CHAPTER 3

EVALUATING A COMPANYS EXTERNAL ENVIRONMENT

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1. Gain command of the basic concepts and analytical tools

widely used to diagnose the competitive conditions in a

companys industry.

2. Learn how to diagnose the factors shaping industry dynamics

and to forecast their effects on future industry profitability.

3. Become adept at mapping the market positions of key groups

of industry rivals.

4. Understand why in-depth evaluation of a businesss strengths and weaknesses in relation to the specific industry conditions

it confronts is an essential prerequisite to crafting a strategy

that is well-matched to its external situation.

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3.1 From Thinking Strategically about the Companys Situation to Choosing a Strategy

Thinking

strategically

about a firms external

environment

Thinking

strategically

about a firms internal

environment

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

Chapter 3

Chapter 4

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The External Environment

The Macro-Environment

Is the broad environmental context in

which a firms industry is situated.

Includes strategically relevant components

over which the firm has no direct control.

General economic conditions

Immediate industry and competitive

environment

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3.2 The Components of a Companys Macro-Environment

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3.1 The Seven Components of the Macro-Environment

Component Description

Demographics The size, growth rate, and age distribution of different sectors of the population. It includes the geographic distribution of the population, the distribution of income

across the population, and trends in these factors.

Social forces Societal values, attitudes, cultural factors, and lifestyles that impact businesses. Social forces vary by locale and change over time.

Political, legal,

and regulatory

factors

Political policies and processes, as well as the regulations and laws with which

companies must complylabor laws, antitrust laws, tax policy, regulatory policies, the political climate, and the strength of institutions such as the court system.

Natural

environment

Ecological and environmental forces such as weather, climate, climate change, and

associated factors like water shortages.

Technological

factors

The pace of technological change and technical developments that have the

potential for wide-ranging effects on society, such as genetic engineering, the rise of

the Internet, changes in communication technologies, and knowledge and

controlling the use of technology,

Global forces Conditions and changes in global markets, including political events and policies toward international trade, sociocultural practices and the institutional environment

in which global markets operate.

General

economic

conditions

Rates of economic growth, unemployment, inflation, interest, trade deficits or

surpluses, savings, per capita domestic product, and conditions in the markets for

stocks and bonds affecting consumer confidence and discretionary income.

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THINKING STRATEGICALLY ABOUT A COMPANYS INDUSTRY AND COMPETITIVE ENVIRONMENT

1. Does the industry offer attractive opportunities for growth?

2. What kinds of competitive forces are industry members facing,

and how strong is each force?

3. What factors are driving changes in the industry, and what

impact will these changes have on competitive intensity and

industry profitability?

4. What market positions do industry rivals occupywho is strongly positioned and who is not?

5. What strategic moves are rivals likely to make next?

6. What are the key factors for competitive success in the

industry?

7. Does the industry offer good prospects for attractive profits?

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QUESTION 1: DOES THE INDUSTRY OFFER ATTRACTIVE OPPORTUNITIES FOR GROWTH?

Defining Growth:

What is the current market size in units or sales?

What is the past, current and expected rate of

growth for the market\industry?

Considerations:

Different sectors\regions of a market grow at

different rates.

Growth varies with the industrys life cycle stageemergence, rapid growth, maturity, and decline.

Growth does not guarantee profitability.

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QUESTION 2: 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

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3.3

The Five-Forces Model

of Competition: A Key

Analytical Tool

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Using the Five-Forces Model of Competition

Step 1

For each of the five forces, identify the different

parties involved, and the specific factors that

bring about competitive pressures.

Step 2

Evaluate how strong the pressures stemming

from each of the five forces are (strong,

moderate to normal, or weak).

Step 3

Determine whether the strength of the five

competitive forces, overall, is conducive to

earning attractive profits in the industry.

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3.2 Common Weapons for Competing with Rivals

Competitive Weapons Primary Effects

Price discounting, clearance sales,

blowout sales Lowers price (P), acts to boost total sales volume and market share,

lowers profit margins per unit sold when price cuts are big and/or

increases in sales volume are relatively small

Couponing, advertising items on sale Acts to increase unit sales volume and total revenues, lowers price (P),

increases unit costs (C), may lower profit margins per unit sold (P C)

Advertising product or service

characteristics, using ads to enhance

a companys image or reputation

Boosts buyer demand, increases product differentiation and perceived

value (V), acts to increase total sales volume and market share, may

increase unit costs (C) and/or lower profit margins per unit sold

Innovating to improve product

performance and quality

Acts to increase product differentiation and value (V), boosts buyer

demand, acts to boost total sales volume, likely to increase unit costs (C)

Introducing new or improved features,

increasing the number of styles or

models to provide greater product

selection

Acts to increase product differentiation and value (V), strengthens buyer

demand, acts to boost total sales volume and market share, likely to

increase unit costs (C)

Increasing customization of product or

service

Acts to increase product differentiation and value (V), increases

switching costs, acts to boost total sales volume, often increases unit

costs (C)

Building a bigger, better dealer network Broadens access to buyers, acts to boost total sales volume and market

share, may increase unit costs (C)

Improving warranties, offering low-

interest financing

Acts to increase product differentiation and value (V), increases unit

costs (C), increases buyer costs to switch brands, acts to boost total

sales volume and market share

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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.

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3.4

Factors Affecting the

Strength of Rivalry

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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

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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

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3.5

Factors Affecting

the Threat of Entry

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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

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3.6

Factors Affecting

Competition from

Substitute Products

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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

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3.7

Factors Affecting

the Bargaining

Power of Suppliers

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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

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3.8

Factors Affecting

the Bargaining

Power of Buyers

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Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?

Is the state of competition in the industry stronger than normal?

Can industry firms expect to earn decent profits given prevailing competitive forces?

Are some of the competitive forces sufficiently powerful to undermine industry profitability?

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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.

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QUESTION 3: 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.

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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

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Assessing the Impact of the Factors Driving Industry Change

1. Overall, are the factors driving change causing

demand for the industrys product to increase or decrease?

2. Is the collective impact of the drivers of change

making competition more or less intense?

3. Will the combined impacts of the change

drivers lead to higher or lower industry

profitability?

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Developing a Strategy That Takes the Changes in Industry Conditions into Account

What strategy adjustments will be needed to deal with the impacts of the changes in

industry conditions?

What adjustments must be made immediately?

What actions must we not take or should we cease

to do now?

What can we do now to prepare for adjustments

we anticipate making in the future?

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QUESTION 4: 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

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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.

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Typical Variables for Differentiating the Market Positions of Key Competitors on Group Maps

Price/quality range (high, medium, low)

Geographic coverage (local, regional, national, global)

Product-line breadth (wide, narrow)

Degree of service offered (no frills, limited, full)

Distribution channels (retail, wholesale, Internet, multiple)

Degree of vertical integration (none, partial, full)

Degree of diversification into other industries (none, some, considerable).

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Choosing Variables for Group Maps

Variables selected as map axes:

Must not be highly correlated.

Must reflect key approaches to customer

value and expose sizable differences in the

marketplace positions of rivals.

May be quantitative, continuous, discrete

and\or defined in terms of distinct classes

and combinations.

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Guidelines for Constructing Group Maps

Draw map circles proportional to the combined sales of firms in each strategic group to reflect

the relative sizes of each group to the total size

of the industry.

Use different variable sets to show different views of relationships among competitive

positions in the industrys structurethere is no one best map for portraying how competing

firms are positioned.

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Follow-up

Which strategic group is located in the least favorable market position? Which group is in

the most favorable position?

Which strategic group is likely to experience increased intragroup competition?

Which groups are most threatened by the likely strategic moves of members of nearby

strategic groups?

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What Can Be Learned from Strategic Group Maps?

Maps are useful in identifying which industry members are close rivals and which are

distant rivals.

Not all map positions are equally attractive.

1. Prevailing competitive pressures in the industry

and drivers of change favor some strategic

groups and hurt others.

2. Profit prospects vary from strategic group to

strategic group.

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QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT?

Competitive Intelligence

Information about rivals that is useful in anticipating

their next strategic moves.

Signals of the Likelihood of Strategic Moves:

Rivals under pressure to improve financial

performance

Rivals seeking to increase market standing

Public statements of rivals intentions

Profiles developed by competitive intelligence units

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Useful Questions to Help Predict the Likely Actions of Important Rivals

Which competitors strategies are achieving good results?

Which competitors are losing in the marketplace or badly need to increase their unit sales and market share?

Which rivals are likely make major moves to enter new geographic markets or to increase sales and market share

in a particular geographic region?

Which rivals can expand product offerings to enter new product segments where they do not have a presence?

Which rivals can be acquired? Which rivals are financially able and looking to make an acquisition?

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QUESTION 6: 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.

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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?

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QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS?

Industry Profitability Considerations:

The industrys overall growth potential

Effects of strong competitive forces

Effects of prevailing drivers of change in the industry

Competitive strength of the firm: its market position

relative to its rivals, its capability to withstand

competitive forces, and whether its position will

change in the course of competitive interactions

The success of the firms strategy in delivering on the industrys key success factors

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Thank You

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