Chapter 3: Evaluating a Company’s External Environment

Chapter Learning Objectives: To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions. To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak. To learn how to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability. To understand why indepth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a company’s situation. 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?

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.

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?

macro- Industry and competitive conditions

 Forces acting to reshape this environment

Assessing the company’s internal or micro-environment

 Market position and competitiveness

Competencies, capabilities, resource strengths and

weaknesses, and competitiveness

Understanding the Factors that

Determine a Company’s Situation

Figure 3.1: From Thinking Strategically About the

Company’s Situation to Choosing a Strategy

3-5

Figure 3.2: The Components of a Company’s Macro-environment

3-6

Thinking Strategically About a

 Requires that company managers scan

the external environment to

Key Questions Regarding the Industry 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?

3-8

 Market size and growth rate

 Number of rivals

 Scope of competitive rivalry

 Buyer needs and requirements

 Degree of product differentiation

 Learning and experience curve effects

Question 1: What are the Industry’s

Dominant Economic Traits?

Table 3.1: What to Consider in Identifying

an Industry’s Dominant Economic Features

3-10

 Accumulating production know-how

 Growing mastery of the technology

curve effect, the bigger the cost advantage

production volume

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

3-13

Analyzing the Five Competitive

Forces: How to Do It

Step 1: Identify the specific competitive

pressures associated with each of the five forces

Step 2: Evaluate the strength of each

competitive force – fierce, strong, moderate to normal, or weak?

Step 3: Determine whether the collective

strength of the five competitive forces

is conducive to earning attractive profits

 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 combative

Figure 3.4: Weapons for Competing and Factors

Affecting Strength of Rivalry

3-16

 Seriousness of threat depends on

 Size of pool of entry candidates

and available resources

 Barriers to entry

 Reaction of existing firms

 How formidable entry barriers are for each type

of potential entrant and

 Attractiveness of growth and profit prospects

Competitive Pressures Associated With Potential Entry

Figure 3.5: Factors Affecting Threat of Entry

3-18

 Sizable economies of scale

 Cost and resource disadvantages independent of size

 Brand preferences and customer loyalty

 Capital requirements and/or other

specialized 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

Competitive Pressures from

Substitute Products

Substitutes matter when customers

are attracted to the products of

 Sugar vs artificial sweeteners

 Eyeglasses and contact lens

vs laser surgery

 Newspapers vs TV vs Internet

Concept

Examples

How to Tell Whether Substitute

available and attractively priced

as being comparable or better

to switch to substitutes

Figure 3.6: Factors Affecting Competition From Substitute Products

3-22

 Whether supplier-seller relationships

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 Suppliers

and Supplier-Seller Collaboration

Figure 3.7: Factors Affecting Bargaining Power of Suppliers

3-24

 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

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 Buyers

and Seller-Buyer Collaboration

Figure 3.8: Factors Affecting Bargaining Power of Buyers

3-27

 Partnerships between industry members and some/many of their customers can impact competitive pressures

 Collaboration may result in

mutual 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: Collaboration

Between Sellers and Buyers

unattractive from the standpoint

 Rivalry is vigorous

 Entry barriers are low

and entry is likely

 Competition from

substitutes is strong

 Suppliers and customers have

considerable bargaining power

Strategic Implications of

the Five Competitive Forces

 Rivalry is moderate

 Entry barriers are high

and no firm is likely to enter

 Good substitutes

do not exist

 Suppliers and customers are

in a weak bargaining position

Strategic Implications of

the Five Competitive Forces

 Objective is to craft a strategy to

 Insulate firm from

competitive pressures

 Initiate actions to produce

sustainable 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 the Five Competitive Forces

Question 3: What Forces Are Driving Industry Change and What Impacts Will They Have?

 Industries change because forces

major underlying causes

of changing industry and competitive conditions

 Where do driving forces originate?

 Outer ring of macroenvironment

 Inner ring of macroenvironment

STEP 1: Identify forces likely to exert greatest

influence over next 1 - 3 years

Usually no more than 3 - 4 factors

qualify as real drivers of change

Are 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?

needed to prepare for impacts of driving forces

Analyzing Driving Forces:

Three Key Steps

Table 3.2: The Most Common Driving Forces

3-34

Question 4: What Market

Positions Do Rivals Occupy?

competitive positions of industry rivals is

strategic group mapping

 A strategic group is a cluster of firms in an industry with similar competitive

approaches and market positions

 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

Strategic Group Mapping

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

3-38

 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

Interpreting Strategic Group Maps

on the map, the stronger the cross-group competitive rivalry tends to be

are 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

are affected by

 Current strategies of competitors

 Future actions of competitors

competitive 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

Are Rivals Likely to Make Next?

 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 gain

market 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

and market share? What strategies are rivals

most likely to pursue?

resources, to make major strategic changes?

acquired? Which rivals have the resources to

acquire others?

markets?

offerings and enter new product segments?

Things to Consider in

Predicting Moves of Rivals

 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

Question 6: What Are the Key

Factors for Competitive Success?

 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

3-46

 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 profitability

vulnerabilities of weaker rivals

defend against unattractive industry factors

Question 7: Does the Outlook for the

Industry Offer an Attractive Opportunity?

Factors to Consider in Assessing Industry Attractiveness

Attractiveness is relative, not absolute

Conclusions about attractiveness have

to be drawn from the perspective of a particular company

 An industry is unlikely to be equally attractive

or unattractive to all industry members

may be unattractive to weak competitors

industry environment and see opportunities that weak competitors have little or no ability to capture

unattractive to potential entrants

share away from weaker competitors

Factors to Consider in Assessing Industry Attractiveness

Core Concept: Assessing Industry 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

company’s ability to capture them.

3-50