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Chapter Learning Objectives: To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions. To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak. To learn how to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability. To understand why indepth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a company’s situation. 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?
Chapter 3: Evaluating a Company’s External Environment Screen graphics created by: Jana F Kuzmicki, Ph.D Troy University McGrawHill/Irwin Copyright © 2010 by The McGrawHill Companies, Inc. All rights reserved Chapter Learning Objectives To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak To learn how to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability 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 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 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 Figure 3.1: From Thinking Strategically About the Company’s Situation to Choosing a Strategy 3-5 Figure 3.2: The Components of a Company’s Macro-environment 3-6 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 Key Questions Regarding the Industry and Competitive Environment What are the industry’s dominant economic traits? How strong are competitive forces? What market positions rivals occupy? What moves will they make next? What forces are driving change in the industry? What are the key factors for competitive success? How attractive is the industry from a profit perspective? 3-8 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 Table 3.1: What to Consider in Identifying an Industry’s Dominant Economic Features 3-10 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 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 Example: Strategic Group Map of Selected Automobile Manufacturers 3-38 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 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 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 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 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-andcoming rivals have strategies and the resources to overtake the current industry leader? 3-42 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 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 Identifying Industry Key Success Factors The answers to questions often help pinpoint an industry’s KSFs On what basis 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 - factors that are truly key to the future financial and competitive success of industry members 3-45 Table 3.3: Common Types of Industry Key Success Factors 3-46 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 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 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 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