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CHAPTER 3. EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT. Student Version. Thinking strategically about a firm’s external environment. Forming a strategic vision of where the firm needs to head. Identifying promising strategic options for the firm. Selecting the best strategy

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slide1

CHAPTER 3

EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT

Student Version

slide2

Thinking

strategically

about a firm’s

external

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

Thinking

strategically

about a firm’s

internal

environment

From Thinking Strategically about the Company’s Situation to Choosing a Strategy

3.1

Chapter 3

Chapter 4

the external environment
The External Environment
  • The Macro-Environment
    • Is the broad environmental context in which a firm’s industry is situated.
    • Includes strategically relevant components over which the firm has no direct control.
      • General economic conditions
      • Immediate industry and competitive environment
question 1 does the industry offer attractive opportunities for growth
QUESTION 1: DOES THE INDUSTRY OFFERATTRACTIVE 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 industry’s life cycle stage—emergence, rapid growth, maturity, and decline.

Growth does not guarantee profitability.

question 2 what kinds of competitive forces are industry members facing and how strong are they
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

competitive pressures that act to increase the rivalry among competing sellers
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.

competitive pressures associated with the threat of new entrants
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 market’s 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

competitive pressures from the sellers of substitute products
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
competitive pressures stemming from supplier bargaining power
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
competitive pressures stemming from buyer bargaining power and price sensitivity
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 of purchase, and consequences of purchase
is the collective strength of the five competitive forces conducive to good profitability
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?
question 3 what factors are driving industry change and what impacts will they have
QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE?

Strategic Analysis of Industry Dynamics:

Identifying the drivers of change.

Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive.

Determining what strategy changes are needed to prepare for the impacts of the anticipated change.

question 4 how are industry rivals positioned who is strongly positioned and who is not
QUESTION 4: HOW ARE INDUSTRY RIVALSPOSITIONED—WHO 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

question 5 what strategic moves are rivals likely to make next
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

question 6 what are the key factors for future competitive success
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.

question 7 does the industry offer good prospects for attractive profits
QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS?

Industry Profitability Considerations:

The industry’s 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 firm’s strategy in delivering on the industry’s key success factors