King's University: MOS 4410 - External Environment Analysis

This report, prepared for MOS 4410 at King's University College, provides a detailed analysis of the external environment. It explores the importance of external analysis for businesses, emphasizing the identification of threats and opportunities, and understanding industry dynamics. The report covers key aspects such as technological changes, international events, demographic trends, economic climate, and cultural trends, followed by a deep dive into industry analysis, using the Model of Environmental Threats, including entry barriers, rivalry, substitute products, supplier leverage, buyer influence, and the role of complementors. It explains how firms can respond to environmental threats by neutralizing them and exploiting industry structure opportunities, covering fragmented, emerging, mature, and declining industry structures. The report concludes by highlighting strategic choices that firms can make to enhance their position within the external environment.

The External Environment
MOS 4410
Trevor Hunter
King’s University College

Why do External Analysis?
External analysis allows firms to:
• discover threats and opportunities
• see if above normal profits are likely in an industry
• better understand the nature of competition in
an industry
• make more informed strategic choices

Focal
Firm
Buyers
Suppliers
Entry
Rivalry
Substitutes
Complementors
Demographic
Trends
Technological
Change
Cultural
Trends
Economic
Climate
Legal/Political
Conditions
Specific
International
Events
Industry
General External Environment

Demographic
Trends
Technological
Change
Cultural
Trends
Economic
Climate
Legal/Political
Conditions
Specific
International
Events
General External Environment
Smart
Phones
Hispanic Population Growth
in the USA
Changing Image of
Gay MarriageRising
Interest
Rates
Changing Policy toward Oil
Exploration on Public Lands
China bans Canadian Canola
Imports after spat with
Canadian government Focal
Firm

Industry Analysis
The Model of Environmental Threats
Focal
Firm
Buyers
Suppliers
Entry
Rivalry
Substitutes
Industry
Threat
Higher Threat Lower Average Profits

Model of Environmental Threats
Entry - Threat from New Competition
• If the costs of entering a given industry are lower
than the expected profits they can gain, there is a
high threat of new competitors entering
• Barriers to entry lower the threat of entry by making
entry more expensive.
• Barriers to entry make an industry more attractive.
• This is true whether the focal firm is already in
the industry or thinking about entering (assuming
they can efficiently enter).

Model of Environmental Threats contd.
Entry - Threat of New Competition
Examples of Entry Barriers:
• Economies of scale—firm that can’t produce
the minimum efficient scale will be at a
disadvantage.
• Product differentiation—entrants are forced to
overcome customer loyalties to existing products.

Economies of Scale and the Cost of Production

Model of Environmental Threats contd.
Entry - Threat of New Competition
Examples of Entry Barriers:
• Cost advantages independent of scale:
•Proprietary technology
•Managerial know-how
•Favourable access to raw materials
•Learning curve cost advantages
• Government policies—governments may impose
trade restrictions and/or grant monopolies.

Model of Industry Competition
Rivalry - Threat from Existing Competitors
• Attributes of an Industry That Increase the Threat of
Direct Competition:
• large numbers of competitors
• slow or declining growth
• high fixed costs and/or high storage costs
• low product differentiation
• industry capacity added in large increments

Model of Industry Competition
Threat of Substitute Products
• Substitutes fill the same need but in a different way.
- Coke and Pepsi are rivals, milk is a
substitute for both.
• Substitutes create a price ceiling because consumers
switch to the substitute if prices rise.
• Substitutes will likely come from outside the
industry—be sure to look.

Model of Industry Competition
Threat of Supplier Leverage
• Powerful suppliers can “squeeze” (lower profits)
the focal firm.
Industry conditions that facilitate supplier power:
• small number of firms in supplier’s industry
• highly differentiated product
• lack of close substitutes for suppliers’ products
• supplier could integrate forward
• focal firm is an insignificant customer of supplier