Lecture 2: The External Environment

Business eLearning

MCQ xam

The Mid-Term MCQ

Exam has been re-scheduled

Thursday 23rd October at 6.00pm

Key Issues
1.
2.
3.
4.
5.
6.

Analyse an organisations external macro-environment and

identify the most strategically relevant components.
Diagnose the factors which shape industry dynamics and forecast
their effects on future industry attractiveness
Identify the competitive forces at work in an organisations
industry
Describe different industry structures, industry lifecycle stages
and identify strategic groups within an industry
Discuss the merits/demerits of the five forces framework.
Explain why in-depth evaluation of a businesss strengths and
weaknesses in relation to the specific industry conditions it
confronts is an essential prerequisite to crafting a strategy that is
well-matched to its external situation.

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The external environment

The Macro-Environment

The broad environmental context in which a

firms industry is situated.
Includes strategically relevant components
over which the firm has no direct control.
General economic conditions
Immediate industry and competitive
environment

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Components of the macro environment

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7 components of
the macro
environment

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Building blocks for scenarios

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Current practice: VisitsScotland

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Thinking strategically about your industry &

competitive environment
1. Does the industry offer attractive opportunities for growth?

2. What kinds of competitive forces are industry members facing,

and how strong is each force?
3. What factors are driving changes in the industry, and what
impact will these changes have on competitive intensity and
industry profitability?
4. What market positions do industry rivals occupy - who is
strongly positioned and who is not?

5. What strategic moves are rivals likely to make next?

6. What are the key factors for competitive success in the
industry?

7. Does the industry offer good prospects for attractive profits?

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Q. 1 Does the industry offer attractive

growth opportunities?
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 industrys life cycle stage emergence, rapid growth, maturity, and decline.
Growth does not guarantee profitability.

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Q. 2 What competitive forces are you 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

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Five competitive forces

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Using the 5 forces

Step 1

For each of the five forces, identify the different parties

involved, and the specific factors that bring about
competitive pressures.

Step 2

Evaluate how strong the pressures stemming from each of

the five forces are (strong, moderate to normal, or weak).

Step 3

Determine whether the strength of the five competitive

forces, overall, is conducive to earning attractive profits in
the industry.

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Competitive Weapons

Primary Effects

Price discounting, clearance sales,

blowout sales

Lowers price (P), acts to boost total sales volume and market share,
lowers profit margins per unit sold when price cuts are big and/or
increases in sales volume are relatively small

Couponing, advertising items on sale

Acts to increase unit sales volume and total revenues, lowers price (P),
increases unit costs (C), may lower profit margins per unit sold (P C)

Advertising product or service

characteristics, using ads to enhance
a companys image or reputation

Boosts buyer demand, increases product differentiation and perceived

value (V), acts to increase total sales volume and market share, may
increase unit costs (C) and/or lower profit margins per unit sold

Innovating to improve product

performance and quality

Acts to increase product differentiation and value (V), boosts buyer

demand, acts to boost total sales volume, likely to increase unit costs (C)

Introducing new or improved features,

increasing the number of styles or
models to provide greater product
selection

Acts to increase product differentiation and value (V), strengthens buyer

demand, acts to boost total sales volume and market share, likely to
increase unit costs (C)

Increasing customization of product or

service

Acts to increase product differentiation and value (V), increases

switching costs, acts to boost total sales volume, often increases unit
costs (C)

Building a bigger, better dealer network

Broadens access to buyers, acts to boost total sales volume and market
share, may increase unit costs (C)

Improving warranties, offering lowinterest financing

Acts to increase product differentiation and value (V), increases unit

costs (C), increases buyer costs to switch brands, acts to boost total
sales volume and market share

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Factors that increase rivalry

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.

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Types of Industry Structure

Monopoly

Oligopoly

Monopolistic
Competition

Perfect
Competition

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Competitive pressures and new

entrants
Entry Threat Considerations:

Strength of barriers to entry

Expected reaction of incumbent firms

Attractiveness of a particular markets 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

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Pressures from the sellers of substitute

goods
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

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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

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Pressures from buyer bargaining

power & 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
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Collective strength of 5 forces &

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?

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Matching strategy to competitive

conditions
1. Pursuing avenues that shield the firm from as
many competitive pressures as possible.
2. Initiating actions calculated to shift competitive
forces in the firms favor by altering underlying
factors driving the five forces.
3. Spotting attractive arenas for expansion, where
competitive pressures in the industry are
somewhat weaker.

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Limitations
Doesnt cover all the significant forces found in
current industry environments e.g. Government
and regulation
Complexity of products and services mean that
firms have to work in networks rather than as
isolated units complementors become an
important force

Developed in an era when markets were less

dynamic, so of limited use in high-velocity
industries where change is rapid and industry
boundaries change frequently
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The Value Net

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Q. 3 What factors are driving industry

change & what impact will they have?

Strategic Analysis of Industry Dynamics:

1. Identifying the drivers of change.
2. Assessing whether the drivers of change
are, individually or collectively, acting to
make the industry more or less attractive.
3. Determining what strategy changes are
needed to prepare for the impacts of the
anticipated change.

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1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Changes in the long-term industry growth rate

Increasing globalization
Changes in who buys the product and how they use it
Technological change
Emerging new Internet capabilities and applications
Product and marketing innovation
Entry or exit of major firms
Diffusion of technical know-how across companies and
countries
Improvements in efficiency in adjacent markets
Reductions in uncertainty and business risk
Regulatory influences and government policy changes
Changing societal concerns, attitudes, and lifestyles

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Assessing overall impact

1. Overall, are the factors driving change causing
demand for the industrys product to increase or
decrease?

2. Is the collective impact of the drivers of change

making competition more or less intense?
3. Will the combined impacts of the change drivers
lead to higher or lower industry profitability?

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Crafting strategy
What strategy adjustments will be needed
to deal with the impacts of the changes in
industry conditions?

What adjustments must be made immediately?

What actions must we not take or should we cease to

do now?

What can we do now to prepare for adjustments we

anticipate making in the future?

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Q. 4 How are competitors positioned?

A Strategic Group:

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

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Using strategic groups to ascertain

positioning
Constructing a strategic group map:

Identify the competitive characteristics that

differentiate firms in the industry.

Plot the firms on a two-variable map using pairs of

differentiating competitive characteristics.

Assign firms occupying about the same map location

to the same strategic group.

Draw circles around each strategic group, making the

circles proportional to the size of the groups share of
total industry sales revenues.

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Common variables for differentiating

competitor positions.
Price/quality range (high, medium, low)
Geographic coverage (local, regional, national, global)
Product-line breadth (wide, narrow)

Degree of service offered (no frills, limited, full)

Distribution channels (retail, wholesale, Internet, multiple)
Degree of vertical integration (none, partial, full)
Degree of diversification into other industries (none,
some, considerable).

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Choosing variables for group maps

Variables selected as map axes:

Must not be highly correlated.

Must reflect key approaches to customer
value and expose sizable differences in the
marketplace positions of rivals.
May be quantitative, continuous, discrete
and\or defined in terms of distinct classes and
combinations.

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Guidelines for constructing group

maps
Draw map circles proportional to the combined
sales of firms in each strategic group to reflect
the relative sizes of each group to the total size
of the industry.
Use different variable sets to show different
views of relationships among competitive
positions in the industrys structurethere is no
one best map for portraying how competing firms
are positioned

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Example => Mobile handsets

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What can be learnt from maps?

Maps are useful in identifying which industry
members are close rivals and which are distant
rivals.

Not all map positions are equally attractive.

1. Prevailing competitive pressures in the industry
and drivers of change favor some strategic groups
and hurt others.
2. Profit prospects vary from strategic group to
strategic group.

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Q. 5 What strategic moves are

competitors likely to make?
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

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Reflecting on the potential moves of

competitors
Which competitors strategies are achieving good
results?
Which competitors are losing in the marketplace or badly
need to increase their unit sales and market share?
Which rivals are likely make major moves to enter new
geographic markets or to increase sales and market
share in a particular geographic region?
Which rivals can expand product offerings to enter new
product segments where they do not have a presence?
Which rivals can be acquired? Which rivals are financially
able and looking to make an acquisition?
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A different view: Blue ocean strategy

Creating new industries tapping markets
that currently dont exist
Break market boundaries between
industries
Reduce or eliminate features that
customers do not value
Enhance and develop those features that
will add value
Differentiate on the basis of value
innovation
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Q.6 What are the KSFs

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.

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How to identify KSFs

1. What product attributes and service features
buyers strongly affect buyers when choosing
between the competing brands of sellers?

2. What resources and competitive capabilities are

required for a firm to execute a successful
strategy in the marketplace?
3. What shortcomings will put a firm at a
significant competitive disadvantage?

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Q. 7 Is industry conducive to profit

making?
Industry Profitability Considerations:

The industrys 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 firms strategy in delivering on the

industrys key success factors
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Tutorial One (Weeks 2&3)

Case Study: Reinventing Accor page 456

Analyse Accors Business Model and Strategy

Readings

Johnson, M., C. Christensen and H. Kagermann

(2008) Reinventing your Business Model Harvard
Business Review, Dec.
Boston Consulting Group (2009 )Business Model
Innovation
Collins and Porras (1996) Building your Companies
Vision. Harvard Business Review, Sept/Oct.

Even Week Tutorials

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Week Three Lecture

Chapter Four
Evaluating Resources Capabilities
& Competencies