Lesson 2 – CORE

CONCEPTS AND
ANALYTICAL
TOOLS

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 LESSON 2 - OUTLINE

 2.1. Evaluating a company’s external environ

ment
 2.2. Evaluating a company’s resources, cost
position and competitiveness

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 2.1.
EVALUATING
A COMPANY’S
EXTERNAL
ENVIRONMENT

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 2.1.1. The strategically relevant
components of a company’s macro-
environment
 Two facets of the company’s situation
 The industry and competitive environments in which
the company operates—its external environment
 The company’s resources and organizational
capabilities—its internal environment
 Resource strengths and weaknesses
 Cost position
 Culture and the strength of its leadership

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 FIGURE 3.1 The Components of a Company’s Macro-Environment

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 2.1.2. Assessing the Company’s Industry

and Competitive Environment

1. Dominant economic characteristics of the
industry => opportunities for growth and
attractive profits
2. Competitive forces => What kind? How
strong is each force?
3. Forces are driving industry change =>
Competitive intensity and industry
profitability.

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 2.1.2. Assessing the Company’s Industry
and Competitive Environment (cont’d)

4. Market positions of industry rivals => who

is strongly positioned and who is not?
5. Strategic moves of rivals.
6. Key factors of competitive success.
7. Industry outlook offer good prospects for
profitability.

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2.1.3. Issue 1: Analyzing the
dominant economic
characteristics of an industry
 2.1.3. Issue 1: Analyzing the dominant
economic characteristics of an industry
 Market size and growth rate
 Number of rivals
 Scope of competitive rivalry
 Pace of technological change
 Degree of vertical integration
 Need for economies of scale
 Learning and experience curve effects

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 What to Consider in Identifying an Industry’s Dominant
TABLE 3.1
Economic Features

ECONOMIC CHARACTERISTIC QUESTIONS TO ANSWER

Market size and growth rate • How big is the industry and how fast is it growing?
• What does the industry’s position in the life cycle (early
development, rapid growth and takeoff, early maturity and
slowing growth, saturation and stagnation, decline) reveal
about the industry’s growth prospects?

Scope of competitive rivalry • Is the geographic area over which most companies
compete local, regional, national, multinational, or global?

Demand-supply conditions • Is a surplus of capacity pushing prices and profit margins

down?
• Is the industry overcrowded with too many competitors?

Market segmentation • Is the industry characterized by various product

characteristics or customer wants, needs, or preferences
that divide the market into distinct segments?

Pace of technological change • What role does advancing technology play in this industry?
• Do most industry members have or need strong
technological capabilities? Why?

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 Test 1
Duration: 20 minutes

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2.1.4. Issue 2: Evaluating
the strength of the industry’s
competitive forces
 2.1.4. Issue 2: Evaluating the strength of
the industry’s competitive forces
“ Where are we now? ”
 The nature of the competitive forces differs
across industries.
 Competitive forces go beyond rivalry and
include five coexisting forces.

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 The Five Competitive Forces
Affecting Industry Attractiveness
 The competitive forces affecting industry
attractiveness are:
1. Buyer bargaining power
2. Firms in other industries attempting to win
buyers over to substitute products
3. Supplier bargaining power
4. The threat of new entrants into the market
5. The strength of the rivalry to attract customers
among competing sellers in an industry (usually
the strongest of the competitive forces).

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 FIGURE 3.2
The Five-Forces
Model of Competition

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 2.1.4.1. The Competitive Force of
Buyer Bargaining Power
 Whether seller-buyer relationships represent
a minor or significant competitive force in
limiting industry profitability depends on:
1. Whether some or many buyers have sufficient
bargaining leverage to obtain price concessions and
other favorable terms.
2. The extent to which buyers are price sensitive.

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 When Is the Bargaining
Power of Buyers Stronger?
 Buyers gain bargaining leverage when:
 Their large size allows them to demand concessions.
 Their costs of switching to competing brands or
substitutes are relatively low.
 They are few in number, control market access, or if
a buyer-customer is particularly important to a seller.
 Weak buyer demand creates a “buyers’ market.”
 Buyers are well informed about sellers’ products,
prices, and costs.
 Buyers pose a credible threat of integrating backward
into the business of sellers.

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 2.1.4.2. The Competitive Force
of Substitute Products
 The strength of competitive pressures from
the sellers of substitute products depends
on three factors:
 Whether substitutes are readily available and
attractively priced.
 Whether buyers view the substitutes as comparable or
better in terms of quality, performance, and other
relevant attributes.
 Whether the costs that buyers incur in switching to the
substitutes are high or low.

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 2.1.4.3. The Competitive Force of
Supplier Bargaining Power
 The bargaining power or leverage of industry
suppliers is increased when:
 The item being supplied is not a commodity readily
available from many suppliers.
 Industry members cannot readily switch their
purchases from one supplier to another nor easily
switch to attractive substitutes.
 Certain inputs are in short supply.
 Certain suppliers provide a differentiated input that
enhances the performance, quality, or image of the
industry’s product.

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 2.1.4.3. The Competitive Force of
Supplier Bargaining Power (cont’d)
 The bargaining power or leverage of industry
suppliers is increased when:
 Suppliers provide specialized equipment or services
that yield cost savings to industry members in
conducting their operations.
 A large fraction of the costs of the buyer industry’s
product is accounted for by the cost of a particular
input.
 Industry members are not major or large customers of
suppliers.
 Industry members cannot easily vertically integrate
backward into the supplier’s industry.
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 2.1.4.4. The Competitive Force of
Potential New Entrants
 The threat of entrants into the marketplace
presents significant competitive pressure
when:
 There is a sizable pool of likely entry candidates.
 Potential entrants have ample entry resources at their
command.
 Current industry participants are looking beyond their
current markets for growth opportunities.
 The industry is growing, offers attractive profit
opportunities, and its barriers to entry are low.

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 What Are the Barriers to Entry?
 The presence of sizable  The difficulties of building a
economies of scale in network of distributors-
production or other areas retailers and securing
of operation adequate space on retailers’
shelves
 Cost and resource
disadvantages not related  Tariffs and international
to scale of operation trade restrictions
 Strong brand preferences  The ability and willingness
and high degrees of of industry incumbents to
customer loyalty launch vigorous initiatives
to block a newcomer’s
 High capital requirements
successful entry
 Restrictive regulatory
policies

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 2.1.4.5. The Competitive Force of Rivalry

among Competing Sellers

 The rivalry among industry competitors strengthens
and intensifies in markets where:
 Competing sellers regularly launch fresh actions to boost their
market standing and business performance.
 Markets are slow-growing or are declining.
 Demand is off and there is excess capacity and/or inventory.
 It has become less costly for buyers to switch brands.
 The products of rival sellers have become more standardized.
 Industry conditions tempt competitors to use price cuts or other
competitive weapons to boost unit volume.
 Competitors have become dissatisfied with their market position.
 Strong outside firms acquire weak firms in the industry and
launch aggressive, well-funded moves to build market share.
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 2.1.4.5. The Competitive Force of Rivalry

among Competing Sellers (cont’d)

 The rivalry among industry competitors is usually
weaker in industries where:
 The products of industry rivals become more differentiated.

 Markets or market segments are expanding and fast-growing.

 Markets are comprised of vast numbers of small rivals; likewise,

it is often weak when there are fewer than five competitors.

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 When the Five Competitive Forces
Result in Attractive Market Conditions
 An industry’s competitive environment
tends to be attractive from a profit-making
perspective when:
 Internal rivalry is moderate
 High entry barriers deter entry of new competitors
 Good substitutes do not exist
 Suppliers and customers are in weak bargaining
positions
thereby producing competitive pressures
that are very weak!

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 When the Five Competitive Forces
Result in Unattractive Market Conditions
 An industry’s competitive environment
tends to be unattractive from a profit-
making standpoint when:
 Internal rivalry among competitors is strong
 Low entry barriers make new competitor entry likely
 Good substitutes exist for industry products
 Suppliers and customers are in strong bargaining
positions
thereby producing competitive pressures
that are very intense or fierce!

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2.1.5. Issue 3: The impact of
the changing driving forces
on an industry
  Core Concept 

Driving forces in the macro-environment are

the major underlying causes of changes in
industry and competitive conditions.

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 2.1.5. Issue 3: The impact of the
changing driving forces on an industry

 Driving forces analysis has three steps:

 Identifying what driving forces are present.
 Assessing whether the drivers of change are,
individually or collectively, acting to make the industry
more or less attractive.
 Determining what strategy changes are needed to
prepare for the impact of the driving forces.

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 2.1.5. Issue 3: The impact of the
changing driving forces on an industry

1. Identify the driving forces likely to reshape industry

competitive conditions:
 Industry changes likely to take place within the next 1–3 years
 Usually only 3–4 factors qualify as real drivers of change
2. Assess the future impact of driving forces on
industry attractiveness:
 Will they cause demand for product to increase or decrease?
 Will they act to make competition more or less intense?
 Will they lead to higher or lower industry profitability?
3. Determine what strategy changes are needed to
prepare for impact of driving forces.
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2.1.6. Issue 4: Determining
the position of the industry
rivals
 2.1.6. Issue 4: Determining the position
of the industry rivals
 Strategic group mapping
 Is a technique for displaying the different market or
competitive positions that rival firms occupy in the
industry.
A strategic group
 Is a cluster of industry rivals that have similar
competitive approaches and market positions.

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 Concepts and Connections 3.1
Comparative Market Positions of Selected Retail Chains:
A Strategic Group Map Application

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 What Can Be Learned from
Strategic Group Maps?

 Driving forces and competitive

pressures often favor some
strategic groups and hurt others.
 Competitive pressures may cause
the profit potential of different
strategic groups to vary.

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2.1.7. Issue 5: Anticipating
the next strategic moves of
rivals
 2.1.7. Issue 5: Anticipating the next
strategic moves of rivals
 Considerations in trying to predict what strategic moves rivals
are likely to make next include the following:
 What executives are saying about where the industry is headed, the
firm’s situation, and their past actions and leadership styles.
 Identifying trends in the timing of product launches or new marketing
promotions.
 Determining which rivals badly need to increase unit sales and market
share.
 Considering which rivals have a strong incentive, along with the
resources, to make major strategic changes.
 Knowing which rivals are likely to enter new geographic markets.
 Deciding which rivals are strong candidates to expand their product
offerings and enter new product segments.

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 Predicting the Next Strategic Moves
Rivals Are Likely to Make

 Profiling key rivals involves gathering

competitive intelligence about:
 Thinking and leadership styles of top executives
 Identifying trends in the timing of new-product
launches and marketing promotions
 Considering which rivals have the motivation and
capability to make major strategy changes

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2.1.8. Issue 6: The definition
of the industry key success
factors
 2.1.8. Issue 6: The definition of the
industry key success factors
 Key success factors (or KSFs) are
competitive factors most affecting every
industry member’s ability to prosper.
 KSFs include:
 Specific product attributes
 Necessary resources, competencies, and capabilities
 Specific intangible assets
 Competitive capabilities

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 Three Questions to Ask in Identifying
Industry 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 are crucial?
2. Given the nature of the competitive forces
prevailing in the marketplace, what resources and
competitive capabilities must a firm possess to be
competitively successful?
3. What shortcomings are almost certain to put a firm
at a significant competitive disadvantage?

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2.1.9. Issue 7: Evaluating
the prospects for gaining
attractive profits of an
industry
2.1.9. Issue 7: Evaluating the prospects for
gaining attractive profits of an industry
 Involves assessing whether the industry and
competitive environment is attractive or
unattractive for earning good profits.
 Draws upon all the previous analysis:
 The industry’s growth potential
 The effect of the intensity of competition on industry profitability
 Whether industry profitability will be favorably or unfavorably
affected by the prevailing driving forces
 The firm’s competitive position in its industry relative to rivals
 How competently the firm performs industry’s key success
factors

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 2.2. EVALUATING
A COMPANY’S
RESOURCES,
COST POSITION, AND
COMPETITIVENESS

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 “Where Are We Now?”

Question 1 How well is the firm’s strategy working?

What are the firm’s competitively important

Question 2
resources and capabilities?

Are the firm’s cost structure and customer

Question 3
value proposition competitive?

Is the firm competitively stronger or weaker

Question 4
than key rivals?

What strategic issues and problems merit

Question 5
front-burner managerial attention?

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2.2.1. Issue 1: Assessing the
efficiency of the current
strategy
2.2.1. Issue 1: Assessing the efficiency of
the current strategy
 The two best indicators of how well a firm’s
strategy is working are:
 Whether the firm is recording gains in financial
strength and profitability.
 Whether the firm’s competitive strength and market
standing is improving.

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 Strategy Performance Indicators
 Trends in the firm’s sales and earnings growth.
 Trends in the firm’s stock price.
 The firm’s overall financial strength.
 The firm’s customer retention rate.
 The rate at which new customers are acquired.
 Changes in the firm’s image and reputation with
customers.
 Evidence of improvement in internal processes
such as defect rate, order fulfillment, delivery times,
days of inventory, and employee productivity.

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2.2.2. Issue 2: Determining
the important resources and
capabilities
 2.2.2. Issue 2: Determining the important
resources and capabilities

A company’s strategy and business model:

 Must be well-matched to its collection of resources
and capabilities
 Is strengthened when exploiting resources that are
competitively valuable, rare, hard to copy, and not
easily trumped by rivals’ equivalent substitute
resources

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 Identifying Competitively Important
Resources and Capabilities
 Common types of valuable resources and
competitive capabilities include:
 Skills or specialized expertise in a competitively
important capability
 Valuable physical assets
 Valuable human assets or intellectual capital
 Valuable organizational assets
 Valuable intangible assets
 Competitively valuable alliances or cooperative
ventures

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  Core Concept 

A resource is a competitive asset that

is owned or controlled by a firm; a
capability is the capacity of a firm to
competently perform some internal
activity. Capabilities are developed
and enabled through the deployment
of a firm’s resources.

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  Core Concept 

A core competence is a proficiently performed

internal activity that is central to a company’s
strategy and competitiveness.
A core competence that is performed with a
very high level of proficiency is referred to as
a distinctive competence.

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 A Company’s Resources and
Capabilities Must Be Managed
Dynamically
 Management’s organization-building
challenge has two elements:
1. Attending to ongoing recalibration of existing
capabilities and resources
2. Casting a watchful eye for opportunities to develop
totally new capabilities for delivering better customer
value and/or outcompeting rivals

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  Core Concept 

A dynamic capability is developed when a

company has become proficient in modifying,
upgrading, or deepening its resources and
capabilities to sustain its competitiveness and
prepare it to seize future market opportunities
and nullify external threats to its well-being.

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 Are Company Resources and Capabilities
Sufficient to Allow It to Seize Market
Opportunities and Nullify External Threats?

 SWOT represents the first letter in:

Strengths Weaknesses Opportunities Threats
A well-conceived strategy is:
 Matched to the firm’s resource strengths and
weaknesses
 Aimed at capturing the firm’s best market
opportunities and defending against external
threats to its well-being

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  Core Concept 

SWOT analysis is a simple but powerful

tool for sizing up a firm’s internal strengths
and competitive deficiencies, its market
opportunities, and the external threats to
its future well-being.

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 Identifying a Company’s
Internal Strengths
A firm’s strengths determine whether its
competitive power in the marketplace will be
impressively strong or disappointingly weak.
A firm that is well endowed with strengths
stemming from potent resources and core
competencies normally has considerable
competitive power.

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 Identifying Resource Weaknesses
and Competitive Deficiencies
A weakness or competitive deficiency is
something a firm lacks or does poorly or
a condition that puts it at a disadvantage
in the marketplace such as:
 Deficiencies in competitively important physical,
organizational, or intangible assets
 Missing or competitively inferior capabilities
in key areas

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 Identifying a Company’s
Market Opportunities
 Opportunities that are most relevant
to a firm are those offering:
 Good match with its financial and
organizational resource capabilities
 The best prospects for growth and profitability
 The most potential for competitive advantage

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 Identifying Threats to a Company’s
Future Profitability
 The emergence of cheaper or better technologies
 Rivals’ introduction of new or improved products
 The entry of lower-cost foreign competitors into a
firm’s market stronghold
 New regulations that are more burdensome
to a firm than to its competitors
 Vulnerability of the firm to a rise in interest rates
 The potential of a hostile takeover
 Unfavorable demographic shifts
 Adverse changes in foreign exchange rates

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 The Value of a SWOT Analysis

 The value of a SWOT analysis is in:

 Drawing conclusions from the SWOT listings
about the firm’s overall situation.
 Translating these conclusions into strategic
actions to better match the firm’s strategy to its
strengths and market opportunities, correcting
problematic weaknesses, and defending against
worrisome external threats.

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2.2.3. Issue 3: Assessing the
competitiveness of the
company’s cost structure
and customer value
proposition
 2.2.3. Issue 3: Assessing the
competitiveness of the company’s cost
structure and customer value proposition
 Why are cost structure and customer value
important?
 Assessing whether a firm’s costs and value
proposition are competitive is crucial, especially so in
industries where price competition is prevalent.
 Useful analytical tools:
 Value chain analysis
 Benchmarking

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 2.2.3.1 Company value chains

A company’s value chain

identifies the primary activities that
create customer value and related
support activities.

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 FIGURE 4.1 A Representative Company Value Chain

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 2.2.3.2. Benchmarking: A Tool for
Assessing Whether a Company’s Value
Chain Activities Are Competitive
 Entails making cross-company comparisons
of how certain activities are performed and
the costs associated with:
 How materials are purchased
 How inventories are managed
 How products are assembled
 How customer orders are filled and shipped
 How maintenance is performed

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  Core Concept 

Benchmarking is a potent tool for learning

which firms are best at performing particular
activities and then using their techniques (or
“best practices”) to improve the cost and
effectiveness of a firm’s own internal activities.

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 FIGURE 4.2 Representative Value Chain for an Entire Industry

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 2.2.3.4. Strategic Options for Remedying

a Cost or Value Disadvantage

 There are two main areas of a firm’s overall
value chain where cost differences occur:
 Activities performed by suppliers
 A firm’s own internal activities

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 Remedying an Internal Cost
or Value Disadvantage
1. Implement the use of best practices throughout the firm
2. Eliminate some cost-producing activities by revamping value
chain
3. Relocate high-cost activities to lower-cost geographic areas
4. See if certain internally performed activities can be
outsourced to vendors or contractors
5. Invest in productivity-enhancing, cost-saving technology
6. Find ways around activities or items where costs are high
7. Redesign the product and/or its components to reduce
manufacturing or assembly costs
8. Make up differences by reducing costs in supplier or forward
portions of value chain system

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 Remedying a Supplier-Related
Cost Disadvantage
 Pressure suppliers for lower prices
 Switch to lower-priced substitutes
 Collaborate closely with suppliers to identify
mutual cost-saving opportunities
 Integrate backward into business of high-
cost suppliers

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2.2.4. Issue 4: Comparing
the competitive strengths of
the company with key rivals
 2.2.4. Issue 4: Comparing the competitive
strengths of the company with key rivals

 Determining a firm’s overall competitive

position involves answering two questions:
1. How does the firm rank relative to its competitors
on each industry key success factor?
2. Does the firm have a net competitive advantage
or disadvantage vis-à-vis its major competitors?

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 Steps in a Competitive Strength Assessment

List the industry’s key success factors and other measures

Step 1 of competitive strength or weakness (6 to 10 measures).

Assign a weight to each measure of competitive strength based

Step 2 on its importance in shaping competitive success. (The sum of
the weights for each measure must add up to 1.0.)

Calculate strength ratings by scoring each competitor on each

Step 3 strength measure (use a scale where 1 is weak and 10 is strong)
and multiplying the assigned rating by the assigned weight.

Sum the weighted strength ratings on each factor to get an overall

Step 4 measure of competitive strength for each company being rated.

Use the overall strength ratings to draw conclusions about the size
Step 5 and extent of the firm’s net competitive advantage or disadvantage
and to take specific note of areas of strength and weakness.

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2.2.5. Issue 5: Strategic
problems and managements
 2.2.5. Issue 5: Strategic problems and
managements

 Final and most important analytical step

in assessing “Where are we
now?”
 The results of industry and competitive analyses
pinpoint the issues and problems that management
must address in setting its agenda for actions to take
next to improve the firm’s performance and business
outlook.

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