1. STRATEGY AND EXTERNAL
ENVIRONMENT
2–1

2. Two Most Important Premises
1. Strategy-Context
Internal
Environment
External
Environment
Strategy
2. Strategy-Time
Present
Future
Strategy
2–2

3. External Environment
General
Environment
Industry
Competitor
External
Environment
2–3

4. General Environment
General Environment
Industry
Strategic Group
Competitors
2–4

5. The External
Environment
2–5
Figure 2.1

6. General Environment
• Dimensions in the broader society that influence
and industry and the firms within it
– Economic
– Sociocultural
– Global
– Technological
– Political/legal
– Demographic
2–6

7. Industry Environment
• Set of factors directly influencing a firm and its
competitive actions and competitive
responses
– Threat of new entrants
– Power of suppliers
– Power of buyers
– Threat of product substitutes
– Intensity of rivalry among competitors
2–7

8. Competitor Environment
• All of the companies that the firm competes
against.
2–8

9. Analysis of the External Environments
• General environment
– Focused on the future
• Industry environment
– Focused on factors and conditions influencing a
firm’s profitability within an industry
• Competitor environment
– Focused on predicting the dynamics of
competitors’ actions, responses and intentions
2–9

10. Opportunities and Threats
• Opportunity
– A condition in the general environment that if
exploited, helps a company achieve strategic
competitiveness
• Threat
– A condition in the general environment that may
hinder a company’s efforts to achieve strategic
competitiveness
2–10

11. General Environment (cont’d)
• The Economic Segment
– Inflation rates
– Interest rates
– Trade deficits or surpluses
– Budget deficits or surpluses
– Personal savings rate
– Business savings rates
– Gross domestic product
2–11

12. General Environment (cont’d)
• The Socio-cultural Segment
– Reservations
– Women in the workplace
– Workforce diversity
– Attitudes about quality of
work-life
– Concerns about environment
– Shifts in work and career
preferences
– Shifts in product and service
preferences
2–12

13. General Environment (cont’d)
• The Technological Segment
– Product innovations
– Applications of knowledge
– Focus of private and
government-supported
R&D expenditures
– New communication
technologies
2–13

14. General Environment (cont’d)
• The Political/Legal Segment
– Antitrust laws
– Taxation laws
– Deregulation philosophies
– Labor training laws
– Educational philosophies
and policies
2–14

15. General Environment
• The Demographic Segment
– Population size
– Age structure
– Geographic distribution
– Ethnic mix
– Income distribution
2–15

16. Industry Environment
• Industry Defined
– A group of firms producing products that are close
substitutes
• Firms that influence one another
• Includes a rich mix of competitive strategies that
companies use in pursuing strategic competitiveness
and above-average returns
2–16

17. Threat of New Entrant- Entry Barriers
• Airlines Industry
• Retail Industry
• Power Generation

18. Substitutes
Tea and Coffee
Aluminum and Copper
Plastic and Glass
Mobile and Landline
Radio and TV
Petrol to Non fossil fuel

19. Bargaining Power of Suppliers
• PC Manufacturing
• Metals

20. Bargaining power of Buyers
• Retail
• Bollywood Producer
and Multiplex owners

21. Five Forces and Industry

22. The Five Forces of Competition Model
2–22
Figure 2.2

23. Threat of New Entrants: Barriers to
Entry
• Economies of scale
• Network Effects
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
• Government policy
• Expected retaliation
2–23

24. Bargaining Power of Suppliers
• Supplier power increases when:
– Suppliers are large and few in number
-concentration E.g. PC vs. Microsoft
– Suitable substitute products are not
available. Plastic and steel, Pilots union, Doctors
– Suppliers do not depend heavily on
industry, E.g. Glass and Automobile, Rubber and Tyre, chip
manufactures and PC, Coke and Steel, Gas and Power
– Suppliers’ goods are critical to buyers’ marketplace success E.g.
Pharma’s patented drugs to hospitals
– Suppliers’ products create high switching costs. E.g. Bloomberg ,
Automobile ancillaries in J’pur,
– Suppliers pose a threat to integrate forward into buyers’ industry
Mfg vs. Retail
2–24

25. Bargaining Power of Buyers
• Buyer power increase when:
– Buyers are large and few in
number (concentration)- E.g.PC vs Chip
– Buyers purchase a large portion of an
industry’s total output E.g. Multiplexes
– Industry products are undifferentiated
– Buyers can switch to another product without incurring high switching
costs
– Buyers pose threat to integrate backward into the sellers’ industry E.g.
Retailers
2–25

26. Bargaining Power of Buyers
• Buyer are price sensitive when:
– Products purchased by them are
significant part of cost structure
E.g. Vermont Milk, Aviation fuel
– Buyers earn lower profits (Airlines)
– Quality of buyers’ products are not affected
E.g. Camera for production house are very important
2–26

27. Threat of Substitute Products
• The threat of substitute products increases when:
– Price-Performance (Computer vs. Typewriter,
Video rentals vs. YouTube, Flix vs. Rentals)
– Buyers face few switching costs
concentration (Patented to generic drug)
– Players should be alert to different industry
as threats are likely to come from unexpected
spaces (Teachers-Search Engines, Airlines - Videoconferencing)
2–27

28. Intensity of Rivalry Among
Competitors
• Industry rivalry increases when:
– There are numerous or equally balanced
competitors E.g. Soft Drink
– Industry growth slows declines E.g.
Airline in India
– There are high fixed costs and marginal
costs low.
– There is a lack of differentiation opportunities or low switching costs
– When the strategic stakes are high E.g Committment
– When high exit barriers prevent competitors from leaving the industry
E.g. Aluminium
– Perishable Products
2–28

29. Interpreting Industry Analyses
2–29
Low entry barriers
Unattractive
Industry
Suppliers and buyers
have strong positions
Strong threats from
substitute products
Intense rivalry
among competitors
Low profit potential

30. Interpreting Industry Analyses
2–30
Attractive
Industry
High entry barriers
Suppliers and buyers
have weak positions
Few threats from
substitute products
Moderate rivalry
among competitors
High profit potential