Lecture

Note
Chapter Evaluating a Company’s
3 External Environment

Essentials of Strategic Management The Quest for Competitive Advantage 4th

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Chapter Summary
Chapter Three explores the concepts and analytical tools for assessing strategically important factors in a compa-
ny’s external environment. Attention centers on tools for determining the level of competition, mapping market
positions of key rivals, and evaluating the long-term outlook for growth and profitability.

Lecture Outline
I. Introduction

1. Chapter 2 identified that the strategy-formulation strategy-execution process begins with an appraisal
of the company’s present situation. The company’s situation includes two facets: (1) the competitive
conditions in the industry in which the company operates—its external environment; and (2) its resources
and organizational capabilities—its internal environment.

2. This chapter presents the concepts and analytical tools for zeroing in on a single-business company’s
external environment.

II. Assessing the Company’s Industry and Competitive Environment

1. Thinking strategically about a company’s industry and competitive environment entails using some
well-validated concepts and analytical tools to get clear answers to seven questions:

a. Do macro-environmental factors and industry characteristics offer sellers opportunities for growth
and attractive profits?

b. What kinds of competitive forces are industry members facing, and how strong is each force?
 c. What forces are driving industry change and what impact will these changes have on competitive
intensity and industry profitability?

d. What market positions do industry rivals occupy—who is strongly positioned and who is not?

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

f. What are the key factors of competitive success?

g. Does the industry outlook offer good prospects for profitability?

2. Table 3.1, The Six Components of the Macro-Environment Included in a PESTEL Analysis,
describes the external factors that shape the company’s macro-environment.

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120 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 120

III. Question 1: What are the Strategically Relevant Components of the Macro-Environment

1. Strictly speaking, a company’s macro-environment includes all relevant factors and influences outside
the company’s boundaries; by relevant, we mean these factors are important enough that they should
shape management’s decisions regarding the company’s long-term direction, objectives and business
model.
2. Figure 3.1 The Components of a Company’s CORE CONCEPT
External Environment presents a depiction of macro- The macro-environment encompasses
environmental factors with a high potential to affect a the broad environmental context in which
company’s business situation. The Macro-Environment a company is situated and is comprised of
will be explored using a PESTEL analysis and the six principal components: political factors,
Industry and Competitive Environment will be explored economic conditions, sociocultural forces,
in Question 2 using Porter’s Five-Forces Model. technological factors, environmental factors,
and legal/regulatory conditions .
3. The factors and forces in a company’s macro-
environment that have the biggest strategy shaping PESTEL analysis can be used to assess
impact typically pertain to the company’s immediate the strategic relevance of the six principal
industry and competitive environment – competitive components of the macro-environment:
pressures, the actions of rival firms, buyer behavior and political, economic, social, technological,
environmental, and legal forces .
supplier related considerations.

4. Table 3.1, The Six Components of the Macro-Environment Included in a PESTEL Analysis,
describes the broad areas that must be explored when conducting a PESTEL analysis.

a. Political Factors

b. Economic Factors

c. Sociocultural Forces

d. Technological Factors

e. Environmental Forces

f. Legal and Regulatory Factors

IV. Question 2: How Strong Are the Industry’s Competitive Forces?

1. The nature and subtleties of the competitive forces operating in a company’s industry are never the same
from one industry to another and must be wholly understood to accurately form answers to the question,
“Where are we now?”

2. The most powerful and widely used tool for assessing the strength of the industry’s competitive forces
is the five-forces model of competition.

3. Figure 3.2, The Five-Forces Model of Competition holds that competitive forces affecting industry
attractiveness go beyond rivalry of competing sellers and include pressures stemming from five co-
existing forces:

a. Competitive pressures stemming from buyer bargaining power.

b. Competitive pressures coming from companies in other industries to win buyers over to substitute
products.

c. Competitive pressures stemming from supplier bargaining power.

d. Competitive pressures associated with the threat of new entrants into the market.
121 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 121

e. Competitive pressures associated with rivalry among competing sellers to attract customers. This is
usually the strongest of the five competitive forces.

A. Competitive Force of Buyer Bargaining Power

1. Whether seller-buyer relationships represent a weak or strong competitive force depends on:

a. Whether some or many of the buyers have sufficient bargaining leverage to obtain price
concessions and other favorable terms and conditions of sale.

b. The extent and competitive importance of seller-buyer strategic partnerships in the industry.

2. Factors affecting buyer bargaining power can create competitive pressures: The leverage that
certain types of buyers have in negotiating favorable terms can range from weak to strong.

3. Even if buyers do not purchase in large quantities or offer a seller important market exposure or
prestige, they gain a degree of bargaining leverage in the following circumstances:

a. If buyers’ costs of switching to competing brands or substitutes are relatively low – buyers who
can readily switch brands or source from several sellers have more negotiating leverage than
buyers who have high switching costs.

b. If the number of buyers is small or if a customer is particularly important to a seller – the

smaller the number of buyers, the less easy it is for sellers to find alternative buyers when a
customer is lost to a competitor.

c. If buyer demand is weak – weak or declining demand creates a “buyers market” and shifts
bargaining power to buyers.

d. If buyers are well informed about sellers’ products, prices, and costs – the more information
buyers have, the better bargaining position they are in.

e. If buyers pose a credible threat of integrating backward into the business of sellers – companies
like Anheuser-Busch, Coors, and Heinz have integrated backward into metal-can manufacturing
to gain bargaining power in obtaining the balance of their can requirements from otherwise
powerful metal-can manufacturers.

4. Not all buyers of an industry’s product have equal degrees of bargaining power with sellers and
some may be less sensitive than others to price, quality, or service differences.

5. Figure 3.3, Factors Affecting the Strength of the Bargaining Power of Buyers, summarizes the
circumstances that make for strong or weak bargaining power on the part of buyers.

B. The Competitive Force of Substitute Products

1. Companies in one industry are vulnerable to competitive pressure from the actions of companies in
another industry whenever buyers view the products of the two industries as a good substitute.

2. Just how strong the competitive pressures are from sellers of substitute products depends on three
factors:

a. Whether substitutes are readily available and attractively priced.

b. Whether buyers view the substitutes as being comparable or better in terms of quality,
performance, and other relevant attributes.

c. Whether the costs that buyers incur in switching to the substitutes are high or low.
122 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 122

3. Figure 3.4, Factors Affecting Competition from Substitute Products, lists factors affecting the
strength of competitive pressures from substitute products and signs that indicate substitutes are a
strong competitive force.

4. As a rule, the lower the price of substitutes, the higher their quality and performance, and the lower
the user’s switching costs, the more intense the competitive pressures posed by substitute products.

C. Competitive Force of Supplier Bargaining Power

1. Whether supplier-seller relationships represent a weak or strong competitive force depends on the
degree to which suppliers have sufficient bargaining power to influence the terms and conditions of
supply in their favor.

2. How Supplier Bargaining Power Can Create Competitive Pressures: When the major suppliers
to an industry have considerable leverage in determining the terms and conditions of the item they
are supplying, they are in a position to exert competitive pressures on one or more rival sellers.

3. The factors that determine whether any of the suppliers to an industry are in a position to exert
substantial bargaining power or leverage are fairly clear-cut:

a. If the item being supplied is a commodity that is readily available from many suppliers,

b. The ability of industry members to switch their purchases from one supplier to another or to
switch to attractive substitutes,

c. If certain inputs are in short supply,

d. If certain suppliers provide a differentiated input that enhances the performance, quality, or
image of the industry’s product,

e. Whether certain suppliers provide equipment or services that deliver cost-savings to industry
members in conducting their operations,

f. The fraction of costs of the industry’s product accounted for by the cost of a particular input

f. If industry members are major customers of suppliers

g. Whether it makes good economic sense for industry members to vertically integrate backward.

4. Figure 3.5, Factors Affecting the Strength of Suppliers Bargaining Power, summarizes the
conditions that tend to make supplier bargaining power strong or weak.

D. Competitive Force of Potential New Entrants

1. Several factors affect the strength of the competitive threats of potential entry in a particular industry.

2. One factor relates to the size of the pool of likely entry candidates and the resources at their
command. As a rule, competitive pressures intensify as the pool of entry candidates increases in
size.

3. Frequently, the strongest competitive pressures associated with potential entry come not from
outsiders but from current industry participants looking for growth opportunities.

4. Existing industry members are often strong candidates to enter market segments or geographic
areas where they currently do not have a market presence.
123 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 123

5. A second factor concerns whether the likely entry candidates face high or low entry barriers. The
most widely encountered barriers that entry candidates must hurdle include:

a. The presence of sizable economies of scale in production or other areas of operation – When
incumbent companies enjoy cost advantages associated with large-scale operation, outsiders
must either enter on a large scale or accept a cost disadvantage and consequently lower
profitability.

b. Cost and resource disadvantages not related to scale of operation – Aside from economies
of scale, industry incumbents can have cost advantages that stem from experience/learning
curve effects, the possession of proprietary technology, partnerships with the best and cheapest
suppliers, and low fixed costs.

c. Strong brand preferences and high degree of customer loyalty – In some industries, buyers are
strongly attached to established brands, making it more difficult for a newcomer to break into
the marketplace.

d. High capital requirements – The larger the total dollar investment needed to enter the market
successfully, the more limited the pool of potential entrants.

e. The difficulties of building a network of distributors or retailers and securing adequate space on
retailers’ shelves.

f. Restrictive regulatory policies – Government agencies can limit or even bar entry by requiring
licenses and patents.

g. Tariffs and international trade restrictions – National governments commonly use tariffs and
trade restrictions to raise entry barriers for foreign firms and protect domestic producers from
outside competition.

h. The ability and willingness of industry incumbents to launch vigorous initiatives to block a
newcomer’s successful entry.

6. Figure 3.6, Factors Affecting the Strength of Threat of Entry, identifies several factors that
affect how strong the competitive threat of potential entry is in a particular industry.

E. The Competitive Force of Rivalry among Competing Sellers

1. The strongest of the five competitive forces is nearly always the rivalry among competing sellers –
the marketing maneuvering and jockeying for buyer patronage that continually go on.

2. In effect, a market is a competitive battlefield where it is customary and expected that rival sellers
will employ whatever resources and weapons they have in their business arsenal to improve their
market positions and performance.

3. Figure 3.7, Factors Affecting the Strength of Rivalry, shows a sampling of competitive weapons
that firms can deploy in battling rivals and indicates the factors that influence the intensity of their
rivalry.

4. Some of the factors that influence the tempo of rivalry among industry competitors include:

a. Rivalry intensifies when competing sellers are active in launching fresh actions to boost their
market standing and business performance.

b. Rivalry is stronger in industries where competitors are equal in size and capability.

c. Rivalry is usually stronger in slow-growing markets and weaker in fast-growing markets.

124 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 124

d. Rivalry is usually weaker in industries comprised of so many rivals that the impact of any one
company’s actions is spread thinly across all industry members. Likewise, it is often weak when
there are fewer than five competitors.

e. Rivalry increases when buyer demand falls off and sellers find themselves with excess capability
and/or inventory.

f. Rivalry increases as it becomes less costly for buyers to switch brands.

g. Rivalry increases as the products of rival sellers become more standardized and diminishes as
the products of industry rivals become more differentiated.

h. Rivalry is more intense when industry conditions tempt competitors to use price cuts or other
competitive weapons to boost unit volumes.

i. Rivalry increases when one or more competitors become dissatisfied with their market position.

j. Rivalry increases when strong companies outside acquire weak firms inside the industry and
launch aggressive, well-funded moves to build market share.
4. Rivalry can be characterized as cutthroat or brutal when competitors engage in protracted price
wars or habitually employ other aggressive tactics that are mutually destructive to profitability.

F. The Collective Strengths of the Five Competitive and Industry Profitability

1. Scrutinizing each competitive force one by one provides a powerful diagnosis of what competition
is like in a given market.

2 As a rule, the stronger the collective impact of the five competitive forces, the lower the combined
profitability of industry participants.

3. The most extreme case of a “competitively unattractive” industry is when all five forces are
producing strong competitive pressures.

4. In contrast, when the collective impact of the five competitive forces is moderate to weak, an
industry is competitively attractive in the sense that industry members can reasonably expect to earn
good profits and a nice return on investment.

5. The ideal competitive environment for earning superior profits is one in which both suppliers and
customers are in weak bargaining positions, there are no good substitutes, high barriers block further
entry, and rivalry among present sellers generates only moderate competitive pressures.

V. Question 3: What Are the Industry’s Driving Forces of Change and What Impact Will They Have?

1. The intensity of competitive forces and the level of industry attractiveness are almost always fluid
and subject to change.

A. The Concept of Driving Forces

1. Driving-forces analysis has three steps:

a. Identifying what the driving forces are,

b. Assessing whether the drivers of change are, individually or collectively, acting to make the
industry more or less attractive, and

c. Determining what strategy changes are needed to prepare for the impact of the driving forces.
125 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 125

B. Identifying an Industry’s Dominant Driving Forces

CORE CONCEPT
1. Many developments can affect an industry Driving forces are the major underlying
powerfully enough to qualify as driving forces. causes of change in industry and competitive
Some are unique and specific to a particular conditions .
industry situation, but most drivers of change fall
into one of the following categories:

a. Changes in an industry’s long-term growth

b. Increasing globalization

c. Changes in who buys the product and how they use it

d. Product innovation

e. Technological change and manufacturing process innovation

f. Marketing innovation

g. Entry or exit of major firms

h. Diffusion of technical know-how across more companies and more countries

i. Changes in cost and efficiency

j. Growing buyer preferences for differentiated products

k. Regulatory influences and government policy changes

l. Changing societal concerns, attitudes, and lifestyles

2. Table 3.3, Common Driving Forces, summarizes the most common forces.

3. Company strategists must resist the temptation to label every change they see as a driving force.

C. Assessing the Impact of the Driving Forces

1. The second step of driving forces analysis is to determine whether the prevailing driving forces are
acting to make the industry environment more or less attractive.

D. Determining Strategy Changes Needed to Prepare for the Impact of the Driving Forces

1. The third step of driving forces analysis is for managers to draw some conclusions about what
strategy adjustments will be needed to deal with the impact of the driving forces.

2. An important part of driving forces analysis is to determine whether the individual or collective
impact of the driving forces will be to increase or decrease market demand, make competition more
or less intense and lead to higher or lower industry profitability.

3. The real payoff of driving forces analysis is to help managers understand what strategy changes are
needed to prepare for the impacts of the driving forces.

VI. Question 4: How Are Industry Rivals Positioned?

1. The best technique for revealing the market positions of industry competitors is strategic group
mapping. This analytical tool is useful for comparing the market positions of industry competitors or
for grouping industry combatants into like positions.
126 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 126

A. Using Strategic Group Maps to Assess the Market

Positions of Key Competitors
1. A strategic group consists of those industry mem-
bers with similar competitive approaches and posi-
tions in the market.
CORE CONCEPT
Strategic group mapping is a technique for
displaying the different market or competitive
positions that rival firms occupy in the industry .

2. The procedure for constructing a strategic group

map is straightforward:
CORE CONCEPT
A strategic group is a cluster of industry rivals
a. Identify the competitive characteristics that that have similar competitive approaches and
differentiate firms in the industry market positions .

b. Plot the firms on a two-variable map using

pairs of these differentiating characteristics

c. Assign firms that fall in about the same strategy space to the same strategic group

d. Draw circles around each strategic group, making the circles proportional to the size of the
group’s respective share of total industry sales revenue

3. Concepts & Connections 3.1, Comparative Market Positions of Producers in the U.S. Beer Industry:
A Strategic Group Map Example, represents a two-dimensional diagram for this industry.

&
Concepts Connections 3.1

Comparative Market Positions of Producers in the U.S. Beer Industry: A Strategic

Group Map Example
Discussion Question: 1 . According to the diagram, which companies comprise the strategic group of firms to which
Anheuser-Bush? Why is the circle containing Anheuser-Bush and Inbev larger than Pabst’s circle?
Answer: The diagram reveals Anheuser-Bush’s strategic group members to be Inbev, Miller, Coors, and Pabst . The
most significant competition is provided by Inbev with similar overall price/quality and large geographic scope .
Anheuser-Bush’s circle is larger than Pabst’s due to a much higher share of overall industry revenue .

C. The Value of Strategic Group Maps

1. Strategic Group maps are revealing in several respects.

a. The most important has to do with identifying which rivals are similarly positioned and are thus
close rivals and which are distant rivals. Generally speaking, the closer strategic groups are to
each other on the map, the stronger the cross-group competitive rivalry tends to be.

b. Not all positions on the map are equally attractive. Two reasons account for why some positions
can be more attractive than others; 1) Industry driving forces may favor some strategic groups
and hurt others and 2) Competitive pressures may cause the profit potential of different strategic
groups to vary.
127 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 127

VII. Question 5: What Strategic Moves Are Rivals Likely to Make Next?

1. Unless a company pays attention to what competitors are doing and knows their strengths and
weaknesses, it ends up flying blind into competitive battle.

2. Having good information about the strategic direction and likely moves of key competitors allows a
company to prepare defensive countermoves, to craft its own strategic moves with some confidence about
what market maneuvers to expect from rivals in response, and to exploit any openings that arise from
competitors’ missteps.

3. Michael Porter’s Framework for Competitor Analysis points to four indicators of a rival’s likely
strategic moves and countermoves. These include a rival’s current strategy, objectives, capabilities, and
assumptions about itself and the industry.

a. Current Strategy – Questions to consider include: How is the competitor positioned in the market?
What is the basis for its competitive advantage (if any)? What kinds of investments is it making (as
an indicator of its growth trajectory)?

b. Objectives – An appraisal of a rival’s objectives should include not only its financial performance
objectives, but strategic ones as well (such as those concerning market share). The appraisal should
also examine how well they are meeting them.

c. Capabilities – A rival’s capabilities (and efforts to acquire new capabilities) serve as a strong signal
of future strategic actions (and reactions to your company’s moves). Assessing a rival’s capabilities
involves sizing up not only their strengths in this respect, but their weaknesses as well.

d. Assumptions – How a rival’s top managers think about their strategic situation can have a big
impact on how they behave.

5. Information regarding these four components can often be found by examining public documents such
as press releases, web sites, and SEC filings.

VIII. Question 6: What are the Industry Key Success Factors?

1. An industry’s key success factors (KSF) are those competitive factors that most affect industry
members’ ability to prosper in the marketplace.
2. An industry’s key success factors can usually be
deduced through identifying the industry’s dominant
CORE CONCEPT
characteristics, assessing the five competitive forces, Key success factors are the strategy
comparing the market positions of industry members, elements, product attributes, competitive
and forecasting the likely next moves of key rivals. capabilities, or intangible assets with the
greatest impact on future competitive success
3. Table 3.3, Common Types of Industry Key Success in the marketplace .
Factors (KSFs), lists the common types of KSFs.

4. The answer to three questions helps identify an industry’s key success factors:

a. On what basis do buyers of the industry’s product choose between the competing brands of sellers?
That is, what product attributes are crucial?

b. Given the nature of the competitive forces prevailing in the marketplace, what resources and
competitive capabilities does a company need to have to be competitively successful?

c. What shortcomings are almost certain to put a company at a significant competitive disadvantage?

5. Only rarely are there more than five or six key factors for future competitive success.
128 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 128

IX. Question 7: Does the Industry Offer Good Prospects for Attractive Profits?

1. The final step in evaluating the industry and competitive environment is boiling down the results in
Questions 1-6 to determine if the industry offers a company strong prospects for attractive profits.

2. The important factors on which to base such a conclusion include:

a. The industry’s growth potential

b. Whether powerful competitive forces are squeezing industry profitability to subpar levels and
whether competition appears destined to grow stronger or weaker

c. Whether industry profitability will be favorably or unfavorably affected by the prevailing driving
forces

d. The company’s competitive position in the industry vis-à-vis

e. How competently the company performs industry key success factors.

3. The degree to which an industry is attractive or unattractive is not the same for all industry participants
and potential new entrants. The attractiveness of an industry depends on the degree of fit between a
company’s competitive capabilities and industry key success factors.

Assurance of Learning Exercises

1. Prepare a brief analysis of the organic food industry using the information provided by the Organic Trade
Association. Based upon information provided in the Organic Report magazine, draw a five-forces diagram
for the organic food industry and briefly discuss the nature and strength of each of the five competitive
forces.

Response:

The student should find information about the Organic Trade Association at https://www.ota.com, while the
magazine can be found at http://theorganicreport.com. Here the student can find detail reports regarding
the market, industry drivers, as well as business and economic outlooks.

The student should draw a five-forces diagram similar to figure 3.2 in the text. The diagram should show
that the five forces are: (1) firms in other industries offering substitute products, (2) buyers, (3) potential new
entrants, (4) suppliers of raw materials, parts, components, or other resource inputs, and (5) rivalry among
competing sellers in the industry.

Suggested student responses for discussing the nature and strength of the five competitive forces in the or-
ganic food industry may include:

(1) Competitive pressures stemming from the attempts of companies outside the industry to win buyers
over to their products – The Organic Food Production Act (OFPA) which specifies allowable inputs to
meet stringent criteria for organic food thereby 1) limiting substitute products.

(2) Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration – The
strong growth in consumption of organic food, specifically in the United States, in the past several years,
thereby reducing buyer power.

(3) Competitive pressures coming from the threat of entry of new rivals – The Organic Food Production Act
(OFPA) which specifies allowable inputs to meet stringent criteria for organic food thereby raising the
bar for new entrants.

(4) Competitive pressures coming from supplier bargaining and supplier-seller collaboration – Tight supply
of organic ingredients that is increasing supplier power.
129 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 129

(5) Competitive pressures created by jockeying for better market position, increased sales and market share,
and competitive advantage – The strong growth in imports of organic food products into the United
States which is increasing competitive rivalry.

2. Based on the strategic group map in Concepts & Connections 3.1, who are Yuengling & Son’s closest
competitors? Between which two strategic groups is competition the strongest? Why do you think no beer
producers are positioned in the lower-left corner of the map? Which company/strategic group faces the
weakest competition from the members of other strategic groups?

Response:

The student should identify that Yuengling & Sons competes in the high price/quality end of the industry.
The closest completion is provided by primarily microbreweries and secondarily by Boston Beer.

The student should identify that the combination of narrow geographic scope and low/price quality does not
provide an attractive business model. Lower price (profit margin) products require a higher volume in order
to achieve profitability.

The student should identify that Microbreweries face their weakest competition from the industry lead-
ers such as Anheuser-Bush/Inbev/Miller/Coors/Pabst. The target market for Microbreweries are locally
focused-high quality consumers as opposed to broad based lower quality consumers. The student might also
consider that this puts Yuengling & Sons in a difficult position with a broader geographic base that might put
it at odds with the locally focused high quality consumer.

3. The National Restaurant Association publishes an annual industry factbook that can be found at www.
restaurant.org. Based on information in the latest report, does it appear that macro-environmental factors and
the economic characteristics of the industry will present industry participants with attractive opportunities
for growth and profitability? Explain.

Response:

From publically available news stories and research items, students should identify factors shaping the
competitive arena. Helpful resources are the 2015 Pocket Factbook and the 2015 Forecast Summary. Items
the student highlights might include:

• There are a growing number of restaurants – 1 Million restaurant locations in the United States.
• Restaurants represent a growing percentage of overall food dollars – 47%: Restaurant-industry share of
the food dollar.

• Fewer restaurants are purchasing capital equipment due to economic concerns.

• The strongest growth in Quickservice market segment rather than the traditional restaurant.
• Restaurants are facing wage pressure as workers and government push for increases in minimum wage.
• Most restaurant owners are downgrading future revenue due to economic forecasts.
• Economists are predicting the strongest gain in wholesale food prices in three decades.

The student could use a five-forces diagram similar to figure 3.3 in the text in order to conduct this analysis.
The diagram should show that the five forces are: (1) firms in other industries offering substitute products,
(2) buyers, (3) potential new entrants, (4) suppliers of raw materials, parts, components, or other resource
inputs, and (5) rivalry among competing sellers in the industry.

From the perspective of the traditional restaurant, the student might find that 1) the Quickservice segment
offers a strong substitute choice over the traditional restaurant, 2) buyers are in a strong position with many
choices in the industry, 3) there is pressure from new entrants, 4) there is supply pressure from wages and
130 Section 5 Instructor’s Manual for Essentials of Strategic Management Section 5 Lectures Notes for Chapter 3 130

wholesale food prices, and 5) there is pressure from rivalry among competing sellers based upon the large
number of restaurants in the industry.

Taken together, costs are being forced higher and prices are being forced lower, putting pressure on profits.
While at the same rivalry, new entrants, and substitutes are putting pressure on restaurants to gain and
maintain customers. The student might conclude that overall, the profit outlook for the traditional restaurant
segment is not favorable.

A follow-on analysis of strategic choice might reveal that an effective way to reduce the pressures from
substitutes, buyer power, rivalry, and new entrants might be differentiation. This analysis is supported by the
growth of the Quickservice restaurant segment that differentiates itself from the traditional restaurant in a
meaningful way that resonates with their customer base.

Chapter Summary
Chapter Four discusses the techniques of evaluating a company’s internal situation, including its collection
of valuable resources and capabilities, its relative cost position, and its competitive strength versus its rivals.
The analytical spotlight will be trained on five questions: (1) How well is the company’s strategy working? (2)
What are the company’s competitively important resources and capabilities? (3) Is the company’s cost structure
and customer value proposition competitive? (4) Is the company competitively stronger or weaker than key rivals?
(5) What strategic issues and problems merit front-burner managerial attention? The answers to these five questions
complete management’s understanding of “Where are we now?” and position the company for a good strategy
situation fit required of the “Three Tests of a Winning Strategy.”