External Environment Each week, you will be asked to respond to the prompt or prompts in the discussion forum. Your initial post should be a minimum of 300 words in length, and you

26 Sep External Environment Each week, you will be asked to respond to the prompt or prompts in the discussion forum. Your initial post should be a minimum of 300 words in length, and you

Posted at 13:53h in Business & Finance /Management by

External Environment

Each week, you will be asked to respond to the prompt or prompts in the discussion forum. Your initial post should be a minimum of 300 words in length, and you should respond to two additional posts from your peers. If you have not done so lately, please review the Rules of Discussion.

Given the importance of understanding the external environment, why do some firms fail to do so? What were the implications of the firms' failure to understand that environment?

chapter 3 Evaluating a Company’s External Environment

Arthur A. Thompson The University of Alabama

An e-book published and distributed by McGraw Hill Education

Sixth Edition of Strategy: Core Concepts and Analytical Approaches (2020-2021). Arthur A. Thompson, The University of Alabama. Published and distributed by McGraw Hill Education. Image of globe comprised of puzzle pieces with several pieces dislodged and scattered below the globe. Title of Chapter 3 Evaluating a Company’s External Environment

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“Analysis is the critical starting point of strategic thinking.”

Kenichi Ohmae, consultant and author

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“Things are always different—the art is figuring out which differences matter.”

Laszlo Birinyi, investments manager

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“In essence, the job of a strategist is to understand and cope with competition.”

Michael E. Porter, Professor, Harvard Business School

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“No matter what it takes, the goal of strategy is to beat the competition.”

Kenichi Ohmae, consultant and author

Learning Objectives

To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions.

To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak.

To learn how to determine whether an industry’s outlook presents a firm with sufficiently attractive opportunities for growth and profitability.

To understand why in-depth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a firm’s situation.

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Chapter 3 Roadmap

Assessing the Strategically Relevant Industry and Competitive Factors in a Firm’s External Environment

Question 1: What competitive forces do industry members face, and how strong are they?

Question 2: What forces are driving changes in the industry and what impacts will they have on competitive intensity and industry profitability?

Question 3: What market positions do rivals occupy—which is strongly positioned and who is not?

Question 4: What strategic moves are rivals likely to make next?

Question 5: What are key factors for future competitive success?

Question 6: Is the industry outlook conducive to good profitability?

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Actions to steer a firm in a different direction or alter its strategy must be predicated on deep understanding of two facets of its situation:

The industry and competitive environment in which the firm operates and the forces acting to reshape this environment

The firm’s own market position and competitiveness

Its resources and capabilities

Its strengths and weaknesses vis-à-vis rivals

Its windows of opportunity

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Understanding a Company’s Situation

Figure 3.1 From Thinking Strategically about the Company’s Situation to Choosing a Strategy

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Access the text alternative for slide image.

External factors and influences in the “macro-environment” that influence a firm’s decisions about its direction, objectives, strategy, and business model include:

General economic conditions

Political, regulatory, and legal influences

Technological influences

Sociocultural forces (values, lifestyles, and shifting population demographics)

Considerations relating to the natural environment

The Strategically Relevant Factors Influencing a Firm’s External Environment

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Figure 3.2 The Components of a Company’s Macroenvironment

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Access the text alternative for the slide image.

There are six questions that must be asked and answered:

What competitive forces do industry members face, and how strong are they?

What forces are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?

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

What strategic moves are rivals likely to make next?

What are the key factors for future competitive success?

Is the industry outlook conducive to good profitability?

Assessing a Company’s Industry and Competitive Environment

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The state of competition in an industry is a composite of five competitive forces:

The market maneuvering and jockeying for buyer patronage among industry rivals.

The threat of new entrants into the market.

The attempts of firms in other industries to win buyers over to their own substitute products.

The exercise of supplier bargaining power.

The exercise of buyer (or customer) bargaining power.

Question 1: What Competitive Forces Do Industry Members Face and How Strong Are They?

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Figure 3.3 The Five-Forces Model of Competition: A Key Analytical Tool

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Access the text alternative for slide image.

How to Analyze the Five Competitive Forces

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Step 1

Identify the specific competitive pressures associated with each of the five forces.

Step 2

Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak).

Step 3

Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.

Core Concept

Competitive maneuvering among industry rivals is ever-changing, as competing sellers initiate round after round of offensive and defensive moves, emphasizing first one mix of competitive weapons and then another in efforts to improve their market positions and profitability.

These ongoing maneuvers and jockeying for position create a continually evolving competitive landscape where the market battle ebbs and flows, sometimes takes unpredictable twists and turns, and produces winners and losers.

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Competitive Pressures Created by the Rivalry among Competing Sellers

A market is a competitive battlefield where the contest among industry rivals is ongoing and dynamic.

Each rival is motivated to use whatever “weapons” in its business arsenal will attract and retain buyers, strengthen its market position, and yield good profits.

The challenge is to craft a competitive strategy that at the very least allows a firm to hold its own against rivals and, more ideally, strengthens its ability to compete successfully enough to produce a competitive edge over rivals.

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When one competitor deploys a strategy or makes a new strategic move that produces good results, its rivals must respond with offensive or defensive countermoves calculated to preserve their market standing and avoid lower profitability.

This pattern of move and countermove, attack and defend, adjust and readjust makes the competitive battle among rivals dynamic and fluid, with firms gaining or losing ground in the marketplace according to whether their strategic maneuvers succeed or fail.

The winners—current market leaders—have no guarantees of continued leadership; their market success is only as durable as the power of their strategies to fend off the strategies of ambitious challengers.

All this constant maneuvering and jockeying quite often results in the competitive battle among industry rivals being the strongest of the five competitive forces.

Why Rivalry Is Usually the Strongest of the Five Competitive Forces

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Figure 3.4 The “Weapons” Used to Battle Rivals and the Factors Affecting the Strength of Rivalry

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Reducing prices; granting special discounts to win the business of particular buyers Introducing more or different features Innovating to improve product performance or quality Running ads to inform buyers of new or special features and/or to strengthen brand awareness or brand image Having periodic sales promotions, holding clearance sales, advertising items on sale Improving selection of models and styles

Building a bigger/better dealer network Offering low interest rate financing Offering coupons Improving customer service Allowing buyers to customize what they buy Improving warranties Providing quicker or cheaper delivery Developing competitively valuable capabilities rivals don’t have

Figure 3.4 The Factors Affecting the Strength of Rivalry

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What Causes Rivalry to Become Stronger?

Rivalry is more intense when:

Competing sellers are active in making fresh moves to improve their market standing and business performance.

Buyer demand is growing slowly.

Buyers incur low costs in switching to rival brands.

The products of rival sellers are essentially identical or else weakly differentiated, resulting in little or no buyer brand loyalty.

Sellers have idle capacity and/or excess inventory.

The industry’s product is costly to hold in inventory, perishable, or seasonal.

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Rivalry is more intense when:

The number of rivals increases and/or rivals are of roughly equal size and competitive capability.

One or more rivals are dissatisfied with their business performance and are making aggressive moves to attract more customers.

Outsiders have recently acquired weak competitors and are spending heavily to turn them into major contenders.

Rivals have diverse industry outlooks, objectives, or strategies and/or have production facilities in countries where production costs are materially different.

What Causes Rivalry to Become Stronger? (continued)

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What Causes Rivalry to Become Weaker?

Rivalry tends to be less intense when:

Industry members infrequently launch aggressive actions to take sales and market share away from rivals

Buyer demand is growing rapidly

The products of rival sellers are strongly differentiated and the loyalty of buyers to their preferred brand is high

Buyer costs to switch to rival brands are high

Industry rivals are so numerous that any one firm’s attempt to grow its business has little direct impact on rival businesses and thus provokes little need for retaliation

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Rivalry tends to be less intense when:

Sellers have small inventories and/or little idle capacity

Rivals have low fixed costs and low inventory storage costs

A few large sellers have the majority of sales and dominant market shares

Rivals have similar costs and similar industry outlooks—there are no industry mavericks to disrupt the status quo

What Causes Rivalry to Become Weaker? (continued)

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Characterizing Industry Rivalry

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Cutthroat or Brutal

When competitors engage in protracted price wars or habitually undertake other aggressive strategic moves that prove mutually destructive to profitability, causing many/most industry members to lose money

Fierce to Strong

When the battle for market share is so vigorous that the profit margins of most industry members are squeezed to sub-par or even bare-bones levels

Weak

When most industry firms are relatively well satisfied with their sales growth and market shares, rarely undertake offensives to steal customers away from one another, and—because of weak competitive forces—earn consistently good profits and returns on investment

Moderate

or Normal

When the maneuvering among industry members, while lively and healthy, still allows most industry members to earn acceptable profits

Competitive Pressures Associated with the Threat of Potential Entry

The increase in competitive pressures faced by industry members due to the threat of market entry of new firms depends on:

Whether the barriers to successfully entering the industry are high or low

The size of the pool of entry candidates and the resources at their command to hurdle the entry barriers

The expected reaction of existing industry members to the entry of newcomers

How attractive the industry’s growth and profit prospects are to potential entrants

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Cost advantages held by industry incumbents

Strong brand preferences and high degrees of customer loyalty to the brands they are currently purchasing

High capital requirements

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

Restrictive or costly regulatory policies that limit/bar new entrants

Tariffs and international trade restrictions

The likelihood that industry incumbents will strongly resist entrants’ efforts to secure a profitable volume of sales

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Common Barriers to Entry

Current industry members may have cost advantages that a new entrant cannot easily overcome; these include:

Scale economies in production, distribution, or other activities

Learning-based costs savings that accrue from in-industry experience in performing certain activities such as manufacturing or new product development or inventory management

Cost-savings accruing from patents or proprietary technology

Partnerships with the best and cheapest suppliers of raw materials and components

Favorable locations

Low fixed costs (because incumbents have older facilities that have been mostly depreciated)

The Cost Advantages of Incumbents: An Important Entry Barrier

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Figure 3.5 Factors Affecting the Threat of Entry

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Access the alternative text for slide image.

Entry threats are stronger when:

The pool of entry candidates is large and some have resources that make them strong market contenders

Entry barriers are low or easily hurdled by new entrants

Industry members can expand their presence into other product segments or geographic areas

Newcomers can expect to earn attractive profits

Buyer demand is growing rapidly

Industry members are unable (or unwilling) to strongly contest the entry of new firms

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Competitive Pressures Associated with the Threat of New Entrants

Core Concept

The threat of entry is stronger

when entry barriers are low,

when incumbent firms are unable or unwilling to vigorously contest a newcomer’s entry,

when there’s a sizable pool of entry candidates, and

when the industry’s outlook is highly attractive to outsiders.

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Entry threats are weaker when:

The pool of entry candidates is small

Entry barriers are high

Existing competitors are struggling to earn good profits

The industry’s outlook is risky or uncertain

Buyer demand is growing slowly or is stagnant

Industry members will strongly contest the efforts of new entrants to gain a market foothold

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When Is the Threat of Entry Weaker?

Are the industry’s growth and profit prospects strongly attractive to potential entry candidates?

A “Yes” answer = Threat of potential entry is a strong competitive force

A “No” answer = Threat of potential entry is a weak competitive force

The Best Test of Whether the Entry of New Competitors Is Likely

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Rapidly growing market demand and high potential profits act as magnets, growing the pool of entry candidates and motivating potential entrants (most usually including resource-rich firms capable of becoming formidable competitors!!!) to commit the resources needed to hurdle entry barriers—in which case the high probability of new entry qualifies as a strong competitive force.

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When the Threat of Entry Is Certain to Be High

Competitive Pressures from the Sellers of Substitute Products

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Firms in one industry come under competitive pressure from firms in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes

Examples of substitutes:

Attending movies at theaters versus subscribing to various streaming services

Cell phone cameras versus traditional digital cameras

Beer versus wine versus hard liquors

Contact lens versus prescription glasses versus corrective laser surgery

Figure 3.6 Factors Affecting Competition from Substitute Products

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Access the alternative text for the slide image.

When Are Substitute Products a Strong Competitive Force?

The strength of competitive pressures from substitute products depends on:

Whether substitutes are readily available and attractively priced

Whether buyers view substitutes as being comparable or better in term of attributes

How much it costs buyers to switch to substitutes

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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.

Competitive pressures from substitutes are stronger when:

Substitutes are readily available and attractively priced

Substitutes are of comparable or better quality and have desirable performance features

Buyers incur low costs in switching to substitutes

Buyers are growing more comfortable with using substitutes

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When Is Competition from Substitutes Stronger?

Competitive pressures from substitutes are weaker when:

Good substitutes are not readily available or don’t exist

Substitutes are higher priced relative to the value they deliver to buyers

Substitutes lack comparable or better performance features

Buyers have high costs in switching to substitutes

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When Is Competition from Substitutes Weaker?

Sales of substitutes are growing faster than overall sales of the industry in question

An indication that the sellers of substitutes are stealing the industry’s customers away

The producers of substitute products are investing in added production capacity and expanding their market coverage

Profits of the producers of substitutes are rising

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Three Signs that Substitute Products Are a Strong Competitive Force

Competitive Pressures Stemming from the Bargaining Power of Suppliers

Whether the suppliers of industry members repres

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26 Sep External Environment Each week, you will be asked to respond to the prompt or prompts in the discussion forum. Your initial post should be a minimum of 300 words in length, and you

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