1. EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT
CHAPTER 3
EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT

2. Become aware of factors in a company’s broad macro-environment that may have strategic significance.
Gain command of the basic concepts and analytical tools widely used to diagnose the competitive conditions in a company’s industry.
Become adept at mapping the market positions of key groups of industry rivals.
Learn how to use multiple frameworks to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability.

3. 3.1
From Thinking Strategically about the Company’s Situation to Choosing a Strategy
Chapter 3
Thinking
strategically
about a firm’s
external
environment
internal
Forming a
strategic
vision of
where the
firm needs to head
Identifying
promising
options
for the firm
Selecting the
best strategy
and business
model for the firm
Quiz – p 19
Chapter 4

4. The External Environment
The Macro-Environment
Is the broad environmental context in which a firm’s industry is situated.
Includes strategically relevant components over which the firm has no direct control.
General economic conditions
Immediate industry and competitive environment
Quiz – p 20 – 22

5. QUESTION 1: WHAT ARE THE STRATEGICALLY RELEVANT FACTORS IN THE MACRO-ENVIRONMENT?
PESTEL Analysis
Focuses on principal components of strategic significance in the macro-environment:
Political factors
Economic conditions (local to worldwide)
Sociocultural forces
Technological factors
Environmental factors (the natural environment)
Legal/regulatory conditions
p. 22
3–5

6. 3.2
The Components of a Company’s Macro-Environment
Quiz – p 22 – 25

9. Quiz – p 22 3.1 The Components of the Macro-Environment Component
Description
Demographics
The size, growth rate, and age distribution of different sectors of the population. It includes the geographic distribution of the population, the distribution of income across the population, and trends in these factors.
Social forces
Societal values, attitudes, cultural factors, and lifestyles that impact businesses. Social forces vary by locale and change over time.
Political, legal, and regulatory factors
Political policies and processes, as well as the regulations and laws with which companies must comply—labor laws, antitrust laws, tax policy, regulatory policies, the political climate, and the strength of institutions such as the court system.
Natural environment
Ecological and environmental forces such as weather, climate, climate change, and associated factors like water shortages.
Technological
factors
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,
Global forces
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.
General economic
conditions
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.

10. QUESTION 2: HOW STRONG ARE THE INDUSTRY’S COMPETITIVE FORCES?
The Five Competitive Forces:
Competition from rival sellers
Competition from potential new entrants
Competition from substitute products producers
Supplier bargaining power
Customer bargaining power
Quiz – p 23 – 38

11. 3.3
The Five-Forces Model of Competition: A Key Analytical Tool
Quiz – p 24

12. Quiz – p 27 3.2 Common “Weapons” for Competing with Rivals
Competitive Weapons
Primary Effects
Price discounting, clearance sales, “blowout” sales
Lowers price (P), acts to boost total sales volume and market share, lowers profit margins per unit sold when price cuts are big and/or increases in sales volume are relatively small
Couponing, advertising items on sale
Acts to increase unit sales volume and total revenues, lowers price (P), increases unit costs (C), may lower profit margins per unit sold (P – C)
Advertising product or service
characteristics, using ads to enhance a company’s image or reputation
Boosts buyer demand, increases product differentiation and perceived value (V), acts to increase total sales volume and market share, may increase unit costs (C) and/or lower profit margins per unit sold
Innovating to improve product
performance and quality
Acts to increase product differentiation and value (V), boosts buyer demand, acts to boost total sales volume, likely to increase unit costs (C)
Introducing new or improved features, increasing the number of styles or models to provide greater product selection
Acts to increase product differentiation and value (V), strengthens buyer demand, acts to boost total sales volume and market share, likely to increase unit costs (C)
Increasing customization of product or service
Acts to increase product differentiation and value (V), increases switching costs, acts to boost total sales volume, often increases unit costs (C)
Building a bigger, better dealer network
Broadens access to buyers, acts to boost total sales volume and market share, may increase unit costs (C)
Improving warranties, offering low-interest financing
Acts to increase product differentiation and value (V), increases unit costs (C), increases buyer costs to switch brands, acts to boost total sales volume and market share
Quiz – p 27

13. Competitive Pressures That Act to Increase the Rivalry among Competing Sellers
Buyer demand is growing slowly or declining.
Switching Costs - It is becoming less costly for buyers to switch brands.
Industry products are becoming more alike.
There is unused production capacity, and\or products have high fixed costs or high storage costs.
The number of competitors is increasing and\or they are becoming more equal in size and competitive strength.
The diversity of competitors is increasing.
High exit barriers stop firms from exiting the industry.
Quiz – p 25 – 27

14. 3.4
Factors Affecting the Strength of Rivalry
Quiz – p 25

15. Wall Street Journal, July 25, 2012, 6:41 p. m
Wall Street Journal, July 25, 2012, 6:41 p.m. ET “Apple-Amazon War Heats Up” -

16. Competitive Pressures Associated with the Threat of New Entrants
Entry Threat Considerations: e.g. Fiat in U.S. New Google Motorola Phone
Strength of barriers to entry
Expected reaction of incumbent firms
Attractiveness of a particular market’s 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
Quiz – p 28 – 30

17. Market Entry Barriers Facing New Entrants
Economies of scale in production, distribution, advertising, or other areas of operation
Experience and learning curve effects
Unique cost advantages of industry incumbents
Strong brand preferences and customer loyalty
Strong “network effects” in customer demand
High capital requirements
Building a network of distributors or dealers and securing adequate space on retailers’ shelves
Restrictive government policies
Barnes and Noble Nook
Quiz – p

18. Quiz – p 30
3.5
Factors Affecting the Threat of Entry

19. Substitutes vs. Alternatives
Substitute Products or Services – Same utility Different Technology:
Aspertame (Equal) for Sugar. Contact lenses for Glasses. Aluminum vs. plastic containers
NOT directly competing products – NOT Big Mac vs. Whopper
Buying fast foods instead of cooking at home
Alternative Products or Services – Provides similar outcome – but different concept:
Going to beach instead of to Disneyland
No hat vs. wearing hat
Instructor Material

20. Competitive Pressures from the Sellers of Substitute Products
Quiz p 31
Substitute Products Considerations:
Readily available and attractively priced?
Comparable or better in terms of quality, performance, and other relevant attributes?
Offer lower switching costs to buyers?
Indicators of Substitutes’ Competitive Strength:
Increasing rate of growth in sales of substitutes
Substitute producers adding new output capacity
Increasing profitability of substitute producers
Quiz – p 31

21. Quiz – p 31
3.6
Factors Affecting Competition from Substitute Products

22. Competitive Pressures Stemming from Supplier Bargaining Power
Quiz – p
Supplier Bargaining Power Depends On:
Strength of demand for and availability of suppliers’ products.
Whether suppliers provide a differentiated input that enhances the performance of the industry’s product.
Industry members’ costs for switching among suppliers
Size of suppliers relative to size of industry members
Fraction of the cost of the supplier’s product relative to the total cost of the industry’s product
Number of suppliers relative to the number of industry members
Possibility of backward integration into suppliers’ industry
Availability of good substitutes for suppliers’ products
Whether industry members are major customers of suppliers.

23. 3.7
Factors Affecting the Bargaining Power of Suppliers
Quiz – p 33

24. Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity
Buyer Bargaining Power Considerations: First decide “who is buyer and who is seller?”
Buyer costs for switching to competing sellers
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
Try NOT to put yourself into this analysis – YOU are NOT a buyer here!!! Ever!!!
Quiz – p 35 – 37

25. 3.8
Factors Affecting the Bargaining Power of Buyers
Quiz – p 35 – 37

26. Is the state of competition in the industry stronger than “normal”?
Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? Should we Compete??
Is the state of competition in the industry stronger than “normal”?
Can industry firms expect to earn decent profits given prevailing competitive forces?
Are some of the competitive forces sufficiently powerful to undermine industry profitability?
Kohl’s in retailing – Revival of JCPenny
Quiz – p 37

27. Matching Strategy to Competitive Conditions
Pursuing avenues that shield the firm from as many competitive pressures as possible.
Initiating actions calculated to shift competitive forces in the firm’s favor by altering underlying factors driving the five forces.
Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.
Quiz – p 38

28. Strategic Analysis of Industry Dynamics:
QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE?
Strategic Analysis of Industry Dynamics:
Identifying the external drivers of change.
Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive.
Determining what strategy changes are needed to prepare for the impacts of the anticipated change.
Quiz – p 38 – 42
****several questions

29. Changes in the long-term industry growth rate
3.3
The Most Common Principal Industry Drivers of Change
Changes in the long-term industry growth rate
Increasing globalization (outsourcing call centers)
Changes in who buys the product and how they use it
Technological change (Device obsolescence)
Emerging new Internet capabilities and applications
Product and marketing innovation
Entry or exit of major firms (Kodak)
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 (ObamaCare)
Changing societal concerns, attitudes, and lifestyles (Green)
Quiz – p 41
****several
questions

30. Assessing the Impact of the Factors Driving Industry Change
Overall, are the factors driving change causing demand for the industry’s product to increase or decrease?
Is the collective impact of the drivers of change making competition more or less intense?
Will the combined impacts of the change drivers lead to higher or lower industry profitability?
Quiz – p 42
****several questions

31. 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? (Make people think we are “green”)
What can we do now to prepare for adjustments we anticipate making in the future?
Quiz – p 42
****several questions

32. A Strategic Group e.g. group retailers
QUESTION 4: HOW ARE INDUSTRY RIVALS POSITIONED—WHO IS STRONGLY POSITIONED AND WHO IS NOT? Page 42
A Strategic Group e.g. group retailers
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 customers
Depend on identical technological approaches
Offer similar services and technical assistance
Quiz – p 50 – 54

33. A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.
Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.
3–33

34. ILLUSTRATION CAPSULE 3.1
Comparative Market Positions of Producers in the U.S. Beer Industry: A Strategic Group Map Example
p - 44
Footnote: Circles are drawn roughly proportional to the sizes of the firms, based on revenues.
3–34

35. ILLUSTRATION CAPSULE 3.1
Comparative Market Positions of Producers in the U.S. Beer Industry: A Strategic Group Map Example
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?
3–35

36. Constructing a strategic group map:
Using Strategic Group Maps to Assess the Market Positions of Key Competitors
Constructing a strategic group map:
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 group’s share of total industry sales revenues.
Quiz – p 50 – 56

37. 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)
Degree of service offered (no frills, limited, full)
Distribution channels (retail, wholesale, Internet, multiple)
Degree of vertical integration (none, partial, full)
Degree of diversification into other industries (none, some, considerable).
Quiz – p 50 – 56

38. Choosing Variables for Group Maps
Variables selected as map axes:
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.
Quiz – p 50 – 56

39. Guidelines for Constructing Group Maps
Draw map circles proportional to the combined sales of firms in each strategic group to reflect the relative sizes of each group to the total size of the industry.
Use different variable sets to show different views of relationships among competitive positions in the industry’s structure—there is no one best map for portraying how competing firms are positioned.
Quiz – p 50 – 56

40. What Can Be Learned from Strategic Group Maps?
Maps are useful in identifying which industry members are close rivals and which are distant rivals.
Not all map positions are equally attractive.
Prevailing competitive pressures in the industry and drivers of change favor some strategic groups and hurt others.
Profit prospects vary from strategic group to strategic group.
Quiz – p 50 – 57

41. QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT?
Competitive Intelligence – GLO-BUS Game
Information about rivals that is useful in anticipating their next strategic moves.
Signals of the Likelihood of 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
Quiz – p 50 – 57

42. QUESTION 6: WHAT ARE THE KEY FACTORS FOR FUTURE COMPETITIVE SUCCESS?
Key Success Factors
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.
Quiz – p 50 – 57

43. Identification of Key Success Factors
What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers?
What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace?
What shortcomings will put a firm at a significant competitive disadvantage?
Quiz – p 50 – 57

44. Industry Profitability Considerations:
QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS?
Industry Profitability Considerations:
The industry’s 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 firm’s strategy in delivering on the industry’s key success factors
Quiz – p 56 – 57