CHAPTER 3

EVALUATING A COMPANYS EXTERNAL ENVIRONMENT

Copyright 2012 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

3.1

From Thinking Strategically about the Companys Situation to Choosing a Strategy

Chapter 3
Thinking strategically about a firms external environment

Thinking strategically about a firms internal environment Chapter 4

Forming a strategic vision of where the firm needs to head

Identifying promising strategic options for the firm

Selecting the best strategy and business model for the firm

32

SWOT Matrix

Internal Strengths

External Opportunities

Internal Weaknesses

External Threats

33

3.2

The Components of a Companys Macro-Environment

34

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

35

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

36

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.

37

3.4 Factors Affecting the Strength of Rivalry

38

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 markets 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

39

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
310

3.5 Factors Affecting the Threat of Entry

311

Competitive Pressures from the Sellers of 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

312

3.6
Factors Affecting Competition from Substitute Products
313

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

314

3.7

Factors Affecting the Bargaining Power of Suppliers

315

Competitive Pressures Stemming from Buyer Bargaining 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
316

3.8 Factors Affecting the Bargaining Power of Buyers

317

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 firms favor by altering underlying factors driving the five forces. 3. Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.

318

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.
319

3.3

The Most Common Drivers of Industry Change

1. 2. 3. 4. 5. 6. 7. 8.
9. 10. 11. 12.

Changes in the long-term industry growth rate Increasing globalization Changes in who buys the product and how they use it Technological change Emerging new Internet capabilities and applications Product and marketing innovation Entry or exit of major firms Diffusion of technical know-how across companies and countries Improvements in efficiency in adjacent markets Reductions in uncertainty and business risk Regulatory influences and government policy changes Changing societal concerns, attitudes, and lifestyles
320

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.
321

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?

322

HOW ARE INDUSTRY RIVALS POSITIONEDWHO IS STRONGLY POSITIONED AND 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
323

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 groups share of total industry sales revenues.
324

325