EVALUATING A COMPANY’S
Copyright ®2012 The McGraw-Hill Companies, Inc.
From Thinking Strategically about the Company’s Situation
to Choosing a Strategy
about a firm’s
about a firm’s
for the firm
The Components of a Company’s Macro-Environment
WHAT KINDS OF COMPETITIVE FORCES ARE
INDUSTRY MEMBERS FACING,
AND HOW STRONG ARE THEY?
♦ The Five Competitive Forces:
Competition from rival sellers
Competition from potential new entrants
Competition from substitute products
Supplier bargaining power
Customer bargaining power
The Five-Forces Model
of Competition: A Key
Competitive Pressures That Act to Increase the
Rivalry among Competing Sellers
♦ Buyer demand is growing slowly or declining.
♦ It is becoming less costly for buyers to switch brands.
♦ Industry products are becoming more alike.
♦ There is unused production capacity, andor products
have high fixed costs or high storage costs.
♦ The number of competitors is increasing andor they are
becoming more equal in size and competitive strength.
♦ The diversity of competitors is increasing.
♦ High exit barriers stop firms from exiting the industry.
Factors Affecting the
Strength of Rivalry
Competitive Pressures Associated
with the Threat of New Entrants
♦ Entry Threat Considerations:
Strength of barriers to entry
Expected reaction of incumbent firms
Attractiveness of a particular market’s growth in
demand and profit potential
Capabilities and resources of potential entrants
Entry of existing competitors into market segments
in which they have no current presence
Market Entry Barriers Facing New Entrants
♦ Economies of scale in production, distribution,
advertising, or other areas of operation
♦ Experience and learning curve effects
♦ Unique cost advantages of industry incumbents
♦ Strong brand preferences and customer loyalty
♦ Strong “network effects” in customer demand
♦ High capital requirements
♦ Building a network of distributors or dealers and
securing adequate space on retailers’ shelves
♦ Restrictive government policies
the Threat of Entry
Competitive Pressures from the Sellers
of Substitute Products
♦ Substitute Products Considerations:
Ready availability of substitutes
Pricing, quality, performance, and other relevant
attributes of substitutes
Switching costs that buyers incur
♦ Indicators of Substitutes’ Competitive Strength:
Increasing rate of growth in sales of substitutes
Substitute producers adding output capacity
Increasing profitability of substitute producers
Competitive Pressures Stemming from
Supplier Bargaining Power
♦ Supplier Bargaining Power Considerations:
Ready availability of supplier products
Criticality of supplier products as industry inputs
Number of suppliers of standardcommodity items
Buyers’ costs for switching among suppliers
Availability of substitutes for suppliers’ products
Fraction of supplier sales due to industry demand
Ratio of suppliers relative to industry buyers
Backward integration into suppliers’ industry
Power of Suppliers
Competitive Pressures Stemming from Buyer
Bargaining Power and Price Sensitivity
♦ Buyer Bargaining Power Considerations:
Buyer costs for switching to competing sellers
Degree to which industry products are commoditized
Number and size of buyers relative to sellers
Strength of buyer demand for sellers’ products
Buyer knowledge of products, costs and pricing
Backward integration of buyers into sellers’ industry
Buyer discretion in delaying purchases
Buyer price sensitivity due to low profits, size of
purchase, and consequences of purchase
Power of Buyers
Matching Strategy to Competitive Conditions
1. Pursuing avenues that shield the firm from as
many competitive pressures as possible.
2. Initiating actions calculated to shift competitive
forces in the firm’s favor by altering underlying
factors driving the five forces.
3. Spotting attractive arenas for expansion, where
competitive pressures in the industry are
WHAT FACTORS ARE DRIVING INDUSTRY
CHANGE, AND WHAT IMPACTS WILL THEY
♦ Strategic Analysis of Industry Dynamics:
Identifying the drivers of change.
Assessing whether the drivers of change
are, individually or collectively, acting to
make the industry more or less attractive.
Determining what strategy changes are
needed to prepare for the impacts of the
The Most Common Drivers of Industry Change
Changes in the long-term industry growth rate
Changes in who buys the product and how they use it
Emerging new Internet capabilities and applications
Product and marketing innovation
Entry or exit of major firms
Diffusion of technical know-how across companies and
Improvements in efficiency in adjacent markets
Reductions in uncertainty and business risk
Regulatory influences and government policy changes
Changing societal concerns, attitudes, and lifestyles
WHAT ARE THE KEY FACTORS FOR FUTURE
♦ Key Success Factors
Are the strategy elements, product and
service attributes, operational approaches,
resources, and competitive capabilities that
are necessary for competitive success by
any and all firms in an industry.
Vary from industry to industry, and over time
within the same industry, as drivers of
change and competitive conditions change.
Identification of Key Success Factors
1. What product attributes and service features
buyers strongly affect buyers when choosing
between the competing brands of sellers?
2. What resources and competitive capabilities
are required for a firm to execute a successful
strategy in the marketplace?
3. What shortcomings will put a firm at a
significant competitive disadvantage?
HOW ARE INDUSTRY RIVALS
POSITIONED—WHO IS STRONGLY POSITIONED
AND WHO IS NOT?
♦ A Strategic Group
Is a cluster of industry rivals that have similar
competitive approaches and market positions:
Have comparable product-line breadth
Sell in the same price/quality range
Emphasize the same distribution channels
Use the same product attributes to buyers
Depend on identical technological approaches
Offer similar services and technical assistance
Using Strategic Group Maps to Assess
the Market Positions of Key Competitors
♦ Constructing a strategic group map:
Identify the competitive characteristics that
differentiate firms in the industry.
Plot the firms on a two-variable map using pairs
of differentiating competitive characteristics.
Assign firms occupying about the same map
location to the same 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.