Chapter  3:  Evaluating  a  Company’s  External  Environment
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Crafting and executing strategy ch 3

Chapter 3: Evaluating a Company’s External Environment

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.

Troy University


Chapter learning objectives

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 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

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?


Understanding the factors that determine a company s situation

Understanding the Factors that Determine a Company’s Situation

  • Diagnosing a company’s situation has two facets

    • Assessing the company’s external or macro-environment

      • Industry and competitive conditions

      • Forces acting to reshape this environment

    • Assessing the company’s internal ormicro-environment

      • Market position and competitiveness

      • Competencies, capabilities,resource strengths andweaknesses, and competitiveness


Figure 3 1 from thinking strategically about the company s situation to choosing a strategy

Figure 3.1: From Thinking Strategically About theCompany’s Situation to Choosing a Strategy

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Figure 3 2 the components of a company s macro environment

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

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Thinking strategically about a company s macro environment

Thinking Strategically About aCompany’s Macro-environment

  • A company’s macro-environment includes all relevant factors and influences outside its boundaries

  • Diagnosing a company’s external situation involves assessing strategically important factorsthat have a bearingon the decisions a company’s makes about its

    • Direction

    • Objectives

    • Strategy

    • Business model

  • Requires that company managers scanthe external environment to

    • Identify potentially important external developments

    • Assess their impact and influence

    • Adapt a company’s direction and strategy as needed


Key questions regarding the industry and competitive environment

Key Questions Regarding theIndustry and Competitive Environment

What are the industry’s dominant economic traits?

How strong are competitive forces?

What forces are driving change in the industry?

How attractive is the industry from a profit perspective?

What are the key factors for competitive success?

What market positions do rivals occupy? What moves will they make next?

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Question 1 what are the industry s dominant economic traits

Question 1: What are the Industry’sDominant Economic Traits?

  • Market size and growth rate

  • Number of rivals

  • Scope of competitive rivalry

  • Buyer needs and requirements

  • Degree of product differentiation

  • Product innovation

  • Supply/demand conditions

  • Pace of technological change

  • Vertical integration

  • Economies of scale

  • Learning and experience curve effects


Table 3 1 what to consider in identifying an industry s dominant economic features

Table 3.1: What to Consider in Identifyingan Industry’s Dominant Economic Features

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Learning experience effects

Learning/Experience Effects

  • Learning/experience effectsexist when a company’s unit costs decline as its cumulativeproduction volume increases because of

    • Accumulating production know-how

    • Growing mastery of the technology

  • The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulativeproduction volume


Question 2 how strong are competitive forces

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

Figure 3.3: The Five Forces Model of Competition

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Analyzing the five competitive forces how to do it

Analyzing the Five Competitive Forces: How to Do It

Step 1:Identify the specific competitivepressures associated with each ofthe five forces

Step 2:Evaluatethe strength of eachcompetitive force – fierce, strong,moderate to normal, or weak?

Step 3:Determinewhether the collectivestrength of the five competitive forcesis conducive to earning attractive profits


Competitive pressures among rival sellers

Competitive PressuresAmong Rival Sellers

  • Usually the strongestof the five forces

  • 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 combativecontest involving

    • Offensive actions

    • Defensive countermoves


Figure 3 4 weapons for competing and factors affecting strength of rivalry

Figure 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry

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Competitive pressures associated with potential entry

Competitive PressuresAssociated With Potential Entry

  • Seriousness of threat depends on

    • Sizeof pool of entry candidatesand available resources

    • Barriers to entry

    • Reaction of existing firms

  • Evaluating threat of entry involves assessing

    • How formidable entry barriers are for each type of potential entrant and

    • Attractiveness of growth and profit prospects


Figure 3 5 factors affecting threat of entry

Figure 3.5: Factors Affecting Threat of Entry

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Common barriers to entry

Common Barriers to Entry

  • Sizable economies of scale

  • Cost and resource disadvantages independent of size

  • Brand preferences and customer loyalty

  • Capital requirements and/or otherspecialized 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


Competitive pressures from substitute products

Competitive Pressures from Substitute Products

Substitutes matter when customersare attracted to the products offirms in other industries

Concept

Examples

  • Sugar vs. artificial sweeteners

  • Eyeglasses and contact lensvs. laser surgery

  • Newspapers vs. TV vs. Internet


How to tell whether substitute products are a strong force

How to Tell Whether SubstituteProducts Are a Strong Force

  • Whether substitutes are readilyavailable and attractively priced

  • Whether buyers view substitutesas being comparable or better

  • How much it costs end usersto switch to substitutes


Figure 3 6 factors affecting competition from substitute products

Figure 3.6: Factors Affecting Competition From Substitute Products

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Competitive pressures from suppliers and supplier seller collaboration

Competitive Pressures From Suppliersand Supplier-Seller Collaboration

  • Whether supplier-seller relationships represent a weak or strong competitive 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


Figure 3 7 factors affecting bargaining power of suppliers

Figure 3.7: Factors Affecting Bargaining Power of Suppliers

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Competitive pressures collaboration between sellers and suppliers

Competitive Pressures: Collaboration Between Sellers and Suppliers

  • 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 from buyers and seller buyer collaboration

Competitive Pressures From Buyersand Seller-Buyer Collaboration

  • Whether the relationships between industry members and buyers represent a weakor 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


Figure 3 8 factors affecting bargaining power of buyers

Figure 3.8: Factors Affecting Bargaining Power of Buyers

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Competitive pressures collaboration between sellers and buyers

Competitive Pressures: CollaborationBetween Sellers and Buyers

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

  • Collaboration may result inmutual 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


Strategic implications of the five competitive forces

Strategic Implications ofthe Five Competitive Forces

  • Competitive environment isunattractive from the standpointof earning good profits when

    • Rivalry is vigorous

    • Entry barriers are lowand entry is likely

    • Competition from substitutes is strong

    • Suppliers and customers haveconsiderable bargaining power


Strategic implications of the five competitive forces1

Strategic Implications ofthe Five Competitive Forces

  • Competitive environmentis ideal froma 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


Coping with the five competitive forces

Coping With theFive Competitive Forces

  • Objective is to craft a strategyto

    • Insulate firm fromcompetitive pressures

    • Initiate actions to producesustainable 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


Question 3 what forces are driving industry change and what impacts will they have

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

  • Industries change because forcesare driving industry participantsto alter their actions

  • Driving forces are themajor underlying causesof changing industry andcompetitive conditions

  • Where do driving forces originate?

    • Outer ring of macroenvironment

    • Inner ring of macroenvironment


Analyzing driving forces three key steps

Analyzing Driving Forces: Three Key Steps

STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years

  • Usually no more than 3 - 4 factorsqualify as real drivers of change

    STEP 2:Assess impact

  • Are driving forces acting to cause market demand for product to increase or decrease?

  • Are driving forces acting to make competitionmore or less intense?

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

    STEP 3:Determine what strategy changes are needed to prepare for impacts of driving forces


Table 3 2 the most common driving forces

Table 3.2: The Most Common Driving Forces

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Question 4 what market positions do rivals occupy

Question 4: What MarketPositions Do Rivals Occupy?

  • One technique to reveal different competitive positions of industry rivals isstrategic group mapping

  • A strategic group is a cluster of firms in an industry with similar competitiveapproaches and market positions


Strategic group mapping

Strategic Group Mapping

  • Firms in same strategic grouphave 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 appealto similar types of buyers

    • Use identical technological approaches

    • Offer buyers similar services

    • Cover same geographic areas


Procedure for constructing a strategic group map

Procedure for Constructing a Strategic Group Map

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


Example strategic group map of selected automobile manufacturers

Example: Strategic Group Map of Selected Automobile Manufacturers

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Guidelines strategic group maps

Guidelines: Strategic Group Maps

  • 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


Interpreting strategic group maps

Interpreting Strategic Group Maps

  • The closer strategic groups are on the map, the stronger the cross-group competitive rivalry tends to be

  • Not all positions on the mapare 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


Question 5 what strategic moves are rivals likely to make next

Question 5: What Strategic MovesAre Rivals Likely to Make Next?

  • A firm’s best strategic movesare affected by

    • Current strategies of competitors

    • Future actions of competitors

  • Profiling key rivals involves gatheringcompetitive 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


Competitor analysis

Competitor Analysis

  • Sizing up strategies and competitive strengths and weaknesses of rivalsinvolves assessing

    • Which rival has the best strategy? Whichrivals appear to have weak strategies?

    • Which firms are poised to gainmarket 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?


Things to consider in predicting moves of rivals

Things to Consider inPredicting Moves of Rivals

  • Which rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue?

  • Which rivals have a strong incentive, along with resources, to make major strategic changes?

  • Which rivals are good candidates to be acquired? Which rivals have the resources to acquire others?

  • Which rivals are likely to enter new geographic markets?

  • Which rivals are likely to expand their product offerings and enter new product segments?


Question 6 what are the key factors for competitive success

Question 6: What Are the KeyFactors for Competitive Success?

  • 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 differencebetween

    • Profit and loss

    • Competitive success or failure

  • KSFs can relate to

    • Specific strategy elements

    • Product attributes

    • Resources

    • Competencies

    • Competitive capabilities

    • Market achievements


Identifying industry key success factors

Identifying Industry Key Success Factors

  • The answers to 3 questions often help pinpoint an industry’s KSFs

    • On what basis do customers choosebetween competing brands of sellers?

    • What resources and competitive capabilities does a company need to have to be competitively successful?

    • What shortcomings are likely to place a company at a significant competitive disadvantage?

  • Rarely are there more than 5 - 6 factors that are trulykey to the future financial and competitive success of industry members


Table 3 3 common types of industry key success factors

Table 3.3: Common Types of Industry Key Success Factors

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Question 7 does the outlook for the industry offer an attractive opportunity

Question 7: Does the Outlook for theIndustry Offer an Attractive Opportunity?

  • 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 growth potential

    • Whether competitive forces are growing stronger/weaker

    • Whether driving forces will favorable/unfavorably impact industry profitability

    • Degree of risk and uncertainty in industry’s future

    • Whether the industry confronts severe problems

    • Firm’s competitive position in industry vis-à-vis rivals

    • Firm’s potential to capitalize on industry opportunities or the vulnerabilities of weaker rivals

    • Whether a firm has sufficient competitive strength todefend against unattractive industry factors


Factors to consider in assessing industry attractiveness

Factors to Consider inAssessing Industry Attractiveness

  • As a general proposition

    • If an industry’s overall profit prospects are above average, the industry environment is basically attractive

    • If an industry’s overall profit prospects are below average, the industry environment is basically unattractive

  • However

    • Attractiveness is relative, not absolute

    • Conclusions about attractiveness have to be drawn from the perspective of a particular company


Factors to consider in assessing industry attractiveness1

Factors to Consider inAssessing Industry Attractiveness

  • An industry is unlikely to be equally attractive or unattractive to all industry members

    • Industry environments attractive to strong competitors may be unattractive to weak competitors

      • A favorably positioned company may survey an industry environment and see opportunities that weak competitors have little or no ability to capture

    • Industry environments attractive to insiders may be unattractive to potential entrants

    • Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn good profits by taking sales and market share away from weaker competitors


Core concept assessing industry attractiveness

Core Concept: AssessingIndustry Attractiveness

The degreeto which an industryis attractive or unattractive is not the same for all industry participantsor potential entrants.

The opportunities an industrypresents depend partly on acompany’s ability to capture them.

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