evaluating a company’s external environment

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter TitleChapter Title

16/e PPT16/e PPT

Evaluating a Company’s

External Environment

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

Troy University-Florida Region

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Diagnosing a company’s situation has two facets

Assessing the company’s external ormacro-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 strengthsand weaknesses, and competitiveness

Understanding the Factors that Determine a Company’s Situation

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Fig. 3.1: From Thinking Strategically about theCompany’s Situation to Choosing a Strategy

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Fig. 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

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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?

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Question 2: What Kinds of CompetitiveForces Are Industry Members Facing?

Objectives are to identify

Main sources of competitive forces

Strength of these forces

Key analytical tool

Five Forces Modelof Competition

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Fig. 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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Fig. 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry

Fig. 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry

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Fig. 3.5: Factors Affecting Threat of Entry

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Fig. 3.6: Factors Affecting Competition From Substitute Products

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Fig. 3.7: Factors Affecting Bargaining Power of Suppliers

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Fig. 3.8: Factors Affecting Bargaining Power of Buyers

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Question 3: What Factors 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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Question 4: What Market PositionsDo 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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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 appealto similar types of buyers

Use identical technological approaches

Offer buyers similar services

Cover same geographic areas

Strategic Group Mapping

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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

Question 5: What Strategic Moves AreRivals 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? Whichrivals 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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KSFs are those competitive factors most affecting every industry member’s ability to prosper

KSFs concern Specific strategy elements Product attributes Resources Competencies Competitive capabilities

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

Profit and loss Competitive success or failure

Question 6: What Are the KeyFactors for Competitive Success?

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Involves assessing whether the industryand competitive environment is attractiveor unattractive for earning good profits

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

Attractiveness is relative, not absolute

Conclusions about attractiveness have to be drawn from the perspective of a particular company

Question 7: Does the Outlook for the Industry Present an Attractive Opportunity?