McGraw-Hill/Irwin© 2007 The McGraw-Hill Companies, Inc. All rights reserved. 3 3 Chapter Title 15/e PPT Evaluating a Company’s External Environment Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region

3-2  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 Understanding the Factors that Determine a Company’s Situation

3-3 Fig. 3.1: From Thinking Strategically about the Company’s Situation to Choosing a Strategy

3-4 Fig. 3.2: The Components of a Company’s Macro-environment

3-5 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

3-6 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?

3-7  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 Question 1: What are the Industry’s Dominant Economic Traits?

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3-9 Question 2: What Kinds of Competitive Forces Are Industry Members Facing?  Objectives are to identify  Main sources of competitive forces  Strength of these forces  Key analytical tool  Five Forces Model of Competition

3-10 Fig. 3.3: The Five Forces Model of Competition

3-11 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

3-12 Fig. 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry

3-13 Fig. 3.5: Factors Affecting Threat of Entry

3-14 Fig. 3.6: Factors Affecting Competition From Substitute Products

3-15 Fig. 3.7: Factors Affecting Bargaining Power of Suppliers

3-16 Fig. 3.8: Factors Affecting Bargaining Power of Buyers

3-17 Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have?  Industries change because forces are driving industry participants to alter their actions  Driving forces are the major underlying causes of changing industry and competitive conditions  Where do driving forces originate?  Outer ring of macroenvironment  Inner ring of macroenvironment

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3-19 Question 4: What Market Positions Do Rivals Occupy?  One technique to reveal different competitive positions of industry rivals is strategic group mapping  A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions

3-20  Firms in same strategic group have 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 appeal to similar types of buyers  Use identical technological approaches  Offer buyers similar services  Cover same geographic areas Strategic Group Mapping

3-21  A firm’s best strategic moves are affected by  Current strategies of competitors  Future actions of competitors  Profiling key rivals involves gathering competitive 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 Question 5: What Strategic Moves Are Rivals Likely to Make Next?

3-22  Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing  Which rival has the best strategy? Which rivals appear to have weak strategies?  Which firms are poised to gain market share, and which ones seen 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? Competitor Analysis

3-23  KSFs are those competitive factors most affecting every industry member’s ability to prosper  KSFs concern  Specific strategy elements  Product attributes  Resources  Competencies  Competitive capabilities that a company needs to be competitively successful  KSFs are attributes that spell the difference between  Profit and loss  Competitive success or failure Question 6: What Are the Key Factors for Competitive Success?

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3-25  Involves assessing whether the industry and competitive environment is attractive or unattractive for earning good profits  Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn unusually good profits  Attractiveness is relative, not absolute  Conclusions about attractiveness have to be drawn from the perspective of a particular company Question 7: Does the Outlook for the Industry Present an Attractive Opportunity?