CHAPTER 3

EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT

McGraw-Hill/IrwinCopyright Copyright ®2012 The McGraw-Hill Companies, Inc.®2012 The McGraw-Hill Companies, Inc.

3–2

3.1 From Thinking Strategically about the Company’s Situation to Choosing a Strategy

Thinkingstrategically

about a firm’sexternal

environment

Thinkingstrategically

about a firm’sinternal

environment

Forming astrategicvision of

where thefirm needs

to head

Identifyingpromisingstrategicoptions

for the firm

Selecting thebest strategyand business

model for the firm

Chapter 3

Chapter 4

3–3

SWOT Matrix

InternalStrengths

InternalWeaknesses

ExternalOpportunities

ExternalThreats

3–4

3.2 The Components of a Company’s Macro-Environment

3–5

WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY?

♦ The Five Competitive Forces:● Competition from rival sellers

● Competition from potential new entrants

● Competition from substitute products producers

● Supplier bargaining power

● Customer bargaining power

3–6

3.3

The Five-Forces Model of Competition: A Key Analytical Tool

3–7

Competitive Pressures That Act to Increase the Rivalry among Competing Sellers

♦ Buyer demand is growing slowly or declining.

♦ It is becoming less costly for buyers to switch brands.

♦ Industry products are becoming more alike.

♦ There is unused production capacity, and\or products have high fixed costs or high storage costs.

♦ The number of competitors is increasing and\or they are becoming more equal in size and competitive strength.

♦ The diversity of competitors is increasing.

♦ High exit barriers stop firms from exiting the industry.

3–8

3.4

Factors Affecting the Strength of Rivalry

3–9

Competitive Pressures Associated with the Threat of New Entrants

♦ Entry Threat Considerations:● Strength of barriers to entry

● Expected reaction of incumbent firms

● Attractiveness of a particular market’s growth in demand and profit potential

● Capabilities and resources of potential entrants

● Entry of existing competitors into market segments in which they have no current presence

3–10

Market Entry Barriers Facing New Entrants

♦ Economies of scale in production, distribution, advertising, or other areas of operation

♦ Experience and learning curve effects

♦ Unique cost advantages of industry incumbents

♦ Strong brand preferences and customer loyalty

♦ Strong “network effects” in customer demand

♦ High capital requirements

♦ Building a network of distributors or dealers and securing adequate space on retailers’ shelves

♦ Restrictive government policies

3–11

3.5

Factors Affecting the Threat of Entry

3–12

Competitive Pressures from the Sellersof Substitute Products

♦ Substitute Products Considerations:● Ready availability of substitutes● Pricing, quality, performance, and other relevant

attributes of substitutes● Switching costs that buyers incur

♦ Indicators of Substitutes’ Competitive Strength:● Increasing rate of growth in sales of substitutes● Substitute producers adding output capacity● Increasing profitability of substitute producers

3–13

3.6Factors Affecting Competition from Substitute Products

3–14

Competitive Pressures Stemming from Supplier Bargaining Power

♦ Supplier Bargaining Power Considerations:● Ready availability of supplier products● Criticality of supplier products as industry inputs● Number of suppliers of standard\commodity items● Buyers’ costs for switching among suppliers● Availability of substitutes for suppliers’ products● Fraction of supplier sales due to industry demand● Ratio of suppliers relative to industry buyers● Backward integration into suppliers’ industry

3–15

3.7

Factors Affecting the Bargaining Power of Suppliers

3–16

Competitive Pressures Stemming from BuyerBargaining Power and Price Sensitivity

♦ Buyer Bargaining Power Considerations:● Buyer costs for switching to competing sellers● Degree to which industry products are commoditized● Number and size of buyers relative to sellers● Strength of buyer demand for sellers’ products● Buyer knowledge of products, costs and pricing● Backward integration of buyers into sellers’ industry● Buyer discretion in delaying purchases● Buyer price sensitivity due to low profits, size of

purchase, and consequences of purchase

3–17

3.8

Factors Affecting the Bargaining Power of Buyers

3–18

Matching Strategy to Competitive Conditions

1. Pursuing avenues that shield the firm from as many competitive pressures as possible.

2. Initiating actions calculated to shift competitive forces in the firm’s favor by altering underlying factors driving the five forces.

3. Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.

3–19

WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE?

♦ Strategic Analysis of Industry Dynamics:

1. Identifying the drivers of change.

2. Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive.

3. Determining what strategy changes are needed to prepare for the impacts of the anticipated change.

3–20

3.3 The Most Common Drivers of Industry Change

1. Changes in the long-term industry growth rate

2. Increasing globalization

3. Changes in who buys the product and how they use it

4. Technological change

5. Emerging new Internet capabilities and applications

6. Product and marketing innovation

7. Entry or exit of major firms

8. Diffusion of technical know-how across companies and countries

9. Improvements in efficiency in adjacent markets

10. Reductions in uncertainty and business risk

11. Regulatory influences and government policy changes

12. Changing societal concerns, attitudes, and lifestyles

3–21

WHAT ARE THE KEY FACTORS FOR FUTURE COMPETITIVE SUCCESS?

♦ Key Success Factors● Are the strategy elements, product and

service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry.

● Vary from industry to industry, and over time within the same industry, as drivers of change and competitive conditions change.

3–22

Identification of Key Success Factors

1. What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers?

2. What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace?

3. What shortcomings will put a firm at a significant competitive disadvantage?

3–23

HOW ARE INDUSTRY RIVALSPOSITIONED—WHO IS STRONGLY POSITIONEDAND WHO IS NOT?

♦ A Strategic Group● Is a cluster of industry rivals that have similar

competitive approaches and market positions: Have comparable product-line breadth Sell in the same price/quality range Emphasize the same distribution channels Use the same product attributes to buyers Depend on identical technological approaches Offer similar services and technical assistance

3–24

Using Strategic Group Maps to Assess the Market Positions of Key Competitors

♦ Constructing a strategic group map:● Identify the competitive characteristics that

differentiate firms in the industry.

● Plot the firms on a two-variable map using pairs of differentiating competitive characteristics.

● Assign firms occupying about the same map location to the same strategic group.

● Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues.

3–25