ch 03 -the company's external environment

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

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ANALYZING COMPANY’S

EXTERNAL ENVIRONMENT

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Strategy formulation begin with an analysis of the

forces that shape competition in the industry in

which a company is operate or based

The 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

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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 related industries

Industries boundaries can change-computer and

telecommunication3


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SECTOR AND INDUSTRY

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COMPETITION IN AN INDUSTRIES: 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 substitution6


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THE FIVE FORCES MODEL OF

COMPETITION


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COMPETITIVE PRESSURES AMONG

RIVAL SELLERS

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Lower pricesMore or differentperformance features

Better productperformance

Stronger brand imageand appeal

Wider selection ofmodels and styles

Bigger/better dealernetwork

Higher levels of

advertisingStronger productinnovation capabilities

Better customer service

Stronger capabilities toprovide buyers withcustom-made products


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SOME FACTORS WOULD CAUSE DEGREE OF

COMPETITION AMONG RIVALRY

Industry rivals move to draw sales from rivals

(frequently or infrequently)

Market growth (rapid or slow)

Products Differentiation of Rivals (High or

Low)

Customer loyalty of Rivals (High or Low)

Buyer costs to switch brands (High or Low)

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COMPETITIVE PRESSURES

ASSOCIATED WITH POTENTIAL

ENTRY

Seriousness of threat depends onSize of pool of entry candidatesand available resources

Barriers to entry Reaction of existing firms

Evaluating threat of entry involvesassessing

How formidable entry barriers are for eachtype of potential entrant and

Attractiveness of growth and profit prospects

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COMMON BARRIERS TO ENTRY

Sizable economies of scaleBrand preferences and customer loyaltyCapital requirements and/or otherspecialized resource requirements

Access to distribution channelsRegulatory policiesTariffs and international trade restrictions

Ability of industry incumbents to launchvigorous initiatives to block a newcomer’sentry

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THREATS OF ENTRY: COST DISADVANTAGES INDEPENDENT OF SCALE (FOR THE ESTABLISHED PLAYERS)

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

cars, handwritten batik

Favorable access to raw materialsOil, gas, gold

Favorable locations Asia region: China, Vietnam, Indonesia

Government subsidiesNational companies: PT KAI

Learning or experience curveElectronic, automotive product,

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LEARNING/EXPERIENCE EFFECTS

Learning/experience effectsexist whena company’s unit costs decline as itscumulativeproduction volume increasesbecause of

Accumulating production of know-how

Growing mastery of the technology

The bigger thelearning or experiencecurve effect, the bigger the costadvantage of the firm with the largestcumulative production volume

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LEARNING/EXPERIENCE EFFECTS

Tendency for unit costs to decline as the firm gainsmore cumulative experience in producing a product(more efficient, more specialized)

Cost declines with experience do not relate to the entire

firm but arise from the individual operations orfunctions that make up the firm

In comparison with economies of scale, experience curverelates with cumulative volume, while economies ofscale are dependent on volume per period;

The decline in cost from experience can be augmented ifthere are diversified firms in the industry who shareoperations or functions subject to such a decline withother units in the company 14


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COMPETITIVE PRESSURES FROM

SUBSTITUTE PRODUCTS

Substitutes matter when customers are

attracted to the products of firms inother

industriesSugar versus artificial sweeteners

Eyeglasses and contact lens

versus laser surgery

Newspapers versus InternetNewsNotebook versus Smartphone

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FACTORS LEADING WHETHER SUBSTITUTE

PRODUCTS ARE ASTRONG FORCE

Whether substitutes are readily available and

attractively priced

Whether buyers view substitutes as beingcomparable or better

How much it costs end users to switch to

substitutes

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WHEN IS THE BARGAINING

POWER OF SUPPLIERSSTRONGER?

Industry members incur high costs inswitching their purchases to alternativesuppliers

Needed inputs are in short supplySupplier provides a (better) quality ordifferentiated input

There are only a few suppliers of a specificinput

Some suppliers threaten to integrateforward

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WHEN IS THE BARGAINING POWER OF

BUYERSSTRONGER?

Buyer switching costs to competing brands orsubstitutes are low

Large-volume purchases by buyers are important tosellers

Buyer demand is weak or decliningOnly 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 purchases until later

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STRATEGIC IMPLICATIONS OF

THE FIVE COMPETITIVE FORCES

Competitive environment is

unattractive from

the standpoint of earning good profits

whenRivalry is vigorous

Entry barriers are low and entry is likely

Competition from substitutes is strongSuppliers and customers have considerable

bargaining power19


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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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(3) WHAT FORCES ARE

DRIVING INDUSTRY CHANGE

AND WHAT IMPACTS WILLTHEY 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 industryChanges in long-term industry growth rate

Product innovationTechnological change/process innovationMarketing innovation

Regulatory policies / government legislationChanging societal concerns, attitudes, andlifestyle

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(4) WHAT MARKET

POSITIONS DO RIVALSOCCUPY?

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STRATEGIC GROUP

Astrategic group is a cluster of firms in anindustry with similar competitive approachesand market positions

Strategic group mapping is one technique torevealdifferent competitive positionsofindustry rivals

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STRATEGIC GROUP MAPPING

Firms insame strategic group have two ormorecompetitive characteristics in commonHave comparable product line breadthHave similarity in price/quality rangeEmphasize similar distribution channelsUse similar product attributes to appealto similar types of buyers

Use identical technological approachesOffer buyers similar services

Cover same geographic areas

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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-group

competitive rivalry tends to be

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(5)WHAT STRATEGIC MOVES


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(5) WHAT STRATEGIC MOVES

ARE RIVALS LIKELY TO MAKE

NEXT?

A firm’sbest strategic movesare affected byCurrent strategies of competitorsFuture actions of competitors

Profiling key rivals involves gathering

competitive intelligence aboutCurrent strategies

Most recent actionsResource strengths and weaknesses

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(6) WHAT ARE THE KEY

FACTORS FOR COMPETITIVE

SUCCESS?

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THE KEY FACTORS FOR

COMPETITIVE SUCCESS

KSFs are those competitive factors most affecting every industry member’s ability to compete withsuccessfully

Key factors as request for companies to competewith 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 to be competitively successful?

What does it take for companies (competitor) to achievea sustainable competitive advantage?

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(7) FACTORS TO BE THE INDUSTRY

OUTLOOK:

A GOOD OPPORTUNITY TO PROFITABILITY

Industry’s market size and growth potentialCompetitive forces influencing industry profitabilityThe driving forces affect the industry profitability

Degree of risk and uncertainty in industry’s futureSeverity of potential problems facing industryFirm’s competitive position in industry vis-à-vis

rivals

Firm’s potential to capitalize on vulnerabilities ofweaker rivals

Whether firm has sufficient resources to

defend against unattractive industry factors 33


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CORE CONCEPT: 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 a

company’s ability tocapture them

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ch 03 -the company's external environment

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