Evaluating a Company’s Saeed Rahman, PhD, MBA, MSc.

MBA
External Environment Assistant Professor, School of Business
LEARNING OBJECTIVES
At the end of this session, you will develop an understanding of:
1. How to recognize the factors in a company’s broad macro-environment that
may have strategic significance.
2. How to use analytic tools to diagnose the competitive conditions in a
company’s industry.
3. How to map the market positions of key groups of industry rivals.
4. How to determine whether an industry’s outlook presents a company with
sufficiently attractive opportunities for growth and profitability.
FIGURE 3.1 FROM ANALYZING THE COMPANY’S
SITUATION TO CHOOSING A STRATEGY
FIGURE 3.2 THE
COMPONENTS
OF A COMPANY’S
MACRO-
ENVIRONMENT
ANALYZING THE COMPANY'S MACRO-ENVIRONMENT

PESTEL Analysis
­ Focuses on primary components of strategic significance in the macro-
environment
­ Political factors
­ Economic conditions (local to worldwide)
­ Sociocultural forces
­ Technological factors
­ Environmental factors (the natural environment)
­ Legal (and regulatory conditions)
 TABLE 2.1
THE GENERAL ENVIRONMENT: SEGMENTS AND ELEMENTS (SLIDE 1 OF 2)

Demographic • Population size • Ethnic mix

segment • Age structure • Income distribution
• Geographic distribution
Economic • Inflation rates • Personal savings rate
segment • Interest rates • Business savings rates
• Trade deficits or surpluses • Gross domestic product
• Budget deficits or surpluses
Political/Legal • Antitrust laws • Labor training laws
segment • Taxation laws • Educational philosophies and
• Deregulation philosophies policies
Sociocultural • Women in the workforce • Shifts in work and career
segment • Workforce diversity preferences
• Attitudes about the quality of • Shifts in preferences regarding
work life product and service
characteristics
 TABLE 2.1
THE GENERAL ENVIRONMENT: SEGMENTS AND ELEMENTS (SLIDE 2 OF 2)

Technological • Product innovations • Focus of private and

segment • Applications of knowledge government-supported
research and development (R&
D) expenditures
• New communication
technologies
Global segment • Important political events • Newly industrialized countries
• Critical global markets • Different cultural and
institutional attributes
Sustainable • Energy consumption • Availability of water as a
physical • Practices used to develop resource
environment energy sources • Producing environmentally
segment • Renewable energy efforts friendly products
• Minimizing a firm’s • Reacting to natural or man-
environmental footprint made disasters
ASSESSING THE COMPANY’S INDUSTRY AND
COMPETITIVE ENVIRONMENT
Thinking strategically about the competitive environment requires managers to
use some well validated concepts and analytical tools.
• Porter’s Five Forces Framework
• The value net
• Driving forces
• Strategic groups
• Competitor analysis
• Key success factors
THE FIVE FORCES FRAMEWORK

The five competitive forces

­ Competition from rival sellers
­ Competition from potential
new entrants
­ Competition from producers of
substitute products
­ Supplier bargaining power
­ Customer bargaining power
https://www.forbes.com/sites/gordonkelly/2019/09/22/apple-iphone-11-pro-max-upgrade-smart-battery-case-iphone-xs-max-xr-update/#41b2ae5f5659
https://petapixel.com/2018/10/11/samsung-galaxy-a9-is-the-first-quad-camera-phone/
USING THE FIVE-FORCES MODEL OF COMPETITION

STEP 1: For each of the five forces, identify the different parties involved,
along with the specific factors that bring about competitive
pressures.

STEP 2: Evaluate How Strong The Pressures Stemming From Each of The
Five Forces Are (Strong, Moderate, or Weak).

STEP 3: Determine whether the five forces, overall, are supportive of high
industry profitability.
RIVALRY AMONG COMPETING SELLERS

• Buyer demand is growing slowly or declining.

• It is becoming less costly for buyers to switch brands.
• Industry products are becoming less differentiated.
• There is unused production capacity, or products have high fixed costs or
high storage costs.
• The number of competitors is increasing, or they are becoming more equal in
size and competitive strength.
• The diversity of competitors is increasing.
• High exit barriers keep firms from exiting the industry.
FIGURE 3.4:
FACTORS
AFFECTING
THE
STRENGTH
OF RIVALRY
THREAT OF NEW ENTRANTS
Already establishhed firms

Entry threat considerations

­ Expected defensive reactions of incumbent firms
­ High economies of scale
­ Significant experience-based cost advantages or learning curve effects
­ Strength of barriers to entry
­ Attractiveness of a particular market’s growth in demand and profit
potential
­ Capabilities and resources of potential entrants
­ Entry of existing competitors into market segments in which they have no
current presence
MARKET ENTRY BARRIERS FACING NEW ENTRANTS

• Sizable economies of scale in production, distribution, advertising, or other activities

• Hard-to-replicate learning curve and industry relationship cost advantages of incumbents
• Strong brand preferences and high customer loyalty Increased numbers of
people or participants
• Patents and other intellectual property protection improve the value of a
• Strong “network effects” in customer demand good or service

• High capital requirements

• Building distributor and/or dealer networks and securing adequate space on retailers’
shelves
• Restrictive regulatory and trade policies
FIGURE 3.5:
FACTORS
AFFECTING
THE THREAT
OF ENTRY
COMPETITIVE PRESSURES FROM THE SELLERS OF
SUBSTITUTE PRODUCTS

Substitute products considerations

­ Readily available and attractively priced?
­ Comparable or better in terms of quality, performance, and other relevant attributes?
­ Offer lower switching costs to buyers?

Indicators of substitutes’ competitive strength

­ Increasing rate of growth in sales of substitutes
­ Substitute producers adding new output capacity
­ Increasing profitability of substitute producers
FIGURE 3.6:
FACTORS
AFFECTING
COMPETITION
FROM
SUBSTITUTE
PRODUCTS
 Boeing's Supply Chain

http://www.supplychain247.com/article/two-thirds_of_boeings_6billion_cost_cutting_will_come_from_its_supply_chain/supply_chain_counci
https://www.aircraft-info.net/2014/10/airbus-vs-boeing-analysis/l
COMPETITIVE PRESSURES STEMMING FROM SUPPLIER
BARGAINING POWER

Supplier bargaining power depends on:

­ Strength of demand for and availability of suppliers’ products.
­ Whether suppliers provide a differentiated input that enhances the performance of the
industry’s product.
­ Industry members’ costs for switching among suppliers.
­ Size and number of suppliers relative to industry members.
­ Possibility of backward integration into suppliers’ industry.
­ Fraction of the cost of the supplier’s product relative to the total cost of the industry’s
product.
­ Availability of good substitutes for suppliers’ products.
­ Whether industry members are major customers of suppliers.
FIGURE 3.7:
FACTORS
AFFECTING THE
BARGAINING
POWER OF
SUPPLIERS
 UNDERSTANDING “BUYER BARGAINING
POWER”

https://techcrunch.com/2015/04/22/the-coming-food-bubble/
https://www.cnet.com/news/top-25-laptops-with-the-best-battery-life/
COMPETITIVE PRESSURES STEMMING FROM BUYER
BARGAINING POWER AND PRICE SENSITIVITY

Buyer bargaining power considerations

­ Strength of buyers’ demand for sellers’ products
­ Degree to which industry goods are differentiated
­ Buyers’ costs for switching to competing sellers or substitutes
­ Number and size of buyers relative to number of sellers
­ Threat of buyers’ integration into sellers’ industry
­ Buyers’ knowledge of products, costs and pricing
­ Buyers’ discretion in delaying purchases
­ Buyers’ price sensitivity due to low profits, size of purchase, and consequences of purchase
­ Product quality not at issue price is primary concern
FIGURE 3.8:
FACTORS
AFFECTING
THE
BARGAINING
POWER OF
BUYERS
IS THE COLLECTIVE STRENGTH OF THE FIVE COMPETITIVE
FORCES CONDUCIVE TO GOOD PROFITABILITY?

Answers to three questions are needed:

­ Is the state of competition in the industry stronger than normal?
­ Can industry firms expect to earn decent profits given prevailing
competitive forces?
­ Are some of the competitive forces sufficiently powerful to
undermine industry profitability?

Even one powerful competitive force may be enough to make the industry
unattractive in terms of its profit potential.
MATCHING COMPANY STRATEGY TO COMPETITIVE
CONDITIONS

Effectively matching a firm’s business strategy to prevailing

competitive conditions has two aspects:
­ Pursuing avenues that shield the firm from as many competitive pressures as
possible
­ Initiating actions calculated to shift competitive forces in the firm’s favor by
altering underlying factors driving the five forces
COMPLEMENTORS

https://www.tclouds-project.eu/electric-vs-gasoline-cars-a-comparative-study/
COMPLEMENTORS AND THE VALUE NET

How the value net differs from the five forces

­ Focuses on the interactions of industry participants with a particular (focal)
company
­ Defines the category of competitors to include the focal firm’s direct
competitors, industry rivals, the sellers of substitute products, and potential
entrants
­ Introduces a new category of industry participant – complementors -
producers of products that enhance the value of the focal firm’s products
when they are used together
FIGURE 3.9:
THE VALUE
NET
INDUSTRY DYNAMICS AND THE FORCES
DRIVING CHANGE

Driving forces analysis has three steps.

­ Identifying what the driving forces are
­ Assessing whether the drivers of change are
acting to make the industry more or less attractive
­ Determining what strategy changes are needed to prepare for the
impact of the driving forces
IDENTIFYING THE FORCES DRIVING
INDUSTRY CHANGE
• Changes in the long-term industry growth rate
• Increasing globalization
• Emerging new Internet capabilities and applications
• Shifts in buyer demographics
• Technological change and manufacturing process innovation
• Product and marketing innovation
• Entry or exit of major firms
• Diffusion of technical know-how across firms and countries
• Changes in cost and efficiency
• Reductions in uncertainty and business risk
• Regulatory influences and government policy changes
• Changing societal concerns, attitudes, and lifestyles
ASSESSING THE IMPACT OF THE FACTORS
DRIVING INDUSTRY CHANGE

Are the driving forces, on balance, acting to cause demand for the industry’s
product to increase or decrease?
Is the collective impact of the driving forces making competition more or less
intense?
Will the combined impacts of the driving forces lead to higher or lower industry
profitability?
ADJUSTING STRATEGY TO PREPARE FOR THE
IMPACTS OF DRIVING FORCES

What strategy adjustments will be needed to deal with the impacts

of the driving forces?
­ What adjustments must be made immediately?
­ What actions currently being taken should be halted or abandoned?
­ What can we do now to prepare for adjustments we anticipate making in the future?
STRATEGIC GROUP ANALYSIS

Strategic group:
Consists of those industry members with similar competitive approaches
and positions in the market
­ Having comparable product-line breadth
­ Emphasizing the same distribution channels
­ Depending on identical technological approaches
­ Offering the same product attributes to buyers
­ Offering similar services and technical assistance
USING STRATEGIC GROUP MAPS TO ASSESS THE
MARKET POSITIONS OF KEY COMPETITORS
Constructing a strategic group map
­ Identify the competitive characteristics that delineate strategic approaches used in
the industry. Typical variables can include:
­ Price/quality range (high, medium and low)
­ Geographic coverage (local, regional, national, global)
­ Degree of services offered (no frills, limited, full)
­ Use of distribution channels (retail, wholesale, Internet, multiple)

­ Plot the firms on a two-variable map using pairs of competitive characteristics.

­ Assign firms occupying about the same map location to the same strategic group.
­ Draw circles around each strategic group, making the circles proportional to the
size of the group’s share of total industry sales revenues.
TYPICAL VARIABLES USED IN CREATING GROUP
MAPS

• Price and quality range (high, medium, low)

• Geographic coverage (local, regional, national, global)
• Product-line breadth (wide, narrow)
• Degree of service offered (no frills, limited, full)
• Distribution channels (retail, wholesale, Internet, multiple)
• Degree of vertical integration (none, partial, full)
• Degree of diversification into other industries (none, some, considerable)
GUIDELINES FOR CREATING GROUP MAPS

1. Variables selected as map axes should not be highly correlated.

2. Variables should reflect important (sizable) differences among rival approaches.
3. Variables may be quantitative, continuous, discrete, or defined in terms of distinct classes
and combinations.
4. Drawing group circles proportional to the combined sales of firms in each group will reflect
the relative sizes of each strategic group.
5. Drawing maps using different pairs of variables will show the different competitive
positioning relationships present in the industry’s structure.
ILLUSTRATION
CAPSULE 3.1
COMPARATIVE
MARKET
POSITIONS OF
SELECTED
COMPANIES IN
THE CASUAL
DINING INDUSTRY:
A STRATEGIC
GROUP MAP
EXAMPLE
EXAMINING THE COMPARATIVE MARKET POSITIONS OF
STRATEGIC GROUPS IN THE CASUAL DINING INDUSTRY

Which strategic group is located in the least favorable market position? Which group is
in the most favorable position?
Which strategic group is likely to experience increased intragroup competition?
Which groups are most threatened by the likely strategic moves of members of nearby
strategic groups?
THE VALUE OF STRATEGIC GROUP MAPS

Where on the map is the ‘BEST’ place to be and why?

Maps are useful in identifying which industry members are close rivals and
which are distant rivals.
Not all map positions are equally attractive
­ Prevailing competitive pressures from the industry’s five forces may cause the profit potential
of different strategic groups to vary.
­ Industry driving forces may favor some strategic groups and hurt others.
COMPETITOR ANALYSIS

Competitive intelligence
­ Information about rivals that is useful in anticipating their next strategic moves

Signals of the likelihood of strategic moves

­ Rivals under pressure to improve financial performance
­ Rivals seeking to increase market standing
­ Public statements of rivals’ intentions
­ Profiles developed by competitive intelligence units
FIGURE 3.10
THE SOAR
FRAMEWORK
FOR
COMPETITOR
ANALYSIS

Current strategy: How is the competitor positioned in the market? What is the basis for its
competitive advantage? what kinds of investments is it making?
Objectives: What are its strategic/financial objectives? To what extent, are they meeting these
objectives?
Resources & capabilities: what is the set of resources/capabilities the rival has at hand?
Assumptions: Analyzing the rival’s assumptions about itself as well as about the industry it
participates in
SOAR FRAMEWORK FOR COMPETITOR
ANALYSIS
Indicators of a rival firm’s likely strategic moves and countermoves
­ The rival firm’s current strategy
­ The rival firm’s objectives
­ The rival firm’s assumptions about itself and its industry
­ The rival firm’s resources and capabilities

Possible sources of information:

­ Company press releases
­ Information posted on the company’s website
­ Public documents including annual reports
KEY SUCCESS FACTORS

Key success factors (KSFs):

­ Are the strategy elements, product and service attributes, operational
approaches, resources, and competitive capabilities that are necessary for
competitive success by any and all firms in an industry.

­ These vary from industry to industry, and over time within the same industry,
and in importance as drivers of change and competitive conditions change.
IDENTIFICATION OF KEY SUCCESS FACTORS

What crucial product attributes and service characteristics do buyers of the industry’s
product consider when choosing among competing brands of sellers?
Given the nature of competitive rivalry prevailing in the marketplace, what resources
and competitive capabilities must a firm have to be competitively successful?
What shortcomings are almost certain to put a firm at a significant competitive
disadvantage?
THE INDUSTRY OUTLOOK FOR PROFITABILITY

An industry environment is fundamentally attractive if it presents a company with

good opportunity for above-average profitability.

An industry environment is fundamentally unattractive if a firm’s profit prospects in

the industry are unappealingly low.
***FACTORS TO CONSIDER IN ASSESSING
INDUSTRY ATTRACTIVENESS
• How the firm is impacted by the state of the macro-environment
• Whether strong competitive forces are squeezing industry profitability to subpar levels
• Whether the presence of complementors and the possibility of cooperative actions improve the
company’s prospects
• Whether industry profitability will be favorably or unfavorably affected by the prevailing
driving forces
• Whether the firm occupies a stronger market position than rivals
• Whether this is likely to change in the course of competitive interactions
• How well the firm’s strategy delivers on industry key success factors
INDUSTRY ATTRACTIVENESS IS NOT THE SAME
FOR ALL PARTICIPANTS

Industry outsiders may conclude that they have the resources to easily hurdle
the barriers to entering an attractive industry while other outsiders may find
the same industry unattractive because they do not want to challenge market
leaders and have better opportunities elsewhere.

A particular industry’s attractiveness depends in large part on whether a

company has the resources and capabilities to be competitively successful and
profitable in that environment.
WHAT SHOULD A CURRENT COMPETITOR
DECIDE ABOUT ITS INDUSTRY?
When a competitor decides an industry is attractive, it should invest aggressively to
capture the opportunities it sees and to improve its long-term competitive position in
the business.

When a strong competitor concludes its industry is relatively unattractive and lacking
in opportunity, it may elect to protect its present position, investing cautiously, if at all,
and looking for opportunities in other industries.

A competitively weak company in an unattractive industry may see its best option as
finding a buyer, perhaps a rival, to acquire its business.