Evaluating a Company’s External Environment

1. Evaluating a Company’s External Environment

2. Understanding the Factors that Determine a Company’s Situation • Diagnosing a company’s situation has two facets • Assessing the company’s external or macro-environment • Industry and competitive conditions • Forces acting to reshape this environment • Assessing the company’s internal ormicro-environment • Market position and competitiveness • Competencies, capabilities,resource strengths andweaknesses, and competitiveness

3. Thinking Strategically About aCompany’s Macro-environment 3-3

4. Scanning the Macro Environment: Environmental Analysis • Identifying external environmental variablesthat influence long-term decisions

5. Understanding Industry’sDominant Economic Features • Market size and growth rate • Number of rivals • Scope of competitive rivalry • Buyer needs and requirements • Degree of product differentiation • Product innovation • Supply/demand conditions • Pace of technological change • Economies of scale • Learning and experience curve effects

6. Industry Analysis • Objectives are to identify • Main sources of competitive forces • Strength of these forces • Key analytical tool • Five Forces Model of Competition

7. The Five Forces Model of Competition 3-7

8. Porter’s Five Forces: How to Do It Step 1:Identify the specific competitivepressures associated with each ofthe five forces Step 2:Evaluatethe strength of eachcompetitive force – fierce, strong,moderate to normal, or weak? Step 3:Determinewhether the collectivestrength of the five competitive forcesis conducive to earning attractive profits

9. Threat of New Entrants Threat of New Entrants decreases if barriers to entry are high • economies of scale are high • capital requirements are high • incumbency advantages independent of size are high • customer loyalty is high • access to distribution channels is limited • government policy is restrictive Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Customers Rivalry Among Competitors Threat of Substitution

10. Bargaining Power of Suppliers • Suppliers are likely to bepowerful if: • Supplier industry dominated by • a few firms • Suppliers’ products have • few substitutes • Suppliers’ product is an • important input • Suppliers’ products have high • switching costs • Suppliers present a creiblethreattointegrate • forward Threat of New Entrants Rivalry Among Competitors Bargaining Power of Suppliers Bargaining Power of Customers Threat of Substitution

11. Bargaining Power of Buyers • Buyers are likely to be powerful if: • They are concentrated or purchases are • large relative to seller’s sales • Purchase accounts for a • significant fraction of supplier’s • sales • Products are • undifferentiated • Buyers face few switching • costs • Buyer presents a credible threat • to backward integration • Buyer is price sensitive Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competitors Bargaining Power of Customers Threat of Substitution

12. Threat of Substitution Threat of Subsitutes is strongerwhen… • There are many good substitutes readily available • Substitutes are attractively priced • The higher the quality and performance of substitutes • The lower the end user’s switching costs • End users grow more comfortable with using substitutes Threat of New Entrants Rivalry Among Competitors Bargaining Power of Suppliers Bargaining Power of Customers Threat of Substitution

13. Rivalry • Rivalry in an industry is strongerwhen… • Competitors are active in making fresh moves to • improve market standing and • business performance • Slow market growth • Number of rivals • increases and rivals are • ofequal size and competitive • capability • Buyer costs to switch brands are • low • Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume Threat of New Entrants Rivalry Among Competitors Bargaining Power of Customers Bargaining Power of Suppliers Threat of Substitution

14. Strategic Implications ofthe Five Competitive Forces Competitive environment isunattractive from the standpointof earning good profits when • Rivalry is vigorous • Entry barriers are lowand entry is likely • Competition from substitutes is strong • Suppliers and customers haveconsiderable bargaining power Competitive environmentis ideal froma profit-making standpoint when • Rivalry is moderate • Entry barriers are highand no firm is likely to enter • Good substitutesdo not exist • Suppliers and customers arein a weak bargaining position

15. Competitor Analysis • A firm’s best strategic movesare affected by • Current strategies of competitors • Future actions of competitors • Profiling key rivals involves gatheringcompetitive intelligence about • Current strategies • Most recent actions and public announcements • Resource strengths and weaknesses • Efforts being made to improve their situation • Thinking and leadership styles of top executives

16. Competitor Analysis • Understanding what market positions do rivals occupy • One technique to reveal differentcompetitive positions of industry rivals isstrategic group mapping • A strategic group is a cluster of firms in an industry with similar competitiveapproaches and market positions

17. Example: Strategic Group Map of Selected Automobile Manufacturers 3-17

18. KeyFactors for Competitive Success • Key Success Factors (KSFs) are competitive factors and attributes that affect every industry member’s ability to be competitively and financially successful • KSFs are those particular attributes that are so important that they spell the differencebetween • Profit and loss • Competitive success or failure • KSFs can relate to • Specific strategy elements • Product attributes • Resources • Competencies • Competitive capabilities • Market achievements

19. Common Types of Industry Key Success Factors 3-19

20. Example: KSFs for Bottled Water Industry • Access to distribution– to get a company’s brand stocked andfavorably displayed in retail outlets • Image – to induce consumers tobuy a particular company’s product(brand name and attractiveness of packaging are key deciding factors) • Low-cost production capabilities – to keep selling prices competitive • Sufficient sales volume – to achievescale economies in marketing expenditures

21. Example: KSFs forReady-to-Wear Apparel Industry • Appealing designs and color combinations – to create buyer appeal • Low-cost manufacturing efficiency – to keep selling prices competitive • Strong network of retailers/company-owned stores – to allow storesto keep best-selling items in stock • Clever advertising – to effectivelyconvey a specific image to induce consumers to purchase a particular label

22. The degreeto which an industryis attractive or unattractive is not the same for all industry participantsor potential entrants. The opportunities an industrypresents depend partly on acompany’s ability to capture them. 3-22