chapter 3

Evaluating a
Company’s
External
Environment

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 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.

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 FIGURE 3.1 From Analyzing the Company’s Situation
to Choosing a Strategy

Chapter 3 External Environment

Chapter 4 Internal Environment

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 Analyzing the Company's Macro-
Environment
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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images.
 Assessing the Company’s Industry and
Competitive Environment
Thinking strategically about the competitive
environment requires managers to use some well
validated concepts and analytical tools.
• Five forces framework
• The value net
• Driving forces
• Strategic groups
• Competitor analysis
• Key success factors
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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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Risk of Entry by Potential Competitors (1st
Competitive Force) (1 of 2)
Potential competitors
• Companies that are currently not competing in the
industry but have the potential to do so.

Economies of scale
• Reductions in unit costs attributed to a larger output.

Brand loyalty
• Preference of consumers for the products of
established companies.
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Risk of Entry by Potential Competitors (1st
Competitive Force) (2 of 2)
Absolute cost advantage
• Enjoyed by incumbents in an industry and that new entrants cannot
expect to match.

Switching costs
• Costs that consumers must bear to switch from the products offered
by one established company to the products offered by a new
entrant.
Government regulations
• Falling entry barriers due to government regulation results in
significant new entry, increase in the intensity of industry
competition, and lower industry profit rates.
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 Rivalry Among Established Companies
(2nd Competitive Force) (1 of 2)

Rivalry - Competitive struggle between

companies within an industry to gain market share
from each other.
• Intense rivalry among established companies
constitutes a strong threat to profitability.
Factors that impact the intensity of rivalry among
established companies within an industry are:
• Industry competitive structure - Number and size
distribution of companies in it.

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 Rivalry Among Established Companies
(2nd Competitive Force) (2 of 2)
• Industry demand - Increasing demand moderates
competition by providing greater scope for companies
to compete for customers.
• Cost conditions - When fixed costs are high,
profitability is highly leveraged to sales volume.
• Exit barriers - Economic, strategic, and emotional
factors that prevent companies from leaving an
industry.
• High exit barriers - Companies become locked into an
unprofitable industry where overall demand is static or
declining.

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 bargaining power of buyers
(3rd Competitive Force)
Buyers’ power to bargain down prices or raise
costs by demanding better quality and service.
Power includes:
• buyers can choose sellers and purchase in large
quantities.
• supplier industry is dependent on buyers for a major
portion of sales.
• with low switching costs and ability to purchase input
from several companies at once, buyers can pit
companies against each other.
• buyers can threaten to enter the industry and produce
the product.
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 bargaining power of suppliers
(4th Competitive Force)
Suppliers’ power to raise input prices or industry
costs through various means.
Power includes:
• product has few substitutes and is vital to the buyer.
• supplier is not dependent on one particular industry for
their sales.
• companies would incur high switching costs if they
moved to a different supplier.
• supplier can threaten to enter a customers’ industry.
• companies cannot enter their suppliers’ industry to
lower prices.
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 Substitute products ( 5th competitive forces)

Substitute products - Those of different

businesses that satisfy similar customer needs.
• Limit the price that companies in an industry can
charge for their product.

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 Complementors and the Value Net
How the value net differs from the five forces
• Focuses on the interactions of industry participants
with a particular (focal) company
• Defines the category of competitors to include the focal
firm’s direct competitors, industry rivals, the sellers of
substitute products, and potential entrants
• Introduces a new category of industry participant—
complementors—producers of products that enhance
the value of the focal firm’s products when they are
used together

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 FIGURE 3.9 The Value Net

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 Industry Dynamics and the Forces Driving
Change
Driving forces analysis has three steps.
• Identifying what the driving forces are
• Assessing whether the drivers of change are
acting to make the industry more or less attractive
• Determining what strategy changes are needed to
prepare for the impact of the driving forces

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 Identifying the Forces Driving 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 firms 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
Are the driving forces, on balance, acting to cause
demand for the industry’s product to increase or
decrease?
Is the collective impact of the driving forces making
competition more or less intense?
Will the combined impacts of the driving forces
lead to higher or lower industry profitability?

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 Adjusting Strategy to Prepare for the
Impacts of Driving Forces
What strategy adjustments will be needed
to deal with the impacts of the driving forces?
• What adjustments must be made immediately?
• What actions currently being taken should be halted or
abandoned?
• What can we do now to prepare for adjustments we
anticipate making in the future?

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 Strategic Group Analysis
Strategic group
• Consists of those industry members with similar
competitive approaches and positions in the market
• Having comparable product-line breadth
• Emphasizing the same distribution channels
• Depending on identical technological approaches
• Offering the same product attributes to buyers
• Offering similar services and technical assistance

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 Using Strategic Group Maps to Assess the
Market Positions of Key Competitors
Constructing a strategic group map
• Identify the competitive characteristics that delineate
strategic approaches used in the industry.
• Plot the firms on a two-variable map using pairs of
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 group’s share of
total industry sales revenues.

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Illustration Capsule 3.1 Comparative Market Positions of Selected Companies in the
Casual Dining Industry: A Strategic Group Map Example

Footnote: Circles are drawn roughly proportional to the sizes of the chains, based on revenues.
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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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 FIGURE 3.10 The SOAR Framework for Competitor Analysis

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 Key Success Factors

Key success factors (KSFs):

• 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.
• These vary from industry to industry, and over time
within the same industry, and in importance as drivers
of change and competitive conditions change.

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 Identification of Key Success Factors
What crucial product attributes and service
characteristics do buyers of the industry’s product
consider when choosing among competing brands
of sellers?
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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