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Chapter 2

Comm 401 chapter 2.docx

Course Code
COMM 315

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Chapter 2- The External Environment: Opportunities, Threats, Industry Competition, and Competitor
Viewed in their totality, the conditions that affect firms today indicate that for most organizations, their
external environment is filled with uncertainty. To successfully deal with this uncertainty and to achieve
strategic competitiveness and thrive, firms must be aware of and fully understand the different segments
of the external environment
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 as the basis for better serving their stakeholders’ needs.
A firms strategic actions are influenced by the conditions in the three parts (the general, industry, and
competitor) of its external environment (see figure 2.1 page 37)
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.
We group these dimensions into 7 environmental segments: demographic, economic, political/legal,
sociocultural, technological, global and physical. See figure 2.1 for examples page 38
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 competitors.
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.
Analysis of the general environment is focused on environmental trends while analysis of the industry
environment is focused on the factors and conditions influencing and 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,
and strategic actions.
External Environmental Analysis
To cope with often ambiguous and incomplete environmental data and to increase understanding of the
general environment, firms engage in external analysis. This analysis has four parts: scanning,
monitoring, forecasting, and assessing.
An opportunity is a condition in the general environment that if exploited effectively, helps a company
achieve strategic competitiveness.
A threat is a condition in the general environment that may hinder a company’s efforts to achieve
strategic competitiveness.
Firms use several sources to analyze the general environment. People in boundary-spanning positions
can obtain a great deal of this type of information salespersons; customer service representative’s…
people interacting with external constituents are examples of boundary-spanning positions).
Components of the External Environmental Analysis
Scanning The study of all segments in the general
Identifying early signals of environmental
changes and trends in the general
environment and detecting changes that are
already underway.
Scanning activities must be aligned with the
organizational context (scanning system for a
volatile environment vs. stable environment).

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Many firms use special software to help them
indentify events that are taking place in the
environment and that are announced in public
Monitoring Detecting meaning through ongoing
observations of environmental changes and
Analysts observe environmental changes to
see if an important trend is emerging from
among those spotted through scanning.
E.g. financial crisis—customers deciding to “go
back to basics” (new trend) -- a reduction in
brand loyalty may be an outcome of this trend.
Scanning and monitoring are particularly
important when a firm competes in an industry
with high technological uncertainty.
Forecasting Developing projections of anticipated
outcomes based on monitored changes and
Analyst develops feasible projections of what
might happen, and how quickly, as a result of
the changes and trends detected through
scanning and monitoring.
E.g. forecast the time that will be required for a
new technology to reach the marketplace.
Assessing Determining the timing and importance of
environmental changes and trends for firms’
strategies and their managment.
The intent of assessment is to specify the
implications of that understanding.
Determining if an identified trend in the
external environment is an opportunity or
E.g. firms with well-known brands have
detected a trend among consumers to receive
more “value” when purchasing branded
products. Having forecasted that this trend
toward “wanting more value” may last beyond
the current global recession, many of these
firms are taking actions in response to their
assessment of the significance of what may be
a long-lasting trend toward value purchases.
Segments of the General Environment
The challenge of the firm is to scan, monitor, forecast, and assess the elements in each segment to
determine their effects on the firm.
1) Demographic segment: is concerned with a population’s size, age structure, geographic
distribution, ethic mix, and income distribution.
a. Population size: population growth, firms seeking growing markets want to recognize the
market potential. Changes within different populations: aging population (the need of workers)
b. Age Structure: baby boomers: the possibility of future declines is creating uncertainty for baby
boomers about how to invest and when they might be able to retire.
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