CHAPTER 3

EVALUATING A COMPANY’S
EXTERNAL ENVIRONMENT

Student Version
Copyright ®2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin
 3.1 From Thinking Strategically about the Company’s Situation
to Choosing a Strategy

Chapter 3

Thinking
strategically
about a firm’s
external
environment Forming a
Identifying Selecting the
strategic
promising best strategy
vision of
strategic and business
where the
options model for
firm needs
for the firm the firm
Thinking to head
strategically
about a firm’s
internal
environment

Chapter 4

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 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

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 QUESTION 1: DOES THE INDUSTRY OFFER
ATTRACTIVE 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.

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 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

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 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.

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 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

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 Competitive Pressures from the Sellers
of 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

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 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

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 Competitive Pressures Stemming from Buyer
Bargaining 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

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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?

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 QUESTION 3: WHAT FACTORS ARE DRIVING
INDUSTRY CHANGE, AND WHAT IMPACTS
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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 QUESTION 4: HOW ARE INDUSTRY RIVALS
POSITIONED—WHO IS STRONGLY POSITIONED
AND 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

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 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

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 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.

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 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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