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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 3: Evaluating a Chapter 3: Evaluating a Company’s External Company’s External
EnvironmentEnvironment
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University
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Chapter Learning Objectives
1. To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions.
2. To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak.
3. To learn how to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability.
4. To understand why in-depth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a company’s situation.
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Chapter Roadmap
The Strategically Relevant Components of a Company’s External Environment
Thinking Strategically About a Company’s Industry and Competitive Environment
Question 1: What Are the Industry’s Dominant Economic Features?
Question 2: How Strong Are Competitive Forces? Question 3: What Forces Are Driving Industry Change and
What Impacts Will They Have? Question 4: What Market Positions Do Rivals Occupy—
Who Is Strongly Positioned and Who Is Not? Question 5: What Strategic Moves Are Rivals Likely to
Make Next? Question 6: What Are the Key Factors for Future
Competitive Success? Question 7: Does the Outlook for the Industry Offer the
Company a Good Opportunity to Earn Attractive Profits?
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Diagnosing a company’s situation has two facetsAssessing the company’s external or macro-
environment
Industry and competitive conditions
Forces acting to reshape this environment
Assessing the company’s internal ormicro-environment
Market position and competitiveness
Competencies, capabilities,resource strengths andweaknesses, and competitiveness
Understanding the Factors that Determine a Company’s Situation
Figure 3.1: From Thinking Strategically About theCompany’s Situation to Choosing a Strategy
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Figure 3.2: The Components of a Company’s Macro-environment
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Thinking Strategically About aCompany’s Macro-environment
A company’s macro-environment includes all relevant factors and influences outside its boundaries
Diagnosing a company’s external situation involves assessing strategically important factors that have a bearing on the decisions a company’s makes about its
Direction Objectives Strategy Business model
Requires that company managers scanthe external environment to
Identify potentially important external developments Assess their impact and influence Adapt a company’s direction and strategy as needed
Key Questions Regarding theIndustry and Competitive Environment
What are the industry’s dominant economic traits?
How strong are competitive forces?
What forces are driving change in the industry?
What market positions do rivals occupy? What moves will they make next?
What are the key factors for competitive success?
How attractive is the industry from a profit perspective?
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Market size and growth rate Number of rivals Scope of competitive rivalry Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions Pace of technological change Vertical integration Economies of scale Learning and experience curve effects
Question 1: What are the Industry’sDominant Economic Traits?
Table 3.1: What to Consider in Identifyingan Industry’s Dominant Economic Features
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Learning/Experience Effects
Learning/experience effects exist when a company’s unit costs decline as its cumulative production volume increases because of
Accumulating production know-how
Growing mastery of the technology
The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
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Question 2: How Strong Are Competitive Forces?
Objectives are to identify
Main sources of competitive forces
Strength of these forces
Key analytical tool
Five Forces Model of Competition
Figure 3.3: The Five Forces Model of Competition
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Analyzing the Five Competitive Forces: How to Do It
Step 1: Identify the specific competitivepressures associated with each ofthe five forces
Step 2: Evaluate the strength of eachcompetitive force – fierce, strong,moderate to normal, or weak?
Step 3: Determine whether the collectivestrength of the five competitive forcesis conducive to earning attractive profits
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Usually the strongest of the five forces
Key factor in determining strength of rivalry
How aggressively are rivals using various weapons of competition to improve their market positions and performance?
Competitive rivalry is a combativecontest involving
Offensive actions
Defensive countermoves
Competitive PressuresAmong Rival Sellers
Figure 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry
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Seriousness of threat depends on
Size of pool of entry candidatesand available resources
Barriers to entry
Reaction of existing firms
Evaluating threat of entry involves assessing
How formidable entry barriers are for each type of potential entrant and
Attractiveness of growth and profit prospects
Competitive PressuresAssociated With Potential Entry
Figure 3.5: Factors Affecting Threat of Entry
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Sizable economies of scale
Cost and resource disadvantages independent of size
Brand preferences and customer loyalty
Capital requirements and/or otherspecialized resource requirements
Access to distribution channels
Regulatory policies
Tariffs and international trade restrictions
Ability of industry incumbents to launch vigorous initiatives to block a newcomer’s entry
Common Barriers to Entry
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Competitive Pressures from Substitute Products
Substitutes matter when customersare attracted to the products of
firms in other industries
Sugar vs. artificial sweeteners
Eyeglasses and contact lensvs. laser surgery
Newspapers vs. TV vs. Internet
ConceptConcept
ExamplesExamples
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How to Tell Whether SubstituteProducts Are a Strong Force
Whether substitutes are readilyavailable and attractively priced
Whether buyers view substitutesas being comparable or better
How much it costs end usersto switch to substitutes
Figure 3.6: Factors Affecting Competition From Substitute Products
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Whether supplier-seller relationships represent a weak or strong competitive force depends on
Whether suppliers can exercisesufficient bargaining leverage toinfluence terms of supply in their favor
Nature and extent of supplier-sellercollaboration in the industry
Competitive Pressures From Suppliersand Supplier-Seller Collaboration
Figure 3.7: Factors Affecting Bargaining Power of Suppliers
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Industry members often forge strategic partnerships with select suppliers to
Reduce inventory and logistics costs
Speed availability ofnext-generation components
Enhance quality of parts being supplied
Squeeze out cost savings for both parties
Competitive advantage potential may accrue to those industry members (sellers) doing the best job of managing supply-chain relationships
Competitive Pressures: Collaboration Between Sellers and Suppliers
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Whether the relationships between industry members and buyers represent a weak or strong competitive force depends on
Whether buyers have sufficientbargaining leverage to influenceterms of sale in their favor
Extent and competitive importance ofstrategic partnerships between certain industry members and the buyers
Competitive Pressures From Buyersand Seller-Buyer Collaboration
Figure 3.8: Factors Affecting Bargaining Power of Buyers
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Partnerships between industry members and some/many of their customers can impact competitive pressures
Collaboration may result inmutual benefits regarding Just-in-time deliveries Order processing Electronic invoice payments Data sharing
Competitive advantage may accrue to those industry members doing the best job of partnering with their customers
Competitive Pressures: CollaborationBetween Sellers and Buyers
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Competitive environment isunattractive from the standpointof earning good profits when
Rivalry is vigorous
Entry barriers are lowand entry is likely
Competition from substitutes is strong
Suppliers and customers haveconsiderable bargaining power
Strategic Implications ofthe Five Competitive Forces
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Competitive environment is ideal froma profit-making standpoint when
Rivalry is moderate
Entry barriers are highand no firm is likely to enter
Good substitutesdo not exist
Suppliers and customers arein a weak bargaining position
Strategic Implications ofthe Five Competitive Forces
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Objective is to craft a strategy to
Insulate firm fromcompetitive pressures
Initiate actions to producesustainable competitive advantage
Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry
Coping With theFive Competitive Forces
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Question 3: What Forces Are Driving Industry Change and What Impacts Will They Have?
Industries change because forcesare driving industry participantsto alter their actions
Driving forces are themajor underlying causesof changing industry andcompetitive conditions
Where do driving forces originate?Outer ring of macroenvironment
Inner ring of macroenvironment
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STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years
Usually no more than 3 - 4 factorsqualify as real drivers of change
STEP 2: Assess impactAre driving forces acting to cause market
demand for product to increase or decrease?Are driving forces acting to make competition
more or less intense?Will driving forces lead to higher or lower industry
profitability?
STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces
Analyzing Driving Forces: Three Key Steps
Table 3.2: The Most Common Driving Forces
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Question 4: What MarketPositions Do Rivals Occupy?
One technique to reveal different competitive positions of industry rivals isstrategic group mapping
A strategic group is a cluster of firms in an industry with similar competitiveapproaches and market positions
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Firms in same strategic grouphave two or more competitive characteristics in common Have comparable product line breadth
Sell in same price/quality range
Emphasize same distribution channels
Use same product attributes to appealto similar types of buyers
Use identical technological approaches
Offer buyers similar services
Cover same geographic areas
Strategic Group Mapping
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STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another
STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy space to same strategic group
STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales
Procedure for Constructing a Strategic Group Map
Example: Strategic Group Map of Selected Automobile Manufacturers
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Variables selected as axes should not be highly correlated
Variables chosen as axes should expose big differences in how rivals compete
Variables do not have to be either quantitative or continuous
Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group
If more than two good competitive variables can be used, several maps can be drawn
Guidelines: Strategic Group Maps
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Interpreting Strategic Group Maps
The closer strategic groups are on the map, the stronger the cross-group competitive rivalry tends to be
Not all positions on the mapare equally attractive
Driving forces and competitive pressures oftenfavor some strategic groups and hurt others
Profit potential of different strategicgroups varies due to strengths andweaknesses in each group’s market position
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A firm’s best strategic movesare affected by Current strategies of competitors
Future actions of competitors
Profiling key rivals involves gatheringcompetitive intelligence about Current strategies
Most recent actions and public announcements
Resource strengths and weaknesses
Efforts being made to improve their situation
Thinking and leadership styles of top executives
Question 5: What Strategic MovesAre Rivals Likely to Make Next?
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Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing Which rival has the best strategy? Which
rivals appear to have weak strategies?
Which firms are poised to gainmarket share, and which onesseen destined to lose ground?
Which rivals are likely to rank among the industry leaders five years from now? Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader?
Competitor Analysis
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Which rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue?
Which rivals have a strong incentive, along with resources, to make major strategic changes?
Which rivals are good candidates to be acquired? Which rivals have the resources to acquire others?
Which rivals are likely to enter new geographic markets?
Which rivals are likely to expand their product offerings and enter new product segments?
Things to Consider inPredicting Moves of Rivals
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Key Success Factors (KSFs) are competitive factors and attributes that affect every industry member’s ability to be competitively and financially successful
KSFs are those particular attributes that are so important that they spell the difference between Profit and loss Competitive success or failure
KSFs can relate to Specific strategy elements Product attributes Resources Competencies Competitive capabilities Market achievements
Question 6: What Are the KeyFactors for Competitive Success?
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The answers to 3 questions often help pinpoint an industry’s KSFs
On what basis do customers choosebetween competing brands of sellers?
What resources and competitive capabilities does a company need to have to be competitively successful?
What shortcomings are likely to place a company at a significant competitive disadvantage?
Rarely are there more than 5 - 6 factors that are truly key to the future financial and competitive success of industry members
Identifying Industry Key Success Factors
Table 3.3: Common Types of Industry Key Success Factors
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Involves assessing whether the industry and competitive environment presents a company with an attractive or unattractive opportunity for earning good profits
Factors to consider: Industry growth potential Whether competitive forces are growing stronger/weaker Whether driving forces will favorable/unfavorably impact
industry profitability Degree of risk and uncertainty in industry’s future Whether the industry confronts severe problems Firm’s competitive position in industry vis-à-vis rivals Firm’s potential to capitalize on industry opportunities or
the vulnerabilities of weaker rivals Whether a firm has sufficient competitive strength to
defend against unattractive industry factors
Question 7: Does the Outlook for theIndustry Offer an Attractive Opportunity?
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Factors to Consider inAssessing Industry Attractiveness
As a general proposition If an industry’s overall profit prospects are
above average, the industry environment is basically attractive
If an industry’s overall profit prospects are below average, the industry environment is basically unattractive
However
Attractiveness is relative, not absolute
Conclusions about attractiveness have to be drawn from the perspective of a particular company
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An industry is unlikely to be equally attractive or unattractive to all industry members Industry environments attractive to strong
competitors may be unattractive to weak competitorsA favorably positioned company may survey an
industry environment and see opportunities that weak competitors have little or no ability to capture
Industry environments attractive to insiders may be unattractive to potential entrants
Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn good profits by taking sales and market share away from weaker competitors
Factors to Consider inAssessing Industry Attractiveness
Core Concept: AssessingIndustry Attractiveness
The degree to which an industry
is attractive or unattractive is not the
same for all industry participants
or potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
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