Chapter 3 "Evaluating a Company's External Environment"

Macro-environment

- encompasses the broad environmental context in which a company's industry is situated that includes strategically relevant components over which the firm has NO DIRECT CONTROL

PESTEL Analysis

- focuses on the 6 principal components of strategic significance in the macro-environment

P - Political

E - Economic (local to worldwide)

S - Social

T - Technological

E - Environmental (the natural environment)

L - Legal (regulatory)

The Five Competitive Forces

1. Competition from Rival Sellers

2. Competition from Potential New Entrants

3. Competition from Producers of Substitute Products

4. Supplier Bargaining Power

5. Customer Bargaining Power

Using the Five-Forces Model of Competition

- for each of the 5 forces, identify the different parties involved, and the specific factors that bring about competitive pressures

- Evaluate how strong the pressures stemming from each of the 5 forces are (strong, moderate, or weak)

- Determine whether the collective strength of all 5 competitive forces is conducive to earning attractive profits in the industry

Competitive Pressures that Increase 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 less differentiated

- there is unused production capacity and/or products have high fixed costs or high storage costs

- the number of competitors is increasing and/or they are becoming more equal in size and competitive strength

- the diversity of competitors is increasing

- high exit barriers keep firms from exiting the industry

Common "Weapons" for Competing with Rivals

- price discounting, clearance sales

- couponing, advertising items on sale

- advertising product /service characteristics, using ads to enhance a company's image

- innovating to improve product performance and quality

- introducing new or improved features, increasing the number of styles/models to provide a greater product selection

- increasing customization of product/service

- building a bigger, better dealer network

- improving warranties, offering low-interest financing

Competitive Pressures Associated with the Threat of New Entrants

- expected defensive reactions of incumbent firms

- strength of barriers to entry

- 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

- incumbent cost advantages related to learning and experience, proprietary patents and technology, favorable locations, and lower fixed costs

- 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' selves

- restrictive government policies

Entry Barriers

- whether an industry's entry barriers ought to be considered high or low depends on the resources and capabilities possessed by the pool of potential entrants

- high entry barriers and weak entry threats today do not always translate into high entry barriers and weak entry threats tomorrow!

Competitive Pressures from the Sellers of Substitute Products

Substitute Products Considerations:

1. readily available and attractively priced?

2. comparable or better in terms of quality, performance, and other relevant attributes?

3. offer lower switching costs to buyers?

Indicators of Substitutes' Competitive Strength:

- increasing rate of growth in sales of substitutes

- substitute producers adding new output capacity

- increasing profitability of substitute producers

Competitive Pressures Stemming from Supplier Bargaining Power

- strength of demand for and availability of suppliers' products

- whether suppliers provide a differentiated input that enhances the performance of the industry's product

- industry members' costs for switching among suppliers

- size of suppliers relative to size of industry members

- fraction of the cost of the suppliers' product relative to the total cost of the industry's product

- number of suppliers relative to the number of industry members

- possibility of backward integration into suppliers' industry

- availability of good substitutes for suppliers' products

- whether industry members are major customers of suppliers

Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity

- strength of buyers' demand for sellers' products

- degree to which industry goods are differentiated

- buyers' costs for switching to competing sellers or substitutes

- number and size of buyers relative to number of sellers

- buyers' knowledge of products, costs, and pricing

- threat of buyers' integration into sellers' industry

- buyers' discretion in delaying purchases

- buyers' price sensitivity due to low profits, size of purchase, and consequences of purchase

Is the collective strength of the 5 competitive forces conducive to good profitability?

- is the state of competition in the industry stronger than "normal"?

- can industry firms expect to earn decent profits given prevailing competitive forces?

- are some of the competitive forces sufficiently powerful to undermine industry profitability?

(even one powerful force may be enough to make the industry unattractive in terms of its profit potential)

Core Concept on 5 Competitive Forces

- the strongest of the five forces determines the extent of the downward pressure on an industry's profitability

- having more than one strong force means that an industry has multiple competitive challenges with which to cope

Matching Company Strategy to Competitive Conditions

effectively matching a firm's business strategy to prevailing competitive conditions has 2 aspects:

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

Strategic Management Principle on Competitive pressures

- a company's strategy is increasingly effective the more it provides some insulation from competitive pressures, shifts the competitive battle in the company's favor, and positions firms to take advantage of attractive growth opportunities

What Factors are Driving Industry Change (Driving Forces Analysis)

1. identifying what the driving forces are

2. assessing whether the driving forces are, on the whole, acting to make the industry more or less attractive

3. determining what strategy changes are needed to prepare for the impact of the driving forces

Core Concept - Driving Forces

- driving forces are the MAJOR UNDERLYING CAUSES of change in industry and competitive conditions

The Most Common Drivers of Industry Change

1. changes in the long-term industry growth rate

2. increasing globalization

3. emerging new internet capabilities and applications

4. changes in who buys the product and how they use it

5. technological change and manufacturing process innovation

6. product and marketing innovation

7. entry or exit of major firms

8. diffusion of technical know-how across firms and countries

9. changes in cost and efficiency

10. reductions in uncertainty and business risk

11. regulatory influences and government policy changes

12. changing societal concerns, attitudes, and lifestyles

Strategic Management Principle - Driving Forces

- the most important part of driving forces analysis is to determine whether the collective impact of the driving forces will be to increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability

Assessing the Impact of the Factors Driving Industry Change

1. are the driving forces as a whole causing demand for the industry's product to increase or decrease?

2. is the collective impact of the driving forces making competition more or less intense?

3. Will the combined impacts of the driving forces lead to higher or lower industry profitability?

The real payoff of driving-forces analysis is...

- to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces

Adjusting Strategy to Prepare for the Impacts of Driving Forces

- what strategy adjustments will be needed to deal with the impacts of the driving forces on industry conditions?

- what adjustments must be made immediately?

- what actions currently being taken should be halted or abandoned?

- what can we do now to prepare for adjustments we anticipate making in the future?

Attributes of a Strategic Group

Consists of those industry members with similar competitive approaches and positions in the market:

- having comparable product-line breadth

- emphasizing the same distribution channels

- depending on identical technological approaches

- offering the same product attributes to buyers

- offering similar services and technical assistance

Strategic Group

- a cluster of industry rivals that have similar competitive approaches and market positions

Strategic Group Mapping

- a technique for displaying the different market or competitive positions that rival firms occupy in the industry

Constructing a Strategic Group Map

1. identify the competitive characteristics that delineate strategic approaches used in the industry

2. plot the firms on a two-variable map using pairs of the competitive characteristics

3. assign firms occupying about the same map location to the same strategic group

4. draw circles around each strategic group, making the circles proportional to the size of the group's share of total industry sales revenues

Typical Variables used in Creating Group Maps

- price/quality range (high, medium, low)

- geographic coverage (local, regional, national, global)

- product-line breadth (wide, narrow)

- degree of service offered (no frills, limited, full)

- distribution channels (retail, wholesale, Internet, multiple)

- degree of vertical integration (none, partial, full)

- degree of diversification into other industries (none, some, considerable)

Guidelines for Creating Group Maps

1. variables selected as map axes should NOT be highly correlated

2. variables should reflect important (sizable) differences among rival approaches

3. variables may be quantitative, continuous, discrete, and/or defined in terms of distinct classes and combinations

4. drawing group circles proportional to the combined sales of firms in each group will reflect the relative sizes of each strategic group

5. drawing maps using different pairs of variables will show the different competitive positioning relationships present in the industry's structure

Strategic Group Map Principle

- strategic group maps reveal which companies are CLOSE COMPETITORS and which are DISTANT COMPETITORS

Evaluating Strategic Group Maps

- which strategic group is located in the LEAST FAVORABLE market position? which group is in the MOST FAVORABLE position?

- which strategic group is likely to experience increased INTRAGROUP COMPETITION?

- which groups are most threatened by the likely strategic moves of members of nearby strategic groups

Competitive Intelligence

- information about rivals that is useful in anticipating their next strategic moves

Signals of the Likelihood of Strategic Moves (by rivals)

- rivals under pressure to improve financial performance

- rivals seeking to increase market standing

- public statements of rivals' intentions

- profiles developed by competitive intelligence units

Useful Questions to Help Predict the Likely Actions of Important Rivals

- which competitors' strategies are achieving good results?

- which competitors are losing in the marketplace or badly need to increase their unit sales and market share?

- which rivals are likely to make major moves to enter new geographic markets or to increase sales and market share in a particular geographic region?

- which rivals can expand product offerings to enter new product segments where they do not have a presence?

- which rivals can be acquired? Which rivals are financially able and looking to make an acquisition?

Indicators of a Rival Firm's likely strategic moves and countermoves:

- the rival firm's current strategy

- the rival firm's objectives

- the rival firm's capabilities

- the rival firm's assumptions about itself and its industry

Key Success Factors (KSFs)

- 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, and in importance as drivers of change (technology) and competitive conditions change

Identification of Key Success Factors (KSFs)

1. on what basis do buyers of the industry's product choose between the competing brands of sellers? That is, what product attributes and service characteristics are crucial to competitive success?

2. given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a firm have to be competitively successful?

3. what shortcomings are almost certain to put a firm at a significant competitive disadvantage?

Is the Industry Outlook Conductive to Good Profitability?

- the anticipated industry environment is fundamentally attractive if it presents a company with good opportunity for above-average profitability

- the industry outlook is fundamentally unattractive if a firm's profit prospects are unappealingly low

Degree of Industry Attractiveness (principle)

- the degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants