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  • 1. Chapter 3 Evaluating a Company’s External EnvironmentMcGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.
  • 2. Answering the Question, “Whereare 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 3-2
  • 3. External Environmental FactorsShaping A Company’s Choice ofStrategy 3-3
  • 4. Assessing a Company’s Industry andCompetitive Environment 1. What are the industry’s 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
  • 5. Assessing a Company’s Industry andCompetitive 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
  • 6. Identifying the Industry’sDominant 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 3-6
  • 7. How Strong are the Industry’sCompetitive Forces?  The nature of competitive forces differs across industries  Competitive forces go beyond rivalry and include four coexisting forces 3-7
  • 8. Porter’s Five Forces Model ofCompetition 3-8
  • 9. When Is the BargainingPower 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
  • 10. When Is the CompetitionFrom 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
  • 11. When Is the BargainingPower 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
  • 12. 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 3-12
  • 13. 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
  • 14. What Causes Rivalry to BeStronger ?  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
  • 15. What Causes Rivalry to BeStronger ?  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 3-15
  • 16. When the Five Competitive ForcesResult in Attractive MarketConditions  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! 3-16
  • 17. When the Five Competitive ForcesResult in Unattractive MarketConditions  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! 3-17
  • 18. The Concept of Driving Forces Driving Forces are powerful external influences acting to reshape the industry landscape and alter competitive conditions. 3-18
  • 19. Analyzing Driving Forces1. 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
  • 20. Analyzing Driving Forces2. 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?3. Determine what strategy changes are needed to prepare for impact of driving forces 3-20
  • 21. Common Driving Forces  Changes in long-term industry growth rate  Increasing globalization of the industry  Changes in who buys the product and how they use it  Product innovation  Technological change  Entry or exit of major firms 3-21
  • 22. Identifying the Market Positions ofRivals 3-22
  • 23. What Can Be Learned fromStrategic 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 3-23
  • 24. Predicting the Next StrategicMoves 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 3-24
  • 25. Pinpointing the Key Factorsfor 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 3-25
  • 26. Three Questions to Ask inIdentifying Industry Key SuccessFactors 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? 3-26
  • 27. Common Types of Industry KeySuccess 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 3-27
  • 28. Deciding Whether the IndustryPresents 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 3-28