Analyzing a Company’s
External Environment
3-2
Fig. 3.2: The Components of a
Company’s Macro-Environment
Key Questions Regarding the
Industry and Competitive Environment
Industry’s
dominant
economic traits
Competitive
Drivers of
forces and
change in the
strength of
industry
each force
Conclusions:
Competitor Key success Industry
analysis factors attractiveness
Q #1: What are the Industry’s Dominant
Economic Traits?
Market size and growth rate
Scope of competitive rivalry
Number of rivals
Buyer needs and requirements
Production capacity
Pace of technological change
Vertical integration
Product innovation
Degree of product differentiation
Economies of scale
Learning and experience curve effects
Q #2: What Kinds of Competitive Forces Are
Industry Members Facing?
• Objectives are to identify
– Main sources of competitive forces
– Strength of these forces
• Key analytical tool
– Five Forces Model
of Competition
Fig. 3.3: The Five Forces
Model of Competition
Analyzing the Five Competitive Forces: How
to Do It
Step 1: Identify the specific competitive
pressures associated with each of
the five forces
Step 2: Evaluate the strength of each
competitive force -- 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
Rivalry Among Competing Sellers
Usually the strongest of the five forces
Key factor in determining strength of rivalry
How aggressively are rivals using various weapons of
competition to improve their market positions and
performance?
Competitive rivalry is a combative
contest involving
Offensive actions
Defensive countermoves
What Are the Typical
Weapons for Competing?
• Vigorous price competition • Bigger/better dealer network
• More or different performance • Low interest rate financing
features
• Higher levels of advertising
• Better product performance
• Stronger product innovation
• Higher quality capabilities
• Stronger brand image and • Better customer service
appeal
• Stronger capabilities to provide
• Wider selection of models and buyers with custom-made
styles products
What Causes Rivalry
to be Stronger?
Competitors engage in frequent and aggressive launches of new
offensives to gain sales and market share
Slow market growth
Number of rivals increases and rivals are of
equal size and competitive capability
Buyer costs to switch brands are low
Industry conditions tempt rivals to use price cuts or other competitive
weapons to boost volume
A successful strategic move carries a big payoff
Diversity of rivals increases in terms of visions, objectives, strategies,
resources, and countries of origin
Strong rivals outside the industry acquire weak firms in the industry
and use their resources to transform the new firms into major market
contenders
What Causes Rivalry
to be Weaker?
Industry rivals move only infrequently or in a non-
aggressive manner to draw sales from rivals
Rapid market growth
Products of rivals are strongly differentiated
and customer loyalty is high
Buyer costs to switch brands are high
There are fewer than 5 rivals or there are numerous
rivals so any one firm’s actions has minimal impact
on rivals’ business
Competitive Force
of Potential Entry
Seriousness of threat depends on
Size of pool of entry candidates
and available resources
Barriers to entry
Reaction of existing firms
Evaluating threat of entry involves assessing
How formidable entry barriers are for each type of
potential entrant and
Attractiveness of growth and profit prospects
Common Barriers to Entry
Sizable economies of scale
Cost and resource disadvantages independent of size
Brand preferences and customer loyalty
Capital requirements and/or other
specialized resource requirements
Access to distribution channels
Regulatory policies
Tariffs and international trade restrictions
When Is the Threat
of Entry Stronger?
There’s a sizable pool of entry candidates
Entry barriers are low
Industry growth is rapid and profit
potential is high
Incumbents are unwilling or unable to contest a newcomer’s entry
efforts
When existing industry members have a strong incentive to expand
into new geographic areas or new product segments where they
currently do not have a market presence
When Is the Threat
of Entry Weaker?
There’s only a small pool of entry candidates
Entry barriers are high
Existing competitors are struggling to earn good profits
Industry’s outlook is risky
Industry growth is slow or stagnant
Competitive Force of
Substitute Products
Concept
Substitutes matter when customers are attracted to the
products of firms in other industries
Examples
Eyeglasses and contact lens
vs. laser surgery
Sugar vs. artificial sweeteners
Newspapers vs. TV vs. Internet
How to Tell Whether Substitute
Products Are a Strong Force
• Whether substitutes are
readily available and attractively
priced
• Whether buyers view substitutes as
being comparable or better
• How much it costs end users to
switch to substitutes
When Is the Competition
From Substitutes Stronger?
There are many good substitutes that are readily available
The lower the price of substitutes
The higher the quality and
performance of substitutes
The lower the user’s switching costs
Competitive Pressures From Suppliers
and Supplier-Seller Collaboration
Whether supplier-seller relationships represent a
weak or strong competitive force depends on
Whether suppliers can exercise
sufficient bargaining leverage to
influence terms of supply in their favor
Nature and extent of supplier-seller
collaboration in the industry
When Is the Bargaining
Power of Suppliers Stronger?
Industry members incur high costs in switching
their purchases to alternative suppliers
Needed inputs are in short supply
Supplier provides a differentiated input
that enhances the quality of performance
of sellers’ products or is a valuable part
of sellers’ production process
There are only a few suppliers of a specific input
Some suppliers threaten to integrate forward
When Is the Bargaining
Power of Suppliers Weaker?
Item being supplied is a commodity
Seller switching costs to alternative suppliers are low
Good substitutes exist or new ones emerge
Surge in availability of supplies occurs
Industry members account for a big
fraction of suppliers’ total sales
Industry members threaten to integrate backward
Seller collaboration with selected suppliers provides
attractive win-win opportunities
Competitive Pressures: Collaboration
Between Sellers and Suppliers
Sellers are forging strategic partnerships
with select suppliers to
Reduce inventory and logistics costs
Speed availability of next-generation
components
Enhance quality of parts being supplied
Squeeze out cost savings for both parties
Competitive advantage potential may accrue to sellers
doing the best job of managing supply-chain
relationships
Competitive Pressures From Buyers
and Seller-Buyer Collaboration
• Whether seller-buyer relationships represent a
weak or strong competitive force depends on
– Whether buyers have sufficient bargaining
leverage to influence terms of sale in their favor
– Extent and competitive importance of
seller-buyer strategic partnerships
in the industry
When Is the Bargaining
Power of Buyers Stronger?
Buyer switching costs to competing brands or substitutes are low
Buyers are large and can demand concessions
Large-volume purchases by buyers are important to sellers
Buyer demand is weak or declining
Only a few buyers exists
Identity of buyer adds prestige
to seller’s list of customers
Quantity and quality of information
available to buyers improves
Buyers have ability to postpone purchases until later
Buyers threaten to integrate backward
When Is the Bargaining
Power of Buyers Weaker?
Buyers purchase item infrequently or in small quantities
Buyer switching costs to competing brands are high
Surge in buyer demand creates a “sellers’ market”
Seller’s brand reputation is important to buyer
A specific seller’s product delivers quality
or performance that is very important to buyer
Buyer collaboration with selected sellers provides
attractive win-win opportunities
Strategic Implications of the
Five Competitive Forces
• Competitive environment is unattractive from
the standpoint of earning good profits when
– Rivalry is vigorous
– Entry barriers are low
and entry is likely
– Competition from
substitutes is strong
– Suppliers and customers have
considerable bargaining power
Strategic Implications of the
Five Competitive Forces
• Competitive environment is ideal from
a profit-making standpoint when
– Rivalry is moderate
– Entry barriers are high
and no firm is likely to enter
– Good substitutes
do not exist
– Suppliers and customers are
Coping With the
Five Competitive Forces
• Objective is to craft a strategy to
– Insulate firm from
competitive pressures
– Initiate actions to produce
sustainable competitive advantage
– Allow firm to be the industry’s “mover and shaker”
with the “most powerful” strategy that defines the
Q #3: What Factors Are Driving Industry Change and
What Impacts Will They Have?
• Industries change because forces
are driving industry participants
to alter their actions
• Driving forces are the
major underlying causes
of changing industry and
competitive conditions
Analyzing Driving Forces
1.Identify forces likely to exert greatest
influence over next 1 - 3 years
– Usually no more than 3 - 4 factors
qualify as real drivers of change
2.Assess impact
– Are the driving forces causing demand for
product to increase or decrease?
– Are the driving forces acting to make competition
more or less intense?
– Will the driving forces lead to higher or lower
Common Types of
Driving Forces
• Internet and e-commerce opportunities
• Increasing globalization of industry
• Changes in long-term industry growth rate
• Changes in who buys the product and
how they use it
• Product innovation
• Technological change/process innovation
Common Types of
Driving Forces
Entry or exit of major firms
Diffusion of technical knowledge
Changes in cost and efficiency
Consumer preferences shift from standardized to
differentiated products (or vice versa)
Changes in degree of uncertainty and risk
Regulatory policies / government legislation
Changing societal concerns, attitudes, and lifestyles
Question 4: What Market Positions Do
Rivals Occupy?
• One technique to reveal
different competitive positions
of industry rivals is
strategic group mapping
• A strategic group is a
cluster of firms in an industry
with similar competitive
approaches and market positions
Strategic Group Mapping
Firms in same strategic group have two or more
competitive characteristics in common
Have comparable product line breadth
Sell in same price/quality range
Emphasize same distribution channels
Use same product attributes to appeal
to similar types of buyers
Use identical technological approaches
Offer buyers similar services
Cover same geographic areas
Procedure for Constructing
a Strategic Group Map
STEP 1: Identify competitive characteristics that differentiate
firms in an industry from one another
STEP 2: Plot firms on a two-variable map using pairs of these
differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy space
to same strategic group
STEP 4: Draw circles around each group, making circles
proportional to size of group’s respective share of
total industry sales
Example: Strategic Group Map
of Selected Retail Chains
Guidelines: Strategic Group Maps
Variables selected as axes should not be highly
correlated
Variables chosen as axes should expose big differences
in how rivals compete
Variables do not have to be either quantitative or
continuous
Drawing sizes of circles proportional to combined sales
of firms in each strategic group allows map to reflect
relative sizes of each strategic group
If more than two good competitive variables can be
used, several maps can be drawn
Interpreting Strategic
Group Maps
Driving forces and competitive pressures often
favor some strategic groups and hurt others
Profit potential of different strategic groups varies due
to strengths and weaknesses in each group’s market
position
The closer that strategic groups are
on the map, the stronger that
competitive rivalry among the
members of these groups tends to be
Q #5: What Strategic Moves
Are Rivals Likely to Make?
• A firm’s best strategic moves are affected by
– Current strategies of competitors
– Future actions of competitors
• Profiling key rivals involves gathering
competitive intelligence about
– Current strategies
– Most recent actions and public announcements
– Resource strengths and weaknesses
– Efforts being made to improve their situation
Competitor Analysis
Sizing up strategies and competitive strengths and
weaknesses of rivals involves assessing
Which rival has the best strategy? Which rivals
appear to have weak strategies?
Which firms are poised to gain
market share, and which ones
seen destined to lose ground?
Which rivals are likely to rank among the industry
leaders five years from now? Do any up-and-coming
rivals have strategies and the resources to overtake the
current industry leader?
Considerations Involved in
Predicting Moves of Rivals
Which rivals need to increase their unit sales and market
share? What strategies are rivals most likely to pursue?
Which rivals have a strong incentive, along with resources, to
make major strategic changes?
Which rivals are good candidates to be acquired? Which
rivals have the resources to acquire others?
Which rivals are likely to enter new geographic markets?
Which rivals are likely to expand their product offerings and
enter new product segments?
Q #6: What Are the Key Factors for
Competitive Success?
KSFs are those competitive factors most affecting every
industry member’s ability to prosper. They concern
Specific strategy elements
Product attributes
Resources
Competencies
Competitive capabilities
that a company needs to have to be competitively successful
KSFs are attributes that spell the difference between
Profit and loss
Competitive success or failure
Identifying Industry
Key Success Factors
• Pinpointing KSFs involves determining
– On what basis do customers choose
between competing brands of sellers?
– What resources and competitive capabilities does
a seller need to have to be competitively
successful?
– What does it take for sellers to achieve a
sustainable competitive advantage?
Example: KSFs for
Beer Industry
• Full utilization of brewing capacity –
to keep manufacturing costs low
• Strong network of wholesale distributors –
to gain access to retail outlets
• Clever advertising –
to induce beer drinkers to
Example: KSFs for Apparel
Manufacturing Industry
• Appealing designs and
color combinations –
to create buyer appeal
• Low-cost manufacturing
efficiency – to keep selling
prices competitive
Example: KSFs for Tin and
Aluminum Can Industry
• Locating plants close to end-use customers –
to keep costs of shipping empty cans low
• Ability to market plant output within
economical shipping distances
Q #7: Does the Outlook for the Industry
Present an Attractive Opportunity?
Involves assessing whether the industry
and competitive environment is attractive
or unattractive for earning good profits
Under certain circumstances, a firm uniquely
well-situated in an otherwise unattractive industry
can still earn unusually good profits
Attractiveness is relative, not absolute
Conclusions have to be drawn from the
perspective of a particular company
Factors to Consider in
Assessing Industry Attractiveness
Industry’s market size and growth potential
Whether competitive forces are conducive to rising/falling industry
profitability
Whether industry profitability will be favorably or unfavorably
impacted by driving forces
Degree of risk and uncertainty in industry’s future
Severity of problems facing industry
Firm’s competitive position in industry vis-à-vis rivals
Firm’s potential to capitalize on
vulnerabilities of weaker rivals
Whether firm has sufficient resources to
defend against unattractive industry factors
Core Concept: Assessing Industry
Attractiveness
The degree to which an industry is
attractive or unattractive is often not the
same for all industry participants
or potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
