ch 03 -analyzing the company's external environment

8/18/2019 Ch 03 -Analyzing the Company's External Environment

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ANALYZING COMPANY’S

EXTERNAL ENVIRONMENT

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INTRODUCTION

Strategy formulation begins with an analysis of the

forces that shape competition in the industry in

which a company is operate or based

Its purposes are to identify opportunities and threats

and then to be base for formulating strategies

Opportunities are when a company can take advantage of its environment –

profitable

Threats are the situation endanger the integrity and profitability of the

company’s business 2


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INDUSTRY

“a group of companies offering products

or services that are close substitutes

for each other-products that satisfy the

same basic customer needs.” (Hill & Jones, p:43, 2009)

Sector is a group of closely relatedindustries

Industries boundaries can change-computer and

telecommunication3


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SECTOR AND INDUSTRY (HILL & JONES)

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COMPETITION IN AN INDUSTRY: HOW

STRONG ARE COMPETITIVE FORCES?

In general, competition within an industry

is driven by five basic competition forces

The Forces are:

Buyers, Rivalries, Suppliers, New

Entrants, and Product Substitutes

(as the collective strength of the forces) of

that industry5


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STRUCTURAL DETERMINANTS OF

THE INTENSITY OF COMPETITION

The strongest force or forces are governing

and become crucial from the point ofview of strategy formulation

An example: a company with a very strong position in

an industry would have no guarantee in gaining

expected profitability, if the company faces a

superior, lower-cost product substitution or low-

entry barrier (new entrants with big capital) 6


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THE FIVE FORCES MODEL OF

COMPETITION


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THREATS OF NEW POTENTIAL

ENTRANT

Depending on Barriers to Entry and the Reactionfrom existing companies

Barriers to Entry:

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy8


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COST DISADVANTAGES INDEPENDENT OF SCALE (BARRIERS TO ENTRY)

Proprietary product technology Airplane-maker or aerospace, mining, machine for racing

cars, handwritten batik, patented products

Favorable access to raw materials Oil, gas, gold

Favorable locationsClose to Market (Asia region): China, Vietnam, Indonesia

Government subsidies National companies: PT KAI

Learning or experience curve Electronic, automotive product,

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LEARNING/EXPERIENCE EFFECTS

Learning/experience effectsexist when acompany’s unit costs decline as its

cumulativeproduction volume increases(more efficient and specialized)

because of

Accumulating production of know-how

Growing mastery of the technology Cost declines with experience do not relate to theentire firm but arise from the individual operations

or functions that make up the firm10


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LEARNING/EXPERIENCE EFFECTS

VERSUS

ECONOMIES OF SCALE

In comparison with economies of scale,experience curve relates with cumulative

volume, while economies of scale aredependent on volume per period;

Sharing operations or functions among relatedbusiness unit within a diversified companies: memory

for desktop and notebook computer

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SOME FACTORS WOULD CAUSE DEGREE OF

COMPETITION AMONG RIVALRY

Numerous or equally balanced Competitors

Market growth

Products Differentiation of Rivals

Customer loyalty of Rivals

Buyer costs to switch brands

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POTENTIAL FACTORS LEADING TO BE THE

THREATS OF SUBSTITUTE

PRODUCTS

Substitutes products are readily available and

attractively priced

Buyers view substitutes as being comparableor better

Low costs for users to switch to substitute

products

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POTENTIAL FACTORS LEADING TO BE THE

BARGAINING POWER OF SUPPLIERS

High costs in switching their purchases toalternative suppliers

Needed inputs are in short supply A quality or differentiated input A few suppliers of a specific inputThe threats of suppliers to integrate

forward

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POTENTIAL FACTORS LEADING TO BE

THE BARGAINING POWER OF BUYERS

Buyer switching costs to competing brands orsubstitutes

Buyer demand is weak or declining

Only a few buyers existsIdentity of buyer adds prestige to seller’s list ofcustomers

Quantity and quality of information available

to buyersBuyers have ability to postpone purchasesuntil later

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FIGURE OUT OF THE COMPETITION

Forces Evidence Strong

/Moderate/

Weak

Actions

Bargaining power of

suppliers

Bargaining power of

buyers

Threats of New

Entrants

Threats of Product

Substitutes

Competition with

Rivalry

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STRATEGIC IMPLICATIONS OF

THE FIVE COMPETITIVE FORCES

Competitive environment is

unattractive from the standpoint of

earning good profitswhen

Rivalry is vigorous

Entry barriers are low and entry is likely

Competition from substitutes is strong

Suppliers and customers have considerablebargaining power

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STRATEGIC IMPLICATIONS OF

THE FIVE COMPETITIVE FORCES

Competitive environment isideal from

a profit-making standpointwhen

Rivalry is moderate

Entry barriers are high and no firm is likely to

enter

Good substitutes do not exist

Suppliers and customers are in a weakbargaining position

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WHAT FORCES ARE DRIVING

INDUSTRY CHANGE AND WHATIMPACTS WILL THEY HAVE?

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FACTORS DRIVING INDUSTRY

CHANGE

Industries change because forces

aredriving industry participants

toalter their actions Driving forces are themajor

underlying causesof changing industry

and competitive conditions

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SOME FORCES DRIVING CHANGES

Emerging new Internet capabilities andapplications

Increasing globalization of industryProduct innovation

Technological change/process innovationMarketing innovationRegulatory policies / government legislation

Changing societal concerns, attitudes, andlifestyle

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STRATEGIC GROUP

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STRATEGIC GROUP

Astrategic group is a cluster of firms in anindustry with similar competitive approaches

(business models)

Strategic group mapping is one technique torevealdifferent competitive positionsof

industry rivals

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STRATEGIC GROUP MAPPING

Firms insame strategic group have two ormorecompetitive characteristics in common(business models), such as

Product line breadth

Price/quality rangeUse of distribution channelsSimilar types of buyers

Use of identical technological approachesCover same geographic areas

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Strategic Group:Mobility Barriers

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EXAMPLE: STRATEGIC GROUP MAP OF SELECTED RETAIL CHAINS


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INTERPRETING STRATEGIC

GROUP MAPS

The closer strategic groups are

on the map, the stronger the cross-groupcompetitive rivalry tends to be

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ANALYZING COMPETITORS:

Profiling key rivals involves gathering

competitive intelligence about

Current strategiesMost recent actions

Resource strengths and weaknesses

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WHAT ARE THE KEY

FACTORS FOR COMPETITIVE

SUCCESS?

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THE KEY FACTORS FOR

COMPETITIVE SUCCESS

KSFs are those competitive factors mostaffecting every industry member’s

ability to compete with successfully

Key factors as request for companiesto compete with in an industry

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IDENTIFYING INDUSTRY KEY SUCCESS

FACTORS

On what basis do customers choosebetween competing brands of sellers?

What resources and competitive

capabilities does a seller need to have tobe competitively successful?

What does it take for companies

(competitor) to achieve a sustainablecompetitive advantage?

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IMPORTANT MESSAGE: IN ASSESSING

INDUSTRY ATTRACTIVENESS

Thedegree to which anindustry

isattractive orunattractive is not the same for

all industry participants

or potential entrants.

Theopportunities an industry

presentsdepend partly on acompany’s ability tocapture them

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ch 03 -analyzing the company's external environment

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