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Small entrepreneurial firms can avoid retaliation by identifying and serving neglected market
segments. For example, Honda first entered the US market by concentrating on small-engine
motorcycles, a market that firms such as Harley-Davidson ignored. After consolidating its
position, Honda went on the offensive by introducing larger motorcycles and competing in
• Industry firms are not a significant customer group for the supplier group
• Suppliers’ goods are critical to buyers’ marketplace success
• Effectiveness of suppliers’ products has created high switching costs for buyers
• Suppliers represent a credible threat to integrate forward into the buyers’ industry,
especially when suppliers have substantial resources and provide highly differentiated
products
In the airline industry, suppliers’ bargaining power is changing. There are few suppliers, but
demand for the major aircraft is also low. Boeing and Airbus compete strongly for most orders of
Buyer groups are powerful relative to firms competing in the industry when:
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• Buyers are important to sellers because they purchase a large portion of the supply
industry’s total sales
• Products purchased from a supply industry represent a significant portion of the seller’s
Threat of Substitute Products
All firms must recognize that they compete against firms producing substitute products,
those products that are capable of satisfying similar customer needs but come from outside
the industry and thus have different characteristics. In effect, prices charged for substitute
products represent the upper limit on the prices that suppliers can charge for their products.
Examples of Traditional and Substitute Products and Their Usage
Traditional product Substitute product Usage
Overnight delivery Fax machines/e-mail
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Intensity of Rivalry Among Competitors
The intensity of rivalry in an industry depends on the extent to which firms in an industry
compete with one another to achieve strategic competitiveness and earn above-average
industry. However, other firms will generally notice these moves and offer countermoves of
their own in response. Patterns of frequent actions and reactions often result in intense
rivalry, such as in local restaurant, retailing, or dry-cleaning industries.
Slow Industry Growth
When a market is growing at a level where there seem to be “enough customers for
everyone,” competition generally centers around effective use of resources so that a firm can
effectively serve a larger, growing customer base. Because of sufficient growth in the market,
firms do not concentrate on taking customers away from other firms.
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The intensity of competition often results in a reduction in industry profitability as observed
in the fast-food industry with the battle for a slower growing traditional, US customer base
between McDonald’s, Burger King, and Wendy’s. The intensity of competition can be
illustrated by the various competitive strategies followed by firms in the fast-food industry:
• Rapid and continuous introduction of new products and new packaging schemes
• The introduction of innovative-pricing strategies
• Product and/or service differentiation
High Fixed Costs or High Storage Costs
High storage costs, especially those related to perishable or time-sensitive products (such as
fruits and vegetables) also can result in high levels of competitive intensity as such products
rapidly lose their value if not sold within a given time period. Pricing strategies often are
used to sell such products.
Lack of Differentiation or Low Switching Costs
High Strategic Stakes
The intensity of competitive rivalry increases when success in an industry is important to a
large number of firms (such as the domestic airline industry following deregulation). For
example, the success of a diversified firm may be important to its effectiveness in other
industries, especially when the firm is in interdependent or related industries.
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Geographic stakes may also be high. The importance of geographic stakes can be illustrated
by the intense rivalry in the US automobile industry as Japanese manufacturers recognized
the strategic importance of a US marketplace presence and US manufacturers responded.
High Exit Barriers
Some sources of exit barriers include:
• Investments in specialized assets, or assets whose value is linked to use in a particular
industry or location, with little or no value as salvage or in other uses
• Fixed costs of exit, such as labor agreements or a requirement to repay federal, state, or
local aid packages
• Strategic relationships, interdependencies within the organization (e.g., shared facilities,
market access)
• Emotional barriers, such as loyalty to employees or fear for one’s own career
• Government and/or social restrictions based on concern for job losses or the economic
impact of exit
Teaching Note
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INTERPRETING INDUSTRY ANALYSES
Effective industry analyses are products of careful study and interpretation of data from
multiple sources. Because of globalization, international markets and rivalry must be
included in the firm’s analyses; in fact, research shows international variables may have more
impact on strategic competitiveness than domestic ones, in some cases.
Characteristics of attractive and unattractive industries are summarized below.
Industry Characteristic Attractive Unattractive
Threat of New Entry Low High
Bargaining Power of Suppliers Low High
Bargaining Power of Buyers Low High
Threat of Substitute Products Low High
Intensity of Competitive Rivalry Low High
6
Define strategic groups and describe their influence on firms.
STRATEGIC GROUPS
As implied by the previous discussion, not all firms in an industry may adopt the same
strategies in their quest for strategic competitiveness and above-average returns. However,
many firms in an industry may follow similar strategies. These firms are generally classified
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as strategic groups, or groups of firms in an industry following the same or similar strategies
along the same strategic dimensions.
Membership in a particular strategic group is determined by the essential characteristics of a
Teaching Note
Many strategy experts believe that the strategic group concept provides a useful tool
for analyzing an industry from firm-specific perspectives in order to learn how to
compete successfully. However, some critics indicate that there is no convincing
evidence that (1) strategic groups exist or (2) that firm performance is dependent on
membership in a particular group. Others contend that little additional understanding
can be gained from industry analysis by looking at strategic groups, but recent
research provides some evidence to support the usefulness of this analysis.
Use of the strategic group concept requires that analysts be aware of several implications:
• A firm’s major or primary competitors are those in its strategic group, thus competitive
rivalry within the strategic group is expected to be more intense than rivalry with other
firms in the industry.
• The relative strengths of the five competitive forces will differ among groups, thus firms
in different groups may adopt different competitive strategies.
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• The closer the strategic groups on the relevant dimensions, the greater the likelihood of
their rivalry.
STRATEGIC FOCUS
Watch Out Retailers, Here Comes Amazon; Watch Out Amazon, Here Comes Jet.com
Teaching Note
The Strategic Focus provides a good discussion vehicle for competitor analysis with a strategic
group. How do traditional retailers compete with online competitors? What can online retailers
do to compete against new entrants?
7
Describe what firms need to know about their competitors and
different methods (including ethical standards) used to collect
intelligence about them.
COMPETITOR ANALYSIS
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• Competitors’ current strategy
• Competitors’ assumptions about the industry
• Capabilities, as shown by competitors’ strengths and weaknesses
Competitor intelligence is critical to competitor analysis because it helps a firm understand
competitors’ intentions and the strategic implications resulting from them. Competitor
intelligence is performed both for domestic and international competitors.
FIGURE 2.3
Competitor Analysis Components
Figure 2.3 shows how the components of competitor analysis help the firm prepare an
anticipated response profile for each competitor.
Components Response
Future Objectives What will our competitors do in the future?
Current Strategy Where do we hold an advantage over our competitors?
Assumptions How will this change our relationship with our
Capabilities competitors?
ETHICAL CONSIDERATIONS
A major concern of many managers is the methods used to gather data on competitors, a
process generally referred to as competitor intelligence. The illustration of Microsoft’s
struggle to understand Google is especially helpful in explaining this concept. It is a great
managerial challenge to ensure that all data and information related to competitors are
gathered both legally and ethically. This is important because many employees may feel
pressure to rely on techniques that are questionable from an ethical perspective to gather
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information that may be valuable to their firm, especially if they perceive value to their own
careers from successfully obtaining such information.
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The general environment represents those elements in the broader society that can influence
all (or most) industries and the firms that compete in those industries; it represents elements
3. What is the external environmental analysis process (four parts)? What does the firm
want to learn when using this process?
The environmental analysis process represents an organized attempt by the firm to better
understand turbulent, complex, and global environments. This is achieved by scanning
(studying all segments of the general environment to identify existing or potential changes),
4. What are the seven segments of the general environment? Explain the differences
among them.
The demographic segment is concerned with characteristics of the population or society that
makes up the general environment. Characteristics of interest are size, age, structure,
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interest rates, trade deficits (or surpluses), budget deficits (or surpluses), individual and
business savings and investment rates, and gross domestic product.
The political/legal segment is the arena in which organizations and interest groups compete
5. How do the five forces of competition in an industry affect its profit potential?
Explain.
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Substitute products influence an industry’s profit potential by placing an upper limit on
6. What is a strategic group? Of what value is knowledge of the firm’s strategic group
in formulating that firm’s strategy?
A strategic group is a group of firms within an industry that generally follow the same (or a
similar) strategy, competing along the same strategic dimensions (such as product quality,
pricing policy, distribution channels, or level of customer service).
competitors) differ across strategic groups. Third, the closer the strategic groups are in terms
of their strategies, the greater is the likelihood of rivalry between the groups. In the end,
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7. What is the importance of collecting and interpreting data and information about
competitors? What practices should a firm use to gather competitor intelligence and
why?
Competitor analysis can help the firm understand and better anticipate competitors’ future
objectives, current strategies, assumptions, and capabilities. The firm should gather
intelligence about its competitors as well as about public policies in countries across the
world, which can serve as an early warning of threats and opportunities emerging from the
global public policy environment that may affect the achievement of the company’s strategy.
Through effective competitive and public policy intelligence, the firm gains the insights
needed to create a competitive advantage and to increase the quality of the strategic decisions
it makes when deciding how to compete against its rivals.
Despite its importance, evidence suggests that a relatively small percentage of firms use
formal processes to study competitors. Beyond this, some firms fail to analyze a competitor’s
future objectives when trying to understand its current strategy, assumptions, and
capabilities, but it is important to study the present and the future when examining
competitors. Failure to do so may lead to incomplete or distorted insights about competitors.
ADDITIONAL QUESTIONS AND EXERCISES
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The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
1. Given the importance of understanding the external environment, why do some firms fail to
do so? Students can provide examples of firms that did not understand their external
environment. What were the implications of the firm’s failure to understand that environment?
2. Have students select a firm and describe its external environment. What actions do you
believe the firm should take, given its external environment, and why?
3. How is it possible that one firm could see a condition in the external environment as an
opportunity whereas a second firm sees it as a threat?
4. Select a firm in the local community. What materials would help one understand the firm’s
external environment? How could the Internet be used to complete this activity?
5. Have students select an industry that is of interest to them. What actions could firms take to
erect barriers of entry to this industry?
6. What conditions would cause a firm to retaliate aggressively against a new entrant to the
industry?
Ethics Questions
1. How can a firm use its “code of ethics” to analyze the external environment?
2. What ethical issues, if any, may be relevant to a firm’s monitoring of its external
environment? Does use of the Internet to monitor the environment lead to additional ethical
issues? If so, what are they?
3. Think of each segment in a firm’s general environment. What is an ethical issue associated
with each segment? Are firms across the globe doing enough to deal with the issue?
4. What is the importance of using ethical practices between a firm and its suppliers?
5. In an intense rivalry, especially one that involves competition in the global marketplace, how
can the firm gather competitor intelligence ethically while maintaining its competitiveness?
6. Ask the class what they believe determines whether an intelligence-gathering practice is or is
not ethical? Do they see this changing as the world’s economies become more
interdependent? If so, why? Do they see this changing because of the Internet? If so, how?
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INSTRUCTOR’S NOTES FOR MINDTAP
INSTRUCTOR’S NOTES FOR BRANCHING EXERCISES
The Movie Exhibition Industry
Students will review these concepts:
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threat of substitution and the threat of new entrants. You choose to neutralize the threats
• You recommend competing with the threat of substitution
• By neutralizing the threat, you recommend theaters leverage their buying power
with studios to put limits on the catalog available to streaming services.
INSTRUCTOR’S NOTES FOR EXPERIENTIAL EXERCISES
Going Back to the Future: Researching the Past to Predict the Future
A critical ingredient to studying the general environment is identifying opportunities and
threats. An opportunity is a condition in the environment that, if exploited, could help a
company achieve strategic competitiveness. In order to identify opportunities, you must be
aware of trends that affect the world around you today or that are projected to affect it in the
analysis that will concentrate on just a few of the segments and complete the steps for only
your focus environmental factors. Prepare a 15-20 slide presentation of your research
findings and the poll results. Use the bold words as your outline and be sure to include the
following points:
• Which of the seven dimensions of the general environment did you analyze?
• Describe the effect on businesses in this industry.
• List some business opportunities that may come from these trends.
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• Identify some existing businesses that stand to benefit from the trends.
INSTRUCTOR’S NOTES FOR VIDEO EXERCISES
The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Craft Beer and Consolidation
RT: 2:24
Topic Key: The Industry Environment, External Environmental Analysis, Five Forces of
Competition,
Craft beer sales have been increasing while domestic beer sales have been declining. This
video is an example of how smaller new entrants compete with larger more established
brands and the external threats they face, including consolation.
Suggested Discussion Questions and Answers
1. Describe the general environment and industry environment in the craft beer market.
2. Discuss the set of factors that has a direct influence on a firm and its competitive
actions and responses including: the power of suppliers, power of buyers, and the
intensity of rivalry among competing firms. When Bill Butcher of Port City Brews
discusses shelf space and the way that a merger could increase the leverage of
potential of large brewers, he is discussing which competitive force?