Chapter 3

Evaluating a
Companys External
Environment
McGraw-Hill/Irwin

Copyright 2011 The McGraw-Hill Companies, All Rights Reserved.

Answering the Question, Where are

We Now?
Two situational considerations
Companys external industry and
competitive environment
Companys own market position and
competitiveness
Its competencies, capabilities,
resource strengths and
weaknesses, cost position, culture,
and the strength of its leadership

3-2

External Environmental Factors

Shaping A Companys Choice of
Strategy

3-3

Assessing a Companys Industry and

Competitive Environment

1. What are the industrys business

and economic traits?
2. What are the nature and strength
of competitive forces?
3. What forces are driving industry
change?
4. What market positions do
industry rivals occupy?
3-4

Assessing a Companys Industry and

Competitive Environment

5. What strategic moves are rivals

likely to make next?
6. What are the key factors of
competitive success?
7. Does the industry outlook offer
good prospects for profitability?

3-5

Identifying the Industrys

Dominant Economic Features
Market size and growth
Number of rivals

rate

Scope of competitive rivalry

Pace of technological change
Degree of vertical integration
Need for economies of scale
Learning and experience curve effects

3-6

How Strong are the Industrys

Competitive Forces?
The nature of
competitive forces
differs across
industries
Competitive forces go beyond rivalry
and include four coexisting forces

3-7

Porters Five Forces Model of

Competition

3-8

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

3-9

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

3-10

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
3-11

When Is the Threat of Entry Stronger ?

Industry growth is
rapid and profit
potential is high
Incumbents are
unwilling or unable
to contest a
newcomers entry
efforts

The pool of entry candidates is large

Entry barriers are low
3-12

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

3-13

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

3-14

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
contenders

market

3-15

When the Five Competitive Forces

Result in Attractive Market
Conditions
An industrys 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!
3-16

When the Five Competitive Forces

Result in Unattractive Market
Conditions
An industrys 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!
3-17

The Concept of Driving Forces

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

3-18

Analyzing Driving Forces

1.

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
3-19

Analyzing Driving Forces

2.

3.

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
3-20

External Environmental Factors

Shaping A Companys Choice of
Strategy

3-21

Basic Driving Forces

Economic Conditions
Technological change
Demographics
Legislation and regulation
Social Values and Lifestyles
3-22

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.

3-23

Strategic Group Mapping

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

3-24

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 groups share of total industry
sales revenues.
3-25

Identifying the Market Positions of

Rivals

3-26

4. Identifying the Market Positions of

Rivals: Strategic Group Maps

3-27

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
3-28

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

3-29

6. Pinpointing the Key Factors

for Future Competitive Success
Key Success Factors (or KSFs) are
competitive factors most affecting
every industry members ability to
prosper.
KSFs include:
Specific product attributes
Necessary resources,
competencies, and capabilities
Specific intangible assets
Competitive capabilities
3-30

Three Questions to Ask in

Identifying Industry Key Success
Factors
1. On what basis do buyers choose
between brands?
2. What resources are needed to
compete successfully?
3. What shortcomings are almost
certain to put a company at a
competitive disadvantage?

3-31

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
3-32

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

3-33

Example: KSFs for Apparel

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

3-34

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

3-35

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 industrys growth potential
The intensity of competition
Whether the impacts of the driving forces
are positive or negative
The companys competitive position in the industry
relative to rivals
How well the company performs the industrys key
success factors

3-36