Chapter 3: Evaluating A Company’s External Environment Flashcards
What are the 7 questions? (MPDRpmKP)
- What are the strategically relevant components of the macro-environment?
- How strong are the industries competitive forces?
- What are the industries driving forces of change and what impact will they have?
- How are industry rivals positioned?
- What strategic moves are rivals likely to make next?
- What are the industry key success factors?
- Does the industry offer good prospects for attractive profits?
Magical pandas dance rhythmically, painting mystical kaleidoscopic patterns.
Macro-Environment
The broad environmental context where firm is situated, comprised of 6 principal components (PESTEL)
PESTEL Analysis
Assesses strategic relevance of the following 6 forces:
Political
Economic
Sociocultural
Technological
Environmental
Legal
Porter’s 5 Forces
- Buyer Bargaining Power
- Supplier Bargaining Power
- Substitute Products
- New Entrants into the market
- Rivalry among competing sellers
When do new entrants have strong power?
• The pool of entry candidates is large and some have resources that would make them formidable market contenders.
• Entry barriers are low or can be readily hurdled by the likely entry candidates.
• Existing industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence.
• Newcomers can expect to earn attractive profits.
• Buyer demand is growing rapidly.
• Industry members are unable (or unwilling) to strongly contest the entry of newcomers.
When do new entrants have weak power?
• 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.
When is supplier bargaining power strong?
• Industry members incur high costs in switching their purchases to alternative suppliers.
• Needed inputs are in short supply (which gives suppliers more leverage in setting prices).
• A supplier has a differentiated input that enhances the quality, performance, or image of sellers’ products or is a valuable or critical part of sellers’ production processes.
• There are only a few suppliers of a particular input.
When is supplier bargaining power weak?
• The item being supplied is a “commodity” that is readily available from many suppliers at the going market price.
• Seller switching costs to alternative suppliers are low.
• Good substitute inputs exist or new ones emerge.
• There is a surge in the availability of supplies (thus greatly weakening supplier pricing power).
• Industry members account for a big fraction of suppliers’ total sales and continued high-volume purchases are important to the well-being of suppliers.
• Industry members are a threat to integrate backward into the business of suppliers and to self-manufacture their own requirements.
When is buyer bargaining power strong?
• Buyer switching costs to competing brands or substitute products are low.
• Buyers are large and can demand concessions when purchasing large quantities.
• Large volume purchases by buyers are important to sellers.
• Buyer demand is weak or declining.
• There are only a few buyers—so that each one’s business is important to sellers.
• Identity of buyer adds prestige to the seller’s list of customers.
• Quantity and quality of information available to buyers improves.
• Buyers have the ability to postpone purchases until later if they do not like the prices offered by sellers.
• Some buyers are a threat to integrate backward into the business of sellers.
When is buyer bargaining power weak?
• Buyers purchase the item infrequently or in small quantities.
• Buyer switching costs to competing brands or substitutes are high.
• There is a surge in buyer demand that creates a “sellers’ market.”
• A seller’s brand reputation is important to the buyer.
• A particular seller’s product delivers quality or performance that is not matched by other brands.
When is competitive pressure from substitute products strong?
• Good substitutes are readily available or new ones are emerging.
• Substitutes are attractively priced.
• Substitutes have comparable or better performance features.
• End users have low costs in switching to substitutes.
• End users grow more comfortable with using substitutes.
When are competitive pressures from substitute products weak?
• Good substitutes are not readily available or don’t exist.
• Substitutes are higher priced relative to the performance they deliver.
• End users have high costs in switching to substitutes.
When is rivalry strong?
• Diversity of competitors increases in terms of long-term directions, objectives, strategies, and countries of origin.
• Buyer demand is growing slowly.
• Buyer demand falls off and sellers find themselves with excess capacity and/or inventory.
• The number of rivals increases and rivals are of roughly equal size and competitive capability.
• The products of rival sellers are commodities or else weakly differentiated.
• Buyer costs to switch brands are low.
• High exit barriers keep unprofitable firms from leaving the industry.
When is rivalry weak?
• Buyer demand is growing rapidly.
• The products of rival sellers are strongly differentiated and customer loyalty is high.
• Buyer costs to switch brands are high.
Driving Forces and how to evaluate them (3 steps)
Major underlying causes of change in industry and competitive conditions
1. What are they?
2. Do they make industry more or less attractive?
3. What strategy changes are needed to prepare for their impact?
Examples of Common Driving Forces
Increasing globalization, emerging internet capabilities, change in who buys and what they use it for, product innovation, tech changes and manufacturing process innovation, marketing innovation, entry/exit of major firms, diffusion of tech know-how, regulatory influences and gov’t policy changes, buyers want more/less differentiation, change in industry growth rate, changing societal concerns, attitudes and lifestyles
Strategic Group Mapping
Technique for displaying the different market or competitive positions that rival firms occupy in the industry
Strategic Group
A cluster of industry rivals that have similar competitive approaches and market systems
Common Strategy Characteristics (For mapping)
Geographic coverage, price, service, quality, degree of vertical integration, variety, distribution channels
Porter’s Framework
Points to 4 indicators of a rival’s likely strategic moves (Found on press releases, website/investor presentations, public documents and filings, etc.)
1. Current Strategy
2. Objectives
3. Capabilities
4. Assumptions
Key Success Factors
The strategy elements, product attributes, competitive capabilities, or intangible assets with the greatest impact on future success in the marketplace
1. On what basis/attributes do buyers of the industry’s product choose between competing brands?
2. Given the nature of the competitive forces prevailing in the marketplace, what capabilities do they need to be successful?
3. What shortcomings will put a company at a significant competitive disadvantage?
Factors to consider if industry is profitable?
Growth potential, competitors weakening/strengthening, profit favorability by driving forces, company’s position within the market, how competently the company performs KSFs
