Chapter 3: Evaluating a Company's External Environment Flashcards
Which 2 facets of a company’s situation are especially pertinent?
- Its external environment (competitors)
2. Its internal environment (resources and capabilities)
What must a manager do prior to forming a strategic vision of where the company needs to head?
Analyze the company’s internal and external environment.
What are the 6 principal components of the macro-environment that every company operates in? (PESTEL analysis)
- Political factors
- Economic conditions in the general environment
- Sociocultural forces
- Technological factors
- Environmental factors
- Legal/regulatory conditions
What does PESTEL analysis stand for?
Political, Economic, Sociocultural, Technological, Environmental, Legal/regulatory
What is the Five Forces Framework?
Holds that competitive pressures on companies within an industry come from 5 sources:
- Competition from rival sellers
- Competition from potential new entrants
- Competition from producers of substitute products
- Supplier bargaining power
- Customer bargaining power
What are the 3 steps involved in using the Five Forces Model to determine the nature & strength of competitive pressures in a given industry?
- Identify the parties involved, along with specific factors that bring competitive pressures
- Evaluate how strong the pressures stemming from each of the 5 forces are
- Determine whether the 5 forces are supportive of high industry profitability
What is often the strongest of the 5 competitive forces in the Five Forces model?
Competition from rival sellers
What are the situations where rivalry among competing sellers would grow (under the 5 forces model)?
- Buyer demand is growing slowly or declining
- If it becomes less costly to switch brands
- Products of rival sellers become less strongly differentiated
- Too much inventory or significant amounts of idle production capacity
- Number of competitors increases
- Diversity of competitors increases
- High exit barriers keep unprofitable firms from leaving the industry
What happens to profit margins when rivalry is strong?
The battle for market share is so vigorous that profit margins of most industry members are squeezed to bare-bones levels.
What are some common “competitive weapons”?
- Discounting prices
- Offering coupons
- Advertising
- Innovation
- New/improved features
- Increasing customization
- Building a bigger, better dealer network
- Improving warranties
- Offering low-interest financing
What does credible threat of new entrants to a market do?
Often prompts industry members to lower their prices and initiate defensive actions in an attempt to deter new entrants.
What does the seriousness of a threat to entry in a particular market depend on?
Whether entry barriers are high or low and the expected reaction of existing members to the entry of newcomers.
What are the options for new market entrants when there are sizeable economies of scale existing in a given market?
Outsiders must either enter on a large scale which can be costly and risky or accept a cost disadvantage and lower profitability.
When is threat of new entrants low?
- Incumbents have large cost advantages over potential entrants
- Existing strong loyalty from customers
- Patents and other forms of intellectual property protection
- Strong network effects
- High capital requirements
- Limited new access to distribution channels and shelf space
- Restrictive government policies
- Restrictive trade policies
Where do substitute products come from?
Outside the industry, not other brands within your industry. Example: contact lenses producers face pressure from doctors who do corrective laser surgery.
What does competitive pressure from buyers depend on?
The degree to which buyers have bargaining power and the extent to which buyers are price sensitive.
What does strong competitive pressures from all 5 directions do?
Drives industry profitability to unacceptably low levels.
What are the 2 aspects of matching a company’s business strategy to prevailing market conditions?
- Pursuing avenues that shield the firm from as many of the different competitive pressures as possible
- Initiating actions calculated to shift the competitive forces in the company’s favour by altering the underlying factors driving the 5 forces
How is the Value Net similar to the 5 forces framework?
Includes an analysis of buyers, suppliers, and substitutes.
How is the Value Net different from the 5 forces framework?
The firm is placed in the center of the framework.
“Competitors” is defined to include sellers of substitute products and potential entrants.
Introduced a new category, “complementors”.
What are complementors?
Producers of complementary products, which are products that enhance the value of the firm’s products when used together. (Shoes and shoelaces)
What are driving forces?
The major underlying causes of change in industry and competitive conditions.
Where do driving forces originate from?
Some originate in the outer ring of the company’s macro-environment, most originate in the company’s more immediate industry and competitive environment.
What are the 3 steps of the driving forces analysis?
- Identify the driving sources
- Assess whether the drivers of change are making the industry more or less attractive
- Determine which strategy changes are needed to prepare for impact
What are the categories of driving forces?
- Changes to an industry’s long-term growth rate
- Increasing globalization
- Emerging Internet technologies
- Shifts in who buys the products and how they’re used
- Technological change + manufacturing process innovation
- Product innovation
- Marketing innovation
- Exit/entry of major firms
- Diffusion/spread of knowledge across companies + countries
- Changes in cost and efficiency
- Reductions in uncertainty and business risk
- Regulatory influences + government policy changes
- Changing societal concerns, attitudes, lifestyles
Why must company strategists resist the temptation to label every change they see as a driving force?
No more than 3 or 4 are likely to be true driving forces powerful enough to qualify as major determinants of why and how the industry is changing
What 3 questions must one ask when assessing the impact of driving forces?
- Are the forces causing demand to increase or decrease?
- Are the forces making competition more or less intense?
- Will the forces lead to higher or lower industry profitability?
What is strategic group mapping?
Technique for displaying the different market or competitive positions that rival firms occupy in the industry.
What is a strategic group?
Cluster of industry rivals with similar competitive approaches and positions in the market.
How might companies in the same strategic group resemble one another?
They may have comparable product-line breadth, sell in the same price/quality range, employ the same distribution channels, depend on the same technology, compete in the same geographic areas, etc.
How do you create a strategic group map?
- Identify characteristics that delineate strategic approaches used in the industry
- Plot the firms on a 2-variable map using pairs of these variables
- Assign firms occupying the same map location to the same strategic group
- Draw circles around each strategic group
What are 2 reasons for why some positions on a strategic group map can be more attractive than others?
They confront weaker competitive forces and/or they are more favourably impacted by industry driving forces
What are mobility barriers?
Restrict firms in one strategic group from entering another more attractive strategic group in the same industry.
What is the best indicator of a company’s strategic intentions?
The SOAR Framework for Competitor Analysis
What is the SOAR Framework for Competitor Analysis?
Points to 4 indicators of a rival’s likely strategic moves and counterparts. Includes Strategy, Objectives, Assumptions about itself and industry, and Resources and capabilities.
What can a company determine by analyzing a rival firm’s SOAR (Strategies, Objectives, Assumptions, Resources and Capabilities)?
The rival’s likely moves and countermoves.
What is “Strategy” from the SOAR framework?
A rival’s current strategy
What is “objectives” from the SOAR framework?
A rival’s objectives and the extent to which the rival is meeting those objectives. Poorly performing rivals are virtually certain to make fresh strategic moves.
What are KSFs?
Key success factors of an industry - strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are essential to surviving and thriving in an industry.
Which 3 questions can help deduce an industry’s key success factors?
- On what basis do buyers of the product choose between competitors?
- What resources and competitive capabilities must a company have to be competitively successful?
- What shortcomings are almost certain to put a company at a significant competitive disadvantage?
How many KSFs are there normally?
Normally no more than 5 key success factors, usually 2 or 3 outrank the others in importance.
What were the 6 analysis frameworks presented in this chapter?
PESTEL, 5 forces analysis, driving forces, strategy groups, competitor analysis, key success factors.
