1. Chapter 3: Evaluating a Company’s External Environment
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University 1

2. “Analysis is the critical starting point of strategic thinking.”
Kenichi Ohmae
Consultant and Author 2

3. “Things are always different –
the art is figuring out which differences matter.”
Laszlo Birinyi
Investments Manager 3

4. 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. 4

5. 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?

6. 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 or micro-environment
Market position and competitiveness
Competencies, capabilities, resource strengths and weaknesses, and competitiveness

7. Figure 3.1: From Thinking Strategically About the Company’s Situation to Choosing a Strategy
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8. Figure 3.2: The Components of a Company’s Macro-environment
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9. Thinking Strategically About a Company’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 factors that have a bearing on the decisions a company’s makes about its
Direction
Objectives
Strategy
Business model
Requires that company managers scan the external environment to
Identify potentially important external developments
Assess their impact and influence
Adapt a company’s direction and strategy as needed

10. Key Questions Regarding the Industry and Competitive Environment
What are the industry’s dominant economic traits?
How strong are competitive forces?
What forces are driving change in the industry?
What market positions do rivals occupy? What moves will they make next?
What are the key factors for competitive success?
How attractive is the industry from a profit perspective?
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11. Question 1: What are the Industry’s Dominant 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

12. Table 3.1: What to Consider in Identifying an Industry’s Dominant Economic Features
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13. Learning/Experience Effects
Learning/experience effects exist when a company’s unit costs decline as its cumulative production 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 cumulative production volume

14. 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

15. Figure 3.3: The Five Forces Model of Competition
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16. Analyzing the Five Competitive Forces: How to Do It
Step 1: Identify the specific competitive pressures associated with each of the five forces
Step 2: Evaluate the strength of each competitive force – fierce, strong, moderate to normal, or weak?
Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits

17. Competitive Pressures Among Rival Sellers
Usually the strongest of 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 combative contest involving
Offensive actions
Defensive countermoves

18. Figure 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry
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19. What Are the Typical Weapons for Competing?
Lower prices
More or different performance features
Better product performance
Higher quality
Stronger brand image and appeal
Wider selection of models and styles
Bigger/better dealer network
Low interest rate financing
Better or more ads
Stronger product innovation capabilities
Better customer service
Stronger capabilities to provide buyers with custom-made products
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20. What Causes Rivalry to be Stronger?
Competitors are active in making fresh moves to improve market standing and business performance
Slow market growth
Number of rivals increases and rivals are ofequal size and competitive capability
Buyer costs to switch brands are low
Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume
A successful strategic move carries a big payoff
Diversity of rivals increases in terms of visions, objectives, strategies, resources, and countries of origin
Outsiders acquire weak firms in the industry and use their resources to transform new firms into major market contenders

21. What Causes Rivalry to be Weaker?
Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals
Rapid market growth
Products of rivals are strongly differentiated and customer loyalty is high
Buyer costs to switch brands are high
There are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business

22. Test Your Knowledge
The rivalry among competing sellers in an industry intensifies
A. when buyer demand for the product is growing rapidly.
B. when customers are brand loyal and their costs to switch to competing brands or substitute products are relatively high.
C. when buyer demand is strong and sellers have little or no excess capacity and only minimal inventories.
D. as the number of rivals increases and as they become more equal in size and competitive capability.
E. when the products of rival sellers are highly differentiated products and the industry consists of so many rivals that any one company’s actions have little direct impact on rivals’ business.
Answer: D

23. Competitive Pressures Associated With Potential Entry
Seriousness of threat depends on
Size of pool of entry candidates and 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

24. Figure 3.5: Factors Affecting Threat of Entry
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25. Common Barriers to Entry
Sizable economies of scale
Cost and resource disadvantages independent of size
Brand preferences and customer loyalty
Capital requirements and/or other specialized 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

26. When Is the Threat of Entry Stronger?
There’s a sizable pool of entry candidates
Entry barriers are low
Industry growth is rapid and profit potential is high
Incumbents are unwilling or unable to contest a newcomer’s entry efforts
When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence

27. When Is the Threat of Entry Weaker?
There’s only a small pool of entry candidates
Entry barriers are high
Existing competitors are struggling to earn good profits
Industry’s outlook is risky
Industry growth is slow or stagnant
Industry members will strongly contest efforts of new entrants to gain a market foothold

28. Competitive Pressures from Substitute Products
Substitutes matter when customers are attracted to the products of firms in other industries
Concept
Examples
Sugar vs. artificial sweeteners
Eyeglasses and contact lens vs. laser surgery
Newspapers vs. TV vs. Internet

29. How to Tell Whether Substitute Products Are a Strong Force
Whether substitutes are readily available and attractively priced
Whether buyers view substitutes as being comparable or better
How much it costs end users to switch to substitutes

30. Figure 3.6: Factors Affecting Competition From Substitute Products
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31. When Is the Competition From Substitutes Stronger?
There are many good substitutes readily available
Substitutes are attractively priced
The higher the quality and performance of substitutes
The lower the end user’s switching costs
End users grow more comfortable with using substitutes

32. When Is the Competition From Substitutes Weaker?
Good substitutes are not readily available or do not exist
Substitutes are higher priced relative to performance they deliver
End users incur high costs in switching to substitutes

33. Competitive Pressures From Suppliers and Supplier-Seller Collaboration
Whether supplier-seller relationships represent a weak or strong competitive force depends on
Whether suppliers can exercise sufficient bargaining leverage to influence terms of supply in their favor
Nature and extent of supplier-seller collaboration in the industry

34. Figure 3.7: Factors Affecting Bargaining Power of Suppliers
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35. When Is the Bargaining Power of Suppliers Stronger?
Industry members incur high costs in switching their purchases to alternative suppliers
Needed inputs are in short supply
Supplier provides a differentiated input that enhances the quality of performance of sellers’ products or is a valuable part of sellers’ production process
There are only a few suppliers of a specific input
Some suppliers threaten to integrate forward