CH 3

COMPANYS MACROENVIRONMENT
Q1. WHAT ARE THE INDUSTRYS

DOMINANT ECONOMIC FEATURES?
Market size
growth rate
the number & sizes of buyers and sellers
the geographic boundaries of the market
The degree of product differentiation
the speed of product innovation
the extent of vertical integration.
The extent of scale economies&
experience/learning curve effects.
LEARNING/EXPERIENCE CURVE EFFECTS
Most goods or services show the experience

curve effect.
Each time cumulative volume doubles,
value added costs (including administration,
marketing, distribution, and manufacturing)
fall by a constant percentage.
The company can gain a cost advantage
with largest cumulative production volume.
RECOGNIZING THESE FEATURES HELPS..
managers to prepare for the analysis

managers to understand the kinds of
strategic moves that industry members
are likely to employ.
QUESTION 2: WHAT KINDS OF COMPETITIVE

FORCES ARE INDUSTRY MEMBERS FACING,
AND HOW STRONG ARE THEY?
THE FIVE-FORCES MODEL OF

Michael E. Porter
COMPETITION
Tool
for diagnosing the principal competitive

pressure
Build the model of competition in 3 steps
Step1: For each of the five forces, identify
the different parties involve
Step2: Evaluate how strong the pressures
stemming form each forces are
Step3: Determine whether the strength of
the five forces is helpful to earning profits
THE FIVE-FORCES MODEL OF

COMPETITION
Competitive pressures
coming fromCREATED
other firms
COMPETITIVE
PRESSURES
in the industry
BY THE RIVALRY AMONG
whenCOMPETING
one firm deploysSELLERS
a strategy that
produces good results, its rivals respond with

offensive and defensive countermoves of their
own.
competitive battle among rivals can
assume many forms that extend well beyond
lively price competition.
The
intensity of rivalry varies from industry to

industry and depends of many identifiable
factors
FACTORS AFFECTING THE STRENGTH

OF RIVALRY
Rivalry is stronger when:

Buyer demand is growing or falling off
slowly
Sellers find themselves with excess capacity
Buyer costs to switch brands are low
Products are commodities
Firms have high fixed and storage costs
Competitors are numerous/similar(size,
strength)
Rivals have diverse
objectives/strategies/origin
Rivals have high exit barriers
FACTORS AFFECTING THE STRENGTH

OF RIVALRY
Rivalry is weaker when:
Buyer demand is growing rapidly
Buyer costs to switch brands are high
Products are strongly differentiated
Customer loyalty is high
Fixed and storage costs are low
Sales are concentrated among a few
sellers
Rivals are homogeneous
Exit barriers are low
Crafting & Executing Strategy Chapter 3
EVALUATING A COMPANYS
EXTERNAL ENVIRONMENT
COMPETITIVE THREAT OF NEW

ENTRANTS
1.
2.
The ease of a firm entering a new market is

dependent on 2 main factors:
Barriers to entry
Expected reaction of existing firms
The size of the barriers and expected reaction
is a huge determinant of any potential new
firms ability to survive in the market
BARRIERS TO ENTRY
Economies of Scale
Experience
Customer loyalty
Intellectual barriers
Networks
Other cost advantages
Threat of entry can
easily fluctuate as
factors change
FACTORS AFFECTING THREAT OF ENTRY

Growth/Profit potential
If this is high, firms will be less deterred to enter the

market
Usually attracts larger, established firms with

sufficient resources in related markets to enter
Potential entrants & capabilities
Large existing companies with a strong brand

image may be able to enter some markets easily
The bigger the pool of potential entrants with the

capabilities to enter the market, the stronger the
threat of entry
COMPETITIVE PRESSURE OF SUBSTITUTES

Substitute products can adversely affect demand
providing:
Good substitutes are available

They are attractively priced
Comparable/better features
Consumers have low costs in switching to substitute
Whether a substitute product is a threat can be

determined by; sales growth comparison,
addition of capacity and profit increases
COMPETITIVE PRESSURES STEMMING

FROM SUPPLIER BARGAINING POWER.
Bargaining power
: the relative ability of parties in a situation to
exert influence over each other.
Suppliers with Bargaining Power
: can erode industry profitability.
FACTORS DETERMINING THE STRENGTH OF

SUPPLIERS BARGAINING POWER.
Suppliers bargaining power is stronger

when
Supplier products are in short supply.

Supplier products are differentiated.
Supplier products are critical to industry.
High costs in purchasing alternatives.
No good substitutes.
Suppliers are not dependant on industry.
Suppliers industry is concentrated.
Suppliers bargaining power is weaker

when
A large entity of suppliers.

The item is available from many suppliers.
Low costs for finding alternatives.
Good substitutes.
Industry members account for a big fraction of
suppliers sales.
No suppliers with large market shares.
Possibility for industry members to integrate
into the supply business. (self-manufacturer)
COMPETITIVE PRESSURES
STEMMING FROM BUYER
BARGAINING POWER AND
PRICE SENSITIVITY
Price-sensitivity
= price elasticity
: It is a measure of responsiveness
of the quantity of a good or service
demanded to changes in its price.
Buyers with strong bargaining power

: can limit industry profitability.
Buyer price sensitivity

: limits the profit potential of industry
members.
FACTORS DETERMINING THE STRENGTH OF

BUYERS BARGAINING POWER.
Buyer bargaining power is stronger when
Low costs in switching to other product.

Products are undifferentiated.
Large number of buyers. Few relation with
industry.
Buyers demand is weak.
Buyers are well-informed.
Buyers with ability to integrate into the
business of sellers.
Buyers with ability to postpone purchase
Buyers are price-sensitive.
Buyer bargaining power is weaker

when
High costs in switching to competing

products.
Sellers products are differentiated.
Buyers are small and numerous relative to
sellers.
Sufficient supply for satisfying buyers
demand.
Limited information about sellers.
Buyers are not price-sensitivity.
IS THE COLLECTIVE STRENGTH

OF THE FIVE COMPETITIVE
FORCES CONDUCIVE TO GOOD
PROFITABILITY?
The effects that each of the five
competitive forces set the stage for
evaluating whether the strength of the
five competitive forces is conducive to
good profitability.
Competitively Unattractive Industry

When all five forces are producing
strong competitive pressures, the
competitively unattractive industry
occurs.
Rivalry among sellers is vigorous.

Low entry barriers.
Competition from substitutes in intense.
Suppliers and buyers can exercise
considerable leverage.
Attractive Industry
When the overall impact of the five
competitive forces is moderate to
weak,
the attractive industry occurs.
The members of the industry can
expect to earn good profits and a
nice return on investment.
QUESTIONS 3: WHAT FACTORS ARE DRIVING

INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY
HAVE?
ANALYZING INDUSTRY DYNAMICS

1 step: Indentifying the drivers of
change.
2 step: Assessing whether the drivers of
change are, individually or collectively,
acting to make the industry more or
less attractive.
3 step: Determining what strategy
changes are needed to prepare for the
impacts of the anticipated change.
IDENTIFYING AN INDUSTRYS DRIVERS OF CHANGE
Changes in an industrys long-term

growth rate
Increasing globalization
Change in who buys the product and
how they use it
Technological change
Emerging new internet capabilities
and applications
Product and marketing innovation
IDENTIFYING AN INDUSTRYS DRIVERS OF CHANGE
Entry or exit of major firms

Diffusion of technical know-how across
companies and countries
Improvements in efficiency in adjacent
markets
Reductions in uncertainty and business risk
Regulatory influences and government
policy changes
Changing societal concerns, attitudes, and
lifestyles
ASSESSING THE IMPACT OF THE FACTORS DRIVING

INDUSTRY CHANGE
1.
2.
3.
Overall, are the factors driving change causing

demand for the industrys product to increase or
decrease?
Is the collective impact of the drivers of change
making competition more or less intense?
Will the combined impacts of the change drivers lead
to higher to lower industry profitability?
Key Question: whether a new strong force is

emerging or whether forces that are strong
presently are beginning to weaken
DEVELOPING A STRATEGY THAT TAKES THE CHANGES

IN INDUSTRY CONDITIONS INTO ACCOUNT
What strategy adjustments will be

needed to deal with the impacts of the
changes in industry conditions.
WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE

NEXT?
Competitive intelligence
- latest action & announcement
- financial performance
- strength & weakness
- thinking & leadership style
WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE

NEXT?
Prepare defensive countermoves
Craft its own strategic moves
Exploit any openings
WHAT ARE THE KEY FACTORS FOR COMPETITIVE

SUCCESS?
Particular strategy elements

Product attributes
Operational approaches
Resources
Competitive capabilities
WHAT ARE THE KEY FACTORS FOR COMPETITIVE

SUCCESS?
Should consider three question

A. On what basis do buyers of the industrys
product choose between the competing
brands of sellers?
B. What resources and competitive capabilities
must a company have to be competitively
successful?
C. What shortcomings are almost certain to put
a company at a significant competitive
disadvantage?
Q7. DOES THE OUTLOOK FOR THE

INDUSTRY OFFER THE COMPANY A
GOOD OPPORTUNITY TO EARN
ATTRACTIVE PROFITS?
if an industrys overall profit

prospects are above average
industry environment is attractive
If an industry profit prospects are
below average
industry environment is not
attractive
BUT! This attractiveness or

unattractiveness is not same for all
industry participants and all potential
entrants.
If company decided that industry is

attractive, it should invest aggressively
to capture the opportunities and to
improve its long-term competitive
position in the business.
If company decided that industry is
unattractive, it should protect its
present position, invest cautiously, and
try to find opportunities in other
industries.

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COMPANYS MACROENVIRONMENT

Q1. WHAT ARE THE INDUSTRYS

LEARNING/EXPERIENCE CURVE EFFECTS

Most goods or services show the experience

RECOGNIZING THESE FEATURES HELPS..

managers to prepare for the analysis

QUESTION 2: WHAT KINDS OF COMPETITIVE

THE FIVE-FORCES MODEL OF

for diagnosing the principal competitive

THE FIVE-FORCES MODEL OF

produces good results, its rivals respond with

intensity of rivalry varies from industry to

FACTORS AFFECTING THE STRENGTH

Rivalry is stronger when:

FACTORS AFFECTING THE STRENGTH

Crafting & Executing Strategy Chapter 3

COMPETITIVE THREAT OF NEW

The ease of a firm entering a new market is

FACTORS AFFECTING THREAT OF ENTRY

If this is high, firms will be less deterred to enter the

Usually attracts larger, established firms with

Large existing companies with a strong brand

The bigger the pool of potential entrants with the

COMPETITIVE PRESSURE OF SUBSTITUTES

Good substitutes are available

Whether a substitute product is a threat can be

COMPETITIVE PRESSURES STEMMING

FACTORS DETERMINING THE STRENGTH OF

Suppliers bargaining power is stronger

Supplier products are in short supply.

Suppliers bargaining power is weaker

A large entity of suppliers.

Buyers with strong bargaining power

Buyer price sensitivity

FACTORS DETERMINING THE STRENGTH OF

Buyer bargaining power is stronger when

Low costs in switching to other product.

Buyer bargaining power is weaker

High costs in switching to competing

IS THE COLLECTIVE STRENGTH

Competitively Unattractive Industry

Rivalry among sellers is vigorous.

QUESTIONS 3: WHAT FACTORS ARE DRIVING

ANALYZING INDUSTRY DYNAMICS

IDENTIFYING AN INDUSTRYS DRIVERS OF CHANGE

Changes in an industrys long-term

IDENTIFYING AN INDUSTRYS DRIVERS OF CHANGE

Entry or exit of major firms

ASSESSING THE IMPACT OF THE FACTORS DRIVING

Overall, are the factors driving change causing

Key Question: whether a new strong force is

DEVELOPING A STRATEGY THAT TAKES THE CHANGES

What strategy adjustments will be

WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE

WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE

Prepare defensive countermoves

Craft its own strategic moves

Exploit any openings