COMPANY’S MACROENVIRONMENT
Q1. WHAT ARE THE INDUSTRY’S DOMINANT
ECONOMIC FEATURES?
Market size
 growth rate
 the number & sizes of buyers and sellers
 the geographic boundaries of the market
 The degree of product differentiation
 the speed of product innovation
 the extent of vertical integration.
 The extent of scale economies&
experience/learning curve effects.
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LEARNING/EXPERIENCE CURVE EFFECTS
Most goods or services show the experience
curve effect.
 Each time cumulative volume doubles, value
added costs (including administration,
marketing, distribution, and manufacturing) fall
by a constant percentage.
 The company can gain a cost advantage with
largest cumulative production volume.
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RECOGNIZING THESE FEATURES HELPS..
managers to prepare for the analysis
 managers to understand the kinds of strategic
moves that industry members are likely to
employ.
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QUESTION 2: WHAT KINDS OF COMPETITIVE
FORCES ARE INDUSTRY MEMBERS FACING,
AND HOW STRONG ARE THEY?
THE FIVE-FORCES MODEL OF COMPETITION
Michael
E. Porter
Tool for diagnosing the principal competitive pressure
Build the model of competition in 3 steps
· Step1: For each of the five forces, identify the different
parties involve
· Step2: Evaluate how strong the pressures stemming
form each forces are
· Step3: Determine whether the strength of the five
forces is helpful to earning profits
THE FIVE-FORCES MODEL OF COMPETITION
COMPETITIVE PRESSURES CREATED BY THE
RIVALRY AMONG COMPETING SELLERS
Competitive
pressures coming from other firms in the
industry
· when one firm deploys a strategy that produces good
results, its rivals respond with offensive and defensive
countermoves of their own.
· competitive battle among rivals can assume many
forms that extend well beyond lively price competition.
The
intensity of rivalry varies from industry to industry
and depends of many identifiable factors
FACTORS AFFECTING THE STRENGTH OF RIVALRY
Rivalry is stronger when:
Buyer demand is growing or falling off slowly
Sellers find themselves with excess capacity
Buyer costs to switch brands are low
Products are commodities
Firms have high fixed and storage costs
Competitors are numerous/similar(size, strength)
Rivals have diverse objectives/strategies/origin
Rivals have high exit barriers
FACTORS AFFECTING THE STRENGTH OF RIVALRY
Rivalry is weaker when:
Buyer demand is growing rapidly
Buyer costs to switch brands are high
Products are strongly differentiated
Customer loyalty is high
Fixed and storage costs are low
Sales are concentrated among a few sellers
Rivals are homogeneous
Exit barriers are low
Crafting & Executing Strategy – Chapter 3
EVALUATING A COMPANY’S EXTERNAL
ENVIRONMENT
COMPETITIVE THREAT OF NEW ENTRANTS

1.
2.
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The ease of a firm entering a new market is
dependent on 2 main factors:
Barriers to entry
Expected reaction of existing firms
The size of the barriers and expected reaction is a
huge determinant of any potential new firms ability to
survive in the market
BARRIERS TO ENTRY
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Economies of Scale
Experience
Customer loyalty
Intellectual barriers
Networks
Other cost advantages
Threat of entry can easily
fluctuate as factors
change
FACTORS AFFECTING THREAT OF ENTRY
Growth/Profit potential –
 If this is high, firms will be less deterred to enter the
market
 Usually attracts larger, established firms with sufficient
resources in related markets to enter
Potential entrants & capabilities –
 Large existing companies with a strong brand image may
be able to enter some markets easily
 The bigger the pool of potential entrants with the
capabilities to enter the market, the stronger the threat
of entry
COMPETITIVE PRESSURE OF SUBSTITUTES
Substitute products can adversely affect demand
providing:
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Good substitutes are available
They are attractively priced
Comparable/better features
Consumers have low costs in switching to substitute
Whether a substitute product is a threat can be
determined by; sales growth comparison, addition of
capacity and profit increases
COMPETITIVE PRESSURES STEMMING FROM
SUPPLIER BARGAINING POWER.
Bargaining power
: the relative ability of parties in a situation to exert
influence over each other.
Suppliers with Bargaining Power
: can erode industry profitability.
FACTORS DETERMINING THE STRENGTH OF
SUPPLIERS’ BARGAINING POWER.
Suppliers’ bargaining power is stronger when
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Supplier products are in short supply.
Supplier products are differentiated.
Supplier products are critical to industry.
High costs in purchasing alternatives.
No good substitutes.
Suppliers are not dependant on industry.
Suppliers industry is concentrated.
Suppliers’ bargaining power is weaker when
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A large entity of suppliers.
The item is available from many suppliers.
Low costs for finding alternatives.
Good substitutes.
Industry members account for a big fraction of
suppliers’ sales.
No suppliers with large market shares.
Possibility for industry members to integrate into the
supply business. (self-manufacturer)
COMPETITIVE PRESSURES STEMMING
FROM BUYER BARGAINING POWER AND
PRICE SENSITIVITY
Price-sensitivity
= price elasticity
: It is a measure of responsiveness of the
quantity of a good or service demanded to
changes in its price.
Buyers with strong bargaining power
: can limit industry profitability.
Buyer price sensitivity
: limits the profit potential of industry
members.
FACTORS DETERMINING THE STRENGTH OF BUYERS’
BARGAINING POWER.
Buyer bargaining power is stronger when
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Low costs in switching to other product.
Products are undifferentiated.
Large number of buyers. Few relation with industry.
Buyers demand is weak.
Buyers are well-informed.
Buyers with ability to integrate into the business of
sellers.
Buyers with ability to postpone purchase
Buyers are price-sensitive.
Buyer bargaining power is weaker when
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High costs in switching to competing products.
Sellers’ products are differentiated.
Buyers are small and numerous relative to sellers.
Sufficient supply for satisfying buyers demand.
Limited information about sellers.
Buyers are not price-sensitivity.
IS THE COLLECTIVE STRENGTH OF THE FIVE
COMPETITIVE FORCES CONDUCIVE TO
GOOD PROFITABILITY?
The effects that each of the five
competitive forces set the stage for
evaluating whether the strength of the
five competitive forces is conducive to
good profitability.
Competitively Unattractive Industry
When all five forces are producing strong
competitive pressures, the competitively
unattractive industry occurs.
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Rivalry among sellers is vigorous.
Low entry barriers.
Competition from substitutes in intense.
Suppliers and buyers can exercise considerable
leverage.
Attractive Industry
When the overall impact of the five
competitive forces is moderate to weak,
the attractive industry occurs.
The members of the industry can expect to
earn good profits and a nice return on
investment.
QUESTIONS 3: WHAT FACTORS ARE DRIVING
INDUSTRY CHANGE, AND WHAT IMPACTS WILL
THEY HAVE?
ANALYZING INDUSTRY DYNAMICS
1 step: Indentifying the drivers of change.
2 step: Assessing whether the drivers of change
are, individually or collectively, acting to make
the industry more or less attractive.
3 step: Determining what strategy changes are
needed to prepare for the impacts of the
anticipated change.
IDENTIFYING AN INDUSTRY’S DRIVERS OF
CHANGE
Changes in an industry’s long-term growth
rate
 Increasing globalization
 Change in who buys the product and how
they use it
 Technological change
 Emerging new internet capabilities and
applications
 Product and marketing innovation

IDENTIFYING AN INDUSTRY’S DRIVERS OF
CHANGE
Entry or exit of major firms
 Diffusion of technical know-how across
companies and countries
 Improvements in efficiency in adjacent
markets
 Reductions in uncertainty and business
risk
 Regulatory influences and government
policy changes
 Changing societal concerns, attitudes, and
lifestyles
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ASSESSING THE IMPACT OF THE FACTORS
DRIVING INDUSTRY CHANGE
1.
2.
3.
Overall, are the factors driving change causing demand
for the industry’s product to increase or decrease?
Is the collective impact of the drivers of change making
competition more or less intense?
Will the combined impacts of the change drivers lead to
higher to lower industry profitability?
Key Question: whether a new strong force is
emerging or whether forces that are strong
presently are beginning to weaken
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 STRATEGIC MOVES ARE RIVALS LIKELY TO
MAKE NEXT?

Competitive intelligence
- latest action & announcement
- financial performance
- strength & weakness
- thinking & leadership style
WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO
MAKE NEXT?

Prepare defensive countermoves

Craft it’s own strategic moves

Exploit any openings
WHAT ARE THE KEY FACTORS FOR COMPETITIVE
SUCCESS?
Particular strategy elements
 Product attributes
 Operational approaches
 Resources
 Competitive capabilities
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WHAT ARE THE KEY FACTORS FOR COMPETITIVE
SUCCESS?
Should consider three question
A. On what basis do buyers of the industry’s product
choose between the competing brands of sellers?
B. What resources and competitive capabilities
must a company have to be competitively
successful?
C. What shortcomings are almost certain to put a
company at a significant competitive
disadvantage?
Q7. DOES THE OUTLOOK FOR THE
INDUSTRY OFFER THE COMPANY A GOOD
OPPORTUNITY TO EARN ATTRACTIVE
PROFITS?
if an industry’s overall profit prospects are
above average
→industry environment is attractive
 If an industry profit prospects are below
average
→industry environment is not attractive
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BUT! This attractiveness or unattractiveness is
not same for all industry participants and all
potential entrants.
If company decided that industry is attractive,
it should invest aggressively to capture the
opportunities and to improve its long-term
competitive position in the business.
 If company decided that industry is
unattractive, it should protect its present
position, invest cautiously, and try to find
opportunities in other industries.
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