strategic intent, strategic mission and strategic actions.

II. External environmental analysis.
An important objective of studying the general environment is identifying opportunities and threats. An opportunity is a condition in the general environment that, if exploited, helps a company achieve strategic competitiveness. (=opportunité) A threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness. (= menace)

A) Scanning.
Through scanning, firms identify early signals of environment changes and trends. (=déchiffrer) When scanning, the firm often deals with ambiguous, incomplete or unconnected data information. Environment scanning is critically important for firms competing in highly volatile environment. Example: Many websites and advertisers on the Internet use “cookies” to obtain information from those who visit their sites.

B) Monitoring.

When monitoring, analysts detect meaning through ongoing observations of environmental changes and trends. (=surveillance) Critical to successful monitoring is the firm’s ability to detect meaning in different environmental events ad trends. By monitoring, firms can be prepared to introduce new good and services at the appropriate time to take advantage of the opportunities identified trends provide. Like scanning, monitoring is particularly important when a firm competes in an industry with high technological uncertainty. Also, scanning and monitoring not only can provide the firm with information, they also serve as a means of importing new knowledge about markets and about how to successfully commercialise new technologies that the firms has developed. Example: The number of immigrants from Asia continues to grow in Australia, which represents an opportunity as a new consumer market.

C) Forecasting.
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When forecasting, analysts develop projections of anticipated outcomes based on monitored changes and trends. (= prévision, prospective)  What might happen and how quickly Example: The price of oil is difficult to forecast because of the impact on geo-political events on its price. Firms competing in industries where oil represents a major cost input are quickly faced with the need to increase their retail prices or face significant losses (the airline industry).

D) Assessing.
The objective of assessing is to determine the timing and importance of environmental changes and trends for firms’ strategies and their management. (= évaluer, estimer) Trough scanning, monitoring and forecasting, analysts are able to understand the general environment. Going a step further, the intent of assessment is to specify the implications of that understanding for the organisation. Without assessment, the firm is left with data that may be interesting but are of unknown competitive relevance. After information has been gathered, assessing whether a trend in the environment represents an opportunity or a threat is extremely important to investing money in the appropriate way.

III.

Segments of the general environment.

The general environment is composed of segments that are external of the firm. The environmental segments indirectly affect each industry and its firms. The challenge of each firm is to scan, monitor, forecast and assess those elements in each segment that are of the greatest importance. These efforts should result in recognition of environmental changes, trends, opportunities and threats. Opportunities are then matched with a firm’s core competencies (cf. Chapter 3).

A) The demographic segment.
The demographic segment is concerned with: - population size, - age structure, - geographic distribution, - ethic mix, - income distribution. Often demographic segments are analysed on a global basis because of their potential effect across countries’ borders and because many firms compete in global markets. 17

B) The economic segment.
The economic environment refers to the nature and direction of the economy in which a firm competes or may compete. The health of a nation’s economy affects individual firms and industries. Because of this, companies study the economic environment to identify changes, trends and their strategic implications. Nations are interconnected as a result of the global economy; firms must scan, monitor, forecast and assess the health of economies outside their host nation.

C) The political/legal segment.
The political/legal segment is the arena in which organisations and interest groups compete for attention, resources and a voice in overseeing the body of laws and regulations guiding the interactions among nations. Essentially, this segment represents how organisations try to influence government and how government influence them.

D) The socio-cultural segment.
The socio-cultural 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.

E) 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. Given the rapid pace of technological change, it is vital for firms to thoroughly study the technological segment. The importance of these efforts is suggested by the finding that early adopters of new technology often achieve higher market shares and earn higher return.

F) 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. Globalisation of business markets creates both opportunities and challenges for firms. The general environment: Segments and elements

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Demographic segment

Economic segment

Political/legal segment

Socio-cultural segment

Technological segment

Global segment

Population size Age structure Geographic distribution Ethnic mix Income distribution Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product Competition and anti-monopoly laws Taxation laws Deregulations philosophies Labour training laws Educational philosophies and policies Women in the workforce Workforce diversity Attitudes about the quality of work life Concern about the environment Shifts in work and careers preferences Shifts in preferences regarding product and service characteristics Product innovations Applications of knowledge Focus of private and government-supported research and development (R&D) expenditures New communication technologies Important political events Critical global markets Newly industrialised countries Different cultural and institutional attributes

IV.

Industry environment analysis.

An industry is a group of firms producing products that are close substitutes. It includes: - firms that influence one another, - a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average return. Compared with the general environment, the industry environment often has a more direct effect on the firm’s strategic competitiveness and above-average returns. The

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intensity of industry competition and an industry’s profit potential are functions of five forces of competition: - the threat of new entrant, - the power of suppliers, - the power of buyers, - the threat of substitute product, - the intensity of rivalry among competitors. ==> The study of the five forces permits to know if a industry is attractive or not.

A) Threat of new entrants.
Identifying new entrants is important because they can threaten the market share of existing competitors. They bring additional production capacity. Unless the demand for a good or service is increasing, additional capacity holds consumers’ costs down, resulting in less revenue and lower returns for competing firms. New entrants have an interest in gaining a large market share. As a result, new competitors may force existing firms to be more effective and efficient and to learn how to compete on new dimensions. a) Barriers to entry. The absence of entry barriers increases the probability that a new entrant can operate profitably. In contrary, high entry barriers increase the returns for existing firms in the industry and may allow some firms to dominate the industry.  Economies of scale. Economies of scale are derived from incremental efficiency improvements through experience as a firm increases in size. Advantages and disadvantages of large-scale and small-scale entry. Small-scale entry places new entrants at a cost disadvantage. And large-scale entry risks strong competitive retaliation. As well, some competitive conditions reduce the ability of economies of scale to create an entry barrier.  Product differentiation. Over time, customers may come to believe that a firm’s product is unique. Customers valuing a product’s uniqueness tend to become loyal to both the product and the company producing it. Typically, new entrants must allocate many resources over time to overcome existing customer loyalties.  Capital requirements. Competing in a new industry requires a firm to have resources to invest: physical facilities, inventories, capital, and knowledge.  Switching costs. Switching costs are the one-time costs customers incur when they buy from a different supplier.  Access to distribution channels. Once a relationship with its distributor has been developed, a firm will nurture it to create switching costs for the distributors. Access to distribution channels can be strong

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entry barrier for new entrants: it shelf space is limited, companies may give price breaks to keep or create distribution channels. (Japan=conglomerate)  Cost disadvantages independent of scale. Sometimes, established competitors have cost advantages that new entrants cannot duplicate: favourable access to raw materials, desirable locations.  Government policy. Through licensing and permit requirements, federal, state or local government can also control entry into an industry (liquor retailing, radio and TV broadcasting, banking). b) Expected retaliation. Responses by existing competitors may depend on a firm’s present stake in the industry and available business options. Vigorous retaliation can be expected when the existing firm has a major stake in the industry. Locating market niches not being served by incumbents allows the new entrants to avoid entry barriers, so the competition (=rule breaker, do something that nobody else did before and everyone said that they will failed).

B) Bargaining power of suppliers.
Increasing prices and reducing the quality of their products are potential means used by suppliers to exert power over firms competing within an industry. If a firm is unable to recover cost increases by its suppliers through its own pricing structure, its profitability is reduced by its suppliers’ actions (Example: Microsoft). Supplier power increases when: - suppliers are large and few in number, - satisfactory substitute products are not available to industry firms, - industry firms are not significant customer for the supplier group, - suppliers’ goods are critical to buyers’ marketplace success, - suppliers’ products create high switching costs, - suppliers pose a threat to integrate forward into buyer’s industry.

C) Bargaining power of buyers.
Firms seek to maximise the return on their invested capital. Alternatively, buyers want to buy product at the lowest possible price. To reduce their cost, buyers bargain for higher quality, greater levels of service and lower prices. These outcomes are achieved by encouraging competitive battle among the industry’s firms. Buyer power increases when: - buyers are large and few in number, - buyers purchase a large portion of an industry’s total output, - buyers purchase are a significant portion of a supplier’s annual revenues, - buyers can switch to another product without incurring high switching costs, - buyers pose a threat to integrate backward into the sellers’ industry. 21

D) Threat of substitute products.
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. The threat of substitute products increases when: - buyers face few switching costs, - the substitute product’s price is lower, - the substitute product’s quality and performance are equal or greater than the existing product. ==> Differentiated industry products that are valued by customers reduce a substitute’s attractiveness.

E) Intensity of rivalry among competitors.
Firms within industries are rarely homogeneous; they differ in resources and capabilities and seek to differentiate themselves from competitors. Typically, firms seek to differentiate their products from competitors’ offering in ways that customers value and in which the firms have a competitive advantage. Because an industry’s firms are mutually dependent, actions taken by one company usually invite competitive responses. Industry rivalry increases when: - there are numerous or equally balanced competitors, - industry growth slows or declines, - there are high fixed costs or high storage costs, - there is a lack of differentiation opportunities or low switching costs, - the strategic stakes are high, - high exit barriers prevent competitors from leaving the industry.

V. Interpreting industry analyses.
UNATTRACTIVE INDUSTRY:  Low entry barriers.  Suppliers and buyers have strong positions.  Strong threats from substitute products.  Intense rivalry among competitors.  Low profit potential. ATTRRACTIVE INDUSTRY:  High entry barriers.  Suppliers and buyers have weak positions.  Few threats from substitute products.  Moderate rivalry among competitors.  High profit potential.

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VI.

Strategic groups.

A strategic group is a set of firms emphasising similar strategic dimensions to use the same or a similar strategy. (Example: in restoration= fast-food) Internal competition between strategic group firms is greater than between firms outside that strategic group. There is more heterogeneity in the performance of firms within strategic groups than across the groups. The performance leaders within groups are able to follow strategies similar to those of other firms in the group and yet maintain strategic distinctiveness to gain and sustain a competitive advantage.

VII. Competitor analysis.
Competitor analysis focuses on each company against which a firm directly competes. For examples: Fuji and Kodak, Airbus and Boeing, Sun Microsystems and Microsoft should be keenly interested in understanding each other’s objectives, strategies, assumptions and capabilities. In a competitor analysis, the firm seeks to understand: - what drives the competitor, as shown by its future objectives, - what the competitor is doing and can do, as revealed by its current strategy, - what the competitor believes about the industry, as shown by its assumptions, - what the competitor’s capabilities are, as shown by its strengths and weaknesses. Competitor analysis components

Future objective  How do our goals compare with our competitors’ goals?  Where will emphasis be placed in the future?  What is the attitude towards risk?

Current strategy  How are we currently competing?  Does this strategy support changes in the competitive structure?

Response  What will our competitors do in the future?  Where do we hold an advantage over our competitors? 23  How will this change our relationship with our competitors?

Assumptions  Do we assume the future will be volatile?  Are we operating under a status quo? Capabilities  What assumptions do our competitors  What are our strengths and weakness? hold about the industry and  How do we rate compared to our themselves? competitors?

 Information about these four dimensions helps the firms prepare an anticipated response profile for each competitor. The results of an effective competitor analysis help a firm understand, interpret and predict its competitors’ actions and responses. Understanding the actions of competitors clearly contributes to the firm’s ability to compete successfully within the industry. Competitor intelligence is the set of ethical data and information the firm gathers to better understand and better anticipate competitors’ objectives, strategies, assumptions and capabilities.

VIII. Ethical considerations.

Firms should follow generally accepted ethical practices in gathering competitor intelligence. Industry associations often develop lists of these practices that firms can adopt. Practices considered both legal and ethical include obtaining publicly available information and attending trade fairs and shows to obtains competitors’ brochures, view their exhibits and listen to discussions about their products.

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