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Companys External
Environment
Chapter 3
Chapter Roadmap
The Strategically Relevant Components of a
Companys External Environment
Thinking Strategically About a Companys
Industry and Competitive Environment
Question 1: What Are the Industrys Dominant
Economic Features?
Question 2: How Strong Are Competitive Forces?
Question 3: What Forces Are Driving Industry Change
and What Impacts Will They Have?
Question 4: What Market Positions Do Rivals Occupy
Who Is Strongly Positioned and Who Is Not?
Question 5: What Strategic Moves Are Rivals Likely to
Make Next?
Question 6: What Are the Key Factors for Future
Competitive Success?
Question 7: Does the Outlook for the Industry Offer the
Competencies, capabilities,
resource strengths and
weaknesses, and competitiveness
3-4
3-5
Direction
Objectives
Strategy
Business model
Environmental Scanning
General Environment/ Societal
environment
1. Economic forces that regulate
exchange of materials, money, energy,
and information
2. Technological forces that generate
problem solving
3. Political legal forces that allocate
power and provide constraining and
protecting laws and regulations
4. Socio-cultural forces that regulate the
values, mores, and customs of society
Technologica
l
Total government
spending for
R&D
Total industry
spending for
R&D
Lifestyle changes
Special incentives
Focus of
technological
efforts
Foreign trade
regulations
Attitudes toward
foreign
companies
Energy
availability and
New
developments in
technology
transfer from lab
to marketplace
New products
Productivity
Antitrust
regulations
Tax laws
Patent protection
Disposable and
discretionary
Prentice Hall, 2000
income
Sociocultural
Environmental
protection laws
Devaluation/reval
uation
cost
Political-Legal
Career
expectations
Consumer
activism
Rate of family
formation
Growth rate of
population
Age distribution of
population
Laws on hiring
and promotion
Regional shifts in
population
Stability of
government
Life expectancies
Chapter 3
Birth rates
8
How strong
are
competitive
forces?
What market
positions do
rivals occupy?
What moves
will they make
next?
What forces
are driving
change in
the
industry? How
What are
attractive is
the key
the industry
factors for
from a profit
competitive
perspective?
success?
Features
Questions to answer
Scope of
competitive
rivalry
Number of Rivals
Production
Capacity
Production
Capacity
Pace of
Technological
Change
Degree of
Product
Differentiation
Product
Innovation
Vertical
Integration
Economies of
Scale
Learning and
experience
curve effects
Learning/Experience Effects
Learning/experience effects exist
when a companys unit costs decline as
its cumulative production volume
increases because of
3-19
Competitive Pressures
Associated With Potential
Entry
HUF MUF
A
A
Neutral
MFA HFA
comment
small
large
Low
High
Ample
Restri
cted
Low
Low
High
High
Low
High
Insignifi
cant
Low
Signifi
cant
high
Exit Barriers
Exit Barriers
Factors
Specialized
Assets
Fixed Cost of
Exit
Strategic
interrelations
hip
Government
Barriers
HA
Comments
Hi
LOW
Hi
Low
Hi
Hi
Low
Low
low
Low, stable
returns
Low, risky
returns
High, stable
returns
High, risky
returns
Entry Barriers
high
low
Exit Barriers
high
Competitive Pressures
Among Rival 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
Factors
HU
FA
Composition of
Competitors
Mkt. Growth rate
Scope of
competition
Fixed storage
Cost
Capacity Increase
Equal
Size
Slow
Global
MU
FA
Neut MFA HF
ral
A
Comment
High
Unequa
l Size
High
Domest
ic
Low
Large
Small
Degree of
differentiation
Comm
odity
High
Strategic Stake
High
Low
Examples
3-31
Factors
Threat of
Obsolescence
of Industrys
product
Aggressiveness
of substitute
products in
promotion
Switching Cost
Perceived
price/ value
MUFA N
MFA HFA
Comment
Hi
Low
Hi
Low
Low
High
Hi
Low
Power of Supplier
Factors
# of important
Suppliers
Switching cost
Availability of
substitutes
Threat of forward
integration
Importance of
Buyer industry to
suppliers profit
Quantity purchased
by the industry of
suppliers product
Suppliers product
an important input
to the buyers
business
HUF
A
MUFA
N MFA HFA
commen
t
Few
Many
High
Low
low
High
high
Low
small
large
low
High
Highly
Importa
nt
Less
import
ant
Competitive Pressures:
Collaboration Between Sellers
and Suppliers
Power Of Buyer
Factors
Number of
Important
buyers
Threat of
Backward
integration
Product
supplied
Switching
cost
% of
buyers
cost
Profit
earned by
buyer
Importance
to final
quality of
buyers Pr.
HUFA MUFA
MFA
HFA
Comment
Few
Many
High
Low
Commodit
y
Specialty
High
High
Low
High
Low
Low
High
low
Competitive Pressures:
Collaboration
Between Sellers and Buyers
Just-in-time deliveries
Order processing
Electronic invoice payments
Data sharing
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
in a weak bargaining position
3-48
3-52
3.10
Mapping Strategic Groups in the U.S. Restaurant Chain Industry (Fig.
3.5)
High
Red Lobster
Olive Garden
ChiChi's
Perkins
International House
of Pancakes
Price
Ponderosa
Bonanza
Shoney's
Denny's
Country Kitchen
Arby's Wendy's
Domino's Dairy Queen
Hardee's Taco Bell
Burger King McDonald's
Low
Limited Menu
Full Menu
Product-Line Breadth
Prentice Hall, 2000
Chapter 3
53
Implications of Strategic
groups
The strategic group a firm should consider
entering
The type and level of entry barriers the firm
will face
The number and type of entry barriers the
firm will face
The strategic dimensions that will make the
firm similar to its strategic group members
and different from members of different
strategic groups
The relative effect of five forces of
competition on its relative profitability
Current strategies
Most recent actions and public announcements
Resource strengths and weaknesses
Efforts being made to improve their situation
Thinking and leadership styles of top
executives
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?
Manufacturing
Related KSF
Marketing
Related KSF
Weight
1
Total
Company A
Rating
Company A
Weighted Score
Company B
Rating
Company B
Weighted Score
1.00
Source:T. L. Wheelen and J. D. Hunger, Industry Matrix. Copyright 1997 by Wheelen and Hunger Associates.
Reprinted by permission.
Prentice Hall, 2000
Chapter 3
63
3.16
External Factor Analysis Summary (EFAS): Blank
External
Strategic Factors
Opportunities
Weight
1
Weighted
Score
Rating
2
Comments
4
Threats
1.00
Notes: 1. List opportunities and threats (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not
Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to
1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply
each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale
used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well
the company is responding to the strategic factors in its external environment.
Source:T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and
Hunger Associates. Reprinted by permission.
Chapter 3
64