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CHAPTER 3
EVALUATING A COMPANYS
EXTERNAL ENVIRONMENT
McGraw-Hill/IrwinCopyright 2012 The McGraw-Hill Companies, Inc.
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3.1 From Thinking Strategically about the Companys Situationto Choosing a Strategy
Thinkingstrategically
about a firmsexternal
environment
Thinkingstrategically
about a firmsinternal
environment
Forming astrategicvision of
where thefirm needs
to head
Identifyingpromisingstrategicoptions
for the firm
Selecting thebest strategyand business
model forthe firm
Chapter 3
Chapter 4
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SWOT Matrix
InternalStrengths
InternalWeaknesses
ExternalOpportunities
ExternalThreats
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3.2 The Components of a Companys Macro-Environment
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WHAT KINDS OF COMPETITIVE FORCES AREINDUSTRY MEMBERS FACING,AND HOW STRONG ARE THEY?
The Five Competitive Forces:
Competition from rival sellers
Competition from potential new entrants
Competition from substitute productsproducers
Supplier bargaining power
Customer bargaining power
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3.3
The Five-Forces Modelof Competition: A Key
Analytical Tool
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Competitive Pressures That Act to Increase theRivalry 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 productshave high fixed costs or high storage costs.
The number of competitors is increasing and\or they arebecoming 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 theStrength of Rivalry
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Competitive Pressures Associatedwith the Threat of New Entrants
Entry Threat Considerations:
Strength of barriers to entry
Expected reaction of incumbent firms
Attractiveness of a particular markets growth indemand 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 andsecuring adequate space on retailers shelves
Restrictive government policies
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3.5
Factors Affectingthe Threat of Entry
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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
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3.6
Factors AffectingCompetition fromSubstitute Products
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Competitive Pressures Stemming fromSupplier 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 Affectingthe BargainingPower of Suppliers
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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 ofpurchase, and consequences of purchase
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3.8
Factors Affectingthe BargainingPower of Buyers
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Matching Strategy to Competitive Conditions
1. Pursuing avenues that shield the firm from asmany competitive pressures as possible.
2. Initiating actions calculated to shift competitive
forces in the firms favor by altering underlyingfactors driving the five forces.
3. Spotting attractive arenas for expansion, where
competitive pressures in the industry aresomewhat weaker.
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WHAT FACTORS ARE DRIVING INDUSTRYCHANGE, AND WHAT IMPACTS WILL THEYHAVE?
Strategic Analysis of Industry Dynamics:
1. Identifying the drivers of change.
2. Assessing whether the drivers of changeare, individually or collectively, acting tomake the industry more or less attractive.
3. Determining what strategy changes areneeded to prepare for the impacts of theanticipated change.
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3.3 The Most Common Drivers of Industry Change
1. Changes in the long-term industry growth rate2. 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 andcountries
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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WHAT ARE THE KEY FACTORS FOR FUTURECOMPETITIVE SUCCESS?
Key Success Factors
Are the strategy elements, product and
service attributes, operational approaches,resources, and competitive capabilities thatare necessary for competitive success byany and all firms in an industry.
Vary from industry to industry, and over timewithin the same industry, as drivers ofchange and competitive conditions change.
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Identification of Key Success Factors
1. What product attributes and service featuresbuyers strongly affect buyers when choosingbetween the competing brands of sellers?
2. What resources and competitive capabilitiesare required for a firm to execute a successfulstrategy in the marketplace?
3. What shortcomings will put a firm at asignificant competitive disadvantage?
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HOW ARE INDUSTRY RIVALSPOSITIONEDWHO 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
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Using Strategic Group Maps to Assessthe Market Positions of Key Competitors
Constructing a strategic group map:
Identify the competitive characteristics thatdifferentiate firms in the industry.
Plot the firms on a two-variable map using pairsof differentiating competitive characteristics.
Assign firms occupying about the same maplocation to the same strategic group.
Draw circles around each strategic group, makingthe circles proportional to the size of the groups
share of total industry sales revenues.
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