CHAPTER 3:

E VA L U AT I N G A
C O M PA N Y ’ S
EXTERNAL
ENVIRONMENT
INTRODUCTION
Personal Experience

Insightful diagnosis of a company’s

external and internal environment
is a prerequisite for managers to
succeed in crafting a strategy
UNDERSTANDING THE FACTORS THAT
DETERMINE A COMPANY’S SITUATION
• Diagnosing a company’s situation has two facets
– Assessing the company’s external or macro-environment
• Industry and competitive conditions
• Forces acting to reshape this environment
– Assessing the company’s internal or
micro-environment
• Market position and competitiveness
• Competencies, capabilities,
resource strengths and
weaknesses, and competitiveness
FIGURE 3.1: FROM THINKING
STRATEGICALLY ABOUT THE COMPANY’S
SITUATION TO CHOOSING A STRATEGY
Thinking
strategically
about a
company’s
external
environment
Form a strategic Select the best
Identify promising
visión of where strategy and
strategic options
the company for the company
business model
needs to head for the company

Thinking
strategically
about a
company’s
internal
environment
 FIGURE 3.2:
THE
COMPONENTS
OF A
COMPANY’S
MACRO-
ENVIRONMENT
 THINKING STRATEGICALLY ABOUT A
COMPANY’S MACRO-ENVIRONMENT
• A company’s macro-environment includes all
relevant factors and influences outside its
boundaries • Diagnosing a company’s external situation
involves assessing strategically important
factors that have a bearing on the
decisions a company’s makes about its
– Direction
– Objectives
– Strategy
– Business model
• Requires that company managers scan
the external environment to
– Identify potentially important external
developments
– Assess their impact and influence
– Adapt a company’s direction and
strategy as needed
KEY QUESTIONS What are the
industry’s
REGARDING THE dominant

INDUSTRY AND
economic
traits?

COMPETITIVE How strong What forces

ENVIRONMENT competitive
are are driving
change in the
forces? industry?
How
What market What are the
positions do attractive is
key factors
rivals occupy? the industry
for
What moves from a profit
competitive
will they make perspective?
success?
next?
EXERCISE

• As the owner of a fast-food enterprise seeking a

loan from a bank to finance the construction and
operation of three new store locations, you have
been asked to provide the loan officer with a brief
analysis of the competitive environment in fast
food.
• Draw a five-forces diagram for the fast-food
industry, and briefly discuss the nature and
strength of each of the five competitive forces in
fast food.
• Do whatever Internet research is required to
expand your understanding of competition in the
fast-food industry and do a competent five-forces
analysis
QUESTION 1: WHAT ARE
THE INDUSTRY’S • Market size and growth rate

DOMINANT ECONOMIC • Number of rivals

TRAITS? • Scope of competitive rivalry

• Buyer needs and
requirements
• Degree of product
differentiation
• Product innovation
• Pace of technological
change
• Vertical integration
• Economies of scale
QUESTION 2: HOW
STRONG ARE
COMPETITIVE
FORCES?

• The Five Forces Model of

Competition
HOW TO DO IT?

1 2 3
Step 1: Identify the Step 2: Evaluate the Step 3: Determine
specific competitive strength of each whether the collective
pressures associated with competitive force – fierce, strength of the five
each of strong, competitive forces
the five forces moderate to normal, or is conducive to earning
weak? attractive profits
• Usually the strongest of the five
forces

• Key factor in determining

strength of rivalry

– How aggressively are rivals

using various weapons of
competition to improve
their market positions and
performance?

• Competitive rivalry is a
combative
contest involving

– Offensive actions

– Defensive countermoves
WEAPONS FOR COMPETING AND FACTORS AFFECTING
STRENGHT OF RIVALRY
 Seriousness of threat depends on
COMPETITIVE • Size of pool of entry candidates
PRESSURES and available resources
• Barriers to entry
ASSOCIATED • Reaction of existing firms
WITH Evaluating threat of entry involves
POTENTIAL assessing
ENTRY • How formidable entry barriers are for
each type of potential entrant and
• Attractiveness of growth and profit
prospects
Sizable economies of
scale
Cost and resource
disadvantages
independent of size
Brand preferences and
customer loyalty
Capital requirements
and/or other
specialized resource
COMMON
BARRIERS
requirements

Access to distribution Regulatory policies Tariffs and international Ability of industry

TO ENTRY
channels trade restrictions incumbents to launch
vigorous initiatives to
block a newcomer’s
entry
COMPETITIVE PRESSURES FROM
SUBSTITUTE PRODUCTS
Concept Examples
 Sugar vs. artificial sweeteners
Substitutes matter when customers
are attracted to the products of  Eyeglasses and contact lens
firms in other industries vs. laser surgery
 Newspapers vs. TV vs. Internet
FIGURE 3.6:
FACTORS
AFFECTING
COMPETITION
FROM
SUBSTITUTE
PRODUCTS
COMPETITIVE • Whether supplier-seller relationships represent a weak
or strong competitive force depends on
PRESSURES
FROM
– Whether suppliers can exercise
sufficient bargaining leverage to

SUPPLIERS
influence terms of supply in their favor

AND SUPPLIER- – Nature and extent of supplier-seller

collaboration in the industry

SELLER
COLLABORATION
 FACTORS
AFFECTING
BARGAINING
POWER OF
SUPPLIERS
Industry members often forge strategic
partnerships with select suppliers
to
COMPETITIVE
• Reduce inventory and logistics costs PRESSURES:
• Speed availability of
next-generation components COLLABORATION
• Enhance quality of parts being supplied BETWEEN
• Squeeze out cost savings for both parties SELLERS AND
Competitive advantage potential may SUPPLIERS
accrue to those industry members
(sellers) doing the best job of managing
supply-chain relationships
 FACTORS
AFFECTING
BARGAINING
POWER OF
BUYERS
 Partnerships between industry members
and some/many of their customers can
impact competitive pressures
COMPETITIVE
PRESSURES: Collaboration may result in
mutual benefits regarding
COLLABORATION
BETWEEN •
•
Just-in-time deliveries
Order processing
SELLERS AND • Electronic invoice payments
BUYERS • Data sharing

Competitive advantage may accrue to

those industry members doing the best job
of partnering with their customers
 • Competitive environment is
unattractive from the standpoint
of earning good profits when
STRATEGIC – Rivalry is vigorous
IMPLICATIONS
OF – Entry barriers are low
and entry is likely
THE FIVE – Competition from
COMPETITIVE substitutes is strong
FORCES – Suppliers and customers have
considerable bargaining power
COPING WITH THE
FIVE COMPETITIVE FORCES

• Objective is to craft a strategy to

– Insulate firm from

competitive pressures

– Initiate actions to produce

sustainable competitive advantage

– Allow firm to be the industry’s “mover and shaker” with

the “most powerful” strategy that defines the business
model for the industry
QUESTION 3: WHAT FORCES • Industries change because
ARE DRIVING INDUSTRY forces are driving industry
participants to alter their
CHANGE AND WHAT actions
IMPACTS WILL THEY • Driving forces are the
HAVE? major underlying causes of
changing industry and
competitive conditions
• Where do driving forces
originate?
– Outer ring of
macroenvironment
– Inner ring of
macroenvironment
The best technique for revealing the
market positions of industry
QUESTION 4:
competitors is strategic group mapping. WHAT
MARKET
This analytical tool is useful for POSITIONS
comparing the market positions of each
firm separately or for grouping them DO RIVALS
into like positions when an industry has
so many competitors that it is not OCCUPY?
practical to examine each one in depth.
USING STRATEGIC GROUP MAPS TO
ASSESS THE MARKET POSITIONS OF KEY
COMPETITORS
• A strategic group consists of those industry members with similar competitive approaches and
positions in the market
• Firms in same strategic group have two or more competitive characteristics in common
– Have comparable product line breadth
– Sell in same price/quality range
– Emphasize same distribution channels
– Use same product attributes to appeal
to similar types of buyers
– Use identical technological approaches
PROCEDURE FOR CONSTRUCTING A
STRATEGIC GROUP MAP
• Identify the competitive characteristics that differentiate firms in the industry. Typical variables
are price/quality range (high, medium, low); geographic coverage (local, regional, national, global);
• Plot the firms on a two-variable map using pairs of these differentiating characteristics.
• Assign firms that fall in about the same strategy space 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.
WHAT CAN BE LEARNED FROM
STRATEGIC GROUP MAPS?
• Strategic group maps reveal which companies are close competitors and which are distant
competitors.
• the closer strategic groups are to each other on the map, the stronger the cross-group
competitive rivalry tends to be
Based on the strategic group
map in Illustration:
• Who are Polo Ralph Lauren’s closest
competitors?
• Between which two strategic groups
is competition the strongest? EXCERCISE
• Why do you think no retailers are
positioned in the upper right-hand
corner of the map?
• Which company/strategic group faces
the weakest competition from the
members of other strategic groups?
QUESTION 5: WHAT STRATEGIC
MOVES
ARE RIVALS LIKELY TO MAKE NEXT?

• A firm’s best strategic moves

are affected by
– Current strategies of competitors
– Future actions of competitors
• Profiling key rivals involves gathering
competitive intelligence about
– Current strategies
– Most recent actions and public announcements
– Resource strengths and weaknesses
– Efforts being made to improve their situation
– Thinking and leadership styles of top executives
THINGS TO CONSIDER IN
PREDICTING MOVES OF RIVALS

Which rivals need to increase Which rivals have a strong Which rivals are good
their unit sales and market incentive, along with resources, candidates to be acquired?
share? What strategies are to make major strategic Which rivals have the
rivals most likely to pursue? changes? resources to acquire others?

Which rivals are likely to

Which rivals are likely to enter expand their product offerings
new geographic markets? and enter new product
segments?
 QUESTION 6: WHAT ARE THE KEY
FACTORS FOR COMPETITIVE SUCCESS?

• Key Success Factors (KSFs) are competitive factors and attributes that affect every industry
member’s ability to be competitively and financially successful
• KSFs are those particular attributes that are so important that they spell the difference between
– Profit and loss
– Competitive success or failure
• KSFs can relate to
– Specific strategy elements
– Product attributes
– Resources
– Competencies
– Competitive capabilities
– Market achievements
IDENTIFYING INDUSTRY
KEY SUCCESS FACTORS
• The answers to 3 questions often help pinpoint an industry’s KSFs
– On what basis do customers choose
between competing brands of sellers?
– What resources and competitive capabilities does a company
need to have to be competitively successful?
– What shortcomings are likely to place a company at a
significant competitive disadvantage?
• Rarely are there more than 5 - 6
factors that are truly key to the future financial and competitive
success of industry members
QUESTION 7: The important factors on which to base such a conclusion include:
● The industry growth potential.
DOES THE ● Whether powerful competitive force are squeezing industry
OUTLOOK FOR profitability to subpar levels and whether competition appears

THE INDUSTRY destined to grow stronger or weaker.

● Whether industry profitability will be favorably or unfavorably
PRESENT THE affected by the prevailing driving forces.

COMPANY WITH ● The degrees of risk and uncertainty in the industry's future.

AN ATTRACTIVE ● Whether the industry as a whole confronts server problems -

regulatory or environmental issues, stagnating buyer demand,
OPPORTUNITY? industry overcapacity mounting competition, and so on.
“If an industry’s overall profit prospects
are above average, the industry
environment is basically attractive; if
industry profit prospects are below
average, conditions are unattractive”
Core Concept:
“The degree to which an industry
is attractive or unattractive is not
the same for all industry
participants and all potential
entrants; the attractiveness of the
opportunities an industry presents
depends heavily whether a
company has the resource
strengths and competitive
capabilities to capture them.”
 What are the industry’s dominant
economic features?

What kinds of competitive forces

KEY POINTS: are industry members facing, and
how strong is each force?

What factors are driving industry

change and what impact will they
have on competitive intensity and
industry profitability?
What market positions do
industry rivals occupy—who is What strategic moves are rivals
strongly positioned and who is likely to make next?
not?

Does the outlook for the industry

What are the key factors for
present the company with
future competitive success?
sufficiently attractive prospects for
profitability?