The Companys External Environment

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The Companys External Environment
Part 1 Question 2 What kind of competitive
forces do industry members face? Question 3 What
factors drive industry change?
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Thinking Strategically About a Companys Industry
and Competitive Environment

• Question 1 What Are the Industrys Dominant
  Economic Features?
• Question 2 What Kinds of Competitive Forces Are
  Industry Members Facing, and How Strong Is Each
  Force?
• Question 3 What Factors Are Driving Industry
  Change and What Impacts Will They Have?
• Question 4 What Market Positions Do Rivals
  OccupyWho Is Strongly Positioned and Who Is Not?
• Question 5 What Strategic Moves Are Rivals
  Likely to Make Next?
• Question 6 What Are the Key Factors for Future
  Competitive Success?
• Question 7 Does the Outlook for the Industry
  Present an Attractive Opportunity?

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Question 2 What Kinds of Competitive Forces Are
Industry Members Facing, and How Strong Is Each
Force?

• Key analytical tool The five-forces model of
  competition.

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Fig. 3.3 The Five Forces Model of Competition
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Analyzing the Five Competitive Forces How
to Do It
Step 1 Identify the specific competitivepressur
es associated with each ofthe five forces Step
2 Evaluate the strength of eachcompetitive
force -- fierce, strong,moderate to normal, or
weak? Step 3 Determine whether the
collectivestrength of the five competitive
forcesis conducive to earning attractive profits
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Force 1 Rivalry Among Competing Sellers

• Usually the strongest competitive force.

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What Are the TypicalWays of Competing?

• Lower prices
• More or different performance features
• Better product performance
• Higher quality
• Stronger brand image and appeal
• Wider selection of models and styles

• Bigger/better dealer network
• Low interest rate financing
• Higher levels of advertising
• Stronger product innovation capabilities
• Better customer service
• Ability to provide buyers with custom-made
  products

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What Causes Rivalry to be Stronger?

• Competitors are actively attempting to improve
  market standing and business performance
• Slow market growth
• Number of rivals increases
• It is easy for buyers to switch brands

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What Causes Rivalry to be Weaker?

• Industry rivals move only infrequently or in a
  non-aggressive manner to draw sales from rivals
• Rapid market growth
• Products of rivals are stronglydifferentiated
  and customer loyalty is high
• Buyer costs to switch brands are high
• There are so many rivals that any one firms
  actions has minimal impact on rivals business
  (or there are very few rivals).

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Force 2 Competitive PressuresAssociated With
Potential Entry

• Are the firms in your industry threatened by new
  entrants?
• This depends on
• 1. How high entry barriers are in the industry.
• Economies of scale
• Legal barriers
• Strong brand loyalty
• High capital requirements
• Resource barriers
• 2. Attractiveness of growth and profit prospects

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When Is the Threat of Entry Stronger?

• Theres a sizable pool of potential entrants
• Entry barriers are low
• Industry growth is rapid and profit potential is
  high
• Incumbents are unwilling or unable to contest a
  newcomers entry efforts

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When Is the Threat of Entry Weaker?

• Theres only a small pool of possible entrants
• Entry barriers are high
• Profits are low
• Industrys outlook is risky
• Industry growth is slow or stagnant
• Industry members will strongly contestefforts of
  new entrants to gain a market foothold

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Force 3 Competitive Pressures from Substitute
Products

• Substitutes matter when customers are attracted
  to the products of firms in other industries

Examples

• Sugar vs. artificial sweeteners
• Eyeglasses and contact lensvs. laser surgery
• Newspapers vs. TV vs. Internet

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When Is the CompetitionFrom Substitutes
Stronger?

• There are many good substitutes readily available
• Substitutes are attractively priced
• The higher the quality and performance of
  substitutes
• The easier it is for customers to switch to
  substitutes

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Force 4 Competitive Pressures From Suppliers

• Whether supplier-seller relationships represent
  aWeak or strong competitive force depends on
• Whether suppliers can exercisesufficient
  bargaining leverage toinfluence terms of supply
  in their favor
• Nature and extent of supplier-sellercollaboration
  in the industry

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When Is the BargainingPower of Suppliers
Stronger?

• Industry members incur high costs in switching
  their purchases to alternative suppliers
• Needed inputs are in short supply
• Supplier provides a differentiated inputthat
  enhances the quality of performanceof sellers
  products or is a valuable partof sellers
  production process
• There are only a few suppliers of a specific
  input
• Some suppliers threaten to integrate forward

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When Is the Bargaining Power of Suppliers
Weaker?

• Item being supplied is readily available from a
  number of sources
• Seller switching costs to alternative suppliers
  are low
• Good substitutes exist
• Industry members account for a bigfraction of
  suppliers total sales

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Force 5 Competitive Pressures From Buyers

• Whether seller-buyer relationships represent
  aweak or strong competitive force depends on
• Whether buyers have sufficient bargainingpower
  to influence terms of sale in their favor
• Extent and competitive importance ofseller-buyer
  strategic partnershipsin the industry

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When Is the BargainingPower of Buyers
Stronger?

• It is easy for buyers to switch to competing
  brands or substitutes
• Buyers are large and can demand concessions
• Buyer demand is weak or declining
• Identity of buyer adds prestigeto sellers list
  of customers
• Buyers can postpone purchases until later

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When Is the BargainingPower of Buyers
Weaker?

• Buyers purchase item infrequently or in small
  quantities
• It is hard for buyer to switch to competing
  brands
• Strong demand creates a sellers market
• Sellers brand reputation is important to buyer
• A specific sellers product delivers qualityor
  performance that is very important to buyer

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Strategic Implications ofthe Five
Competitive Forces

• Competitive environment is unattractive fromthe
  standpoint of earning good profits when
• Rivalry is vigorous
• Entry barriers are lowand entry is likely
• Competition from substitutes is
  strong
• Suppliers and customers haveconsiderable
  bargaining power

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Strategic Implications ofthe Five
Competitive Forces

• Competitive environment is ideal froma
  profit-making standpoint when
• Rivalry is moderate
• Entry barriers are highand no firm is likely to
  enter
• Good substitutesdo not exist
• Suppliers and customers arein a weak bargaining
  position

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Question 3 What Factors Are Driving
Industry Change?

• Industries change because forcesare driving
  industry participantsto alter their actions
• Driving forces are themajor underlying causesof
  changing industry andcompetitive conditions
• Driving forces originate
• Outside the industry
• Within the industry

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Analyzing Driving Forces Three Key Steps

• STEP 1 Identify forces likely to exert
  greatest influence over next 1 - 3 years
• STEP 2 Assess impact
• Are the driving forces acting to cause market
  demand for product to increase or decrease?
• Are the driving forces acting to make competition
  more or less intense?
• Will the driving forces lead to higher or lower
  industry profitability?
• STEP 3 Determine what strategy changes are
  needed

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Common Types of Driving Forces

• IT changes the internet
• Increasing globalization of industry
• Changes in long-term industry growth rate
• Product innovation
• Technological change/process innovation

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Common Types of Driving Forces (cont)

• Entry or exit of major firms
• Changes in cost and efficiency
• Changes in degree of uncertainty and risk
• Regulatory policies / government legislation
• Changing societal concerns, attitudes, and
  lifestyles