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Thom21e Ch03 Final
Thom21e Ch03 Final
Evaluating a
Company’s
External
Environment
LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
1. How to recognize the factors in a company’s broad
macro-environment that may have strategic
significance
2. How to use analytic tools to diagnose the
competitive conditions in a company’s industry
3. How to map the market positions of key groups of
industry rivals
4. How to use multiple frameworks to determine
whether an industry’s outlook presents a company
with sufficiently attractive opportunities for growth
and profitability
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FIGURE 3.1 From Thinking Strategically about
the Company’s Situation to Choosing a Strategy
Chapter 3
Chapter 4
Jump to Appendix 1 long image description
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CORE CONCEPT (1 of 7)
The macro-environment encompasses the broad
environmental context in which a company’s
industry is situated that includes strategically
relevant components over which the firm has no
direct control.
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CORE CONCEPT (2 of 7)
PESTEL analysis focuses on the six principal
components of strategic significance in the macro-
environment.
Political
Economic
Social
Technological
Environmental
Legal
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PESTEL Analysis
● Focuses on principal components of strategic
significance in the macro-environment
Political factors
Economic conditions (local to worldwide)
Sociocultural forces
Technological factors
Environmental factors (the natural environment)
Legal and regulatory conditions
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FIGURE 3.2 The Components of a Company’s
Macro-Environment
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THE FIVE FORCES FRAMEWORK
♦ The five competitive forces
● Competition from rival sellers
● Competition from potential new entrants
● Competition from producers of substitute products
● Supplier bargaining power
● Customer bargaining power
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USING THE FIVE-FORCES MODEL OF COMPETITION
McDonald’s problem (1 of 4)
♦ McDonald's is the largest restaurant chain in the world. It has 14,350
restaurants in the United
♦ States, with the largest market share of any such chain (7.3 percent).
In total, it has more than 36,000 restaurants worldwide. Over the
years, McDonald's was a leader, not only in market share, but also
with the introduction of new menu items to the fast food market. For
example, it first introduced breakfast items to this market. and its
breakfast menu now accounts for about 25 percent Of its sales. It
successfully introduced Chicken McNuggets to this market, and
currently, McDonald's is the single largest restaurant customer of
Tyson Foods, the largest distributor ot chicken products. In more
recent years, McDonald's successfully introduced gourmet coffee
products and began to compete against Starbucks. With all of this
success, what is the problem?
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McDonald’s problem (2 of 4)
♦ The problems revolve around competition and changing consumer tastes.
Consumers have become more health-conscious, and competitors have
been more attuned to customer desires.
♦ As a result, McDonald's suffered a decline in its total sales revenue of 2.4
percent and a drop in net income of 15 percent in 2014. This was the first
decline in both figures in 33 years. It seems that McDonald's did a poor job
of analyzing its environment and especially its customers and competitors.
During this same time, some of McDonald's competitors flourished. For
example, Sonic enjoyed a 7 percent increase in its sales, and Chipotle
recorded a large 20 percent increase. Other specialty burger restaurants,
such as Smashburger, have stolen business from McDonald's even though
their burgers are priced a little higher than McDonald's burgers. The quality
of these competitors' products is perceived to be higher and many are
"made to order" and thus customized to the customer's desires. And, partly
because the volume and complexity of the McDonald's menu items have
grown, the time required for service has also increased. This change has
been most evident in the drive-through lanes in which the wait time has
grown by approximately 20 percent in recent years.
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McDonald’s problem (3 of 4)
Because of the lack of understanding the changing market and
competitive landscape, McDonald's was unable to be proactive and
now is in a reactive mode. For example, in 2013, it decided to add
chicken wings to its menu. Wings were sold successfully at McDonald's
in Hong Kong, and it imported its "cayenne-and-chili-pepper coating"
used there. The market test for the wings in Atlanta was successful, so
the firm implemented a major campaign to sell them at its restaurants
throughout the United States. The eight-week campaign was a
miserable failure (some referred to it as the "mighty wings debacle").
Perhaps they were too spicy for the broad market, but some believe
that they were also too expensive at $1.00 per wing, with a box of five
wings costing $1.00 more than a similar number at KFC. Because of
these problems, McDonald's hired a new CEO in 2015, hoping to
overcome its woes.
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McDonald’s problem (4 of 4)
The new CEO must act quickly. McDonald's has recently announced
that it is changing to use only chickens raised without antibiotics to be
sensitive to human health concerns. It has also market tested custom
hamburgers in Australia with success. In fact, Australia is one of
McDonald's bright spots around the world, Sales have increased in
Australia when they have fallen in the United States, Europe, and Asia.
Making major changes to the McDonald's menu is challenging partly
because of its scale and supply chain. It orders hundreds of millions of
pounds of chicken each year, so it will take a few years to fully
implement the change to antibiotic-free chicken. Changing vegetables
in Happy Meals (e.g., adding baby carrots) and implementing new
wraps which require additional (new) vegetables (such as cucumbers)
will take time because they require obtaining large scale suppliers that
can provide the necessary quantity and quality at the right price and in
the right location(s). McDonald's was once a leader, and now it is
fighting from behind, trying to stem its downturn. It has to respond
quickly and effectively to its external environment, especially its
customers and competitors.
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FIGURE 3.4 Factors Affecting the Strength of Rivalry
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MARKET ENTRY BARRIERS FACING
NEW ENTRANTS
Incumbent cost advantages related to learning
and experience, proprietary patents and
technology, favorable locations, and lower fixed
costs
Strong brand preferences and customer loyalty
Strong “network effects” in customer demand
High capital requirements
Building a network of distributors or dealers and
securing adequate space on retailers’ shelves
Restrictive regulatory and trade policies
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FIGURE 3.5 Factors Affecting the Threat of Entry
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FIGURE 3.6 Factors Affecting
Competition from Substitute Products
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FIGURE 3.7 Factors Affecting the
Bargaining Power of Suppliers
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FIGURE 3.8 Factors Affecting the Bargaining Power of Buyers
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CORE CONCEPT (3 of 7)
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STRATEGIC MANAGEMENT PRINCIPLE (2 of 8)
A company’s strategy is increasingly effective the
more it provides some insulation from competitive
pressures, shifts the competitive battle in the
company’s favor, and positions firms to take
advantage of attractive growth opportunities.
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FIGURE 3.9 The Value Net
CORE CONCEPT (4 of 7)
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INDUSTRY DYNAMICS AND THE FORCES
DRIVING CHANGE
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CORE CONCEPT (5 of 7)
Driving forces are the major underlying causes of
change in industry and competitive conditions.
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THE MOST COMMON DRIVERS
OF INDUSTRY CHANGE
• Changes in the long-term industry growth rate
• Increasing globalization
• Emerging new Internet capabilities and applications
• Shifts in buyer demographics
• Technological change and manufacturing process innovation
• Product and marketing innovation
• Entry or exit of major firms
• Diffusion of technical know-how across companies and countries
• Changes in cost and efficiency
• Reductions in uncertainty and business risk
• Regulatory influences and government policy changes
• Changing societal concerns, attitudes, and lifestyles
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ASSESSING THE IMPACT OF THE FACTORS
DRIVING INDUSTRY CHANGE
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ADJUSTING STRATEGY TO PREPARE FOR
THE IMPACTS OF DRIVING FORCES
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CORE CONCEPT (6 of 7)
A strategic group is a cluster of industry rivals
that have similar competitive approaches and
market positions.
Strategic group mapping is a technique for
displaying the different market or competitive
positions that rival firms occupy in the industry.
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TYPICAL VARIABLES USED
IN CREATING GROUP MAPS
Price and 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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STRATEGIC MANAGEMENT PRINCIPLE (5 of 8)
Strategic group maps reveal which firms are close
competitors and which are distant competitors.
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Footnote: Circles are drawn roughly proportional to the sizes of the chains, based on revenues.
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Examining the Comparative Market Positions of
Strategic Groups in the Casual Dining Industry
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THE VALUE OF STRATEGIC GROUP 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 from the industry’s
five forces may cause the profit potential of different
strategic groups to vary.
2. Industry driving forces may favor some strategic
groups and hurt others.
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COMPETITOR ANALYSIS
♦ 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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STRATEGIC MANAGEMENT PRINCIPLE (7 or 8)
Studying competitors’ past behavior and
preferences provides a valuable assist in
anticipating what moves rivals are likely to make
next and outmaneuvering them in the marketplace.
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A FRAMEWORK FOR
COMPETITOR ANALYSIS
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CREATING A STRATEGIC PROFILE
OF A RIVAL COMPETITOR FIRM (1 of 2)
Current strategy
● How is the competitor positioned in the market?
● What is the basis for its competitive advantage?
● What kinds of investments is it making (as an
indicator of its expected growth trajectory)?
Objectives
● What are its financial performance objectives?
● What are its strategic objectives?
● How well is it performing in meeting its objectives?
● Is it under pressure to improve its performance?
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KEY SUCCESS FACTORS
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CORE CONCEPT (7 of 7)
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IDENTIFICATION OF KEY
SUCCESS FACTORS
On what basis do buyers of the industry’s
product choose between the competing brands
of sellers? What product attributes and service
characteristics are crucial to competitive
success?
Given the nature of competitive rivalry
prevailing in the marketplace, what resources
and competitive capabilities must a firm have to
be competitively successful?
What shortcomings are almost certain to put a
firm at a significant competitive disadvantage?
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FACTORS TO CONSIDER IN ASSESSING
INDUSTRY ATTRACTIVENESS
How the firm is impacted by the state of the macro-environment
Whether strong competitive forces are squeezing industry
profitability to subpar levels
Whether the presence of complementors and the possibility of
cooperative actions improve the company’s prospects
Whether industry profitability will be favorably or unfavorably
affected by the prevailing driving forces
Whether the firm occupies a stronger market position than rivals
Whether this is likely to change in the course of competitive
interactions
How well the firm’s strategy delivers on industry key success
factors
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INDUSTRY ATTRACTIVENESS IS NOT
THE SAME FOR ALL PARTICIPANTS
Industry outsiders may conclude that they have the
resources to easily hurdle the barriers to entering an
attractive industry while other outsiders may find the
same industry unattractive because they do not want to
challenge market leaders and have better opportunities
elsewhere.
A particular industry’s attractiveness depends in large
part on whether a company has the resources and
capabilities to be competitively successful and profitable
in that environment.
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