Transcript PowerPoint - Huizenga Business School
Chapter 3: Evaluating a Company’s External Environment
Screen graphics created by: Jana F. Kuzmicki, Ph.D.
Troy University
McGraw Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved
“Analysis is the critical starting point of strategic thinking.”
Kenichi Ohmae Consultant and Author
“Things are always different – the art is figuring out which differences matter.”
Laszlo Birinyi Investments Manager
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.
1-4
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: Make Next?
What Strategic Moves Are Rivals Likely to
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?
1-5
Understanding the Factors that Determine a Company’s Situation
Diagnosing a company’s situation has two facets Assessing the company’s
external or macro environment
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
1-6
Figure 3.1: From Thinking Strategically About the Company’s Situation to Choosing a Strategy
Figure 3.2: The Components of a Company’s Macro-environment
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
bearing that have a 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 1-9
Key Questions Regarding the Industry and Competitive Environment What are the industry’s dominant economic traits? How strong are competitive forces?
What market positions do 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?
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
1-11
Table 3.1: What to Consider in Identifying an Industry’s Dominant Economic Features
Learning/Experience Effects
Learning/experience effects
exist when a company’s unit costs decline as its
cumulative
because of production volume increases 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
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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
1-14
Figure 3.3: The Five Forces Model of Competition
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
strength
whether the
collective
of the five competitive forces is conducive to earning attractive profits
1-16
Competitive Pressures Among Rival Sellers
Usually the
strongest
of the five forces Key
factor rivalry
in determining
strength of
How aggressively are rivals using various
weapons of competition
to improve their market positions and performance?
Competitive rivalry contest
involving is a
combative
Offensive
actions
Defensive
countermoves
1-17
Figure 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry
What Are the
Typical
Weapons for Competing?
Lower prices 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 Better or more ads Stronger product innovation capabilities Better customer service Stronger capabilities to provide buyers with custom-made products
What Causes Rivalry to be
Stronger?
Competitors are active in making fresh moves to improve market standing and business performance Slow market growth Number of rivals increases and rivals are ofequal 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 Outsiders acquire weak firms in the industry and use their resources to transform new firms into major market contenders 1-20
What Causes Rivalry to be
Weaker?
Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals Rapid market growth Products of rivals are strongly differentiated and customer loyalty is high Buyer costs to switch brands are high There are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business
1-21
Test Your Knowledge
The rivalry among competing sellers in an industry intensifies A.
when buyer demand for the product is growing rapidly.
B.
when customers are brand loyal and their costs to switch to competing brands or substitute products are relatively high.
C.
when buyer demand is strong and sellers have little or no excess capacity and only minimal inventories. D.
as the number of rivals increases and as they become more equal in size and competitive capability. E.
when the products of rival sellers are highly differentiated products and the industry consists of so many rivals that any one company’s actions have little direct impact on rivals’ business.
1-22
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
1-23
Figure 3.5: Factors Affecting Threat of Entry
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
1-25
When Is the Threat of Entry
Stronger?
There’s a sizable pool of entry candidates Entry barriers are low Industry growth is rapid and profit potential is high Incumbents are unwilling or unable to contest a newcomer’s entry efforts When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence
1-26
When Is the Threat of Entry
Weaker?
There’s only a small pool of entry candidates Entry barriers are high Existing competitors are struggling to earn good profits Industry’s outlook is risky Industry growth is slow or stagnant Industry members will strongly contest efforts of new entrants to gain a market foothold
1-27
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
1-28
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
1-29
Figure 3.6: Factors Affecting Competition From Substitute Products
When Is the Competition From Substitutes
Stronger?
There are many good substitutes readily available Substitutes are attractively priced The higher the quality and performance of substitutes The lower the end user’s switching costs End users grow more comfortable with using substitutes
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When Is the Competition From Substitutes
Weaker?
Good substitutes are not readily available or do not exist Substitutes are higher priced relative to performance they deliver End users incur high costs in switching to substitutes
1-32
Competitive Pressures From Suppliers and Supplier-Seller Collaboration
Whether supplier-seller relationships represent a
weak
force depends on or
strong
competitive 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
1-33
Figure 3.7: Factors Affecting Bargaining Power of Suppliers
When Is the Bargaining Power of 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 of sellers’ products or is a valuable part of sellers’ production process There are only a few suppliers of a specific input Some suppliers threaten to integrate forward
1-35
When Is the Bargaining Power of Suppliers
Weaker?
Item being supplied is a commodity Seller switching costs to alternative suppliers are low Good substitutes exist or new ones emerge Surge in availability of supplies occurs Industry members account for a big fraction of suppliers’ total sales Industry members threaten to integrate backward Seller collaboration with selected suppliers provides attractive win-win opportunities
1-36
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
1-37
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
1-38
Figure 3.8: Factors Affecting Bargaining Power of Buyers
When Is the Bargaining Power of Buyers
Stronger?
Buyer switching costs to competing brands or substitutes are low Buyers are large and can demand concessions Large-volume purchases by buyers are important to sellers Buyer demand is weak or declining Only a few buyers exists Identity of buyer adds prestige to seller’s list of customers Quantity and quality of information available to buyers improves Buyers have ability to postpone purchases until later Buyers threaten to integrate backward
1-40
When Is the Bargaining Power of Buyers
Weaker?
Buyers purchase item infrequently or in small quantities Buyer switching costs to competing brands are high Surge in buyer demand creates a “sellers’ market” Seller’s brand reputation is important to buyer A specific seller’s product delivers quality or performance that is very important to buyer Buyer collaboration with selected sellers provides attractive win-win opportunities
1-41
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
1-42
For Discussion: Your Opinion
Explain why low switching costs and weakly differentiated products tend to give buyers a high degree of bargaining power.
1-43
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
1-44
Strategic Implications of the Five Competitive Forces
Competitive
environment
is
ideal
a profit-making standpoint
when
from 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
1-45
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
1-46
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
1-47
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
1-48
Common Types of Driving Forces
Changes in long-term industry growth rate Increasing globalization of industry Emerging new Internet capabilities and applications Changes in who buys the product and how they use it Product innovation Technological change/process innovation Marketing innovation
1-49
Common Types of Driving Forces
(con’t)
Entry or exit of major firms Diffusion of technical knowledge Changes in cost and efficiency Consumer preferences 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
1-50
Table 3.2: The Most Common Driving Forces
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
1-52
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
1-53
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
1-54
Example: Strategic Group Map of Selected Automobile Manufacturers
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
1-56
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
1-57
Test Your Knowledge
A strategic group map is a helpful analytical tool for A.
assessing why competitive pressures and driving forces usually impact the biggest strategic groups more so than the smaller groups.
B.
determining which companies have how big a competitive advantage and how good their prospects are for increasing their market shares.
C.
determining which company is the most profitable in the industry and why it is doing so well.
D.
determining who competes most closely with whom; evaluating whether industry driving forces and competitive pressures favor some strategic groups and hurt others; and ascertaining whether the profit potential of different strategic groups varies due to the strengths and weaknesses in each group’s respective market positions.
E.
pinpointing which of the five competitive forces is the strongest and which is the weakest.
1-58
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
1-59
Competitor Analysis
Sizing up strategies strengths
and and competitive
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?
1-60
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?
1-61
For Discussion: Your Opinion
Why does a company need to bother with studying competitors and trying to predict what moves rivals will make next? Why can’t it just choose whatever strategy it wants or make whatever moves in the marketplace it wishes without first worrying about what rivals are going to do?
1-62
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
Profit and loss Competitive success or failure between
KSFs
can relate to Specific strategy elements Product attributes Resources Competencies Competitive capabilities Market achievements
1-63
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
1-64
Table 3.3: Common Types of Industry Key Success Factors
Example: KSFs for Bottled Water Industry
Access to distribution
– to get a company’s brand stocked and favorably displayed in retail outlets
Image
– to induce consumers to buy a particular company’s product (brand name and attractiveness of packaging are key deciding factors)
Low-cost production capabilities
to keep selling prices competitive –
Sufficient sales volume
– to achieve scale economies in marketing expenditures
1-66
Example: KSFs for Ready-to-Wear Apparel Industry
Appealing designs and color combinations
– to create buyer appeal
Low-cost manufacturing efficiency
keep selling prices competitive – to
Strong network of retailers/company owned stores
– to allow stores to keep best-selling items in stock
Clever advertising
– to effectively convey a specific image to induce consumers to purchase a particular label
1-67
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
1-68
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
1-69
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 well situated
in an
otherwise unattractive industry can
still
earn
good
profits
by taking sales and market share away from weaker competitors
1-70
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.
Test Your Knowledge
Which of the following is not an important factor for company managers to consider in drawing conclusions about whether the industry presents an attractive opportunity?
A.
B.
Whether powerful competitive forces are squeezing industry profitability to subpar levels and whether competition appears destined to grow stronger or weaker The industry’s growth potential and the degree of uncertainty and risk in the industry’s future C.
D.
E.
Whether industry profitability will be affected favorably or unfavorably by the prevailing driving forces How many of the industry’s key success factors do companies in the industry typically incorporate into their strategies The company’s ability to capitalize on the vulnerabilities of weakly positioned rivals and whether the company has sufficient competitive strength to defend against or counteract the factors that make the industry unattractive 1-72