External Environmental Analysis

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Chapter 2

• External Environmental Analysis

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Situation Analysis Where are we now?

• Two considerations
• Companys external ormacro-environment (opps
  threats
• Industry and competitive conditions
• Companys internal ormicro-environment
  (strengths weaknesses)
• Competencies, capabilities, resource strengths
  and weaknesses, and competitiveness

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Fig. 2.1 From Thinking Strategically to
Choosing a Strategy
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Fig. 2.2 The Components of a Companys
Macro-Environment
Auto Companies?
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Scanning the External Environment

Analysis of Societal Environment

Economic, Sociocultural, Technological,
Political-Legal Factors
Market

Analysis
Competitor

Community

Analysis
Analysis
Supplier

Analysis
Selection of

Strategic Factors

Governmental

Interest Group

Analysis
Analysis
Opportunities

Threats
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8 Key Questions Analyzing the Industry and
Competitive Environment

• What are the industrys strategy-shaping economic
  features? (Examine Economics of the Environment
  Industry)
• What kinds of competitive forces are industry
  members facing, and how strong is each force?
  (Construct a Porters 5 Forces model)
• What forces are driving changes in the industry,
  and what impact will these changes have? Where
  should priorities be placed? Occurrence vs.
  Impact (Construct a Priorities Matrix)
• What market positions do industry rivals occupy?
  (Construct a Strategic Map)
• What strategic moves are rivals likely to make
  next? (Intell SWOT)
• What are the key factors for future success?
  Rival comparison (Construct an Industry Matrix)
• What are the opportunities and threats?
  (Construct an EFAS)
• Does the outlook for the industry present the
  company with sufficiently attractive prospects
  for profitability? (Decisions Stay in the
  industry or enter the industry-GE Business Screen)

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Question 1 What Are theIndustrys Dominant
Economic Traits?
Oil Companies?

• 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

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Question 2 What Is Competition Like and
How Strong Are the Competitive Forces?

• Objectives are to identify
• Main sources of competitive forces
• Minimize/control neg. force and Strengthen
  advantage
• Key analytical tool
• Five Forces Model of Competition

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Fig. 2.3 The Five ForcesModel of
Competition
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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, or
  weak?
• Step 3 Consider the overall patternof
  competition and collective impact of all five
  forces
• Step 4 Develop ways to blunt negative forces and
  to take advantage of controlled forces

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Rivalry Among Competing 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 combativecontest
  involving
• Offensive actions
• Defensive countermoves

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What Are the TypicalWeapons for Competing?

• Vigorous price competition
• More or different performance features
• Better product performance
• Higher quality
• Stronger brand image and appeal
• Wider selection of models and styles

• Bigger/better dealer network
• Low interest rate financing
• Higher levels of advertising
• Stronger product innovation capabilities
• Better customer service
• Stronger capabilities to provide buyers with
  custom-made products

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What Causes Rivalry to be Stronger?

• Competitors engage in frequent and aggressive
  launches of new offensives to gain sales and
  market share
• Slow market growth
• Number of rivals increases and rivals are of
  equal 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
• A successful strategic move carries a big payoff
• Diversity of rivals increases in terms of
  visions, objectives, strategies, resources, and
  countries of origin
• Strong rivals outside the industry acquire weak
  firms in the industry and use their resources to
  transform the new firms into major market
  contenders

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Competitive Force of Potential Entry

• Seriousness of threat depends on
• Size of pool of entry candidatesand available
  resources
• Barriers to entry
• Reaction of existing firms
• Evaluating the threat of entryinvolves assessing
• How formidable entry barriers are for each type
  of potential entrant and
• Attractiveness of growth and profit prospects

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Common Barriers to Entry

• Sizable economies of scale
• Cost and resource disadvantages independent of
  size
• Brand preferences and customer loyalty
• Capital requirements and/or otherspecialized
  resource requirements
• Access to distribution channels
• Regulatory policies
• Tariffs and international trade restrictions

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Competitive Force ofSubstitute Products
Concept

• Substitutes matter when customers are attracted
  to the products of firms in other industries

Examples

• Eyeglasses and contact lens vs. laser surgery
• Sugar vs. artificial sweeteners
• Newspapers vs. TV vs. Internet

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How to Tell Whether SubstituteProducts Are
a Strong Force

• Whether substitutes arereadily available and
  attractively priced
• Whether buyers view substitutes as being
  comparable or better
• How much it costs end users to switch to
  substitutes

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Competitive Pressures From Suppliersand
Supplier-Seller Collaboration

• Whether supplier-seller relationships represent a
  weak or strongcompetitive force depends on
• Whether suppliers can exercise sufficient
  bargaining leverage to influence terms of supply
  in their favor
• Extent and competitive importance of
  collaborative partnerships between one or more
  sellers and their suppliers

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When Is the Bargaining Powerof Suppliers
Stronger?

• Industry members incur high costs in switching
  their purchases to alternative suppliers
• Needed inputs are in short supply
• Supplier provides a differentiated input that
  enhances the quality of performance ofsellers
  products or is a valuable part ofsellers
  production process
• There are only a few suppliers of a specific
  input
• Some suppliers threaten to integrate forward

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Competitive Pressures Collaboration Between
Sellers and Suppliers

• Sellers are forging strategic partnershipswith
  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
  sellers doing the best job of managing
  supply-chain relationships

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Competitive Pressures From Buyersand
Seller-Buyer Collaboration

• Whether seller-buyer relationships represent a
  weak or strongcompetitive force depends on
• Whether buyers have sufficient bargaining
  leverage to influence terms of sale in their
  favor
• Extent and competitive importance of seller-buyer
  strategic partnerships in the industry

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Competitive Pressures Collaboration Between
Sellers and Buyers

• Partnerships are an increasingly important
  competitive element in business-to-business
  relationships
• Collaboration may result inmutual benefits
  regarding
• Just-in-time deliveries
• Order processing
• Electronic invoice payments
• Data sharing
• Competitive advantage potential may accrue to
  sellers doing the best job of managing
  seller-buyer partnerships

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Strategic Implications of theFive
Competitive Forces

• Competitive environment is unattractive from the
  standpointof earning good profits when
• Rivalry is strong
• Entry barriers are lowand entry is likely
• Competition from substitutes is
  strong
• Suppliers and customers have considerable
  bargaining power

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Coping With theFive Competitive Forces

• Objective is to craft a strategy
• To insulate firm fromcompetitive pressures
• To initiate actions to produce a sustainable
  competitive advantage, placing added pressure on
  rivals
• Which allows firm to define the business model
  for the industry

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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

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Analyzing Driving Forces

• 1. Identify those forces likely to exert greatest
  influence over next 1 - 3 years
• Usually no more than 3 - 4 factorsqualify as
  real drivers of change
• 2. Assess impact
• Are forces causing demand for productto increase
  or decrease?
• Are forces acting to make competitionmore or
  less intense?
• Will forces lead to higher or lowerindustry
  profitability?

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Common Types of Driving Forces

• Internet and e-commerce opportunities
• Increasing globalization of industry
• Changes in long-term industry growth rate
• Changes in who buys the product and how they use
  it
• Product innovation
• Technological change/process innovation
• Marketing innovation

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Common Types of Driving Forces

• Internet and e-commerce opportunities
• Increasing globalization of industry
• Changes in long-term industry growth rate
• Changes in who buys the product and how they use
  it
• Product innovation
• Technological change/process innovation
• Marketing innovation

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Common Types of Driving Forces

• Entry or exit of major firms
• Diffusion of technical knowledge
• Changes in cost and efficiency
• Market shift from standardized to differentiated
  products (or vice versa)
• Changes in degree of uncertainty and risk
• Regulatory policies / government legislation
• Changing societal concerns, attitudes, and
  lifestyles

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Issues Priority Matrix
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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 approachesin an industry

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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

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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 groups
  respective share of total industry sales

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Mapping Strategic Groups in the U.S. Restaurant
Chain Industry
Price
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Example Strategic Group Mapof Selected
Retail Chains
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Interpreting Strategic Group Maps

• 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
  groups market position
• The closer strategic groups are on map, the
  stronger the competitive rivalry among member
  firms tends to be

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Question 5 What Strategic Moves Are Rivals
Likely to Make?

• A firms 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

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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 gainmarket share, and
  which onesseen destined to lose ground?
• Which rivals are likely to rank among the
  industry leaders five years from now? Do any
  rivals have strategies and the resources to
  overtake the current industry leader?

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Considerations Involved inPredicting 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?

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Question 6 What Are the Key Factors for
Competitive Success?

• Competitive factors most affecting every industry
  members ability to prosper
• Specific strategy elements
• Product attributes
• Resources
• Competencies
• Competitive capabilities
• KSFs spell the difference between
• Profit and loss
• Competitive success or failure

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Identifying IndustryKey Success Factors
Major Oil Companies??

• Pinpointing KSFs involves determining
• On what basis do customers choose between
  competing brands of sellers?
• What resources and competitive capabilities does
  a seller need to have to be competitively
  successful?
• What does it take for sellers to achieve a
  sustainable competitive advantage?
• KSFs consist of the 3 - 5 major determinants of
  financial and competitive success

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Example KSFs for Beer Industry

• Full utilization of brewing capacity -- to keep
  manufacturing costs low
• Strong network of wholesale distributors -- to
  gain access to retail outlets
• Clever advertising -- to induce beer drinkers to
  buy a particular brand

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Example KSFs for Apparel Manufacturing
Industry

• Appealing designs and color combinations -- to
  create buyer appeal
• Low-cost manufacturing efficiency -- to keep
  selling prices competitive

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Industry Matrix
Company A Rating
Company A Weighted Score
Company B Rating
Company B Weighted Score
Key Success Factors
Weight
1
2
3
4
5
6
Total
1.00
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External Factor Analysis Summary (EFAS)
Maytag as Example
ExternalStrategic Factors
Rating
Weighted Score
Weight
Comments
Opportunities Economic integration of European
Community Demographics favor quality
appliances Economic development of
Asia Opening of Eastern Europe Trend to
Super Stores Threats Increasing government
regulations Strong U.S. competition Whirlpool
and Electrolux strong globally New product
advances Japanese appliance companies Total
Scores
.20 .10 .05 .05 .10 .10 .10 .15 .05 .10
4 5 1 2 2 4 4 3 1 2
.80 .50 .05 .10 .20 .40 .40 .45 .05
.20
Acquisition of Hoover Maytag quality Low
Maytag presence Will take time Maytag weak in
this channel Well positioned Well
positioned Hoover weak globally Questionable Only
Asian presence is Australia
1
2
3
4
5
1.00
3.15
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Question 7 Does the IndustryPresent an
Attractive Opportunity?
Objective

• Develop conclusions about whether theindustry
  and competitive environment is attractive or
  unattractive for earning good profits

Principle
A firm uniquely well-suited in an otherwise
unattractive industry can, under certain
circumstances, still earn unusually good profits
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Factors to Consider inAssessing Industry
Attractiveness

• Industrys 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 industrys
  future
• Severity of problems facing industry
• Firms competitive position in industry vis-à-vis
  rivals
• Firms potential to capitalize on vulnerabilities
  of weaker rivals
• Whether firm has sufficient resources to defend
  against unattractive industry factors

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Core ConceptAssessing Industry Attractiveness
The degree to which an industry is attractive or
unattractive is not the same for all industry
participants and all potential entrants. The
opportunities an industry presents depends partly
on a companys ability to capture them.