Threats, Industry Competition, and Competitor Analysis

2
The External Environment:
Opportunities, Threats,
Industry Competition,
and Competitor Analysis
iStock.com/DNY59
Studying this chapter should provide
you with the strategic management
knowledge needed to:
2-1 Explain the importance of analyzing
and understanding the firm’s
external environment.
2-2 Define and describe the general
environment and the industry
environment.
2-3 Discuss the four parts of the
external environmental analysis
process.
2-4 Name and describe the general
environment’s seven segments.
2-5 Identify the five competitive forces
and explain how they determine an
industry’s profitability potential.
2-6 Define strategic groups and
describe their influence on firms.
2-7 Describe what firms need to
know about their competitors
and different methods (including
ethical standards) used to collect
intelligence about them.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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CRACKS IN THE GOLDEN ARCHES AND MCDONALD’S NEW GLUE Ruaridh Stewart/ZUMA Press/Newscom
McDonald’s is the largest restaurant chain in the world. It has 14,155 restaurants in the United
States, and 36,899 restaurants worldwide—in more than 100 countries. It employs 1.5 million
people and serves approximately 69 million customers daily. It sells 9 million pounds of french
fries daily and sells 550 million Big Macs annually. Over the years, McDonald’s was a leader, not
only in market share, but also with the introduction of new menu items to the fast food market. For example, it first introduced breakfast items to this market, and its breakfast menu now
accounts for about 25 percent of its sales. It successfully introduced Chicken McNuggets to
this market, and also successfully introduced gourmet coffee products and began to compete
against Starbucks. With all this success, what is the problem?
The problems revolve around competition and changing consumer tastes. Consumers
have become more health-conscious, and competitors have been more attuned to customer
desires. As a result, McDonald’s suffered a decline in its total sales revenue of
18.9 percent from its
high point in 2013
of $28.1 billion to
$22.8 billion in 2017. It
seems that McDonald’s
did a poor job of analyzing its environment and
especially its customers
and competitors. During
this same time, some of
McDonald’s competitors
flourished. For example,
Sonic and Chipotle
recorded significant
increases in their annual
sales. Other specialty
burger restaurants,
such as Smashburger,
have stolen business
from McDonald’s even
though their burgers are
priced higher. The quality
of these competitors’
products is perceived
to be higher, and many are “made to order” and thus customized to the customer’s desires.
And, partly because the volume and complexity of the McDonald’s menu items have grown,
the time required to provide service has also increased.
Failing to understand the changing market and competitive landscape, McDonald’s
was unable to be proactive and thus tried to be reactive but without much success.
Because of these problems, McDonald’s hired a new CEO in 2015, hoping to overcome
its woes. With a thorough analysis of its customers and competition and its products and
services, McDonald’s developed a strategy to achieve a multi-year turnaround. It is adding
new products to its menu and has enhanced the healthiness of those products along with
enhancing their quality. For example, McDonald’s announced that it will now use only
chickens raised without antibiotics to be sensitive to human health concerns. Changing
vegetables in Happy Meals (e.g., adding baby carrots) and implementing new wraps
that require additional (new) vegetables (such as cucumbers) are meant to enhance the
healthiness of the McDonald’s menu. It has also introduced signature sandwiches, Quarter
Pounders cooked with fresh meat only (not frozen), new espresso-based drinks, and other
quality items.
Other parts of its multi-year strategy include renovated restaurants, digital ordering, and
new delivery services. McDonald’s was once a leader, and now it is fighting regain its position,
trying to stem the downturn. It is now responding to its external environment, especially its
Healthier choice options now available at McDonald’s to satisfy the
more health-conscious consumer.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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38
Part 1: Strategic Management Inputs
As suggested in the Opening Case and by research, the external environment (which
includes the industry in which a firm competes as well as those against whom
it competes) affects the competitive actions and responses firms take to outperform
competitors and earn above-average returns.1
For example, McDonald’s has been experiencing a reduction in returns in recent times because of changing consumer tastes
and enhanced competition. McDonald’s is attempting to respond to the threats from its
environment by changing its menu, revising the types of supplies it purchases, remodeling its restaurants, and implementing digital sales and home delivery of food orders.
The sociocultural segment of the general environment (discussed in this chapter) is the
driver of some of the changing values in society that are now placing greater emphasis
on healthy food choices. As the Opening Case describes, McDonald’s is responding to
these changing values by, for example, using only antibiotic-free chicken and making
its Happy Meals healthier.
As noted in Chapter 1, the characteristics of today’s external environment differ from historical conditions. For example, technological changes and the continuing growth of information gathering and processing capabilities increase the need
for firms to develop effective competitive actions and responses on a timely basis.2
(We fully discuss competitive actions and responses in Chapter 5.) Additionally, the
rapid sociological changes occurring in many countries affect labor practices and
the nature of products that increasingly diverse consumers demand. Governmental
policies and laws also affect where and how firms choose to compete.3
And, changes
to several nations’ financial regulatory systems were enacted after the financial crisis
in 2008–2009 that increased the complexity of organizations’ financial transactions.4
(However, in 2018 the Trump administration weakened or eliminated some of those
regulations in the United States.)
Firms understand the external environment by acquiring information about competitors, customers, and other stakeholders to build their own base of knowledge and
capabilities.5
On the basis of the new information, firms take actions, such as building
new capabilities and core competencies, in hopes of buffering themselves from any negative environmental effects and to pursue opportunities to better serve their stakeholders’
needs.6
In summary, a firm’s competitive actions and responses are influenced by the conditions in the three parts (the general, industry, and competitor) of its external environment
(see Figure 2.1) and its understanding of those conditions. Next, we fully describe each
part of the firm’s external environment.
customers and competitors. Sales began to pick up in the last part of 2017. Within the next few
years, we will know whether these changes succeed.
Sources: C. Smith, 2018, 40 Interesting McDonald’s facts and statistics, DMR Business Statistics, https://expanded ramblings
.com/index.php/mcdonalds-statistics/, February 19; J. Wohl, 2018, McDonald’s makes happy meals (slightly) healthier,
AdAge, http://adage.com, February 15; J. Wohl, 2018, McDonald’s CMO bullish on tiered value menu amid competition,
AdAge, http://adage.com, January 5; K. Taylor, 2017, McDonald’s makes 6 major changes that totally turned business
around, Business Insider, www.businessinsider.com, October 24; S. Whitten, 2017, 4 ways McDonald’s is about to change,
CNBC, www.cnbc.com; A. Gasparro, 2015, McDonald’s new chief plots counter attack, Wall Street Journal, www.wsj.com,
March 1; D. Shanker, 2015, Dear McDonald’s new CEO: Happy first day. Here’s some (unsolicited) advice, Fortune,
www.Fortune.com, March 2; S. Strom, 2015, McDonald’s seeks its fast-food soul, New York Times, www.nytimes.com,
March 7; S. Strom, 2015, McDonald’s tests custom burgers and other new concepts as sales drop, New York Times,
www.nytimes.com, January 23; B. Kowitt, 2014, Fallen Arches, Fortune, December, 106–116.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 39
2-1 The General, Industry, and Competitor
Environments
The general environment is composed of dimensions in the broader society that influence an industry and the firms within it.7
We group these dimensions into seven environmental segments: demographic, economic, political/legal, sociocultural, technological,
global, and sustainable physical. Examples of elements analyzed in each of these segments
are shown in Table 2.1.
Firms cannot directly control the general environment’s segments. Accordingly,
what a company seeks to do is recognize trends in each segment of the general environment and then predict each trend’s effect on it. For example, it has been predicted
that over the next 10 to 20 years, millions of people living in emerging market countries
will join the middle class. In fact, by 2030, it is predicted that two-thirds of the global
middle class, about 525 million people, will live in the Asia-Pacific region of the world.8
Of course, this is not surprising given that almost 60 percent of the world’s population
is located in Asia.9
No firm, including large multinationals, is able to control where
growth in potential customers may take place in the next decade or two. Nonetheless,
firms must study this anticipated trend as a foundation for predicting its effects on their
ability to identify strategies to use that will allow them to remain successful as market
conditions change.
The industry environment is the set of factors that directly influences a firm and
its competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry
General
Environment
Economic
Technological
Sociocultural
Sustainable
Physical
Political/Legal
Demographic
Industry
Environment
Threat of New Entrants
Power of Suppliers
Power of Buyers
Product Substitutes
Intensity of Rivalry
Competitor
Environment
Global
Figure 2.1 The External Environment
The general environment
is composed of dimensions
in the broader society that
influence an industry and the
firms within it.
The industry environment
is the set of factors that
directly influences a firm
and its competitive actions
and responses: the threat
of new entrants, the power
of suppliers, the power of
buyers, the threat of product
substitutes, and the intensity
of rivalry among competing
firms.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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40
Part 1: Strategic Management Inputs
among competing firms.10 In total, the interactions among these five factors determine an
industry’s profitability potential; in turn, the industry’s profitability potential influences
the choices each firm makes about its competitive actions and responses. The challenge
for a firm is to locate a position within an industry where it can favorably influence the
five factors or where it can successfully defend itself against their influence. The greater a
firm’s capacity to favorably influence its industry environment, the greater the likelihood
it will earn above-average returns.
How companies gather and interpret information about their competitors is called
competitor analysis. Understanding the firm’s competitor environment complements
the insights provided by studying the general and industry environments.11 This means,
for example, that McDonald’s needs to do a better job of analyzing and understanding its
general and industry environments.
An analysis of the general environment focuses on environmental trends and their
implications, an analysis of the industry environment focuses on the factors and conditions influencing an industry’s profitability potential, and an analysis of competitors is
focused on predicting competitors’ actions, responses, and intentions. In combination,
the results of these three analyses influence the firm’s vision, mission, choice of strategies, and the competitive actions and responses it will take to implement those strategies. Although we discuss each analysis separately, the firm can develop and implement a more effective strategy when it successfully integrates the insights provided by
analyses of the general environment, the industry environment, and the competitor
environment.
How companies gather and
interpret information about
their competitors is called
competitor analysis.
Table 2.1 The General Environment: Segments and Elements
Demographic segment ● Population size
● Age structure
● Geographic distribution
● Ethnic mix
● Income distribution
Economic segment ● Inflation rates
● Interest rates
● Trade deficits or surpluses
● Budget deficits or surpluses
● Personal savings rate
● Business savings rates
● Gross domestic product
Political/Legal segment ● Antitrust laws
● Taxation laws
● Deregulation philosophies
● Labor training laws
● Educational philosophies and policies
Sociocultural segment ● Women in the workforce
● Workforce diversity
● Attitudes about the quality of work life
● Shifts in work and career preferences
● Shifts in preferences regarding product and
service characteristics
Technological segment ● Product innovations
● Applications of knowledge
● Focus of private and government-supported
R&D expenditures
● New communication technologies
Global segment ● Important political events
● Critical global markets
● Newly industrialized countries
● Different cultural and institutional attributes
Sustainable physical
environment segment
● Energy consumption
● Practices used to develop energy sources
● Renewable energy efforts
● Minimizing a firm’s environmental footprint
● Availability of water as a resource
● Producing environmentally friendly products
● Reacting to natural or man-made disasters
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 41
2-2 External Environmental Analysis
Most firms face external environments that are turbulent, complex, and global—
conditions that make interpreting those environments difficult.12 To cope with often
ambiguous and incomplete environmental data and to increase understanding of the
general environment, firms complete an external environmental analysis. This analysis
has four parts: scanning, monitoring, forecasting, and assessing (see Table 2.2).
Identifying opportunities and threats is an important objective of studying the general
environment. An opportunity is a condition in the general environment that, if exploited
effectively, helps a company reach strategic competitiveness. Most companies—and certainly large ones—continuously encounter multiple opportunities as well as threats.
In terms of possible opportunities, a combination of cultural, political, and economic
factors is resulting in rapid retail growth in parts of Africa, Asia, and Latin America.
Accordingly, Walmart, the world’s largest retailer, and the next three largest global
giants (France’s Carrefour, UK–based Tesco, and Germany’s Metro) are expanding in
these regions. Walmart is expanding its number of retail units in Chile (404 units), India
(20 units), and South Africa (360 units). Interestingly, Carrefour exited India after four
years and in the same year that Tesco opened stores in India. While Metro closed its
operations in Egypt, it has stores in China, Russia, Japan, Vietnam, and India in addition
to many eastern European countries.13
A threat is a condition in the general environment that may hinder a company’s
efforts to achieve strategic competitiveness.14 Intellectual property protection has become
a significant issue not only within a country but also across country borders. For example,
in 2018 President Trump placed tariffs on goods exported from China into the United
States. The primary reason given for the tariffs was the theft of U.S. firms’ intellectual
property by Chinese firms. As is common in these cases, China responded by placing
tariffs on a large number of U.S. products exported to China, sparking fears of a potential
trade war between the two countries with the largest economies in the world. This type
of threat obviously deals with the political/legal segment.
Firms use multiple sources to analyze the general environment through scanning, monitoring, forecasting, and assessing. Examples of these sources include a wide variety of printed
materials (such as trade publications, newspapers, business publications, and the results of
academic research and public polls), trade shows, and suppliers, customers, and employees
of public-sector organizations. Of course, the information available from Internet sources is
of increasing importance to a firm’s efforts to study the general environment.
2-2a Scanning
Scanning entails the study of all segments in the general environment. Although challenging, scanning is critically important to the firms’ efforts to understand trends in the
Table 2.2 Parts of the External Environment Analysis
Scanning ● Identifying early signals of environmental changes and trends
Monitoring ● Detecting meaning through ongoing observations of environmental changes
and trends
Forecasting ● Developing projections of anticipated outcomes based on monitored changes
and trends
Assessing ● Determining the timing and importance of environmental changes and trends
for firms’ strategies and their management
An opportunity is a
condition in the general
environment that, if
exploited effectively, helps
a company reach strategic
competitiveness.
A threat is a condition in
the general environment
that may hinder a company’s
efforts to achieve strategic
competitiveness.
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42
Part 1: Strategic Management Inputs
general environment and to predict their implications. This is particularly the case for
companies competing in highly volatile environments.15
Through scanning, firms identify early signals of potential changes in the general
environment and detect changes that are already under way.16 Scanning activities must
be aligned with the organizational context; a scanning system designed for a volatile
environment is inappropriate for a firm in a stable environment.17 Scanning often
reveals ambiguous, incomplete, or unconnected data and information that require
careful analysis.
Many firms use special software to help them identify events that are taking place
in the environment and that are announced in public sources. For example, news event
detection uses information-based systems to categorize text and reduce the trade-off
between an important missed event and false alarm rates. Increasingly, these systems are
used to study social media outlets as sources of information.18
Broadly speaking, the Internet provides a wealth of opportunities for scanning.
Amazon.com, for example, records information about individuals visiting its website,
particularly if a purchase is made. Amazon then welcomes these customers by name
when they visit the website again. The firm sends messages to customers about specials and new products similar to those they purchased in previous visits. A number
of other companies, such as Netflix, also collect demographic data about their
customers in an attempt to identify their unique preferences (demographics is one
of the segments in the general environment). Approximately 4 billion people use
the Internet in some way, including more than 738 million in China and 287 million in
the United States. So, the Internet represents a healthy opportunity to gather information
on users.19
2-2b Monitoring
When monitoring, analysts observe environmental changes to see if an important trend
is emerging from among those spotted through scanning.20 Critical to successful monitoring is the firm’s ability to detect meaning in environmental events and trends. For
example, those monitoring retirement trends in the United States learned that the median
retirement savings of U.S. workers was only $5000. And for those who are aged 56-61,
the median savings for retirement was only $17,000. For a reasonable retirement, Fidelity
estimates that people should have saved 10 times their annual salary.21 Firms seeking to
serve retirees’ financial needs will continue monitoring workers’ savings and investment
patterns to see if a trend is developing. If, say, they identify that saving less for retirement
(or other needs) is indeed a trend, these firms will seek to understand its competitive
implications.
Effective monitoring requires the firm to identify important stakeholders and understand its reputation among these stakeholders as the foundation for serving their unique
needs.22 (Stakeholders’ unique needs are described in Chapter 1.) One means of monitoring major stakeholders is by using directors that serve on other boards of directors
(referred to as interlocking directorates). They facilitate information and knowledge
transfer from external sources.23 Scanning and monitoring are particularly important
when a firm competes in an industry with high technological uncertainty.24 Scanning and
monitoring can provide the firm with information. These activities also serve as a means
of importing knowledge about markets and about how to successfully commercialize the
new technologies the firm has developed.25
2-2c Forecasting
Scanning and monitoring are concerned with events and trends in the general environment at a point in time. When forecasting, analysts develop feasible projections of what
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 43
might happen, and how quickly, as a result of the events and trends detected through
scanning and monitoring.26 For example, analysts might forecast the time that will
be required for a new technology to reach the marketplace, the length of time before
different corporate training procedures are required to deal with anticipated changes
in the composition of the workforce, or how much time will elapse before changes in
governmental taxation policies affect consumers’ purchasing patterns.
Forecasting events and outcomes accurately is challenging. Forecasting demand
for new technological products is difficult because technology trends are continually shortening product life cycles. This is particularly difficult for a firm such
as Intel, whose products go into many customers’ technological products, which
are frequently updated. Thus, having access to tools that allow better forecasting of
electronic product demand is of value to Intel as the firm studies conditions in its
external environment.27
2-2d Assessing
When assessing, the objective is to determine the timing and significance of the effects
of environmental changes and trends that have been identified.28 Through scanning,
monitoring, and forecasting, analysts are able to understand the general environment.
Additionally, the intent of assessment is to specify the implications of that understanding.
Without assessment, the firm has data that may be interesting but of unknown competitive relevance. Even if formal assessment is inadequate, the appropriate interpretation of
that information is important.
Accurately assessing the trends expected to take place in the segments of a firm’s general
environment is important. However, accurately interpreting the meaning of those trends
is even more important. In slightly different words, although gathering and organizing
information is important, appropriately interpreting that information to determine if an
identified trend in the general environment is an opportunity or threat is critical.29
2-3 Segments of the General Environment
The general environment is composed of segments that are external to the firm (see
Table 2.1). Although the degree of impact varies, these environmental segments affect
all industries and the firms competing in them. The challenge to each firm is to scan,
monitor, forecast, and assess the elements in each segment to predict their effects on it.
Effective scanning, monitoring, forecasting, and assessing are vital to the firm’s efforts to
recognize and evaluate opportunities and threats.
2-3a The Demographic Segment
The demographic segment is concerned with a population’s size, age structure, geographic distribution, ethnic mix, and income distribution.30 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.
Population Size
The world’s population doubled (from 3 billion to 6 billion) between 1959 and 1999.
Current projections suggest that population growth will continue in the twenty-first
century, but at a slower pace. In 2018, the world’s population was 7.6 billion, and it is
projected to be 9.2 billion by 2040 and roughly 10 billion by 2055.31 In 2018, China was
the world’s largest country by population with slightly more than 1.4 billion people. By
The demographic
segment is concerned
with a population’s size,
age structure, geographic
distribution, ethnic mix, and
income distribution.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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44
Part 1: Strategic Management Inputs
2050, however, India is expected to be the most populous nation in the world followed
by China, the United States, Indonesia, and Pakistan.32 Firms seeking to find growing
markets in which to sell their goods and services want to recognize the market potential
that may exist for them in these five nations.
Firms also want to study changes occurring within the populations of different
nations and regions of the world to assess their strategic implications. For example,
28 percent of Japan’s citizens are 65 or older, while the figures for the United States
and China are 15 percent and 11 percent, respectively. However, the population in both
countries is aging rapidly and could match that in Japan by 2040.33 Aging populations
are a significant problem for countries because of the need for workers and the burden
of supporting retirement programs. In Japan and some other countries, employees are
urged to work longer to overcome these problems.
Age Structure
The most noteworthy aspect of this element of the demographic segment is that the
world’s population is rapidly aging, as noted above. For example, predictions are that
the number of centenarians worldwide will double by 2023 and double again by 2035.
Projections suggest life expectancy will surpass 100 in some industrialized countries
by the second half of this century—roughly triple the lifespan of the population in
earlier years.34 In the 1950s, Japan’s population was one of the youngest in the world.
However, 45 is now the median age in Japan, with the projection that it will be 55 by
2040. With a fertility rate that is below replacement value, another prediction is that
by 2040 there will be almost as many Japanese people 100 years old or older as there
are newborns.35 By 2050, almost 25 percent of the world’s population will be aged
65 or older. These changes in the age of the population have significant implications
for availability of qualified labor, health care, retirement policies, and business
opportunities among others.36
This aging of the population threatens the ability of firms to hire and retain a workforce
that meets their needs. Thus, firms are challenged to increase the productivity of their workers and/or to establish additional operations in other nations in order to access the potential
working age population. A potential opportunity is represented by delayed retirements;
older workers with extended life expectancies may need to work longer in order to eventually afford retirement. Delayed retirements may help companies to retain experienced
and knowledgeable workers. In this sense, “organizations now have a fresh opportunity to
address the talent gap created by a shortage of critical skills in the marketplace as well as
the experience gap created by multiple waves of downsizing over the past decade.”37 Firms
can also use their older, more experienced workers to transfer their knowledge to younger
employees, helping them to quickly gain valuable skills. There is also an opportunity
for firms to more effectively use the talent available in the workforce. For example, moving
women into higher level professional and managerial jobs could offset the challenges
created by decline in overall talent availability. And, based on research, it may even enhance
overall outcomes.38
Geographic Distribution
How a population is distributed within countries and regions is subject to change over
time. For example, over the last few decades, the U.S. population has shifted from states in
the Northeast and Great Lakes region to states in the West (California), South (Florida),
and Southwest (Texas). Based on data in 2018, California’s population has grown by
approximately 2.3 million since 2010, while Texas’s population has grown by 3.2 million
in the same time period.39 These changes are characterized as moving from the “Frost
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 45
Belt” to the “Sun Belt.” Outcomes from these shifts include the fact that the gross domestic
product (GDP) of California in 2017 was slightly more than $2.75 trillion, an amount that
makes California the sixth-largest economy in the world. In this same year, at a value of
$1.6 trillion, Texas’ GDP was second to that of California.40
The least popular states are Illinois, Vermont, and West Virginia, which experienced
population declines between 2010 and 2018. During the same time period, the population
of Connecticut, Maine, Michigan, Mississippi, Pennsylvania and Rhode Island grew less
than one percent. In the coming years, California, Florida and Texas are forecasted to
have the largest gains in population.41
Firms want to carefully study the patterns of population distributions in countries
and regions to identify opportunities and threats. Thus, in the United States, current
patterns suggest the possibility of opportunities in states on the West Coast and some
in the South and Southwest. In contrast, firms competing in the Northeast and Great
Lakes areas may concentrate on identifying threats to their ability to operate profitably
in those areas.
Of course, geographic distribution patterns differ throughout the world. For example,
in past years, the majority of the population in China lived in rural areas; however, growth
patterns have been shifting to urban communities such as Shanghai and Beijing. In fact,
in 2006, there were 148.7 million more people living in rural areas than in urban areas
in China. However, by 2016, 203.2 million more people lived in urban than in rural areas
within China, a substantial shift in a only ten-year period.42 Recent shifts in Europe show
small population gains for countries such as France, Germany, and the United Kingdom,
while Greece experienced a small population decline. Overall, the geographic distribution
patterns in Europe have been reasonably stable.43
Ethnic Mix
The ethnic mix of countries’ populations continues to change, creating opportunities
and threats for many companies as a result. For example, Hispanics have become
the largest ethnic minority in the United States.44 In fact, the U.S. Hispanic market
is the third largest “Latin American” economy behind Brazil and Mexico. Spanish is
now the dominant language in parts of the United States such as Texas, California,
Florida, and New Mexico. Given these facts, some firms might want to assess how
their goods or services could be adapted to serve the unique needs of Hispanic consumers. Interestingly, by 2020, more than 50 percent of children in the United States
will be a member of a minority ethnic group, and the population in the United States
is projected to have a majority of minority ethnic members by 2044. And, by 2060,
whites are projected to compose approximately 44 percent of the U.S. population.45
The ethnic diversity of the population is important not only because of consumer
needs but also because of the labor force composition. Interestingly, research has
shown that firms with greater ethnic diversity in their managerial team are likely to
enjoy higher performance.46
Additional evidence is of interest to firms when examining this segment. For
example, African countries are the most ethnically diverse in the world, with Uganda
having the highest ethnic diversity rating and Liberia having the second highest. In
contrast, Japan and the Koreas are the least ethnically diversified in their populations.
European countries are largely ethnically homogeneous while the Americas are more
diverse. “From the United States through Central America down to Brazil, the ‘new
world’ countries, maybe in part because of their histories of relatively open immigration (and, in some cases, intermingling between natives and new arrivals) tend to be
pretty diverse.”47
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Part 1: Strategic Management Inputs
Income Distribution
Understanding how income is distributed within and across populations informs firms
of different groups’ purchasing power and discretionary income. Of particular interest to
firms are the average incomes of households and individuals. For instance, the increase
in dual-career couples has had a notable effect on average incomes. Although real income
has been declining in general in some nations, the household income of dual-career
couples has increased, especially in the United States. These figures yield strategically
relevant information for firms. For instance, research indicates that whether an employee
is part of a dual-career couple can strongly influence the willingness of the employee
to accept an international assignment. Worldwide it is estimated that there were almost
57 million expatriates in 2017, with Saudi Arabia, United Arab Emirates, and the United
States as the top three destinations.48
The growth of the economy in China has drawn many firms, not only for the lowcost production, but also because of the large potential demand for products, given its
large population base. However, in recent times, the amount of China’s gross domestic
product that makes up domestic consumption is the lowest of any major economy at
less than one-third. In comparison, India’s domestic consumption of consumer goods
accounts for two-thirds of its economy, or twice China’s level. For this reason, many
western multinationals are interested in India as a consumption market as its middle
class grows extensively; although India has poor infrastructure, its consumers are in
a better position to spend. Because of situations such as this, paying attention to the
differences between markets based on income distribution can be very important.49
These differences across nations suggest it is important for most firms to identify the
economic systems that are most likely to produce the most income growth and market
opportunities.50 Thus, the economic segment is a critically important focus of firms’
environmental analysis.
2-3b The Economic Segment
The economic environment refers to the nature and direction of the economy in which
a firm competes or may compete.51 In general, firms seek to compete in relatively stable
economies with strong growth potential. Because nations are interconnected as a result
of the global economy, firms must scan, monitor, forecast, and assess the health of their
host nation as well as the health of the economies outside it.
It is challenging for firms studying the economic environment to predict economic
trends that may occur and their effects on them. There are at least two reasons for this.
First, the global recession of 2008 and 2009 created numerous problems for companies
throughout the world, including problems of reduced consumer demand, increases in
firms’ inventory levels, development of additional governmental regulations, and a tightening of access to financial resources. Second, the global recovery from the economic
shock in 2008 and 2009 was persistently slow compared to previous recoveries. Firms
must adjust to the economic shock and try to recover from it. And although the world
economic prospects appear to be good in 2018, the recovery has been uneven across
countries. For example, the economies in several European countries continue to struggle (e.g., Greece, Spain). And, perhaps partly due to political uncertainties (e.g., in the
United States), there continue to be concerns about economic uncertainty. And again,
according to some research, “it is clear that (economic) uncertainty has increased in
recent times.”52 This current degree of economic uncertainty makes it challenging to
develop effective strategies.
When facing economic uncertainty, firms especially want to study closely the economic environment in multiple regions and countries throughout the world. Although
The economic
environment refers to the
nature and direction of the
economy in which a firm
competes or may compete.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 47
economic growth remains relatively weak
and economic uncertainty has been strong
in Europe, economic growth has been better in the United States in recent times.
For example, the projected average annual
economic growth in Europe for 2018–2020
is 1.75 percent, while in the United States
it is 2.25 percent. Alternatively, the projected average annual economic growth
for 2018–2020 is 6.3 percent in China,
7.45 percent in India, 2.25 percent in
Brazil, and 2.45 percent in Mexico. These
estimates highlight the anticipation of
the continuing development of emerging
economies.53 Ideally, firms will be able
to pursue higher growth opportunities
in regions and nations where they exist
while avoiding the threats of slow growth
periods in other settings.
2-3c The Political/Legal Segment
The political/legal segment is the arena in which organizations and interest groups
compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between firms and various local
governmental agencies.54 Essentially, this segment is concerned with how organizations
try to influence governments and how they try to understand the influences (current and projected) of those governments on their competitive actions and responses.
Commonly, firms develop a political strategy to specify how they will analyze and the
political/legal to develop approaches they can take (such as lobbying efforts) to successfully deal with opportunities and threats that surface within this segment of the
environment.55
Regulations formed in response to new national, regional, state, and/or local laws
that are legislated often influence a firm’s competitive actions and responses.56 For
example, the state of California in the United States recently legalized the retail selling
of cannabis (also known as marijuana). This action follows similar laws legalizing the
sale of cannabis in other states such as Colorado and Washington. The immediate concern is the risk that firms take to invest capital in this business, given that it is unknown
whether the U.S. Department of Justice will allow the states to proceed without enforcing federal law against the sale of this product. Thus, the relationship between national,
regional, and local laws and regulations creates a highly complex environment within
which businesses must navigate.57
For interactive, technology-based firms such as Facebook, Google, and Amazon,
among others, the effort in Europe to adopt the world’s strongest data protection law has
significant challenges. Highly restrictive laws about consumer privacy could threaten how
these firms conduct business in the European Union. Alternatively, firms must deal with
quite different challenges when they operate in countries with weak formal institutions
(e.g., weak legal protection of intellectual property). Laws and regulations provide structure to guide strategic and competitive actions; without such structure, it is difficult to
identify the best strategic actions.58
The political/legal
segment is the arena in
which organizations and
interest groups compete
for attention, resources, and
a voice in overseeing the
body of laws and regulations
guiding interactions among
nations as well as between
firms and various local
governmental agencies.
AP Images/Brennan Linsley
A marijuana Budtender sorts strands of marijuana for sale at a retail
and medical cannabis dispensary in Boulder, Colorado.
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Part 1: Strategic Management Inputs
2-3d The Sociocultural Segment
The sociocultural 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.
Individual societies’ attitudes and cultural orientations are relatively stable, but they
can and often do change over time. Thus, firms must carefully scan, monitor, forecast,
and assess them to recognize and study associated opportunities and threats. Successful
firms must also be aware of changes taking place in the societies and their associated cultural values in which they are competing. Indeed, firms must identify changes in cultural
values, norms, and attitudes in order to “adapt to stay ahead of their competitors and stay
relevant in the minds of their consumers.”59 Research has shown that sociocultural factors
influence the entry into new markets and the development of new firms in a country.60
Attitudes about and approaches to health care are being evaluated in nations and
regions throughout the world. For Europe, the European Commission has developed
a health care strategy for all of Europe that is oriented to preventing diseases while
tackling lifestyle factors influencing health such as nutrition, working conditions, and
physical activity. This Commission argues that promoting attitudes to take care of
one’s health is especially important in the context of an aging Europe, as shown by the
projection that the proportion of people over 65 living in Europe and in most of the
developed nations throughout the world will continue to grow.61 At issue for business
firms is that attitudes and values about health care can affect them; accordingly, they
must carefully examine trends regarding health care in order to anticipate the effects
on their operations.
The U.S. labor force has evolved to become more diverse, with significantly more
women and minorities from a variety of cultures entering the workplace. For example,
women were 46.8 percent of the workforce in 2014, a number projected to grow to
47.2 percent by 2024. Hispanics are expected to be about 20 percent of the workforce
by 2024. In 2005, the total U.S. workforce was slightly greater than 148 million, and it is
predicted to grow to approximately 164 million by 2024.62
However, the rate of growth in the U.S.
labor force has declined over the past two
decades largely because of slower growth
of the nation’s population and because of a
downward trend in the labor force participation rate. More specifically, data show that
the overall participation rate (the proportion
of the civilian non-institutional population
in the labor force) peaked at an annual average of 67.1 percent in 2000. But the rate has
declined since that time and is expected to
fall to 58.5 percent by 2050. Other changes
in the U.S. labor force between 2010 and
2050 are expected. During this time, Asian
membership in the labor force is projected to
more than double in size, while the growth
in Caucasian members of the labor force is
predicted to be much slower compared to
other racial groups. In contrast, people of
Hispanic origin are expected to account for
roughly 80 percent of the total growth in the
labor force.63
The sociocultural segment
is concerned with a society’s
attitudes and cultural values.
Healthcare is becoming increasingly important as the proportion of
people older than 65 is growing larger in many nations throughout
the world.
Alexander Raths/Shutterstock.com
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 49
Greater diversity in the workforce creates challenges and opportunities, including
combining the best of both men’s and women’s traditional leadership styles. Although
diversity in the workforce has the potential to improve performance, research indicates that diversity initiatives must be successfully managed to reap these organizational benefits.
Although the lifestyle and workforce changes referenced previously reflect the attitudes and values of the U.S. population, each country is unique with respect to these
sociocultural indicators. National cultural values affect behavior in organizations and
thus also influence organizational outcomes such as differences in managerial styles.
Likewise, the national culture influences a large portion of the internationalization strategy that firms pursue relative to one’s home country.64 Knowledge sharing is important
for dispersing new knowledge in organizations and increasing the speed in implementing innovations. Personal relationships are especially important in China; the concept
of guanxi (personal relationships or good connections) is important in doing business
within the country and for individuals to advance their careers in what is becoming a
more open market society. Understanding the importance of guanxi is critical for foreign
firms doing business in China.65
2-3e The Technological Segment
Pervasive and diversified in scope, technological changes affect many parts of societies. These effects occur primarily through new products, processes, and materials. The
technological segment includes the institutions and 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 of disruption, it is vital for firms
to thoroughly study the technological segment.66 The importance of these efforts is shown
by the fact that early adopters of new technology often achieve higher market shares and
earn higher returns. Thus, both large and small firms should continuously scan the general environment to identify potential substitutes for technologies that are in current use,
as well as to identify newly emerging technologies from which their firm could derive
competitive advantage.67
New technology and innovations are changing many industries.68 These changes
are exemplified by the change to digital publishing (e.g., electronic books) and retail
industries moving from brick and mortar stores to Internet sales. As such, firms in all
industries must become more innovative in order to survive, and must develop new or
at least comparable technology—and continuously improve it.69 In so doing, most firms
must have a sophisticated information system to support their new product development efforts.70 In fact, because the adoption and efficient use of new technology has
become critical to global competitiveness in many or most industries, countries have
begun to offer special forms of support, such as the development of technology business
incubators, which provide several types of assistance to increase the success rate of new
technology ventures.71
As a significant technological development, the Internet offers firms a remarkable
capability in terms of their efforts to scan, monitor, forecast, and assess conditions in
their general environment. Companies continue to study the Internet’s capabilities to
anticipate how it may allow them to create more value for customers and to anticipate
future trends. Additionally, the Internet generates a significant number of opportunities
and threats for firms across the world. As noted earlier, there are approximately 4 billion
Internet users globally.
Despite the Internet’s far-reaching effects and the opportunities and threats associated with its potential, wireless communication technology has become a significant
The technological
segment includes the
institutions and activities
involved in creating new
knowledge and translating
that knowledge into new
outputs, products, processes,
and materials.
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Part 1: Strategic Management Inputs
technological opportunity for companies. Handheld devices and other wireless communications equipment are used to access a variety of network-based services. The use of
handheld computers (of many types) with wireless network connectivity has become the
dominant form of communication and commerce, and additional functionalities and
software applications are generating multiple opportunities—and potential threats—for
companies of all types.
2-3f The Global Segment
The global segment includes relevant new global markets and their critical cultural
and institutional characteristics, existing markets that are changing, and important
international political events.72 For example, firms competing in the automobile
industry must study the global segment. The fact that consumers in multiple nations
are willing to buy cars and trucks “from whatever area of the world”73 supports this
position.
When studying the global segment, firms should recognize that globalization of business markets may create opportunities to enter new markets, as well as threats that new
competitors from other economies may also enter their market.74 In terms of an opportunity for automobile manufacturers, the possibility for these firms to sell their products outside of their home market would seem attractive. But what markets might firms
choose to enter? Currently, automobile and truck sales are expected to increase in Brazil,
Russia, India, China, and Eastern Europe. In contrast, sales are expected to decline, at
least in the near term, in the United States, Western Europe, and Japan. These markets,
then, are the most and least attractive ones for automobile manufacturers desiring to sell
outside their domestic market. At the same time, from the perspective of a threat, Japan,
Germany, Korea, Spain, France, and the United States appear to have excess production
capacity in the automobile manufacturing industry. In turn, overcapacity signals the possibility that companies based in markets where this is the case will simultaneously attempt
to increase their exports as well as sales in their domestic market.75 Thus, global automobile manufacturers should carefully examine the global segment to precisely identify all
opportunities and threats.
In light of threats associated with participating in international markets, some
firms choose to take a more cautious approach to globalization. For example, family
business firms, even the larger ones, often take a conservative approach to entering
international markets in a manner very similar to how they approach the development and introduction of new technology. They try to manage their risk.76 These
firms participate in what some refer to as globalfocusing. Globalfocusing often is used
by firms with moderate levels of international operations who increase their internationalization by focusing on global niche markets.77 This approach allows firms
to build onto and use their core competencies while limiting their risks within the
niche market. Another way in which firms limit their risks in international markets
is to focus their operations and sales in one region of the world.78 Success with these
efforts finds a firm building relationships in and knowledge of its markets. As the
firm builds these strengths, rivals find it more difficult to enter its markets and compete successfully.
Firms competing in global markets should recognize each market’s sociocultural
and institutional attributes.79 For example, Korean ideology emphasizes communitarianism, a characteristic of many Asian countries. Alternatively, the ideology in China
calls for an emphasis on guanxi—personal connections—while in Japan, the focus is on
wa—group harmony and social cohesion.80 The institutional context of China suggests
a major emphasis on centralized planning by the government. The Chinese government
The global segment
includes relevant new global
markets and their critical
cultural and institutional
characteristics, existing
markets that are changing,
and important international
political events.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 51
provides incentives to firms to develop alliances with foreign firms having sophisticated
technology, in hopes of building knowledge and introducing new technologies to the
Chinese markets over time.81 As such, it is important to analyze the strategic intent of
foreign firms when pursuing alliances and joint ventures abroad, especially where the
local partners are receiving technology that may in the long run reduce the foreign
firms’ advantages.82
Increasingly, the informal economy as it exists throughout the world is another
aspect of the global segment requiring analysis. Growing in size, this economy has
implications for firms’ competitive actions and responses in that increasingly, firms
competing in the formal economy will find that they are competing against informal
economy companies as well.
2-3g The Sustainable Physical Environment Segment
The sustainable physical environment segment refers to potential and actual
changes in the physical environment and business practices that are intended to
positively respond to those changes in order to create a sustainable environment.83
Concerned with trends oriented to sustaining the world’s physical environment,
firms recognize that ecological, social, and economic systems interactively influence
what happens in this particular segment and that they are part of an interconnected
global society.84
Companies across the globe are concerned about the physical environment, and many
record the actions they are taking in reports with names such as “Sustainability” and
“Corporate Social Responsibility.” Moreover, and in a comprehensive sense, an increasing
number of companies are investing in sustainable development.
There are many parts or attributes of the physical environment that firms consider as they try to identify trends in the physical environment.85 Because of the
importance to firms of becoming sustainable, certification programs have been
developed to help them understand how to be sustainable organizations.86 As the
world’s largest retailer, Walmart’s environmental footprint is huge, meaning that
trends in the physical environment can significantly affect this firm and how it
chooses to operate. Because of this, Walmart’s goal is to produce zero waste and to
use 100 percent renewable energy to power its operations.87 Environmental sustainability is important to all societal citizens and because of its importance, customers
react more positively to firms taking actions such as those by Walmart.88 To build
and maintain sustainable operations in companies that directly service retail customers requires sustainable supply chain management practices.89 Thus, top managers must focus on managing any of the firm’s practices that have effects on the physical environment. In doing so, they not only contribute to a cleaner environment
but also reap financial rewards from being an effective competitor due to positive
customer responses.90
As our discussion of the general environment shows, identifying anticipated changes
and trends among segments and their elements is a key objective of analyzing this environment. With a focus on the future, the analysis of the general environment allows
firms to identify opportunities and threats. It is necessary to have a top management
team with the experience, knowledge, and sensitivity required to effectively analyze the
conditions in a firm’s general environment—as well as other facets such as the industry
environment and competitors.91 In fact, as you noted in the Strategic Focus on Target,
the lack of a commitment to analyzing the environment in depth can have serious,
company-wide ramifications.
The sustainable physical
environment segment
refers to potential and actual
changes in the physical
environment and business
practices that are intended to
positively respond to those
changes in order to create a
sustainable environment.
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52
Part 1: Strategic Management Inputs
Target (Tar-zhey) Is Trying to Navigate in a New and Rapidly Changing
Competitive Landscape
Strategic Focus
Target became known by consumers as Tar-zhey, the retailer of
cheaper but ‘chic’ products. The firm offered a step up in quality
goods at a slightly higher price than discount retailers such as
Walmart, but was targeted below major, first line retailers such
Macy’s and Nordstrom. Additionally, it promoted its stores to
offer one-stop shopping with clothing, toys, health products, and
food goods, among other products. For many years, Tar-zhey “hit
the bullseye” and performed well serving this large niche in the
market. But the company took its eye off the target and began
losing market share (along with other poor strategic actions).
The first major crack in the ship appeared with the
announcement of a massive cyberattack on Target’s computer
system that netted customers’ personal information. Not only
was this a public relations disaster, it drew a focus on Target that
identified other problems. For example, careful analysis showed
that Target was losing customers to established competitors
and new rivals, especially Internet retailers (e.g., Amazon.com).
Target’s marketing chief stated that “it’s not that we became
insular. We were insular.” This suggests that the firm was not
analyzing its environment. By allowing rivals, and especially
Internet competitors, to woo the company’s customers, it lost
sales, market share, and profits. It obviously did not predict and
prepare for the significant competition from Internet rivals that
is now reshaping most all retail industries. Competitors were
offering better value to customers (perhaps more variety and
convenience through online sales). Thus, Target’s reputation
and market share were simultaneously harmed.
Because of all the problems experienced, Target hired a
new CEO, Brian Cornell, in 2014. Cornell has made a number
of changes, but the continued revolution in the industry,
largely driven by Amazon, continued to gnaw away Target’s
annual sales. Target’s annual sales declined by approximately
5 percent in 2017 and its stock price suffered as a result. Target
was forced to develop a new strategy, which involves a major
rebranding. It launched four new brands late in 2017, including A New Day, a fashionable line of women’s clothes, and
Goodfellow & Co, a modern line of menswear, with the intent
to make an emotional connection with customers. It also
plans to remodel 100 of its stores and change in-store displays
to improve customer experiences. It will add 30 small stores
that offer innovative designs and, to compete with Amazon, is
emphasizing its digital sales and delivery of products. Up to
now its digital strategy has not been highly successful, so it is
narrowing its focus to increase its effectiveness.
Glen Stubbe/ZUMA Press/Minneapolis/Minnesota/USA
Goodfellow & Co menswear, a new line introduced by Target
in late 2017.
Target plans to discontinue several major brands by 2019
and will continue to introduce new brands (12 in total are
planned). The intent is to increase the appeal of Target and its
products to millennials. These actions alone suggest the importance of gathering and analyzing data on the market and
competitors’ actions. The next few years will show the fruits of
all of Target’s changes. If they are successful, Target will still face
substantial competition from Amazon and Walmart; if they are
not successful, Target suffer the same fate of of many other
large and formerly successful retailers that no exist.
Sources: A. Pasquarelli, 2017, Our strategy is working: Target plows into the holidays,
AdAge, http://adage.com, October 19; S. Heller, 2017, Target’s biggest brands are about
to disappear from stores, The Insider, www.theinsider.com, July 6; 2017, Rebranding its
wheel: Target’s new strategy, Seeking Alpha, http://seeking alpha.com, July 4;K. Safdar,
2017, Target’s new online strategy: Less is more, Wall Street Journal, www.wsj.com,
May 15; 2015, What your new CEO is reading: Smell ya later; Target’s new CEO, CIO
Journal/Wall Street Journal, www.wsj.com/cio, March 6; J. Reingold, 2014, Can Target’s
new CEO get the struggling retailer back on target? Fortune, www.fortune.com,
July 31; G. Smith, 2014, Target turns to PepsiCo’s Brian Cornell to restore its fortunes,
Fortune, www.fortune.com, July 31; P. Ziobro, M. Langley, & J. S. Lublin, 2014, Target’s
problem: Tar-zhey isn’t working. Wall Street Journal, www.wsj.com, May 5.
As described in the Strategic Focus, Target failed to maintain a good understanding
of its industry and hence, lost market share to Internet company rivals and other more
established competitors. We conclude that critical to a firm’s choices of strategies and
their associated competitive actions and responses is an understanding of its industry
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 53
environment, its competitors, and the general environment of the countries in which it
operates.92 Next, we discuss the analyses firms complete to gain such an understanding.
2-4 Industry Environment Analysis
An industry is a group of firms producing products that are close substitutes. In the
course of competition, these firms influence one another. Typically, companies use a rich
mix of different competitive strategies to pursue above-average returns when competing
in a particular industry. An industry’s structural characteristics influence a firm’s choice
of strategies.93
Compared with the general environment, the industry environment (measured
primarily in the form of its characteristics) has a more direct effect on the competitive
actions and responses a firm takes to succeed.94 To study an industry, the firm examines
five forces that affect the ability of all firms to operate profitably within a given industry.
Shown in Figure 2.2, the five forces are: the threats posed by new entrants, the power of
suppliers, the power of buyers, product substitutes, and the intensity of rivalry among
competitors.
The five forces of competition model depicted in Figure 2.2 expands the scope of a
firm’s competitive analysis. Historically, when studying the competitive environment,
firms concentrated on companies with which they directly competed. However, firms
must search more broadly to recognize current and potential competitors by identifying
potential customers as well as the firms serving them. For example, the communications
industry is now broadly defined as encompassing media companies, telecoms, entertainment companies, and companies producing devices such as smartphones. In such
an environment, firms must study many other industries to identify companies with
capabilities (especially technology-based capabilities) that might be the foundation for
producing a good or a service that can compete against what they are producing.
An industry is a group of
firms producing products that
are close substitutes.
Threat of
new entrants
Bargaining power
of suppliers
Bargaining power
of buyers
Threat of
substitute products
Rivalry among
competing firms
Figure 2.2 The Five Forces of Competition Model
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Part 1: Strategic Management Inputs
When studying the industry environment, firms must also recognize that suppliers
can become a firm’s competitors (by integrating forward) as can buyers (by integrating
backward). For example, several firms have integrated forward in the pharmaceutical
industry by acquiring distributors or wholesalers. In addition, firms choosing to enter
a new market and those producing products that are adequate substitutes for existing
products can become a company’s competitors.
Next, we examine the five forces the firm needs to analyze in order to understand
the profitability potential within an industry (or a segment of an industry) in which it
competes or may choose to compete.
2-4a Threat of New Entrants
Identifying new entrants is important because they can threaten the market share of
existing competitors.95 One reason new entrants pose such a threat is that 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. Often, new entrants have a keen interest in gaining a large
market share. As a result, new competitors may force existing firms to be more efficient
and to learn how to compete in new dimensions (e.g., using an Internet-based distribution channel).
The likelihood that firms will enter an industry is a function of two factors: barriers to entry and the retaliation expected from current industry participants. Entry
barriers make it difficult for new firms to enter an industry and often place them at a
competitive disadvantage even when they can enter. As such, high entry barriers tend
to increase the returns for existing firms in the industry and may allow some firms to
dominate the industry.96 Thus, firms competing successfully in an industry want to
maintain high entry barriers to discourage potential competitors from deciding to enter
the industry.
Barriers to Entry
Firms competing in an industry (and especially those earning above-average returns)
try to develop entry barriers to thwart potential competitors. In general, more is known
about entry barriers (with respect to how they are developed as well as paths firms can
pursue to overcome them) in industrialized countries such as those in North America
and Western Europe. In contrast, relatively little is known about barriers to entry in the
rapidly emerging markets such as those in China.
There are different kinds of barriers to entering a market to consider when examining an industry environment. Companies competing within a particular industry study
these barriers to determine the degree to which their competitive position reduces the
likelihood of new competitors being able to enter the industry to compete against them.
Firms considering entering an industry study entry barriers to determine the likelihood
of being able to identify an attractive competitive position within the industry. Next, we
discuss several significant entry barriers that may discourage competitors from entering a
market and that may facilitate a firm’s ability to remain competitive in a market in which
it currently competes.
Economies of Scale Economies of scale are derived from incremental efficiency
improvements through experience as a firm grows larger. Therefore, the cost of producing each unit declines as the quantity of a product produced during a given period
increases. A new entrant is unlikely to quickly generate the level of demand for its product
that in turn would allow it to develop economies of scale.
Economies of scale can be developed in most business functions, such as marketing,
manufacturing, research and development, and purchasing.97 Firms sometimes form
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 55
strategic alliances or joint ventures to gain scale economies. And, other firms acquire
rivals in order to build economies of scale in the operations and to increase their market share as well.
Becoming more flexible in terms of being able to meet shifts in customer demand
is another benefit for an industry incumbent and a possible entry barrier for the firms
considering entering the industry. For example, a firm may choose to reduce its price with
the intention of capturing a larger share of the market. Alternatively, it may keep its price
constant to increase profits. In so doing, it likely will increase its free cash flow, which is
very helpful during financially challenging times.
Some competitive conditions reduce the ability of economies of scale to create an
entry barrier such as the use of scale free resources.98 Also, many companies now customize their products for large numbers of small customer groups. In these cases, customized
products are not manufactured in the volumes necessary to achieve economies of scale.
Customization is made possible by several factors, including flexible manufacturing systems. In fact, the new manufacturing technology facilitated by advanced information
systems has allowed the development of mass customization in an increasing number of
industries. Online ordering has enhanced customers’ ability to buy customized products.
Companies manufacturing customized products can respond quickly to customers’ needs
in lieu of developing scale economies.
Product Differentiation Over time, customers may come to believe that a firm’s
product is unique. This belief can result from the firm’s service to the customer, effective advertising campaigns, or being the first to market a good or service.99 Greater
levels of perceived product uniqueness create customers who consistently purchase a
firm’s products. To combat the perception of uniqueness, new entrants frequently offer
products at lower prices. This decision, however, may result in lower profits or even
losses.
The Coca-Cola Company and PepsiCo have established strong brands in the markets in which they compete, and these companies compete against each other in
countries throughout the world. Because each of these competitors has allocated a
significant amount of resources over many decades to build its brands, customer
loyalty is strong for each firm. When considering entry into the soft drink market,
a potential entrant would be well advised to pause and determine actions it would
take to try to overcome the brand image and consumer loyalty each of these giants
possesses.
Capital Requirements Competing in a new industry requires a firm to have
resources to invest. In addition to physical facilities, capital is needed for inventories,
marketing activities, and other critical business functions. Even when a new industry is
attractive, the capital required for successful market entry may not be available to pursue
the market opportunity.100 For example, defense industries are difficult to enter because of
the substantial resource investments required to be competitive. In addition, because of
the high knowledge requirements of the defense industry, a firm might acquire an existing company as a means of entering this industry, but it must have access to the capital
necessary to do this.
Switching Costs Switching costs are the one-time costs customers incur when they
buy from a different supplier. The costs of buying new ancillary equipment and of retraining employees, and even the psychological costs of ending a relationship, may be incurred
in switching to a new supplier. In some cases, switching costs are low, such as when the
consumer switches to a different brand of soft drink. Switching costs can vary as a function of time, as shown by the fact that in terms of credit hours toward graduation, the cost
to a student to transfer from one university to another as a freshman is much lower than
it is when the student is entering the senior year.
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Part 1: Strategic Management Inputs
Occasionally, a decision made by manufacturers to produce a new, innovative product
creates high switching costs for customers. Customer loyalty programs, such as airlines’
frequent flyer miles, are intended to increase the customer’s switching costs. If switching
costs are high, a new entrant must offer either a substantially lower price or a much better
product to attract buyers. Usually, the more established the relationships between parties,
the greater the switching costs.
Access to Distribution Channels Over time, industry participants commonly
learn how to effectively distribute their products. After building a relationship with
its distributors, a firm will nurture it, thus creating switching costs for the distributors. Access to distribution channels can be a strong entry barrier for new entrants,
particularly in consumer nondurable goods industries (e.g., in grocery stores where
shelf space is limited) and in international markets.101 New entrants have to persuade
distributors to carry their products, either in addition to or in place of those currently distributed. Price breaks and cooperative advertising allowances may be used
for this purpose; however, those practices reduce the new entrant’s profit potential.
Interestingly, access to distribution is less of a barrier for products that can be sold
on the Internet.
Cost Disadvantages Independent of Scale Sometimes, established competitors
have cost advantages that new entrants cannot duplicate. Proprietary product technology, favorable access to raw materials, desirable locations, and government subsidies are examples. Successful competition requires new entrants to reduce the strategic
relevance of these factors. For example, delivering purchases directly to the buyer can
counter the advantage of a desirable location; new food establishments in an undesirable location often follow this practice. Spanish clothing company Zara is owned
by Inditex, the largest fashion clothing retailer in the world.102 From the time of its
launching, Zara relied on classy, well-tailored, and relatively inexpensive items that
were produced and sold by adhering to ethical practices to successfully enter the highly
competitive global clothing market and overcome that market’s entry barriers. It is successful because it has used a novel business model in the industry. It also sells quality
merchandise for less, offers good stores and store locations, and is well positioned in
the industry.103 Business model innovation may be the key to survival and success in
current retail industries.104
Government Policy Through their decisions about issues such as the granting of
licenses and permits, governments can also control entry into an industry. Liquor
retailing, radio and TV broadcasting, banking, and trucking are examples of industries
in which government decisions and actions affect entry possibilities. Also, governments often restrict entry into some industries because of the need to provide quality
service or the desire to protect jobs. Alternatively, deregulating industries, such as the
airline and utilities industries in the United States, generally results in additional firms
choosing to enter and compete within an industry.105 It is not uncommon for governments to attempt to regulate the entry of foreign firms, especially in industries considered critical to the country’s economy or important markets within it.106 Governmental
decisions and policies regarding antitrust issues also affect entry barriers. For example,
in the United States, the Antitrust Division of the Justice Department or the Federal
Trade Commission will sometimes disallow a proposed merger because officials conclude that approving it would create a firm that is too dominant in an industry and
would thus create unfair competition. For example, the U.S. Department of Justice filed
a suit in 2017 to block the merger of AT&T and Time Warner with the trial initiated
in March 2018. The actions of the Department of Justice were unsuccessful and in
June 2018, the merger was approved and completed.107 Such a negative ruling would
obviously be an entry barrier for an acquiring firm.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 57
Expected Retaliation
Companies seeking to enter an industry also
anticipate the reactions of firms in the industry. An expectation of swift and vigorous
competitive responses reduces the likelihood
of entry. Vigorous retaliation can be expected
when the existing firm has a major stake in
the industry (e.g., it has fixed assets with few,
if any, alternative uses), when it has substantial resources, and when industry growth is
slow or constrained.108 For example, any firm
attempting to enter the airline industry can
expect significant retaliation from existing
competitors due to overcapacity.
Locating market niches not being served
by incumbents allows the new entrant to
avoid entry barriers. Small entrepreneurial
firms are generally best suited for identifying and serving neglected market segments.
When Honda first entered the U.S. motorcycle market, it concentrated on small-engine
motorcycles, a market that firms such as
Harley-Davidson ignored. By targeting this
neglected niche, Honda initially avoided a
significant amount of head-to-head competition with well-established competitors.
After consolidating its position, Honda
used its strength to attack rivals by introducing larger motorcycles and competing in
the broader market.
2-4b Bargaining Power
of Suppliers
Increasing prices and reducing the quality
of their products are potential means suppliers use 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.109
A supplier group is powerful when:
â–  It is dominated by a few large companies and is more concentrated than the industry
to which it sells.
â–  Satisfactory substitute products are not available to industry firms.
â–  Industry firms are not a significant customer for the supplier group.
■ Suppliers’ goods are critical to buyers’ marketplace success.
■ The effectiveness of suppliers’ products has created high switching costs for industry firms.
■ It poses a credible threat to integrate forward into the buyers’ industry. Credibility is
enhanced when suppliers have substantial resources and provide a highly differentiated product.110 DWImages Northern Ireland/Alamy Stock Photo
Honda’s entry into the large motorcycle market is changing the
competitive landscape especially for the traditional competitors in this
market such as Harley-Davidson.
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Part 1: Strategic Management Inputs
Some buyers attempt to manage or reduce suppliers’ power by developing a longterm relationship with them. Although long-term arrangements reduce buyer power,
they also increase the suppliers’ incentive to be helpful and cooperative in appreciation of
the longer-term relationship (guaranteed sales). This is especially true when the partners
develop trust in one another.111
The airline industry is one in which suppliers’ bargaining power is changing. Though
the number of suppliers is low, the demand for major aircraft is also relatively low. Boeing
and Airbus aggressively compete for orders of major aircraft, creating more power for
buyers in the process. When a large airline signals that it might place a “significant” order
for wide-body airliners that either Airbus or Boeing might produce, both companies are
likely to battle for the business and include a financing arrangement, highlighting the
buyer’s power in the potential transaction. And, with China’s entry into the large commercial airliner industry, buyer power has increased.
2-4c Bargaining Power of Buyers
Firms seek to maximize the return on their invested capital. Alternatively, buyers (customers of an industry or a firm) want to buy products at the lowest possible price—the
point at which the industry earns the lowest acceptable rate of return on its invested capital. To reduce their costs, buyers bargain for higher quality, greater levels of service, and
lower prices.112 These outcomes are achieved by encouraging competitive battles among
the industry’s firms. Customers (buyer groups) are powerful when:
■ They purchase a large portion of an industry’s total output.
â–  The sales of the product being purchased account for a significant portion of the
seller’s annual revenues.
â–  They could switch to another product at little, if any, cost.
■ The industry’s products are undifferentiated or standardized, and the buyers pose a
credible threat if they were to integrate backward into the sellers’ industry.
Consumers armed with greater amounts of information about the manufacturer’s
costs and the power of the Internet as a shopping and distribution alternative have
increased bargaining power in many industries.
2-4d 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. For example, as a sugar
substitute, NutraSweet (and other sugar substitutes) places an upper limit on sugar manufacturers’ prices—NutraSweet and sugar perform the same function, though with different characteristics. Other product substitutes include e-mail and fax machines instead
of overnight deliveries, plastic containers rather than glass jars, and tea instead of coffee.
Newspaper firms have experienced significant circulation declines over the past 20 years.
The declines are a result of the ready availability of substitute outlets for news including
Internet sources and cable television news channels, along with e-mail and cell phone alerts.
Likewise, satellite TV and cable and telecommunication companies provide substitute services
for basic media services such as television, Internet, and phone. The many electronic devices
that provide services overlapping with the personal computer (e.g., laptops) such as tablets,
watches (iWatch), etc. are changing markets for PCs, with multiple niches in the market.
In general, product substitutes present a strong threat to a firm when customers face
few if any switching costs and when the substitute product’s price is lower or its quality
and performance capabilities are equal to or greater than those of the competing product.
Interestingly, some firms that produce substitutes have begun forming brand alliances,
which research shows can be effective when the two products are of relatively equal quality.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 59
If there is a differential in quality, the firm with the higher quality product will obtain
lower returns from such an alliance.113 Differentiating a product along dimensions that
are valuable to customers (such as quality, service after the sale, and location) reduces a
substitute’s attractiveness.
2-4e Intensity of Rivalry among Competitors
Because an industry’s firms are mutually dependent, actions taken by one company usually invite responses. Competitive rivalry intensifies when a firm is challenged by a competitor’s actions or when a company recognizes an opportunity to improve its market
position.114
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’ offerings in ways that customers value and in which the
firms have a competitive advantage. Common dimensions on which rivalry is based include
price, service after the sale, and innovation. More recently, firms have begun to act quickly
(speed a new product to the market) in order to gain a competitive advantage.115
Next, we discuss the most prominent factors that experience shows affect the intensity
of rivalries among firms.
Numerous or Equally Balanced Competitors
Intense rivalries are common in industries with many companies. With multiple competitors, it is common for a few firms to believe they can act without eliciting a response.
However, evidence suggests that other firms generally are aware of competitors’ actions,
often choosing to respond to them. At the other extreme, industries with only a few
firms of equivalent size and power also tend to have strong rivalries. The large and often
similar-sized resource bases of these firms permit vigorous actions and responses. The
competitive battles between Airbus and Boeing and between Coca-Cola and PepsiCo
exemplify intense rivalry between relatively equal competitors.
Slow Industry Growth
When a market is growing, firms try to effectively use resources to serve an expanding
customer base. Markets increasing in size reduce the pressure to take customers from
competitors. However, rivalry in no-growth or slow-growth markets becomes more
intense as firms battle to increase their market shares by attracting competitors’ customers. Certainly, this has been the case in the fast-food industry as explained in the Opening
Case about McDonald’s. McDonald’s, Wendy’s, and Burger King use their resources, capabilities, and core competencies to try to win each other’s customers. The instability in the
market that results from these competitive engagements may reduce the profitability for
all firms engaging in such battles. As noted in the Opening Case, McDonald’s has suffered
from this competitive rivalry but is taking actions to rebuild its customer base and achieve
a competitive advantage or at least competitive parity.
High Fixed Costs or High Storage Costs
When fixed costs account for a large part of total costs, companies try to maximize the
use of their productive capacity. Doing so allows the firm to spread costs across a larger
volume of output. However, when many firms attempt to maximize their productive
capacity, excess capacity is created on an industry-wide basis. To then reduce inventories,
individual companies typically cut the price of their product and offer rebates and other
special discounts to customers. However, doing this often intensifies competition. The
pattern of excess capacity at the industry level followed by intense rivalry at the firm
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Part 1: Strategic Management Inputs
level is frequently observed in industries with high storage costs. Perishable products,
for example, lose their value rapidly with the passage of time. As their inventories grow,
producers of perishable goods often use pricing strategies to sell products quickly.
Lack of Differentiation or Low Switching Costs
When buyers find a differentiated product that satisfies their needs, they frequently
purchase the product loyally over time. Industries with many companies that have
successfully differentiated their products have less rivalry, resulting in lower competition for individual firms. Firms that develop and sustain a differentiated product that
cannot be easily imitated by competitors often earn higher returns. However, when
buyers view products as commodities (i.e., as products with few differentiated features
or capabilities), rivalry intensifies. In these instances, buyers’ purchasing decisions are
based primarily on price and, to a lesser degree, service. Personal computers are a
commodity product, and the cost to switch from a computer manufactured by one firm
to another is low. Thus, the rivalry among Dell, Hewlett-Packard, Lenovo, and other
computer manufacturers is strong as these companies consistently seek to find ways to
differentiate their offerings.
High Strategic Stakes
Competitive rivalry is likely to be high when it is important for several of the competitors to perform well in the market. Competing in diverse businesses (such as petrochemicals, fashion, medicine, and plant construction, among others), Samsung is a
formidable foe for Apple in the global smartphone market. Samsung has committed
a significant amount of resources to develop innovative products as the foundation
for its efforts to try to outperform Apple in selling this particular product. Only a
few years ago, Samsung held a sizable lead in market share. But in 2017, in the U.S.
market, it was estimated that the iPhone achieved a holiday period market share of
31.3 percent while Samsung’s Galaxy held 28.9 percent. Overall, these firms are in
a virtual dead heat in the smartphone market.116 Because this market is extremely
important to both firms, the smart-phone rivalry between them (and others) will
likely remain quite intense.
High strategic stakes can also exist in terms of geographic locations. For example, several automobile manufacturers have established manufacturing facilities in China, which
has been the world’s largest car market since 2009.117 Because of the high stakes involved
in China for General Motors and other firms (including domestic Chinese automobile
manufacturers) producing luxury cars (including Audi, BMW, and Mercedes-Benz),
rivalry among them in this market is quite intense.
High Exit Barriers
Sometimes companies continue competing in an industry even though the returns on
their invested capital are low or even negative. Firms making this choice likely face high
exit barriers, which include economic, strategic, and emotional factors causing them to
remain in an industry when the profitability of doing so is questionable.
Common exit barriers that firms face include the following:
â–  Specialized assets (assets with values linked to a business or location)
â–  Fixed costs of exit (such as labor agreements)
â–  Strategic interrelationships (relationships of mutual dependence, such as those
between one business and other parts of a company’s operations, including shared
facilities and access to financial markets)
â–  Emotional barriers (aversion to economically justified business decisions because of
fear for one’s own career, loyalty to employees, and so forth)
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 61
â–  Government and social restrictions (often based on government concerns for job
losses and regional economic effects; more common outside the United States)
Exit barriers are especially high in the airline industry. Fortunately, profitability has
returned to the industry following the global financial crisis and is expected to reach
its highest level in 2018. Industry consolidation and efficiency enhancements regarding
airline alliances helped reduce airline companies’ costs. This, combined with improving
economic conditions in several countries, resulted in a greater demand for travel. This
has helped eased the pressures on several firms that may have been contemplating leaving
the airline travel industry.118
2-5 Interpreting Industry Analyses
Effective industry analyses are products of careful study and interpretation of data and
information from multiple sources. A wealth of industry-specific data is available for
firms to analyze to better understand an industry’s competitive realities. Because of globalization, international markets and rivalries must be included in the firm’s analyses.
And, because of the development of global markets, a country’s borders no longer restrict
industry structures. In fact, in general, entering international markets enhances the
chances of success for new ventures as well as more established firms.119
Analysis of the five forces within a given industry allows the firm to determine
the industry’s attractiveness in terms of the potential to earn average or above-average
returns. In general, the stronger the competitive forces, the lower the potential for firms
to generate profits by implementing their strategies. An unattractive industry has low
entry barriers, suppliers and buyers with strong bargaining positions, strong competitive
threats from product substitutes, and intense rivalry among competitors. These industry
characteristics make it difficult for firms to achieve strategic competitiveness and earn
above-average returns. Alternatively, an attractive industry has high entry barriers, suppliers and buyers with little bargaining power, few competitive threats from product substitutes, and relatively moderate rivalry.120 Next, we explain strategic groups as an aspect
of industry competition.
2-6 Strategic Groups
A set of firms emphasizing similar strategic dimensions and using a similar strategy is
called a strategic group.
121 The competition between firms within a strategic group is
greater than the competition between a member of a strategic group and companies
outside that strategic group. Therefore, intra-strategic group competition is more intense
than is inter-strategic group competition. In fact, more heterogeneity is evident in the
performance of firms within strategic groups than across the groups. The performance
leaders within groups can follow strategies similar to those of other firms in the group and
yet maintain strategic distinctiveness as a foundation for earning above-average returns.122
The extent of technological leadership, product quality, pricing policies, distribution channels, and customer service are examples of strategic dimensions that firms in
a strategic group may treat similarly. Thus, membership in a strategic group defines the
essential characteristics of the firm’s strategy.
The notion of strategic groups can be useful for analyzing an industry’s competitive structure. Such analyses can be helpful in diagnosing competition, positioning,
and the profitability of firms competing within an industry. High mobility barriers,
high rivalry, and low resources among the firms within an industry limit the formation
of strategic groups.123 However, after strategic groups are formed, their membership
A set of firms emphasizing
similar strategic dimensions
and using a similar strategy is
called a strategic group.
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Part 1: Strategic Management Inputs
remains relatively stable over time. Using strategic groups to understand an industry’s
competitive structure requires the firm to plot companies’ competitive actions and
responses along strategic dimensions, such as pricing decisions, product quality, distribution channels, and so forth. This type of analysis shows the firm how certain companies
are competing similarly in terms of how they use similar strategic dimensions.
Strategic groups have several implications. First, because firms within a group offer
similar products to the same customers, the competitive rivalry among them can be
intense. The more intense the rivalry, the greater the threat to each firm’s profitability.
Second, the strengths of the five forces differ across strategic groups. Third, the closer
Toys ‘R’ Us Exemplifies the Apocalypse in the Retail Industries
More than 10,000 stores closed in the United States in 2017.
The companies that have gone bankrupt or are in serious
financial trouble read like a list of Who’s Who in retailing,
The ones that could default in the near term include Sears,
Neiman Marcus, Payless, J. Crew, PetSmart, and Steak ‘n Shake,
among others. But, perhaps the bankruptcy of Toys ‘R’ Us in
2018 caused the most angst among consumers because
they remember what it used to be and know what it could
have been.
Toys ‘R’ Us was a dominant retailer of toys that had devoted
customers and toy manufacturers. The stores had every conceivable toy and became a ‘one-stop-shopping destination’ for
most parents. It also reached out to and fostered the development of many small and medium sized toy manufacturers
who largely owed their existence to Toys ‘R’ Us. At one time it
was perhaps the most significant toy retailer in the world. As it
grew, many of its competitors went out of business. Yet, after
the founder stepped down from the CEO position, a succession
of CEOs became complacent. Toys ‘R’ Us stopped analyzing its
competitors, didn’t invest in and update its stores, and began
to lose the devotion of its customers. This made it vulnerable
to new competition. Essentially, by ignoring competition and
maintaining the status quo, it let competitors take advantage
by better serving its customer base.
Large retailers such as Walmart and Target began to grow
their toy sales and take market share away from Toys ‘R’ Us. And
then Internet sales began to take market share. To respond,
Toys ‘R’ Us signed an exclusive agreement to sell its toys over
the Internet with Amazon. The contract was expensive (about
$50 million annually), and Amazon did not only sell the toys
from Toys ‘R’ Us. In fact, Amazon created an Internet marketplace selling multiple brands’ and companies’ toys. As such, Toy
‘R’ Us paid Amazon to become a substantial competitor.
At the height of these problems, Toys ‘R’ Us was sold to private equity investors who completed a leveraged buyout that
saddled the company with substantial debt. With large debt
payments, fewer resources were available to invest in the stores
and to respond to competitors. Thus, in 2018 it filed for bankruptcy, closing all of its stores.
The exit of Toys ‘R’ Us leaves its two biggest competitors,
Walmart and Amazon, now locked in a rivalry of their own.
Sources: H. Peterson, 2018, Retailers are filing for bankruptcy at a staggering
rate—and these 19 companies could be the next to default. Business Insider,
www.msn.com, March 18; 2018, Toys R Us built a kingdom and the world’s
biggest toy store. Then, they lost it, MSN, www.msn.com, March 17; 2018,
Nostalgic shoppers shed tears over Toys ‘R’ Us demise, CNBC, wwwcnbc.com,
March 15; M. Corkery, 2018, Toys ‘R’ Us case is test of private equity in age of
Amazon, New York Times, nyti.ms/2DvabV5, March 15; M. Boyle, K. Bhasin &
L. Rupp, 2018, Walmart-Amazon battle takes to Manhattan with dueling
showcases, Bloomberg, Bloomberg.com, February 28; K Taylor, 2017, Here are
the 18 biggest bankruptcies of the ‘retail apocalypse’ of 2017, Business Insider,
www.businessinsider.com, December 20.
Strategic Focus
Andrew Harrer/Bloomberg/Getty Images
Toys ‘R’ Us filed for bankruptcy in 2018, closing
all of its stores.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 63
the strategic groups are in terms of their strategies, the greater is the likelihood of rivalry
between the groups.
As explained in the Strategic Focus, there is a massive ‘train wreck’ occurring in the
retail industries. Former stalwarts such as Sears, Macy’s, JCPenney, and Toys ‘R’ Us are
all failing, largely because they ignored competition and it eventually caught up to them.
Although other rivals began to erode their market share, the current problem revolves
around the formidable Amazon. Amazon has been winning competitive battles against
these weakened retailers, and even against other more formidable rivals Google and
Walmart. Toys ‘R’ Us sowed the seeds of its demise a number of years ago by ignoring its
competition. It was dominant in its industry, and then focused on growing its store base
while paying little or no attention to what new competitors were doing. In fact, unknowingly it helped Amazon become a major competitor. The lesson in this for Amazon is that
even highly successful firms must continuously analyze and understand their competitors
if they are to maintain their current market leading positions. If Amazon continues to
effectively analyze its competition across industries, the question becomes, can any of its
rivals beat it?124
2-7 Competitor Analysis
The competitor environment is the final part of the external environment requiring study.
Competitor analysis focuses on each company against which a firm competes directly.
The Coca-Cola Company and PepsiCo, Home Depot and Lowe’s, Carrefour SA and Tesco
PLC, and Amazon and Google are examples of competitors that are keenly interested in
understanding each other’s objectives, strategies, assumptions, and capabilities. Indeed,
intense rivalry creates a strong need to understand competitors.125 In a competitor analysis, the firm seeks to understand the following:
â–  What drives the competitor, as shown by its future objectives.
â–  What the competitor is doing and can do, as revealed by its current strategy.
â–  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.126
Knowledge about these four dimensions helps the firm prepare an anticipated
response profile for each competitor (see Figure 2.3). The results of an effective competitor analysis help a firm understand, interpret, and predict its competitors’ actions
and responses. Understanding competitors’ actions and responses clearly contributes to
the firm’s ability to compete successfully within the industry.127 Interestingly, research
suggests that executives often fail to analyze competitors’ possible reactions to competitive actions their firm takes,128 placing their firm at a potential competitive disadvantage
as a result.
Critical to an effective competitor analysis is gathering data and information that
can help the firm understand its competitors’ intentions and the strategic implications resulting from them.129 Useful data and information combine to form competitor
intelligence, which is the set of data and information the firm gathers to better understand and anticipate competitors’ objectives, strategies, assumptions, and capabilities.
In competitor analysis, the firm gathers intelligence not only about its competitors,
but also regarding public policies in countries around the world. Such intelligence
facilitates an understanding of the strategic posture of foreign competitors. Through
effective competitive and public policy intelligence, the firm gains the insights needed
to make effective strategic decisions regarding how to compete against rivals.
When asked to describe competitive intelligence, phrases such as “competitive spying” and “corporate espionage” come to mind for some. These phrases underscore the fact
Competitor intelligence
is the set of data and
information the firm gathers
to better understand and
anticipate competitors’
objectives, strategies,
assumptions, and capabilities.
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64
Part 1: Strategic Management Inputs
that competitive intelligence appears to involve trade-offs.130 The reason for this is that
“what is ethical in one country is different from what is ethical in other countries.” This
position implies that the rules of engagement to follow when gathering competitive intelligence change in different contexts.131 To avoid the possibility of legal entanglements and
ethical quandaries, firms must govern their competitive intelligence gathering methods
by a strict set of legal and ethical guidelines.132 Ethical behavior and actions, as well as the
mandates of relevant laws and regulations, should be the foundation on which a firm’s
competitive intelligence-gathering process is formed.
When gathering competitive intelligence, a firm must also pay attention to the complementors of its products and strategy.133 Complementors are companies or networks of
companies that sell complementary goods or services that are compatible with the focal
firm’s good or service. When a complementor’s good or service contributes to the functionality of a focal firm’s good or service, it in turn creates additional value for that firm.
There are many examples of firms whose good or service complements other companies’ offerings. For example, firms manufacturing affordable home photo printers complement other companies’ efforts to sell digital cameras. Intel and Microsoft are perhaps
the most widely recognized complementors. The two firms do not directly buy from or
sell to each other, but their products are highly complementary.
Alliances among airline companies such as Oneworld and Star involve member
companies sharing their route structures and customer loyalty programs as a means
Future Objectives
• How do our goals compare with our
competitors’ goals?
• Where will emphasis be placed in the
future?
• What is the attitude toward risk?
Current Strategy
• How are we currently competing?
• Does their strategy support changes
in the competitive structure?
Assumptions
• Do we assume the future will be volatile?
• Are we operating under a status quo?
• What assumptions do our competitors
hold about the industry and themselves?
Capabilities
• What are our strengths and weaknesses?
• How do we rate compared to our
competitors?
Response
• What will our competitors do in the
future?
• Where do we hold an advantage over
our competitors?
• How will this change our relationship
with our competitors?
Figure 2.3 Competitor Analysis Components
Complementors are
companies or networks
of companies that sell
complementary goods or
services that are compatible
with the focal firm’s good or
service.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 65
of complementing each other’s operations. (Alliances and other cooperative strategies
are described in Chapter 9.) In this example, each of the two alliances is a network of
complementors. American Airlines, British Airways, Finnair, Japan Airlines, and Royal
Jordanian are among the airlines forming the Oneworld alliance. Air Canada, Brussels
Airlines, Croatia Airlines, Lufthansa, and United Airlines are five of the members forming the Star alliance. Both alliances constantly adjust their members and services offered
to better meet customers’ needs.
As our discussion shows, complementors expand the set of competitors that firms
must evaluate when completing a competitor analysis. In this sense, American Airlines
and United Airlines examine each other both as direct competitors on multiple routes but
also as complementors that are members of different alliances (Oneworld for American
and Star for United). In all cases though, ethical commitments and actions should be the
foundation on which competitor analyses are developed.
2-8 Ethical Considerations
Firms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence. Industry associations often
develop lists of these practices that firms can adopt. Practices considered both legal
and ethical include:
1. Obtaining publicly available information (e.g., court records, competitors’ helpwanted advertisements, annual reports, financial reports of publicly held corporations, and Uniform Commercial Code filings)
2. Attending trade fairs and shows to obtain competitors’ brochures, view their exhibits,
and listen to discussions about their products
In contrast, certain practices (including blackmail, trespassing, eavesdropping, and
stealing drawings, samples, or documents) are widely viewed as unethical and often are
illegal as well.
Some competitive intelligence practices may be legal, but a firm must decide
whether they are also ethical, given the image it desires as a corporate citizen.
Especially with electronic transmissions, the line between legal and ethical practices
can be difficult to determine. For example, a firm may develop website addresses that
are like those of its competitors and thus occasionally receive e-mail transmissions
that were intended for those competitors. The practice is an example of the challenges
companies face in deciding how to gather intelligence about competitors while simultaneously determining how to prevent competitors from learning too much about
them. To deal with these challenges, firms should establish principles and take actions
that are consistent with them.
Professional associations are available to firms as sources of information regarding competitive intelligence practices. For example, while pursuing its mission to
help firms make “better decisions through competitive intelligence,” the Strategy and
Competitive Intelligence Professionals association offers codes of professional practice
and ethics to firms for their possible use when deciding how to gather competitive
intelligence.134
Open discussions of intelligence-gathering techniques can help a firm ensure that
employees, customers, suppliers, and even potential competitors understand its convictions to follow ethical practices when gathering intelligence about its competitors. An
appropriate guideline for competitor intelligence practices is to respect the principles of
common morality and the right of competitors not to reveal certain information about
their products, operations, and intentions.
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66 Part 1: Strategic Management Inputs
■ The firm’s external environment is challenging and complex.
Because of its effect on performance, firms must develop the
skills required to identify opportunities and threats that are a
part of their external environment.
â–  The external environment has three major parts:
1. The general environment (segments and elements in the
broader society that affect industries and the firms competing in them)
2. The industry environment (factors that influence a firm, its
competitive actions and responses, and the industry’s profitability potential)
3. The competitor environment (in which the firm analyzes
each major competitor’s future objectives, current strategies, assumptions, and capabilities)
â–  Scanning, monitoring, forecasting, and assessing are the four
parts of the external environmental analysis process. Effectively
using this process helps the firm in its efforts to identify opportunities and threats.
â–  The general environment has seven segments: demographic,
economic, political/legal, sociocultural, technological, global,
and sustainable physical. For each segment, firms have to
determine the strategic relevance of environmental changes
and trends.
■ Compared with the general environment, the industry environment has a more direct effect on firms’ competitive actions
and responses. The five forces model of competition includes
the threat of entry, the power of suppliers, the power of buyers,
product substitutes, and the intensity of rivalry among competitors. By studying these forces, a firm can identify a position in an
industry where it can influence the forces in its favor or where it
can buffer itself from the power of the forces in order to achieve
strategic competitiveness and earn above-average returns.
â–  Industries are populated with different strategic groups. A strategic group is a collection of firms following similar strategies
along similar dimensions. Competitive rivalry is greater within
a strategic group than between strategic groups.
â–  Competitor analysis informs the firm about the future objectives, current strategies, assumptions, and capabilities of the
companies with which it competes directly. A thorough competitor analysis examines complementors that support forming and implementing rivals’ strategies.
â–  Different techniques are used to create competitor intelligence: the set of data, information, and knowledge that allow
the firm to better understand its competitors and thereby
predict their likely competitive actions and responses. Firms
absolutely should use only legal and ethical practices to gather
intelligence. The Internet enhances firms’ ability to gather
insights about competitors and their strategic intentions.
SUMMARY
KEY TERMS
competitor analysis 40
competitor intelligence 63
complementors 64
demographic segment 43
economic environment 46
general environment 39
global segment 50
industry 53
industry environment 39
opportunity 41
political/legal segment 47
sociocultural segment 48
strategic group 61
sustainable physical environment segment 51
threat 41
technological segment 49
REVIEW QUESTIONS
1. Why is it important for a firm to study and understand the
external environment?
2. What are the differences between the general environment
and the industry environment? Why are these differences
important?
3. What is the external environmental analysis process (four parts)?
What does the firm want to learn when using this process?
4. What are the seven segments of the general environment?
Explain the differences among them.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 67
5. How do the five forces of competition in an industry affect its
profitability potential? Explain.
6. What is a strategic group? Of what value is knowledge of the
firm’s strategic group in formulating that firm’s strategy?
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?
Mini-Case
Watch Out All Retailers, Here Comes Amazon; Watch Out Amazon, Here
Comes Other Competitors
Amazon’s sales in 2014 were $88.99 billion, an increase
of 19.4 percent over 2013. In fact, its sales in 2014 were
a whopping 160 percent more than its sales in 2010,
only four years prior. Amazon has been able to achieve
remarkable gains in sales by providing high quality,
rapid, and relatively inexpensive (relative to competitors)
service. Amazon has taken on such formidable competitors as Walmart, Google, and Barnes & Noble, among
others, and has come out of it as a winner, particularly in
the last 4–5 years.
Walmart has been emphasizing its online sales as
well. In 2014, it grew online sales by about $3 billion, for
a 30 percent increase. That seems like excellent progress, until one compares it to Amazon’s sales increase
in 2014 of about $14.5 billion. Much opportunity
remains for both to improve as total 2014 online sales
were $300 billion.
Google is clearly the giant search engine with
88 percent of the information search market. However,
when consumers are shopping to purchase goods,
Amazon is the leader. In the third quarter of 2014,
39 percent of online shoppers in the United States
began their search on Amazon, compared to 11 percent for Google. Interestingly, in 2009 the figures were
18 percent for Amazon and 24 percent for Google. So,
Amazon appears to be winning this competitive battle
with Google.
Barnes & Noble lost out to Google before by
ignoring it as a threat. Today, B&N has re-established
itself in market niches trying not to compete with
Google. For example, its college division largely sells
through college bookstores, which have a ‘monopoly’
location granted by the university. However, Amazon
is now targeting the college market by developing
agreements with universities to operate co-branded
websites to sell textbooks, university t-shirts, etc.
Most of the students already shop on Amazon, making the promotion easier to market to universities and
to sell to students.
A few years ago, Amazon was referred to as the
Walmart of the Internet. But, Amazon has diversified
its product/service line much further than Walmart.
For example, Amazon now competes against Netflix
and other services providing video entertainment. In
fact, Amazon won two Golden Globe Awards in 2015
for programs it produced. Amazon also markets high
fashion clothing for men and women. Founder and CEO
of Amazon, Jeff Bezos, stated that Amazon’s goal is to
become a $200 billion company, and to do that, the firm
must learn how to sell clothes and food.
It appears that Amazon is beating all competitors,
even formidable ones such as Google and Walmart.
But, Amazon still needs to carefully watch its competition. A new company, Jet.com, is targeting Amazon.
Jet.com was founded by Marc Lore, who founded the
highly successful Diaper.com and a former competitor
of Amazon, Quidsi. Amazon hurt Quidsi in a major
price war and eventually acquired the company for
$550 million. Lore worked for Amazon for two years
thereafter but eventually quit to found Jet.com. Jet.com
plans to market 10 million products and guarantee the
lowest price. Its annual membership will be $50 compared to Amazon Prime’s cost of $99. Competing with
Amazon represents a major challenge. However, Jet.
com has raised about $240 million in venture funding with capital from such players as Bain Capital
Ventures, Google Ventures, Goldman Sachs, and
Norwest Venture partners. Its current market value is
estimated to be $600 million. The future competition
between the two companies should be interesting.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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68 Part 1: Strategic Management Inputs
Sources: G. Bensniger, 2015, Amazon makes a push on college campuses,
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Mini-Case Questions
1. Can any firm beat Amazon in the marketplace? If not, why not?
If so, how can they best do so?
2. How formidable a competitor is Google for Amazon? Please
explain.
3. What are Amazon’s major strengths? Does it have any weaknesses? Please explain.
4. Is Jet.com a potential concern for Amazon? Why or why not?
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 69
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Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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72 Part 1: Strategic Management Inputs
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part without explicit permission. November 2019. WCN 03-300-273
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Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part without explicit permission. November 2019. WCN 03-300-273

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