19e Global Edition

THOMPSON | PETERAF | GAMBLE | STRICKLAND

CHAPTER 3
EVALUATING A COMPANY’S EXTERNAL
ENVIRONMENT

Copyright © 2014 by The McGraw-Hill Education All rights reserved.

1. Become aware of factors in a company’s broad
macro-environment that may have strategic
significance.
2. Gain command of the basic concepts and analytical
tools widely used to diagnose the competitive
conditions in a company’s industry.
3. Become adept at mapping the market positions of
key groups of industry rivals.
4. Learn how to use multiple frameworks to determine
whether an industry’s outlook presents a company
with sufficiently attractive opportunities for growth
and profitability.
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FIGURE 3.1 From Thinking Strategically about the Company’s Situation
to Choosing a Strategy

Chapter 3

Thinking
strategically
about a firm’s
external
environment Form a
Identify Select the
strategic
promising best strategy
vision of
strategic and business
where the
options model for
firm needs
for the firm the firm
Thinking to head
strategically
about a firm’s
internal
environment

Chapter 4

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CORE CONCEPT

♦ The macro-environment encompasses the

b ro ad e nv i ro nme n t a l c on t e x t in wh i c h a
company’s industry is situated that includes
strategically relevant components over which
the firm has no direct control.

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CORE CONCEPT

♦ PEST analysis focuses on the four (4) principal

components of strategic significance in the
macro-environment:
● Political
● Economic,
● Social
● Technological,

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 WHAT ARE THE STRATEGICALLY
RELEVANT FACTORS
IN THE MACRO-ENVIRONMENT?

 PEST Analysis
● Focuses on principal components of strategic
significance in the macro-environment:
v Political factors
v Economic conditions (local to worldwide)
v Sociocultural forces
v Technological factors

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FIGURE 3.2 The Components of a Company’s Macro-Environment

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CORE CONCEPT

♦ PEST Analysis
 HOW STRONG ARE THE INDUSTRY’S
COMPETITIVE FORCES?

 The Five Competitive Forces:

● Competition from rival sellers
● Competition from potential new entrants
● Competition from producers of substitute products
● Supplier bargaining power
● Customer bargaining power

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

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USING THE FIVE-FORCES MODEL
OF COMPETITION

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 COMPETITIVE PRESSURES THAT
INCREASE RIVALRY AMONG
COMPETING SELLERS
 Buyer demand is growing slowly or declining.
 It is becoming less costly for buyers to switch brands.
 Industry products are becoming less differentiated.
 There is unused production capacity, and\or products
have high fixed costs or high storage costs.
 The number of competitors is increasing and\or they are
becoming more equal in size and competitive strength.
 The diversity of competitors is increasing.
 High exit barriers keep firms from exiting the industry.

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 COMPETITIVE PRESSURES
ASSOCIATED WITH THE THREAT
OF NEW ENTRANTS

 Entry Threat Considerations:

● Expected defensive reactions of incumbent firms
● Strength of barriers to entry
● Attractiveness of a particular market’s growth
in demand and profit potential
● Capabilities and resources of potential entrants
● Entry of existing competitors into market segments
in which they have no current presence

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 MARKET ENTRY BARRIERS
FACING NEW ENTRANTS

 Incumbent cost advantages related to learning and

experience, proprietary patents and technology,
favorable locations, and lower fixed costs
 Strong brand preferences and customer loyalty
 Strong “network effects” in customer demand
 High capital requirements
 Building a network of distributors or dealers and
securing adequate space on retailers’ shelves
 Restrictive government policies

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COMPETITIVE PRESSURES FROM THE
SELLERS OF SUBSTITUTE PRODUCTS

 Substitute Products Considerations:

1. Readily available and attractively priced?
2. Comparable or better in terms of quality,
performance, and other relevant attributes?
3. Offer lower switching costs to buyers?
 Indicators of Substitutes’ Competitive Strength:
● Increasing rate of growth in sales of substitutes
● Substitute producers adding new output capacity
● Increasing profitability of substitute producers

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COMPETITIVE PRESSURES STEMMING
FROM SUPPLIER BARGAINING POWER

 Supplier Bargaining Power Depends On:

● Strength of demand for and availability of suppliers’ products.
● Whether suppliers provide a differentiated input that enhances
the performance of the industry’s product.
● Industry members’ costs for switching among suppliers
● Size of suppliers relative to size of industry members
● Fraction of the cost of the supplier’s product relative to the total
cost of the industry’s product
● Number of suppliers relative to the number of industry members
● Possibility of backward integration into suppliers’ industry
● Availability of good substitutes for suppliers’ products
● Whether industry members are major customers of suppliers.

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COMPETITIVE PRESSURES STEMMING
FROM BUYER BARGAINING POWER
AND PRICE SENSITIVITY
 Buyer Bargaining Power Considerations:
● Strength of buyers’ demand for sellers’ products
● Degree to which industry goods are differentiated
● Buyers’ costs for switching to competing sellers or substitutes
● Number and size of buyers relative to number of sellers
● Buyers’ knowledge of products, costs and pricing
● Threat of buyers’ integration into sellers’ industry
● Buyers’ discretion in delaying purchases
● Buyers’ price sensitivity due to low profits, size of purchase,
and consequences of purchase

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 MATCHING COMPANY STRATEGY
TO COMPETITIVE CONDITIONS

Effectively matching a firm’s business strategy to

prevailing competitive conditions has two aspects:
1.Pursuing avenues that shield the firm from as
many competitive pressures as possible.
2.Initiating actions calculated to shift competitive
forces in the firm’s favor by altering underlying
factors driving the five forces.

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 WHAT FACTORS ARE DRIVING
INDUSTRY CHANGE, AND WHAT
IMPACTS WILL THEY HAVE?

 Driving forces analysis has three steps:

1. Identifying what the driving forces are.
2. Assessing whether the driving forces are,
on the whole, acting to make the industry
more or less attractive.
3. Determining what strategy changes are
needed to prepare for the impact of the
driving forces.

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 ASSESSING THE IMPACT OF THE
FACTORS DRIVING INDUSTRY CHANGE

1. Are the driving forces as a whole causing

demand for the industry’s product to increase
or decrease?
2. Is the collective impact of the driving forces
making competition more or less intense?
3. Will the combined impacts of the driving forces
lead to higher or lower industry profitability?

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 ADJUSTING STRATEGY TO PREPARE
FOR THE IMPACTS OF DRIVING FORCES

 What strategy adjustments will be needed

to deal with the impacts of the driving forces
on industry conditions?
● What adjustments must be made immediately?
● What actions currently being taken should be
halted or abandoned?
● What can we do now to prepare for adjustments
we anticipate making in the future?

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 WHAT ARE THE INDUSTRY’S KEY
SUCCESS FACTORS?

 Key Success Factors (KSFs)

 • are those competitive factors that most affect
industry members’ ability to survive or prosper
in the marketplace.
● Are the strategy elements, product and service
attributes, operational approaches, resources, and
competitive capabilities that spell the difference being
a strong competitor and a weak competitor.
● Vary from industry to industry, and over time within
the same industry, as drivers of change and
competitive conditions change.
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 IDENTIFICATION OF
KEY SUCCESS FACTORS

1. On what basis do buyers of the industry’s product

choose between the competing brands of sellers?
That is, what product attributes and service
characteristics are crucial to competitive success?
2. Given the nature of competitive rivalry prevailing in
the marketplace, what resources and competitive
capabilities must a firm have to be competitively
successful?
3. What shortcomings are almost certain to put a firm
at a significant competitive disadvantage?

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CORE CONCEPT

♦ Examples of CSFs for major industries:

♦ > in the automobile industry – styling (design),

positive image, an efficient dealer (distribution)
network, vehicle performance (technology),fuel
efficiency and compliance.

♦ > in the food manufacturing industry – new

product development, production efficiency,
good distribution channels and health aspects
(e.g. low fat).
CORE CONCEPT

♦ > in the retail grocery supermarket industry –

having the right product mix (range of choice),
competitive pricing, location, inventory control,
personal touch, effective marketing, and etc
CORE CONCEPT
IS THE INDUSTRY OUTLOOK CONDUCIVE
TO GOOD PROFITABILITY?

 The anticipated industry environment is

fundamentally attractive if it presents a
company with good opportunity for above-
average profitability.
 The industry outlook is fundamentally
unattractive if a firm’s profit prospects are
unappealingly low.

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FACTORS TO CONSIDER IN ASSESSING
INDUSTRY ATTRACTIVENESS

 The industry’s growth potential.

 Whether and to what degree industry profitability will be
favorably or unfavorably affected by the prevailing
driving forces.
 The anticipated strength of competitive forces—the
overriding issue here is whether competitive forces
seem likely to intensify and squeeze industry profitability
to subpar levels or whether the company should be able
to earn good profits despite the expected strength of
competitive forces.

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FACTORS TO CONSIDER IN ASSESSING
INDUSTRY ATTRACTIVENESS (cont’d)

 Whether the company is strongly or weakly positioned

on the industry’s strategic group map.
 How well the company’s strategy, product offering, and
capabilities stack up against industry KSFs.
 The degrees of risk and uncertainty in the industry’s
future and whether the industry confronts severe
problems relating to regulatory or environmental issues,
stagnating buyer demand, industry overcapacity, and so
on.

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 INDUSTRY ATTRACTIVENESS IS NOT
THE SAME FOR ALL PARTICIPANTS
 Future conditions in a particular industry are not
equally attractive or unattractive to all industry
participants and all potential entrants.
● Even if a particular industry’s outlook is deemed
unattractive, a favorably situated and competitively
capable company may see ample opportunity to
outcompete weaker rivals and significantly grow its
revenues and profits.
● A weak competitor in an attractive industry may
conclude that fighting a steep uphill battle against
much stronger rivals holds little promise of eventual
market success or even average profitability.
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INDUSTRY ATTRACTIVENESS IS NOT THE
SAME FOR ALL PARTICIPANTS (cont’d)

● Industry outsiders may conclude that they have the

resources to easily hurdle the barriers to entering an
attractive industry while other outsiders may find the
same industry unattractive because they do not want
to challenge market leaders and have better
opportunities elsewhere.
A particular industry’s attractiveness depends in
large part on whether a company has the
resources and capabilities to be competitively
successful and profitable in that environment.

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WHAT SHOULD A CURRENT COMPETITOR
DECIDE ABOUT ITS INDUSTRY?
 When a competitor decides an industry is attractive, it
should invest aggressively to capture the opportunities it
sees and to improve its long-term competitive position in
the business.
 When a strong competitor concludes its industry is
relatively unattractive and lacking in opportunity, it may
elect to protect its present position, investing cautiously
if at all and looking for opportunities in other industries.
 A competitively weak company in an unattractive
industry may see its best option as finding a buyer,
perhaps a rival, to acquire its business.

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