Chapter 3 - External Environment

PESTEL Analysis

Focuses on macro environment

6 Components of PESTEL

• Political

• Economic

• Sociocultural

• Technology

• Environmental

• Legal

Political Factor Examples

• Government Interventions

• Policies

• Tariffs

Economic Factor Examples 

• Inflation Rates

• Interest Rates

• Unemployment Rate

Sociocultural Factors Examples

• Societal Values

• Cultural Influences

• Social Trends

Technological Factor Examples

• Tech Developments

• Disruptive Technologies

Environmental Factors 

• Weather

• Climate Change

Legal Factors

• Consumer Laws

• Labour Laws

Five Competitive Forces From Five Forces Framework

• Competition from rival sellers

• Competition from new entrants

• Competition from producers of substitute products

• Bargaining Power of Buyers

• Bargaining Power of Suppliers

3 Steps of Using Five Forces Model 

• First identify parties involved and competitive pressures they bring

• Next, evaluate how strong pressure is (strong, moderate or weak)

• Lastly, determine whether forces are supportive in achieving high profitability 

When Does Rivalry Among Competing Sellers Increase

• Buyer demand is growing slowly

• Low Switching Costs

• Less Differentiation

• Excess Inventory

• Number of Competitors is Increasing 

• Strategic & Geographic Diversity is Increasing

• High Exit Barriers 

When Does Rivalry Among New Entrants Increase

• Low Barriers to Entry

• When Market is Growing

• When New Entrants Have Capabilities & Resources

• Strong Brand Recognition

When Does Rivalry Among Substitute Products Increase

• Good products readily available and attractively priced 

• Substitutes have comparable or better performance results

•  Low Switching Costs 

When Does Supplier Bargaining Power Increase

• When there is short supply

• Products/services are differentiated

• High Switching costs with alternatives

• Supplier industry has few players

• No Backwards Integration

• No Good Substitutes

When Does Buyer Bargaining Power Increase

• Buyer demand is weak

• Products are standardized

• Low Switching Costs

• Buyers are well informed

• Ability to postpone purchase

When Are Buyers More Price Sensitive

• Buyers aren’t earning much

• Product represents large portion of their purchase

• Quality isn’t biggest consideration

Ways of Matching Company’s Business Strategy to Prevailing Competitive Conditions (2)

• Pursuing avenues that protect firm from facing competitive pressure

• Initiating actions that shift competitive forces in firms favour

Components of Value Net (5)

• Customers

• Competitors (Includes substitutes and potential entrants)

• Firm

• Complementors

• Suppliers

Difference between Value Net & Five Forces Model

• Focuses on interaction of industry participants with company

• Competitors includes direct competitors, substitutes, and threat of new entrants 

• Introduces complementors

Complementors

Producers of complementary products

3 Steps of Driving Forces Analysis

• Identify what driving forces are

• Assess whether forces make industry more or less attractive

• Determine what strategy changes are needed to prepare for impact of forces

How to Assess Impact of Factors Driving Industry Change

• Is there increase or decrease in demand

• Does force make competition more or less intense

• Will force lead to higher or lower profitability

Strategic Group

Industry members with similar competitive approaches and positions in the market

Traits in Strategic Groups 

• Comparable Product Line Breadth

• Same Distribution Channels

• Similar Tech Approaches

• Compete in similar geographic area

• Offer buyers similar product attributes

• Offer buyers similar services

Steps to Construct Strategic Group Map

• Identify characteristics used in industry

• Plot firms on map with uncorrelated x and y axis

• Place firms competing similar to same strategic group

• Draw circles with size proportionate to how much market share a firm has

Typical Variables Used on X & Y Axis

• Price & Quality

• Geographic Coverage

• Product Line Breadth

• Services Offered

• Distribution Channels

• Degree of Diversification

Competitive Intelligence 

Information about rivals that is useful in anticipating next strategic move 

Signals of Which Rivals are Likely to Make Strategic Moves

• Rivals under pressure to improve financial performance

• Rivals seeking to increase market standing

• Public statements of rivals intentions

• Profiles developed by competitive intelligence units

Components of SOAR Framework

• Strategy

• Objectives

• Assumptions

• Resources & Capabilities

Strategy

How rival company is currently competing 

Objectives

Rivals strategic and performance objectives

Assumptions

What rival believes about itself and industry

Resources & Capabilities

Strengths and Weaknesses of Rival

Key Success Factors (KSF)

Strategic elements, product and service attributes, operational approaches, resources and competitive capabilities that allow a firm to be successful in an industry

When is an industry attractive 

Presents firm with opportunity for above average profitability

When is an industry unattractive

Firms profit prospects are low