Chapter 3: Evaluating a Company s External Environment

Transcription

1 Chapter 3: Evaluating a Company s External Environment Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights

2 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. 2. To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak. 3. To learn how to determine whether an industry s outlook presents a company with sufficiently attractive opportunities for growth and profitability. 4. To understand why in-depth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a company s situation. 3-2

3 Chapter Roadmap The Strategically Relevant Components of a Company s External Environment Thinking Strategically About a Company s Industry and Competitive Environment Question 1: What Are the Industry s Dominant Economic Features? Question 2: How Strong Are Competitive Forces? Question 3: What Forces Are Driving Industry Change and What Impacts Will They Have? Question 4: What Market Positions Do Rivals Occupy Who Is Strongly Positioned and Who Is Not? Question 5: What Strategic Moves Are Rivals Likely to Make Next? Question 6: What Are the Key Factors for Future Competitive Success? Question 7: Does the Outlook for the Industry Offer the Company a Good Opportunity to Earn Attractive Profits? 3-3

4 Understanding the Factors that Determine a Company s Situation Diagnosing a company s situation has two facets Assessing the company s external or macroenvironment Industry and competitive conditions Forces acting to reshape this environment Assessing the company s internal or micro-environment Market position and competitiveness Competencies, capabilities, resource strengths and weaknesses, and competitiveness 3-4

5 Figure 3.1: From Thinking Strategically About the Company s Situation to Choosing a Strategy 3-5

6 Figure 3.2: The Components of a Company s Macro-environment 3-6

7 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 3-7

8 Key Questions Regarding the Industry and Competitive Environment What are the industry s dominant economic traits? How strong are competitive forces? What forces are driving change in the industry? What market positions do rivals occupy? What moves will they make next? What are the key factors for competitive success? How attractive is the industry from a profit perspective? 3-8

9 Question 1: What are the Industry s Dominant Economic Traits? 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 Vertical integration Economies of scale Learning and experience curve effects 3-9

10 Table 3.1: What to Consider in Identifying an Industry s Dominant Economic Features 3-10

11 Learning/Experience Effects Learning/experience effects exist when a company s unit costs decline as its cumulative production volume increases because of Accumulating production know-how Growing mastery of the technology The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume 3-11

12 Question 2: How Strong Are Competitive Forces? Objectives are to identify Main sources of competitive forces Strength of these forces Key analytical tool Five Forces Model of Competition 3-12

13 Figure 3.3: The Five Forces Model of Competition 3-13

14 Analyzing the Five Competitive Forces: How to Do It Step 1: Identify the specific competitive pressures associated with each of the five forces Step 2: Evaluate the strength of each competitive force fierce, strong, moderate to normal, or weak? Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits 3-14

15 Competitive Pressures Among Rival Sellers Usually the strongest of the five forces Key factor in determining strength of rivalry How aggressively are rivals using various weapons of competition to improve their market positions and performance? Competitive rivalry is a combative contest involving Offensive actions Defensive countermoves 3-15

16 Figure 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry 3-16

17 Competitive Pressures Associated With Potential Entry Seriousness of threat depends on Size of pool of entry candidates and available resources Barriers to entry Reaction of existing firms Evaluating threat of entry involves assessing How formidable entry barriers are for each type of potential entrant and Attractiveness of growth and profit prospects 3-17

18 Figure 3.5: Factors Affecting Threat of Entry 3-18

19 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

20 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 3-20

21 How to Tell Whether Substitute Products Are a Strong Force Whether substitutes are readily available and attractively priced Whether buyers view substitutes as being comparable or better How much it costs end users to switch to substitutes 3-21

22 Figure 3.6: Factors Affecting Competition From Substitute Products 3-22

23 Competitive Pressures From Suppliers and Supplier-Seller Collaboration Whether supplier-seller relationships represent a weak or strong competitive force depends on Whether suppliers can exercise sufficient bargaining leverage to influence terms of supply in their favor Nature and extent of supplier-seller collaboration in the industry 3-23

24 Figure 3.7: Factors Affecting Bargaining Power of Suppliers 3-24

25 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 3-25

26 Competitive Pressures From Buyers and Seller-Buyer Collaboration Whether the relationships between industry members and buyers represent a weak or strong competitive force depends on Whether buyers have sufficient bargaining leverage to influence terms of sale in their favor Extent and competitive importance of strategic partnerships between certain industry members and the buyers 3-26

27 Figure 3.8: Factors Affecting Bargaining Power of Buyers 3-27

28 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 3-28

29 Strategic Implications of the Five Competitive Forces Competitive environment is unattractive from the standpoint of earning good profits when Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power 3-29

30 Strategic Implications of the Five Competitive Forces Competitive environment is ideal from a profit-making standpoint when Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist Suppliers and customers are in a weak bargaining position 3-30

31 Coping With the Five Competitive Forces Objective is to craft a strategy to Insulate firm from competitive pressures Initiate actions to produce sustainable competitive advantage Allow firm to be the industry s mover and shaker with the most powerful strategy that defines the business model for the industry 3-31

32 Question 3: What Forces Are Driving Industry Change and What Impacts Will They Have? 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 Where do driving forces originate? Outer ring of macroenvironment Inner ring of macroenvironment 3-32

33 Analyzing Driving Forces: Three Key Steps STEP 1: Identify forces likely to exert greatest influence over next 1-3 years Usually no more than 3-4 factors qualify as real drivers of change STEP 2: Assess impact Are driving forces acting to cause market demand for product to increase or decrease? Are driving forces acting to make competition more or less intense? Will driving forces lead to higher or lower industry profitability? STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces 3-33

34 Table 3.2: The Most Common Driving Forces 3-34

35 Question 4: What Market Positions Do Rivals Occupy? One technique to reveal different competitive positions of industry rivals is strategic group mapping A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions 3-35

36 Strategic Group Mapping Firms in same strategic group have two or more competitive characteristics in common Have comparable product line breadth Sell in same price/quality range Emphasize same distribution channels Use same product attributes to appeal to similar types of buyers Use identical technological approaches Offer buyers similar services Cover same geographic areas 3-36

37 Procedure for Constructing a Strategic Group Map STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group, making circles proportional to size of group s respective share of total industry sales 3-37

38 Example: Strategic Group Map of Selected Automobile Manufacturers 3-38

39 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 3-39

40 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 Profit potential of different strategic groups varies due to strengths and weaknesses in each group s market position 3-40

41 Question 5: What Strategic Moves Are Rivals Likely to Make Next? 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 3-41

42 Competitor Analysis Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing Which rival has the best strategy? Which rivals appear to have weak strategies? Which firms are poised to gain market share, and which ones seen destined to lose ground? Which rivals are likely to rank among the industry leaders five years from now? Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader? 3-42

43 Things to Consider in Predicting Moves of Rivals Which rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue? Which rivals have a strong incentive, along with resources, to make major strategic changes? Which rivals are good candidates to be acquired? Which rivals have the resources to acquire others? Which rivals are likely to enter new geographic markets? Which rivals are likely to expand their product offerings and enter new product segments? 3-43

44 Question 6: What Are the Key Factors 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 difference between Profit and loss Competitive success or failure KSFs can relate to Specific strategy elements Product attributes Resources Competencies Competitive capabilities Market achievements 3-44

45 Identifying Industry Key Success Factors The answers to 3 questions often help pinpoint an industry s KSFs On what basis do customers choose between competing brands of sellers? What resources and competitive capabilities does a company need to have to be competitively successful? What shortcomings are likely to place a company at a significant competitive disadvantage? Rarely are there more than 5-6 factors that are truly key to the future financial and competitive success of industry members 3-45

46 Table 3.3: Common Types of Industry Key Success Factors 3-46

47 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 3-47

48 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 3-48

49 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 wellsituated in an otherwise unattractive industry can still earn good profits by taking sales and market share away from weaker competitors 3-49

50 Core Concept: Assessing Industry Attractiveness The degree to which an industry is attractive or unattractive is not the same for all industry participants or potential entrants. The opportunities an industry presents depend partly on a company s ability to capture them. 3-50