CHAPTER 3

EVALUATING A COMPANY’S
EXTERNAL ENVIRONMENT
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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 3.1 From Thinking Strategically about the Company’s Situation
to Choosing a Strategy

Chapter 3

Thinking
strategically
about a firm’s
external Selecting
environment Forming a the
Identifying
strategic best
promising
vision of strategy
strategic
where the and
options
firm needs business
for the firm
Thinking to head model for
strategically the firm
about a firm’s
internal
environment
Quiz – p 19

Chapter 4

3–3
 The External Environment

♦ The Macro-Environment
● Is the broad environmental context in
which a firm’s industry is situated.
● Includes strategically relevant components
over which the firm has no direct control.
►General economic conditions
►Immediate industry and competitive
environment
Quiz – p 20 – 22

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QUESTION 1: WHAT ARE THE STRATEGICALLY RELEVANT
FACTORS
IN THE MACRO-ENVIRONMENT?

♦ PESTEL Analysis
● Focuses on principal components of strategic
significance in the macro-environment:
► Political factors
► Economic conditions (local to worldwide)
► Sociocultural forces
► Technological factors
► Environmental factors (the natural environment)
► Legal/regulatory conditions
p. 22
3–5
3–5
3.2 The Components of a Company’s Macro-Environment

Quiz – p 22 – 25
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3–7
3–8
 Quiz – p 22
3.1 The Components of the Macro-Environment

Component Description
Demographics The size, growth rate, and age distribution of different sectors of the population. It
includes the geographic distribution of the population, the distribution of income
across the population, and trends in these factors.
Social forces Societal values, attitudes, cultural factors, and lifestyles that impact businesses.
Social forces vary by locale and change over time.
Political, legal, Political policies and processes, as well as the regulations and laws with which
and regulatory companies must comply—labor laws, antitrust laws, tax policy, regulatory policies,
factors the political climate, and the strength of institutions such as the court system.

Natural Ecological and environmental forces such as weather, climate, climate change, and
environment associated factors like water shortages.

Technological The pace of technological change and technical developments that have the
factors potential for wide-ranging effects on society, such as genetic engineering, the rise
of the Internet, changes in communication technologies, and knowledge and
controlling the use of technology,

Global forces Conditions and changes in global markets, including political events and policies
toward international trade, sociocultural practices and the institutional environment
in which global markets operate.
General Rates of economic growth, unemployment, inflation, interest, trade deficits or
economic surpluses, savings, per capita domestic product, and conditions in the markets for
conditions stocks and bonds affecting consumer confidence and discretionary income.

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 QUESTION 2: HOW STRONG ARE THE
INDUSTRY’S COMPETITIVE FORCES?

♦ The Five Competitive Forces:

● Competition from rival sellers
● Competition from potential new entrants
● Competition from substitute products
producers Quiz – p 23 – 38
● Supplier bargaining power
● Customer bargaining power

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

Quiz – p 24

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 3.2 Common “Weapons” for Competing with Rivals

Competitive Weapons Primary Effects

Price discounting, clearance sales, Lowers price (P), acts to boost total sales volume and market share,
“blowout” sales lowers profit margins per unit sold when price cuts are big and/or
increases in sales volume are relatively small
Couponing, advertising items on sale Acts to increase unit sales volume and total revenues, lowers price (P),
increases unit costs (C), may lower profit margins per unit sold (P – C)

Advertising product or service Boosts buyer demand, increases product differentiation and perceived
characteristics, using ads to enhance value (V), acts to increase total sales volume and market share, may
a company’s image or reputation increase unit costs (C) and/or lower profit margins per unit sold
Innovating to improve product Acts to increase product differentiation and value (V), boosts buyer
performance and quality demand, acts to boost total sales volume, likely to increase unit costs
(C)
Introducing new or improved features, Acts to increase product differentiation and value (V), strengthens buyer
increasing the number of styles or demand, acts to boost total sales volume and market share, likely to
models to provide greater product increase unit costs (C)
selection

Increasing customization of product or Acts to increase product differentiation and value (V), increases
service switching costs, acts to boost total sales volume, often increases unit
costs (C)
Building a bigger, better dealer network Broadens access to buyers, acts to boost total sales volume and market
share, may increase unit costs (C)
Improving warranties, offering low- Acts to increase product differentiation and value (V), increases unit
interest financing costs (C), increases buyer costs to switch brands, acts to boost total
sales volume and market share
Quiz – p 27 3–12
 Competitive Pressures That Act to Increase the
Rivalry among Competing Sellers
♦ Buyer demand is growing slowly or declining.
♦ Switching Costs - It is becoming less costly for buyers
to switch brands.
♦ Industry products are becoming more alike.
♦ 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 stop firms from exiting the industry.

Quiz – p 25 – 27 3–13
 3.4
Factors Affecting the
Strength of Rivalry

Quiz – p 25

3–14
Wall Street Journal, July 25, 2012, 6:41 p.m. ET “Apple-Amazon War Heats Up” -
http://professional.wsj.com/article/
SB10000872396390443295404577547070376968192.html

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 Competitive Pressures Associated
with the Threat of New Entrants

♦ Entry Threat Considerations: e.g. Fiat in U.S.

New Google Motorola Phone
● Strength of barriers to entry
● Expected reaction of incumbent firms
● 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

Quiz – p 28 – 30

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 Market Entry Barriers Facing New Entrants

♦ Economies of scale in production, distribution,

advertising, or other areas of operation
♦ Experience and learning curve effects
♦ Unique cost advantages of industry incumbents
♦ Strong brand preferences and customer loyalty
♦ Strong “network effects” in customer demand
♦ High capital requirements Barnes and Noble Nook
♦ Building a network of distributors or dealers and
securing adequate space on retailers’ shelves
♦ Restrictive government policies
Quiz – p 28 - 30

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 3.5 Quiz – p 30
Factors Affecting
the Threat of Entry

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 Substitutes vs. Alternatives

♦ Substitute Products or Services – Same utility

Different Technology:
● Aspertame (Equal) for Sugar. Contact lenses for Glasses.
Aluminum vs. plastic containers
● NOT directly competing products – NOT Big Mac vs. Whopper
● Buying fast foods instead of cooking at home
♦ Alternative Products or Services – Provides
similar outcome – but different concept:
● Going to beach instead of to Disneyland
● No hat vs. wearing hat
Instructor Material

3–19
 Competitive Pressures from the Sellers
of Substitute Products
Quiz p 31
♦ Substitute Products Considerations:
1. Readily available and attractivelyQuiz
priced?
– p 31

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 3–20
 Quiz – p 31

3.6
Factors Affecting
Competition from
Substitute Products

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 Competitive Pressures Stemming from
Supplier Bargaining Power

♦ Supplier Bargaining Power Depends On: Quiz – p 32 - 34

● 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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 3.7
Factors Affecting
the Bargaining
Power of Suppliers

Quiz – p 33
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 Competitive Pressures Stemming from Buyer
Bargaining Power and Price Sensitivity

♦ Buyer Bargaining Power Considerations: First decide

“who is buyer and who is seller?” Quiz – p 35 – 37
● Buyer costs for switching to competing sellers
● Degree to which industry products are commoditized
● Number and size of buyers relative to sellers
● Strength of buyer demand for sellers’ products
● Buyer knowledge of products, costs and pricing
● Backward integration of buyers into sellers’ industry
● Buyer discretion in delaying purchases
● Buyer price sensitivity due to low profits, size of purchase, and
consequences of purchase
● Try NOT to put yourself into this analysis – YOU are NOT a
buyer here!!! Ever!!!

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 3.8
Factors Affecting
the Bargaining
Power of Buyers

Quiz – p 35 – 37
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 Is the Collective Strength of the Five Competitive Forces
Conducive to Good Profitability? Should we Compete??

♦ Is the state of competition in the industry

stronger than “normal”?
♦ Can industry firms expect to earn decent profits
given prevailing competitive forces?
♦ Are some of the competitive forces sufficiently
powerful to undermine industry profitability?
♦ Kohl’s in retailing – Revival of JCPenny

Quiz – p 37

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Matching Strategy to Competitive Conditions

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.
3. Spotting attractive arenas for expansion, where
competitive pressures in the industry are
somewhat weaker.
Quiz – p 38

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QUESTION 3: WHAT FACTORS ARE DRIVING
INDUSTRY CHANGE, AND WHAT IMPACTS WILL
THEY HAVE?

♦ Strategic Analysis of Industry Dynamics:

1. Identifying the external drivers of change.
2. Assessing whether the drivers of change
are, individually or collectively, acting to
make the industry more or less attractive.
3. Determining what strategy changes are
needed to prepare for the impacts of the
anticipated change.

Quiz – p 38 – 42
****several questions

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 3.3 The Most Common Principal Industry Drivers of
Change

1. Changes in the long-term industry growth rate

2. Increasing globalization (outsourcing call centers)
3. Changes in who buys the product and how they use it
4. Technological change (Device obsolescence)
5. Emerging new Internet capabilities and applications
6. Product and marketing innovation
7. Entry or exit of major firms (Kodak)
8. Diffusion of technical know-how across companies and
countries
9. Improvements in efficiency in adjacent markets Quiz – p 41
10. Reductions in uncertainty and business risk ****several
11. Regulatory influences and government policy changes
questions
(ObamaCare)
12. Changing societal concerns, attitudes, and lifestyles (Green)

3–29
 Assessing the Impact of the Factors
Driving Industry Change

1. Overall, are the factors driving change causing

demand for the industry’s product to increase
or decrease?
2. Is the collective impact of the drivers of change
making competition more or less intense?
3. Will the combined impacts of the change
drivers lead to higher or lower industry
profitability?
Quiz – p 42
****several questions

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 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 adjustments must be made immediately?
● What actions must we not take or should we cease
to do now? (Make people think we are “green”)
● What can we do now to prepare for adjustments
we anticipate making in the future?
Quiz – p 42
****several questions

3–31
 QUESTION 4: HOW ARE INDUSTRY RIVALS
POSITIONED—WHO IS STRONGLY POSITIONED
AND WHO IS NOT? Page 42

♦ A Strategic Group e.g. group retailers

● Is a cluster of industry rivals that have similar
competitive approaches and market positions:
► Have comparable product-line breadth
► Sell in the same price/quality range
► Emphasize the same distribution channels
► Use the same product attributes to customers
► Depend on identical technological approaches
► Offer similar services and technical assistance
Quiz – p 50 – 54
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CORE CONCEPTS

♦ A strategic group is a cluster of industry

rivals that have similar competitive
approaches and market positions.
♦ Strategic group mapping is a technique
for displaying the different market or
competitive positions that rival firms
occupy in the industry.

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3–33
 ILLUSTRATION CAPSULE 3.1
Comparative Market Positions of Producers in the
p - 44 U.S. Beer Industry: A Strategic Group Map Example

Footnote: Circles are drawn roughly proportional to the sizes of the firms, based on revenues.
3–34
3–34
 ILLUSTRATION CAPSULE 3.1
Comparative Market Positions of Producers in the
U.S. Beer Industry: A Strategic Group Map Example

♦ Which strategic group is located in the least

favorable market position? Which group is in
the most favorable position?
♦ Which strategic group is likely to experience
increased intragroup competition?
♦ Which groups are most threatened by the likely
strategic moves of members of nearby strategic
groups?

3–35
3–35
 Using Strategic Group Maps to Assess
the Market Positions of Key Competitors

♦ Constructing a strategic group map:

● Identify the competitive characteristics that
differentiate firms in the industry. Quiz – p 50 – 56
● Plot the firms on a two-variable map using pairs
of differentiating competitive characteristics.
● Assign firms occupying about the same map
location to the same strategic group.
● Draw circles around each strategic group, making
the circles proportional to the size of the group’s
share of total industry sales revenues.

3–36
 Typical Variables for Differentiating the Market
Positions of Key Competitors on Group Maps

♦ Price/quality range (high, medium, low)

♦ Geographic coverage (local, regional, national, global)
♦ Product-line breadth (wide, narrow)
♦ Degree of service offered (no frills, limited, full)
♦ Distribution channels (retail, wholesale, Internet, multiple)
♦ Degree of vertical integration (none, partial, full)
♦ Degree of diversification into other industries (none,
some, considerable).

Quiz – p 50 – 56

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 Choosing Variables for Group Maps

♦ Variables selected as map axes:

● Must not be highly correlated.
● Must reflect key approaches to customer
value and expose sizable differences in the
marketplace positions of rivals.
● May be quantitative, continuous, discrete
and\or defined in terms of distinct classes
and combinations.
Quiz – p 50 – 56

3–38
 Guidelines for Constructing Group Maps

♦ Draw map circles proportional to the combined

sales of firms in each strategic group to reflect
the relative sizes of each group to the total size
of the industry.
♦ Use different variable sets to show different
views of relationships among competitive
positions in the industry’s structure—there is no
one best map for portraying how competing
firms are positioned.
Quiz – p 50 – 56

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What Can Be Learned from Strategic Group Maps?

♦ Maps are useful in identifying which industry

members are close rivals and which are
distant rivals.
♦ Not all map positions are equally attractive.
1. Prevailing competitive pressures in the industry
and drivers of change favor some strategic
groups and hurt others.
2. Profit prospects vary from strategic group to
strategic group.
Quiz – p 50 – 57

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 QUESTION 5: WHAT STRATEGIC MOVES
ARE RIVALS LIKELY TO MAKE NEXT?

♦ Competitive Intelligence – GLO-BUS Game

● Information about rivals that is useful in anticipating
their next strategic moves.
♦ Signals of the Likelihood of Strategic Moves:
● Rivals under pressure to improve financial
performance
● Rivals seeking to increase market standing
● Public statements of rivals’ intentions
● Profiles developed by competitive intelligence units

Quiz – p 50 – 57
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 QUESTION 6: WHAT ARE THE KEY FACTORS
FOR FUTURE COMPETITIVE SUCCESS?

♦ Key Success Factors

● Are the strategy elements, product and
service attributes, operational approaches,
resources, and competitive capabilities that
are necessary for competitive success by
any and all firms in an industry.
● Vary from industry to industry, and over time
within the same industry, as drivers of
change and competitive conditions change.
Quiz – p 50 – 57
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 Identification of Key Success Factors

1. What product attributes and service features

buyers strongly affect buyers when choosing
between the competing brands of sellers?
2. What resources and competitive capabilities
are required for a firm to execute a successful
strategy in the marketplace?
3. What shortcomings will put a firm at a
significant competitive disadvantage?
Quiz – p 50 – 57

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 QUESTION 7: DOES THE INDUSTRY OFFER
GOOD PROSPECTS FOR ATTRACTIVE
PROFITS?

♦ Industry Profitability Considerations:

● The industry’s overall growth potential
● Effects of strong competitive forces
● Effects of prevailing drivers of change in the industry
● Competitive strength of the firm: its market position
relative to its rivals, its capability to withstand
competitive forces, and whether its position will
change in the course of competitive interactions
● The success of the firm’s strategy in delivering on
the industry’s key success factors
Quiz – p 56 – 57
3–44