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Evaluating A Company'S External Environment
Evaluating A Company'S External Environment
1. Gain command of the basic concepts and analytical tools widely used to diagnose the competitive conditions in a companys industry. 2. Learn how to diagnose the factors shaping industry dynamics and to forecast their effects on future industry profitability. 3. Become adept at mapping the market positions of key groups of industry rivals. 4. Understand why in-depth evaluation of a businesss strengths and weaknesses in relation to the specific industry conditions it confronts is an essential prerequisite to crafting a strategy that is well-matched to its external situation.
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3.1
Chapter 3
Thinking strategically about a firms external environment
Selecting the best strategy and business model for the firm
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The Macro-Environment
Is the broad environmental context in which a firms industry is situated. Includes strategically relevant components over which the firm has no direct control. General economic conditions Immediate industry and competitive environment
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3.2
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3.1 Component
Demographics
Social forces
Political, legal, Political policies and processes, as well as the regulations and laws with which and regulatory companies must complylabor laws, antitrust laws, tax policy, regulatory policies, the political climate, and the strength of institutions such as the court system. factors Natural environment Technological factors
Ecological and environmental forces such as weather, climate, climate change, and associated factors like water shortages. The pace of technological change and technical developments that have the potential for wide-ranging effects on society, such as genetic engineering, the rise of the Internet, changes in communication technologies, and knowledge and controlling the use of technology, Conditions and changes in global markets, including political events and policies toward international trade, sociocultural practices and the institutional environment in which global markets operate. Rates of economic growth, unemployment, inflation, interest, trade deficits or surpluses, savings, per capita domestic product, and conditions in the markets for stocks and bonds affecting consumer confidence and discretionary income.
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Global forces
1. Does the industry offer attractive opportunities for growth? 2. What kinds of competitive forces are industry members facing, and how strong is each force? 3. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?
4. What market positions do industry rivals occupywho is strongly positioned and who is not?
5. What strategic moves are rivals likely to make next? 6. What are the key factors for competitive success in the industry? 7. Does the industry offer good prospects for attractive profits?
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 37
Defining Growth:
What is the current market size in units or sales? What is the past, current and expected rate of growth for the market\industry? Different sectors\regions of a market grow at different rates. Growth varies with the industrys life cycle stage emergence, rapid growth, maturity, and decline. Growth does not guarantee profitability.
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Considerations:
QUESTION 2: WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY?
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Step 1
Step 2
Step 3
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3.2
Competitive Weapons
Price discounting, clearance sales, blowout sales Couponing, advertising items on sale Advertising product or service characteristics, using ads to enhance a companys image or reputation Innovating to improve product performance and quality Introducing new or improved features, increasing the number of styles or models to provide greater product selection Increasing customization of product or service Building a bigger, better dealer network Improving warranties, offering lowinterest financing
Competitive Pressures That Act to Increase the Rivalry among Competing Sellers
Buyer demand is growing slowly or declining.
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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 markets 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
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Building a network of distributors or dealers and securing adequate space on retailers shelves
Restrictive government policies
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 316
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Ready availability of substitutes Pricing, quality, performance, and other relevant attributes of substitutes Switching costs that buyers incur
Increasing rate of growth in sales of substitutes Substitute producers adding output capacity Increasing profitability of substitute producers
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3.6
Factors Affecting Competition from Substitute Products
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 319
Ready availability of supplier products Criticality of supplier products as industry inputs Number of suppliers of standard\commodity 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
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3.7
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Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity Buyer Bargaining Power Considerations:
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
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 322
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Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?
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QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE?
3.3
1. 2. 3. 4. 5. 6. 7. 8.
9. 10. 11. 12.
Changes in the long-term industry growth rate Increasing globalization Changes in who buys the product and how they use it Technological change Emerging new Internet capabilities and applications Product and marketing innovation Entry or exit of major firms Diffusion of technical know-how across companies and countries Improvements in efficiency in adjacent markets Reductions in uncertainty and business risk Regulatory influences and government policy changes Changing societal concerns, attitudes, and lifestyles
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1. Overall, are the factors driving change causing demand for the industrys product to increase or decrease?
2. Is the collective impact of the drivers of change making competition more or less intense? 3. Will the combined impacts of the change drivers lead to higher or lower industry profitability?
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Developing a Strategy That Takes the Changes in Industry Conditions into Account
What strategy adjustments will be needed to deal with the impacts of the changes in industry conditions?
What adjustments must be made immediately? What actions must we not take or should we cease to do now? What can we do now to prepare for adjustments we anticipate making in the future?
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QUESTION 4: HOW ARE INDUSTRY RIVALS POSITIONEDWHO 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
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Using Strategic Group Maps to Assess the Market Positions of Key Competitors
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 groups share of total industry sales revenues.
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Typical Variables for Differentiating the Market Positions of Key Competitors on Group Maps
Price/quality range (high, medium, low)
Geographic coverage (local, regional, national, global) Product-line breadth (wide, narrow)
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Must not be highly correlated. Must reflect key approaches to customer value and expose sizable differences in the marketplace positions of rivals. May be quantitative, continuous, discrete and\or defined in terms of distinct classes and combinations.
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Follow-up
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?
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QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT? Competitive Intelligence
Information about rivals that is useful in anticipating their next 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
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QUESTION 6: WHAT ARE THE KEY FACTORS FOR FUTURE COMPETITIVE SUCCESS?
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.
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QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS? Industry Profitability Considerations:
The industrys overall growth potential Effects of strong competitive forces Effects of prevailing drivers of change in the industry Competitive strength of the firm: its market position relative to its rivals, its capability to withstand competitive forces, and whether its position will change in the course of competitive interactions The success of the firms strategy in delivering on the industrys key success factors
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