McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Evaluating a Company’s External Environment

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

Thinking Strategically About a Company’s Macro-environment 3-3

3-4 Scanning the Macro Environment: Environmental Analysis Identifying external environmental variables that influence long-term decisions

3-5 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 Economies of scale Learning and experience curve effects Understanding Industry’s Dominant Economic Features

3-6 Industry Analysis Objectives are to identify  Main sources of competitive forces  Strength of these forces Key analytical tool  Five Forces Model of Competition

The Five Forces Model of Competition 3-7

3-8 Porter’s Five 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

3-9 Threat of New Entrants decreases if barriers to entry are high economies of scale are high capital requirements are high incumbency advantages independent of size are high customer loyalty is high access to distribution channels is limited government policy is restrictive Threat of New Entrants Threat of Substitution Bargaining Power of Suppliers Bargaining Power of Customers Rivalry Among Competitors

3-10 Bargaining Power of Suppliers Suppliers are likely to be powerful if:  Supplier industry dominated by a few firms  Suppliers’ products have few substitutes  Suppliers’ product is an important input  Suppliers’ products have high switching costs  Suppliers present a creible threat to integrate forward Threat of New Entrants Threat of Substitution Bargaining Power of Suppliers Bargaining Power of Customers Rivalry Among Competitors

3-11 Bargaining Power of Buyers Buyers are likely to be powerful if:  They are concentrated or purchases are large relative to seller’s sales  Purchase accounts for a significant fraction of supplier’s sales  Products are undifferentiated  Buyers face few switching costs  Buyer presents a credible threat to backward integration  Buyer is price sensitive Threat of New Entrants Threat of Substitution Bargaining Power of Suppliers Bargaining Power of Customers Rivalry Among Competitors

3-12 Threat of Substitution Threat of New Entrants Threat of Substitution Bargaining Power of Suppliers Bargaining Power of Customers Rivalry Among Competitors Threat of Subsitutes is stronger when… 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

3-13 Rivalry Rivalry in an industry is stronger when…  Competitors are active in making fresh moves to improve market standing and business performance  Slow market growth  Number of rivals increases and rivals are of equal 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 Threat of New Entrants Threat of Substitution Bargaining Power of Suppliers Bargaining Power of Customers Rivalry Among Competitors

3-14 Competitive environment is unattractive from the standpoint of earning good profits when Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power Strategic Implications of the Five Competitive Forces Competitive environment is ideal 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

3-15 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 Competitor Analysis

3-16 Competitor Analysis Understanding 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

Example: Strategic Group Map of Selected Automobile Manufacturers 3-17

3-18 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 difference between  Profit and loss  Competitive success or failure KSFs can relate to  Specific strategy elements  Product attributes  Resources  Competencies  Competitive capabilities  Market achievements Key Factors for Competitive Success

Common Types of Industry Key Success Factors 3-19

3-20 Access to distribution – to get a company’s brand stocked and favorably displayed in retail outlets Image – to induce consumers to buy a particular company’s product (brand name and attractiveness of packaging are key deciding factors) Low-cost production capabilities – to keep selling prices competitive Sufficient sales volume – to achieve scale economies in marketing expenditures Example: KSFs for Bottled Water Industry

3-21 Example: KSFs for Ready-to-Wear Apparel Industry Appealing designs and color combinations – to create buyer appeal Low-cost manufacturing efficiency – to keep selling prices competitive Strong network of retailers/company- owned stores – to allow stores to keep best-selling items in stock Clever advertising – to effectively convey a specific image to induce consumers to purchase a particular label

The degree to which an industry is attractive or unattractive is not the same for all industry participants or potential entrants. The opportunities an industry presents depend partly on a company’s ability to capture them. 3-22