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CHAPTER 3

CHAPTER 3. EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT. Student Version. Thinking strategically about a firm’s external environment. Forming a strategic vision of where the firm needs to head. Identifying promising strategic options for the firm. Selecting the best strategy

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CHAPTER 3

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

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

  3. 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

  4. QUESTION 1: DOES THE INDUSTRY OFFERATTRACTIVE OPPORTUNITIES FOR GROWTH? Defining Growth: What is the current market size in units or sales? What is the past, current and expected rate of growth for the market\industry? Considerations: Different sectors\regions of a market grow at different rates. Growth varies with the industry’s life cycle stage—emergence, rapid growth, maturity, and decline. Growth does not guarantee profitability.

  5. QUESTION 2: WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY? The Five Competitive Forces: Competition from rival sellers Competition from potential new entrants Competition from substitute products producers Supplier bargaining power Customer bargaining power

  6. Competitive Pressures That Act to Increase the Rivalry among Competing Sellers Buyer demand is growing slowly or declining. 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.

  7. Competitive Pressures Associated with the Threat of New Entrants Entry Threat Considerations: 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

  8. Competitive Pressures from the Sellersof Substitute Products • Substitute Products Considerations: • Ready availability of substitutes • Pricing, quality, performance, and other relevant attributes of substitutes • Switching costs that buyers incur • Indicators of Substitutes’ Competitive Strength: • Increasing rate of growth in sales of substitutes • Substitute producers adding output capacity • Increasing profitability of substitute producers

  9. Competitive Pressures Stemming from Supplier Bargaining Power • Supplier Bargaining Power Considerations: • Ready availability of supplier products • Criticality of supplier products as industry inputs • Number of suppliers of standard\commodity items • Buyers’ costs for switching among suppliers • Availability of substitutes for suppliers’ products • Fraction of supplier sales due to industry demand • Ratio of suppliers relative to industry buyers • Backward integration into suppliers’ industry

  10. Competitive Pressures Stemming from BuyerBargaining Power and Price Sensitivity • Buyer Bargaining Power Considerations: • 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

  11. Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? • 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?

  12. QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE? Strategic Analysis of Industry Dynamics: Identifying the 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.

  13. QUESTION 4: HOW ARE INDUSTRY RIVALSPOSITIONED—WHO IS STRONGLY POSITIONEDAND WHO IS NOT? A Strategic Group 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 buyers Depend on identical technological approaches Offer similar services and technical assistance

  14. QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT? Competitive Intelligence 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

  15. 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.

  16. 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

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