Evaluating a Company’s External Environment Chapter 3 Evaluating a Company’s External Environment

Answering the Question, “Where are We Now?” Two situational considerations Company’s external industry and competitive environment Company’s own market position and competitiveness Its competencies, capabilities, resource strengths and weaknesses, cost position, culture, and the strength of its leadership

External Environmental Factors Shaping A Company’s Choice of Strategy

Assessing a Company’s Industry and Competitive Environment What are the industry’s business and economic traits? What are the nature and strength of competitive forces? What forces are driving industry change? What market positions do industry rivals occupy?

Assessing a Company’s Industry and Competitive Environment What strategic moves are rivals likely to make next? What are the key factors of competitive success? Does the industry outlook offer good prospects for profitability?

Identifying the Industry’s Dominant 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

How Strong are the Industry’s Competitive Forces? The nature of competitive forces differs across industries Competitive forces go beyond rivalry and include four coexisting forces

Porter’s Five Forces Model of Competition

When Is the Bargaining Power of Buyers 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

When Is the Competition From Substitutes 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

When Is the Bargaining Power of Suppliers Stronger ? Industry members incur high switching costs Needed inputs are in short supply Supplier provides a differentiated input that enhances the quality or performance of sellers’ products There are only a few suppliers of a specific input Some suppliers threaten to integrate forward

When Is the Threat of Entry Stronger ? 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

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

What Causes Rivalry to Be 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

What Causes Rivalry to Be 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

When the Five Competitive Forces Result in Attractive Market Conditions An industry’s competitive environment tends to be attractive from a profit-making standpoint when Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist Suppliers and customers are in a weak bargaining position thereby producing competitive pressures that are very weak!

When the Five Competitive Forces Result in Unattractive Market Conditions An industry’s competitive environment tends to be unattractive from a profit-making standpoint when Rivalry is strong Entry barriers are low and new competitors are likely to enter Good substitutes exist Suppliers and customers are in a strong bargaining position thereby producing competitive pressures that are very intense or fierce!

The Concept of Driving Forces Driving Forces are powerful external influences acting to reshape the industry landscape and alter competitive conditions.

Analyzing Driving Forces 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

Analyzing Driving Forces 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? Determine what strategy changes are needed to prepare for impact of driving forces

External Environmental Factors Shaping A Company’s Choice of Strategy

Basic Driving Forces Economic Conditions Technological change Demographics Legislation and regulation Social Values and Lifestyles

Question 4: How Are Industry Rivals Positioned? Strategic group mapping Is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. A strategic group Is a cluster of industry rivals that have similar competitive approaches and market positions.

Strategic Group Mapping Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.

Constructing a Strategic Group Map Identify the competitive characteristics that delineate strategic approaches used in the industry. Typical variables: the price/quality range (high, medium, low), geographic coverage (local, regional, national, global), degree of vertical integration (none, partial, full), product-line breadth (wide, narrow), choice of distribution channels (retail, wholesale, Internet, multiple channels), and degree of service offered (no- frills, limited, full). Plot firms on a two-variable map based upon their strategic approaches. Assign firms occupying the same map location to a common strategic group. Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues.

Identifying the Market Positions of Rivals

4. Identifying the Market Positions of Rivals: Strategic Group Maps

What Can Be Learned from Strategic 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 Identification of competitive “white spaces” or “blue ocean” opportunities

5. Predicting the Next Strategic Moves 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

6. Pinpointing the Key Factors for Future Competitive Success Key Success Factors (or KSFs) are competitive factors most affecting every industry member’s ability to prosper. KSFs include: Specific product attributes Necessary resources, competencies, and capabilities Specific intangible assets Competitive capabilities

Three Questions to Ask in Identifying Industry Key Success Factors On what basis do buyers choose between brands? What resources are needed to compete successfully? What shortcomings are almost certain to put a company at a competitive disadvantage?

Common Types of Industry Key Success 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

Example: KSFs for the Beer Industry Full utilization of brewing capacity -- to keep manufacturing costs low Strong network of wholesale distributors -- to gain access to retail outlets Clever advertising -- to induce beer drinkers to buy a particular brand

Example: KSFs for Apparel Manufacturing Industry Appealing designs and color combinations -- to create buyer appeal Low-cost manufacturing efficiency -- to keep selling prices competitive

Example: KSFs for Tin and Aluminum Can Industry Locating plants close to end-use customers -- to keep costs of shipping empty cans low Ability to market plant output within economical shipping distances

7. Deciding Whether the Industry Presents an Attractive Opportunity Involves assessing whether the industry and 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 forces are 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