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33Chapter

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy State University-Florida and Western Region

Analyzing a Company’s Analyzing a Company’s External EnvironmentExternal Environment

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Chapter RoadmapChapter 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: What Kinds of Competitive Forces Are Industry

Members Facing? Question 3: What Factors 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 Present an Attractive

Opportunity?

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Two considerations

Company’s external ormacro-environment

Industry and competitive conditions

Company’s internal ormicro-environment

Competencies, capabilities,resource strengths and weaknesses,and competitiveness

What Is Situation Analysis?What Is Situation Analysis?

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Fig. 3.1: From Thinking Strategically Fig. 3.1: From Thinking Strategically about the Company’s Situation about the Company’s Situation

to Choosing a Strategyto Choosing a Strategy

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Fig. 3.2: The Components of a Fig. 3.2: The Components of a Company’s Macro-EnvironmentCompany’s Macro-Environment

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Key Questions Regarding theKey Questions Regarding theIndustry and Competitive Industry and Competitive

EnvironmentEnvironmentIndustry’s dominant economic traits

Competitive forces and strength of each force

Drivers of change in the industry

Competitor analysis

Key success factors

Conclusions: Industry attractiveness

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Q #1: What are the Industry’s Q #1: What are the Industry’s Dominant Economic Traits?Dominant Economic Traits?

Market size and growth rate Scope of competitive rivalry Number of rivals Buyer needs and requirements Production capacity Pace of technological change Vertical integration Product innovation Degree of product differentiation Economies of scale Learning and experience curve effects

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Objectives are to identify

Main sources of competitive forces

Strength of these forces

Key analytical tool

Five Forces Modelof Competition

Q #2: What Kinds of Competitive Q #2: What Kinds of Competitive Forces Are Industry Members Facing?Forces Are Industry Members Facing?

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Fig. 3.3: The Five ForcesFig. 3.3: The Five ForcesModel of CompetitionModel of Competition

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Fig. 3.4: Weapons for Competing andFig. 3.4: Weapons for Competing andFactors Affecting Strength of RivalryFactors Affecting Strength of Rivalry

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What Are the What Are the TypicalTypicalWeapons for Competing?Weapons for Competing?

Vigorous price competition

More or different performance features

Better product performance

Higher quality

Stronger brand image and appeal

Wider selection of models and styles

Bigger/better dealer network

Low interest rate financing

Higher levels of advertising

Stronger product innovation capabilities

Better customer service

Stronger capabilities to provide buyers with custom-made products

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Fig. 3.5: Factors AffectingFig. 3.5: Factors AffectingStrength of Threat of Entry Strength of Threat of Entry

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Common Barriers to EntryCommon Barriers to Entry 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

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Fig. 3.6: Factors AffectingFig. 3.6: Factors AffectingCompetition From Substitute Competition From Substitute

ProductsProducts

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Fig. 3.7: Factors Affecting theFig. 3.7: Factors Affecting theBargaining Power of SuppliersBargaining Power of Suppliers

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Competitive Pressures: Competitive Pressures: Collaboration Between Sellers and Collaboration Between Sellers and

SuppliersSuppliers Sellers are forging strategic partnerships

with select suppliers to

Reduce inventory and logistics costs

Speed availability of next-generationcomponents

Enhance quality of parts being supplied

Squeeze out cost savings for both parties

Competitive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships

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Fig. 3.8: Factors AffectingFig. 3.8: Factors AffectingBargaining Power of BuyersBargaining Power of Buyers

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Strategic Implications of theStrategic Implications of theFive Competitive ForcesFive Competitive Forces

Competitive environment is unattractive fromthe standpoint of 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

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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 of theStrategic Implications of theFive Competitive ForcesFive Competitive Forces

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Q #3: What Factors Are Driving Industry Q #3: What Factors Are Driving Industry Change and What Impacts Will They Have?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

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Question 4: What Market Question 4: What Market Positions Do Rivals Occupy?Positions Do Rivals Occupy?

One technique to revealdifferent competitive positionsof industry rivals isstrategic group mapping

A strategic group is acluster of firms in an industrywith similar competitiveapproaches and market positions

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Strategic Group MappingStrategic Group Mapping Firms in same strategic group have 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 appeal

to similar types of buyers Use identical technological approaches Offer buyers similar services Cover same geographic areas

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Q #5: What Strategic MovesQ #5: What Strategic MovesAre Rivals Likely to Make?Are Rivals Likely to Make?

A firm’s best strategic moves are 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

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Q #6: What Are the Key Factors Q #6: What Are the Key Factors for Competitive Success? for Competitive Success?

KSFs are those competitive factors most affecting everyindustry member’s ability to prosper. They concern Specific strategy elements Product attributes Resources Competencies Competitive capabilities

that a company needs to have to be competitively successful KSFs are attributes that spell the difference between

Profit and loss Competitive success or failure

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Q #7: Does the Outlook for the Q #7: Does the Outlook for the Industry Present an Attractive Industry Present an Attractive

Opportunity?Opportunity? Involves assessing whether the industry

and competitive environment is attractiveor unattractive for earning good profits

Under certain circumstances, a firm uniquelywell-situated in an otherwise unattractive industrycan still earn unusually good profits

Attractiveness is relative, not absolute

Conclusions have to be drawn from theperspective of a particular company