Chapter 3: Evaluating A Company's External Environment
Chapter 3: Evaluating A Company's External Environment
Chapter 3: Evaluating A Company's External Environment
Company’s External
Environment
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Learning Objectives
1. To gain command of the basic concepts and
analytical tools widely used to diagnose a
company’s industry and competitive conditions.
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Figure 3.2: The Components of a Company’s Macro-environment
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Thinking Strategically About a
Company’s Macro-environment
A company’s macro-environment includes all relevant
factors and influences outside its boundaries
Diagnosing a company’s external situation involves
assessing strategically important factors that have a
bearing on the decisions a company’s makes about
its
Direction
Objectives
Strategy
Business model
Requires that company managers scan
the external environment to
Identify potentially important external developments
Assess their impact and influence
Adapt a company’s direction and strategy as needed
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Key Questions Regarding the
Industry and Competitive Environment
What forces
How strong are
are driving
competitive
change in the
forces?
industry?
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Learning/Experience Effects
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Figure 3.3: The Five Forces Model of Competition
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Analyzing the Five Competitive
Forces: How to Do It
Step 1: Identify the specific competitive
pressures associated with each of
the five forces
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Competitive Pressures
Associated With Potential Entry
Seriousness of threat depends on
Barriers to entry
Reaction of existing firms
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Common Barriers to Entry
Sizable economies of scale
Cost and resource disadvantages independent of
size
Brand preferences and customer loyalty
Capital requirements and/or other
specialized resource requirements
Access to distribution channels
Regulatory policies
Tariffs and international trade restrictions
Ability of industry incumbents to launch vigorous
initiatives to block a newcomer’s entry
3-19
Competitive Pressures from Substitute
Products
Concept
Substitutes matter when customers
are attracted to the products of
firms in other industries
Examples
Sugar vs. artificial sweeteners
Eyeglasses and contact lens
vs. laser surgery
Newspapers vs. TV vs. Internet
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How to Tell Whether Substitute
Products Are a Strong Force
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Figure 3.6: Factors Affecting Competition From Substitute Products
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Competitive Pressures From Suppliers
and Supplier-Seller Collaboration
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Figure 3.7: Factors Affecting Bargaining Power of Suppliers
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Competitive Pressures: Collaboration
Between Sellers and Suppliers
Industry members often forge strategic
partnerships with select suppliers
to
Reduce inventory and logistics costs
Speed availability of
next-generation components
Enhance quality of parts being supplied
Squeeze out cost savings for both parties
Competitive advantage potential may accrue
to those industry members (sellers) doing the
best job of managing supply-chain relationships
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Competitive Pressures From Buyers
and Seller-Buyer Collaboration
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Competitive Pressures: Collaboration
Between Sellers and Buyers
Partnerships between industry members
and some/many of their customers can
impact competitive pressures
Collaboration may result in
mutual benefits regarding
Just-in-time deliveries
Order processing
Electronic invoice payments
Data sharing
Competitive advantage may accrue to
those industry members doing the best job
of partnering with their customers
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Strategic Implications of
the Five Competitive Forces
Competitive environment is
unattractive from the standpoint
of earning good profits when
Rivalry is vigorous
Competition from
substitutes is strong
Rivalry is moderate
Good substitutes
do not exist
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Question 4: What Market
Positions Do Rivals Occupy?
One technique to reveal different
competitive positions of industry rivals is
strategic group mapping
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Strategic Group Mapping
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Guidelines: Strategic Group Maps
Variables selected as axes should not be highly
correlated
Variables chosen as axes should expose big
differences in how rivals compete
Variables do not have to be either quantitative
or continuous
Drawing sizes of circles proportional to
combined sales of firms in each strategic group
allows map to reflect relative sizes of each
strategic group
If more than two good competitive variables can
be used, several maps can be drawn
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Interpreting Strategic Group Maps
The closer strategic groups are
on the map, the stronger the cross-group
competitive rivalry tends to be
Not all positions on the map
are equally attractive
Driving forces and competitive pressures often
favor some strategic groups and hurt others
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Question 7: Does the Outlook for the
Industry Offer an Attractive Opportunity?
Involves assessing whether the industry and
competitive environment presents a company with an
attractive or unattractive opportunity
for earning good profits
Factors to consider:
Industry growth potential
Whether competitive forces are growing stronger/weaker
Whether driving forces will favorable/unfavorably impact
industry profitability
Degree of risk and uncertainty in industry’s future
Whether the industry confronts severe problems
Firm’s competitive position in industry vis-à-vis rivals
Firm’s potential to capitalize on industry opportunities or
the vulnerabilities of weaker rivals
Whether a firm has sufficient competitive strength to
defend against unattractive industry factors
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Factors to Consider in
Assessing Industry Attractiveness
As a general proposition
If an industry’s overall profit prospects are above
average, the industry environment is basically
attractive
If an industry’s overall profit prospects are below
average, the industry environment is basically
unattractive
However
Attractiveness is relative, not absolute
Conclusions about attractiveness have
to be drawn from the perspective of a
particular company
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Factors to Consider in
Assessing Industry Attractiveness
An industry is unlikely to be equally
attractive or unattractive to all industry
members
Industry environments attractive to strong competitors
may be unattractive to weak competitors
A favorably positioned company may survey an
industry environment and see opportunities that
weak competitors have little or no ability to capture
Industry environments attractive to insiders may be
unattractive to potential entrants
Under certain circumstances, a firm uniquely well-
situated in an otherwise unattractive industry can
still earn good profits by taking sales and market
share away from weaker competitors
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Core Concept: Assessing
Industry Attractiveness