McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 2 Analyzing a Company’s External Environment Screen graphics created by: Jana F. Kuzmicki, PhD Troy State University-Florida and Western Region

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 2 Chapter Outline  The Strategically Relevant Components of a Company’s External Environment  Thinking Strategically About a Company’s Industry and Competitive Environment  Identifying Strategically Relevant Industry Features  Analyzing the Nature and Strength of Competitive Forces  The Drivers of Change: What Impacts Will They Have?  Diagnosing the Market Positions of Industry Rivals  Predicting the Next Strategic Moves Rivals Are Likely to Make  Pinpointing the Key Factors for Future Competitive Success  Deciding Whether the Industry Presents an Attractive Opportunity

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 3 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

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 4 Fig. 2.1: From Thinking Strategically to Choosing a Strategy

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 5 Fig. 2.2: The Components of a Company’s Macro-Environment

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 6 Key Questions: Analyzing the Industry and Competitive Environment 1. What are the industry’s strategy-shaping economic features? 2. What kinds of competitive forces are industry members facing, and how strong is each force? 3. What forces are driving changes in the industry, and what impact will these changes have? 4. What market positions do industry rivals occupy? 5. What strategic moves are rivals likely to make next? 6. What are the key factors for future success? 7. Does the outlook for the industry present the company with sufficiently attractive prospects for profitability?

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 7 Question 1: What Are the Industry’s Dominant Economic Traits?  Market size and growth rate  Position in life cycle  Number of rivals  Buyer needs and requirements  Production capacity  Pace of technological change  Prevalence of vertical integration  Product innovation  Degree of product differentiation  Scope of competitive rivalry  Economies of scale  Experience and learning-curve effects  Industry profitability

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 8 Question 2: What Is Competition Like and How Strong Are the Competitive Forces?  Objectives are to identify  Main sources of competitive forces  Strength of these forces  Key analytical tool  Five Forces Model of Competition

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 9 Fig. 2.3: The Five Forces Model of Competition

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 10 Fig. 2.4: Weapons for Competing and Factors Affecting Strength of Rivalry

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 11 Fig. 2.5: Factors Affecting the Threat of Entry

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 12 Fig. 2.6: Factors Affecting Competition From Substitute Products

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 13 Fig. 2.7: Factors Affecting the Bargaining Power of Suppliers

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 14 Fig. 2.8: Factors Affecting the Bargaining Power of Buyers

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 15 Question 3: What Impact Will the Drivers of Change Have on Industry Conditions?  Industries change because forces are driving industry participants to alter their actions  Driving forces are the major underlying causes of changing industry and competitive conditions

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 16 Analyzing Driving Forces Analyzing Driving Forces 1. Identify those forces likely to exert greatest influence over next years  Usually no more than factors qualify as real drivers of change 2. Assess impact  Are forces causing demand for product to increase or decrease?  Are forces acting to make competition more or less intense?  Will forces lead to higher or lower industry profitability?

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 17 Question 4: What Are the Market Positions of Industry Rivals?  One technique for revealing the different competitive positions of industry rivals is strategic group mapping  A strategic group consists of those rivals with similar competitive approaches in an industry

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 18 Example: Strategic Group Map of Selected Retail Chains

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 19 Question 5: What Strategic Moves Are Rivals Likely to Make?  A firm’s best strategic moves are affected by  Current strategies of competitors  Future actions of competitors  Profiling key rivals involves gathering competitive 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

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 20 Question 6: What Are the Key Factors for Competitive Success?  Competitive factors most affecting every industry member’s ability to prosper  Specific strategy elements  Product attributes  Resources  Competencies  Competitive capabilities  KSFs spell the difference between  Profit and loss  Competitive success or failure

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 21 Question 7: Does the Industry Present an Attractive Opportunity? Develop conclusions about whether the industry and competitive environment is attractive or unattractive for earning good profits Objective Principle A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 22 Factors to Consider in Assessing Industry Attractiveness  Industry’s market size and growth potential  Whether competitive forces are conducive to rising/falling industry profitability  Whether industry profitability will be favorably or unfavorably impacted by driving forces  Degree of risk and uncertainty in industry’s future  Severity of problems facing industry  Firm’s competitive position in industry vis-à-vis rivals  Firm’s potential to capitalize on vulnerabilities of weaker rivals  Whether firm has sufficient resources to defend against unattractive industry factors