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Chapter 04 - The External Environment
4-1
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
6. Access to Distribution Channels
a) The new boy or girl on the block must, of course, secure distribution of his or
b) The more limited the wholesale or retail channels are and the more that
c) Sometimes this barrier is so high that, to surmount it, a new contestant must
7. Government Policy
a) The government can limit or even foreclose entry to industries, with such
b) The potential rival’s expectations about the reaction of existing competitors
c) The company is likely to have second thoughts if incumbents have previously
(1) The incumbents possess substantial resources to fight back, including
(2) The incumbents seem likely to cut prices because of a desire to keep
(3) Industry growth is slow, affecting its ability to absorb the new arrival
C. Powerful Suppliers
1. Suppliers can exert bargaining power on participants in an industry by raising
2. Powerful suppliers can squeeze profitability out of an industry unable to recover
3. The power of each important supplier (or buyer) group depends on a number of
a) A supplier group is powerful if:
(1) It is dominated by a few companies and is more concentrated than the
(2) Its product is unique or at least differentiated, or if it has built-up
(4) It poses a credible threat of integrating forward into the industry’s
business.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
(5) The industry is not an important customer of the supplier group. If the
e) The industry’s product is unimportant to the quality of the buyers’ products
3. Most of these sources of buyer power can be attributed to consumers as a group as
well as to industrial and commercial buyers; only a modification of the frame of
reference is necessary.
a) Consumers tend to be more prices sensitive if they are purchasing products
b) The buying power of the retailers is determined by the same rules, with one
important addition: Retailers can gain significant bargaining power over
E. Substitute Products
1. By placing a ceiling on the prices it can charge, substitute products or services
limit the potential of an industry.
a) Unless it can upgrade the quality of the product or differentiate it somehow,
b) The more attractive the price-performance trade-off offered by substitute
2. Substitutes not only limit profits in normal times but also reduce the bonanza an
industry can reap in boom times.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
3. Substitute products that deserve the most attention strategically are those that are
F. Jockeying for Position
1. Rivalry among existing competitors takes the familiar form of jockeying for
2. This type of intense rivalry is related to the presence of a number of factors:
a) Competitors are numerous or are roughly equal in size and power.
b) Industry growth is slow, precipitating fights for market share that involve
expansion-minded members.
3. As an industry matures, its growth rate changes, resulting in declining profits and
(often) a shakeout.
4. An acquisition can introduce a very different personality to an industry.
5. While a company must live with many of these factors—because they are built
VII. Industry Analysis and Competitive Analysis
A. Industry Boundaries
1. An industry is a collection of firms that offer similar products or services.
a) A definition of industry boundaries is important because it helps executives
b) It is also important because this definition focuses attention on the firm’s
c) Third, a definition of industry boundaries helps executives determine key
d) Finally, a definition of industry boundaries gives executives another basis on
2. Problems in Defining Industry Boundaries
a) Defining industry boundaries requires both caution and imagination.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
b) Caution is necessary because there are no precise rules for this task and
c) Imagination is necessary because industries are dynamic—in every industry,
d) Defining industry boundaries is a very difficult task because of three sources:
(1) The evolution of industries over time creates new opportunities and
threats.
3. Developing a Realistic Industry Definition
a) Having developed a preliminary concept of the industry, executives flesh out
b) Executives need to select the scope of their firm’s potential market from
c) To understand the makeup of the industry, executives adopt a longitudinal
perspective.
e) To realistically define their industry, executives need to examine five issues:
(1) Which part of the industry corresponds to our firm’s goals?
(2) What are the key ingredients of success in that part of the industry?
B. Power Curves
1. Power curves depict the fundamental structural trends that underlie an industry. .
a) A power curve is described as exhibiting a small set of companies with
extremely large incomes, followed quickly by a much larger array of
c) Exhibit 4.12 illustrates the power curve.
C. Competitive Analysis
1. How to Identify Competitors
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
a) In identifying their firm’s current and potential competitors, executives
consider several important variables:
(1) How do other firms define the scope of their market?
(3) How committed are other firms to the industry?
2. Common Mistakes in Identifying Competitors
a) Identifying competitors is a process laden with uncertainty and risk, a
(1) Overemphasizing current and known competitors while giving
inadequate attention to potential entrants.
(2) Overemphasizing large competitors while ignoring small competitors.
VIII. Operating Environment
A. The operating environment, also called the competitive or task environment, comprises
1. Among the most important of these factors are a firm’s competitive position, th e
2. The operating environment is typically much more subject to the firm’s influence
or control than the remote environment.
3. This allows firms to be much more proactive in dealing with the operating
environment than in dealing with the remote environment.
B. Competitive Position
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
1. Assessing its competitive position improves a firm’s chances of designing
2. Development of competitor profiles enables a firm to more accurately forecast
3. Although the exact criteria used in constructing a competitor’s profile are largely
a) Market share
b) Breadth of product line
c) Effectiveness of sales distribution
d) Proprietary and key account advantages
e) Price competitiveness
importance to a firm’s success.
5. Exhibit 4.13, Competitor Profile, shows how the weights and ratings
characterize the firm.
7. Comparing the firm’s profile with those of its competitors can aid its managers in
C. Customer Profiles
1. Perhaps the most vulnerable result of analyzing the operating environment is the
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
a) Developing a profile of a firm’s present and prospective customers improves
b) Enterprising companies have quickly learned the importance of identifying
c) Assessing consumer behavior is a key element in the process of satisfying
e) Market research and industry surveys can help to reduce a firm’s chances of
f) Firms that are most vulnerable are those that have had success with one or
2. Geographic
a) It is important to define the geographic area from which customers do or
could come.
3. Demographic
a) Demographic variables most commonly are used to differentiate groups of
present or potential customers.
4. Psychographic
a) Personality and lifestyle variables often are better predictors of customer
5. Buyer Behavior
a) Buyer behavior data also can be a component of the customer profile.
D. Suppliers
1. Dependable relationships between a firm and its suppliers are essential to the
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
a) A firm regularly relies on its suppliers for financial support, services,
b) In addition, it occasionally is forced to make special requests for such favors
2. In assessment of a firm’s relationships with its suppliers, several factors, other
than the strength of that relationship, should be considered:
a) Are the suppliers’ prices competitive? Do they offer attractive quantity
discounts?
c) In terms of deficiency rates, are the suppliers’ abilities, reputations, and
services competitive?
d) Are the suppliers reciprocally dependent on the firm?
E. Creditors
1. Because the quantity, quality, price, and accessibility of financial, human, and
2. With regard to its competitive position with its creditors, among the most
a) Do the creditors fairly value and willingly accept the firm’s stock as
collateral?
c) A strong working capital position? Little or no leverage?
F. Human Resources: Nature of the Labor Market
1. A firm’s ability to attract and hold capable employees is essential to its success.
a) A firm’s personnel recruitment and selection alternatives often are influenced
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
a) A firm’s reputation within its operating environment is a major element of its
b) A firm is more likely to attract and retain valuable employees if it is seen as
3. Employment Rates
a) The readily available supply of skilled and experienced personnel may vary
4. Availability
a) The skills of some people are so specialized that relocation may be necessary
b) A firm that seeks to hire such a person is said to have broad labor market
c) On the other hand, people with more common skills are less likely to relocate
d) Thus, the labor market boundaries are fairly limited for such occupational
5. Labor Unions
a) Approximately 12 percent of all workers in the United States belong to a
IX. Emphasis on Environmental Factors
A. The forces in the external environment are so dynamic and interactive that the impact of
1. Strategic managers are frequently frustrated in their attempts to anticipate the
environments’ changing influences.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
a) Differing external elements affect different strategies at different times and
with varying strengths.
b) The only certainty is that the effect of the remote and operating environments
2. There is yet another difficulty in assessing the probable impact of remote,
industry, and operating environments on the effectiveness of alternative strategies.
a) Assessment of this kind involves collecting information that can be analyzed
B. Assessing the potential impact of changes in the external environment offers a real
advantage.
1. It enables decision makers to narrow the range of the available options and to
and opening.
4. Chapter 4 Appendix, Sources for Environmental Forecasting, is provided to
