McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.

Chapter 3Chapter 3

Evaluating a Evaluating a Company’s External Company’s External

EnvironmentEnvironment

3-2

Answering the Question, “Where Answering the Question, “Where are We Now?”are We Now?”

Two situational considerations

Company’s external industry andcompetitive environment

Company’s own market position and competitiveness

» Its competencies, capabilities,resource strengths and weaknesses, cost position, culture, and the strength of its leadership

3-3

External Environmental Factors External Environmental Factors Shaping A Company’s Choice of Shaping A Company’s Choice of StrategyStrategy

3-4

Assessing a Company’s Industry and Assessing a Company’s Industry and Competitive EnvironmentCompetitive Environment

1. What are the industry’s business and economic traits?

2. What are the nature and strength of competitive forces?

3. What forces are driving industry change?

4. What market positions do industry rivals occupy?

3-5

Assessing a Company’s Industry and Assessing a Company’s Industry and Competitive EnvironmentCompetitive Environment

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

6. What are the key factors of competitive success?

7. Does the industry outlook offer good prospects for profitability?

3-6

Identifying the Industry’s Identifying the Industry’s Dominant Economic FeaturesDominant Economic Features

Market size and growth rate

Number of rivals

Scope of competitive rivalry

Pace of technological change

Degree of vertical integration

Need for economies of scale

Learning and experience curve effects

3-7

How Strong are the Industry’s How Strong are the Industry’s Competitive Forces?Competitive Forces?

The nature of competitive forces differs across industries

Competitive forces go beyond rivalry and include four coexisting forces

3-8

Porter’s Five Forces Model of Porter’s Five Forces Model of CompetitionCompetition

3-9

When Is the BargainingWhen Is the BargainingPower of Buyers Power of Buyers Stronger Stronger ??

Buyers are large and can demand concessions

Buyer switching costs for substitutes are low

The number of buyers is small Buyer demand is weak or declining Buyers are well-informed about sellers’

products, prices, and costs Buyers threaten to

integrate backward

3-10

When Is the CompetitionWhen Is the CompetitionFrom Substitutes From Substitutes Stronger Stronger ??

There are many good substitutes that are readily available

Substitutes are attractively priced

Substitutes have comparable or better quality and performance

End-users have low switching costs

3-11

When Is the Bargaining When Is the Bargaining Power of Suppliers Power of Suppliers Stronger Stronger ??

Industry members incur high switching costs

Needed inputs are in short supply

Supplier provides a differentiated inputthat enhances the quality or performanceof sellers’ products

There are only a few suppliers of a specific input

Some suppliers threaten to integrate forward

3-12

When Is the Threat of Entry When Is the Threat of Entry StrongerStronger ??

Industry growth is rapid and profit potential is high

Incumbents are unwilling or unable to contest a newcomer’s entry efforts

The pool of entry candidates is large

Entry barriers are low

3-13

What are the Barriers To Entry?What are the Barriers To Entry?

Importance of economies of scale

Experience/learning curve disadvantages

Strong brand preferences and high degrees of customer loyalty

High capital requirements

Restricted access to distribution channels

Restrictive regulatory policies

Tariffs and international trade restrictions

3-14

What Causes Rivalry to Be What Causes Rivalry to Be Stronger Stronger ??

Competing sellers regularly launch fresh actions to boost market standing

Declining demand or slow market growth

The products or services offered by rivals are standardized or weakly differentiated

One or more industry rivals becomes dissatisfied with their market standing

3-15

What Causes Rivalry to Be What Causes Rivalry to Be Stronger Stronger ??

Number of rivals increases

Buyer costs to switch brands are low

Industry conditions tempt rivals use price cuts or other competitive weapons to boost volume

Outsiders have recently acquired weak firms in the industry and are trying to turn them into major market contenders

3-16

When the Five Competitive Forces When the Five Competitive Forces Result in Attractive Market Result in Attractive Market ConditionsConditions

An industry’s competitive environment tends to be attractive from a profit-making standpoint when

Rivalry is moderate

Entry barriers are highand no firm is likely to enter

Good substitutesdo not exist

Suppliers and customers arein a weak bargaining position

thereby producing competitive pressures that are very weak!

3-17

When the Five Competitive Forces When the Five Competitive Forces Result in Unattractive Market Result in Unattractive Market ConditionsConditions

An industry’s competitive environment tends to be unattractive from a profit-making standpoint when

Rivalry is strong

Entry barriers are lowand new competitors are likely to enter

Good substitutes exist

Suppliers and customers arein a strong bargaining position

thereby producing competitive pressures that are very intense or fierce!

3-18

The Concept of Driving ForcesThe Concept of Driving Forces

Driving Forces are

powerful external

influences acting to

reshape the industry

landscape and alter

competitive conditions.

3-19

Analyzing Driving ForcesAnalyzing Driving Forces

1. Identify forces likely to reshape industry competitive conditions

Changes likely to take place within next 1 – 3 years

Usually no more than 3 - 4 factors qualify as real drivers of change

3-20

Analyzing Driving ForcesAnalyzing Driving Forces

2. Assess impact of driving forces on industry attractiveness

Are the driving forces causing demand for product to increase or decrease?

Are the driving forces acting to make competition more or less intense?

Will the driving forces lead to higher or lower industry profitability?

3. Determine what strategy changes are needed to prepare for impact of driving forces

3-21

Common Driving ForcesCommon Driving Forces

Changes in long-term industry growth rate

Increasing globalization of the industry

Changes in who buys the product and how they use it

Product innovation

Technological change

Entry or exit of major firms

3-22

Identifying the Market Positions of Identifying the Market Positions of RivalsRivals

3-23

What Can Be Learned from What Can Be Learned from Strategic Group MapsStrategic Group Maps

Driving forces and competitive pressures often favor some strategic groups and hurt others

Competitive pressures may cause the profit potential of different strategic groups to vary

3-24

Predicting the Next StrategicPredicting the Next StrategicMoves Rivals Are Likely to MakeMoves Rivals Are Likely to Make

Profiling key rivals involves gathering competitive intelligence about

Thinking and leadership styles of top executives

Identifying trends in the timing of new product launches and marketing promotions

Considering which rivals have the motivation and capability to make major strategy changes

3-25

Pinpointing the Key FactorsPinpointing the Key Factorsfor Future Competitive Successfor Future Competitive Success

Key Success Factors (or KSFs) are competitive factors most affecting every industry member’s ability to prosper.

KSFs include:Specific product attributesNecessary resources,

competencies, and capabilitiesSpecific intangible assetsCompetitive capabilities

3-26

Three Questions to Ask in Three Questions to Ask in Identifying Industry Key Success Identifying Industry Key Success FactorsFactors

1. On what basis do buyers choose between brands?

2. What resources are needed to compete successfully?

3. What shortcomings are almost certain to put a company at a competitive disadvantage?

3-27

Common Types of Industry Key Common Types of Industry Key Success FactorsSuccess Factors

Expertise in a particular technology

Scale economies or experience curve benefits

High capacity utilization

Strong network of wholesale distributors

Brand building skills

Convenient retail locations

3-28

Deciding Whether the IndustryDeciding Whether the IndustryPresents an Attractive OpportunityPresents an Attractive Opportunity

Involves assessing whether the industryand competitive environment is attractive or unattractive for earning good profits

Draws upon all the previous analysis The industry’s growth potential

The intensity of competition

Whether the impacts of the driving forcesare positive or negative

The company’s competitive position in the industry relative to rivals

How well the company performs the industry’s key success factors