EVALUATING A COMPANY’S

EXTERNAL ENVIRONMENT

1
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Figure 1-1: The Five Tasks
of Strategic Management
Task 1 Task 2 Task 3 Task 4 Task 5

Develop a Monitor,
Craft a Implement
Strategic Evaluate,
Set Strategy and
Vision and Take
Objectives to Achieve Execute
and Corrective
Objectives Strategy
Mission Action

Revise as Revise as Improve/ Improve/ Recycle

Needed Needed Change Change as Needed

2
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter #3 Outline
 Role of Situation Analysis in Strategy-Making
 Methods of Industry and Competitive Analysis
 Industry’s Dominant Economic Traits
 Industry’s Competitive Forces
 Drivers of Industry Change
 Competitive Positions of Rivals
 Competitive Moves of Rivals
 Key Success Factors
 Conclusions: Overall Industry Attractiveness
 Conducting an Industry and Competitive Analysis
3
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 What Is Situation Analysis?
 Two considerations
Company’s external or
macro-environment
 Industry and competitive
conditions
Company’s internal or
micro-environment
 Competencies,
capabilities, resource
strengths and weaknesses,
and competitiveness
4
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Figure 3.1: The Components of a
Company’s Macro-Environment
MACROENVIRONMENT
The Economy
at Large
Le
gi
gy Re sla
o lo gu tio
hn la n a
c Suppliers Substitutes tio n
Te n d

COMPANY
Rival Buyer
Firms s

So New
c Entrants
an ietal tion s
dL V
ife alue  p ula phic
sty s IMMEDIATE INDUSTRY Po ogra
les m
AND COMPETITIVE
ENVIRONMENT
De

5
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Figure 3.2: Strategic Thinking and Analysis
Leads to Good Strategic Choices
Assess Industry & Competitive Conditions

1. Industry’s dominant economic traits

2. Nature of competition & strength of
competitive forces
3. Drivers of industry change
4. Competitive position of rivals
5. Strategic moves of rivals
6. Key success factors Identify Select
7. Conclusions about industry attractiveness Strategic the Best
Options Strategy
Assess Company Situation
for the for the
Company Company
1. Assessment of company’s present strategy
2. Resource strengths and weaknesses,
market opportunities, and external threats
3. Company’s costs compared to rivals
4. Strength of company’s competitive position
5. Strategic issues that need to be addressed
6
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Key Considerations Regarding the
Industry and Competitive Environment

1.Industry’s
dominant
economic
traits

2. Competitive
3. Drivers of
forces and
change in the
strength of
industry
each force

6. Conclusions:
4. Competitor 5. Key success Industry
analysis factors attractiveness

7
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Table 3.2: Relevance of
Key Economic Features
Economic Strategic Importance
Feature
Market Size Small markets don’t tend to attract new firms; large markets attract firms
looking to acquire rivals with established positions in attractive industries
Market growth rate Fast growth breeds new entry; slow growth spawns increased rivalry & shake-
out of weak rivals
Capacity Surpluses push prices & profit margins down; shortages pull them up
surpluses/shortages
Industry profitability High-profit industries attract new entrants; depressed conditions lead to exit

Entry/exit barriers High barriers protect positions and profits of existing firms; low barriers make
existing firms vulnerable to entry
Product is big-ticket More buyers will shop for lowest price
item for buyers
Standard products Buyers have more power because it’s easier to switch from seller to seller
Rapid technological Raises risk; investments in technology facilities/equipment may become
change obsolete before they wear out
Capital requirements Big requirements make investment decisions critical; timing becomes
important; creates a barrier to entry and exit
Vertical integration Raises capital requirements; often creates competitive & cost differences
among fully vs. partially vs. non-integrated firms
Economies of scale Increases volume & market share needed to be cost competitive
Rapid product Shortens product life cycle; increases risk because of opportunities for
innovation leapfrogging
8
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Figure 3-4: Five Forces
Model of Competition

Substitute Products
(of firms in
other industries)

Rivalry
Suppliers
Among
of Key Buyers
Competing
Inputs
Sellers

Potential
New
Entrants
9
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Rivalry Among Competing Seller

Competitive jockeying among rival

firms is dynamic and ever-changing
 As industry members initiate new
offensive and defensive moves
 As emphasis swings from one
mix of competitive weapons to
another
10
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Rivalry Among Competing Seller

Threat of entry is stronger when:

 Entry barriers are low
 Sizable pool of entry candidates
exists
 Incumbents are unwilling or unable to
contest a newcomer’s entry efforts
 Newcomers can expect to earn
attractive profits
11
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Substitute Products

Competitive threat of substitutes is

stronger when they are:
Readily available
Attractively priced
Believed to have comparable or
better performance features
Customer switching costs are low
12
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Suppliers of Key Inputs

Suppliers are a stronger force the

more they can exercise power over:
 Prices charged
 Quality and
performance
of items supplied
 Reliability of deliveries
13
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases Buyers compete

are large relative to seller’s sales with the supplying
industry by:
Products are undifferentiated
Buyers face few switching costs * Bargaining down prices
* Forcing higher quality
Buyers’ industry earns low profits
* Playing firms off of
Product unimportant to quality each other

Buyer has full information

14
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Environmental Scanning

Definition
Monitoring and interpreting sweep of social,
political, economic, ecological, and technological
events to spot budding trends that could
eventually impact industry

Purpose
Raise consciousness of managers about potential
developments that could
 Have important impact on industry conditions
 Pose new opportunities and threats
15
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Strategic Group Mapping
 Firms in same strategic group have two or
more competitive characteristics in common
 Sell in same price/quality range
 Cover same geographic areas
 Be vertically integrated to same degree
 Have comparable product line breadth
 Emphasize same types of distribution
channels
 Offer buyers similar services
 Use identical technological approaches

16
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Table 3.3: Categorizing Objectives
and Strategies of Competitors
Competitive Strategic Market Share Competitive Strategic Competitive
Scope Intent Objective Position Posture Strategy
• Aggressive • Getting • Striving for
• Be dominant • Mostly
• Local expansion stronger; on low-cost
leader offensive
via the move leadership
• Overtake acquisition &
internal • Well- • Mostly • Focusing on
• Regional industry
growth entrenched defensive market niche
leader
• Be among • Expansion • Stuck in the • Combination • Pursuing
• National industry via internal middle of the of offensive differentiation
leaders growth pack & defensive based on
Quality
• Expansion • Going after a
• Move into • Aggressive Service
• Multicountry via different
top 10 risk-taker Technology
acquisition position
superiority
• Move up a • Hold on to • Struggling; Breadth of
• Conservative
• Global notch in present losing product line
follower
rankings share ground Image &

• Maintain • Give up reputation

More value
current present • Retrenching
position share to for the
to a position
achieve money
that can be Other
• Just survive short-term defended
profits attributes

17
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Identifying Industry
Key Success Factors
 Answers to three questions pinpoint KSFs
 On what basis do customers choose between
competing brands of sellers?
 What resources and competitive capabilities
does a seller need to have to be competitively
successful?
 What does it take for sellers to achieve a
sustainable competitive advantage?
 KSFs consist of the 3 - 5 really major
determinants of financial and
competitive success in an industry

18
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Table 3.3: Common Types of
Key Success Factors
Scientific research expertise; Product innovation capability; Expertise
Technology-
in a given technology; Capability to use Internet to conduct various
related business activities
Low-cost production efficiency; Quality of manufacture; High use of
Manufacturing- fixed assets; Low-cost plant locations; High labor productivity; Low-
related cost product design; Flexibility to make a range of products
Strong network of wholesale distributors/dealers; Gaining ample
Distribution-
space on retailer shelves; Having company-owned retail outlets; Low
related distribution costs; Fast delivery
Fast, accurate technical assistance; Courteous customer service;
Marketing-
Accurate filling of orders; Breadth of product line; Merchandising
related skills; Attractive styling; Customer guarantees; Clever advertising
Superior workforce talent; Quality control know-how; Design
Skills-related expertise; Expertise in a particular technology; Ability to develop
innovative products; Ability to get new products to market quickly
Superior information systems; Ability to respond quickly to shifting
Organizational market conditions; Superior ability to employ Internet to conduct
capability business; More experience & managerial know-how
Favorable image/reputation with buyers; Overall low-cost; Convenient
Other types locations; Pleasant, courteous employees; Access to financial capital;
Patent protection
19
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Strategic Management Principle

A sound strategy incorporates

efforts to be competent on all
industry key success factors and
to excel on at least one factor!

20
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Things to Consider in
Assessing Industry Attractiveness
 Industry’s market size and growth potential
 Whether competitive conditions are conducive to
rising/falling industry profitability
 Will competitive forces become stronger or
weaker
 Whether industry will be favorably or unfavorably
impacted by driving forces
 Potential for entry/exit of major firms
 Stability/dependability of demand
 Severity of problems facing industry
 Degree of risk and uncertainty in industry’s future

21
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.