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Chapter 3 Evaluating a Company's External Environment

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by Cammie Harris on 23 January 2013

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Transcript of Chapter 3 Evaluating a Company's External Environment

Evaluating a Company's External Environment "In essence, the job of a strategist is to understand and cope with competition." -Michael Porter As a rule, the lower the price of substitutes, the higher their quality and performance; and the lower the user's switching costs, the more intense the competitive pressures posed by substitute products.
Market Indicators:
1. whether the sales of substitutes are growing faster than the sales of the industry being analyzed (a sign that the sellers of substitutes may be drawing customers away from the industry in question),
2. whether the producers of substitutes are moving to add new capacity, and
3. whether the profits of the producers of substitutes are on the rise.
1. Identify the drivers of change
2. Assess whether the drivers of change make the industry more or less attractive
3. Determine strategy changes needed to prepare for the anticipated change

Dynamic industry analysis - determining how the drivers of change are affecting industry and competitive conditions How are Industry Rivals Positioned? Strategic Group - a cluster of industry rivals that
have similar competitive approaches and market positions Competitive Pressures Stemming from Supplier Bargaining Power Ready availability of supplier products.
Supplier products/services are differentiated.
Number of suppliers of standard/commodity items.
Buyers' costs for switching among suppliers.
Availability of substitutes for suppliers' products.
Fraction of supplier sales due to industry demand.
Ratio of suppliers relative to industry buyers.
Backward integration into suppliers industry. Whether the competitive pressures from substitute products are strong, moderate, or weak depends on three factors:
1. Whether substitutes are readily available.
2. Whether buyers view the substitutes as attractively priced in relation to their quality, performance, and other relevant attributes.
3. Whether the costs that buyers incur in switching to the substitutes are low or high. 7 Components for Evaluating a Macro-environment -Demographics
-Social Forces
-Political, legal, and regulatory factors
-natural environment
-technical factors
-global forces
-general economic conditions What kinds of competitive forces are industry members facing, and how strong are they? The most powerful and widely used tool for diagnosing the principal competitive pressures in a market is the five-forces model of competition Macro-Environment Market Indicators of the Competitive Strength Posed by Substitute Products What Factors are Driving Industry Change and What Impacts Will They Have? Competitive Pressures from the Sellers of Substitute Products The macro-environment encompasses the broad environmental context in which a company's industry is situated Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity Bargaining Power Considerations:
Buyers' bargaining power is greater when their costs of switching to competing brands or substitutes are relatively low.
Buyer power increases when industry goods are standardized or differentiation is weak.
Buyers have more power when they are large and few in number relative to the number of sellers.
Buyer power increases when buyer demand is weak and industry members are scrambling to sell more units.
Buyers gain leverage if they are well informed about sellers' products, prices and costs.
Buyers' bargaining power is greater when they pose a credible threat of integrating backward into the business of sellers.
Buyer leverage increases if buyers have discretion to delay their purchases or perhaps even not make a purchase at all.
Buyer price sensitivity increases when buyers are earning low profits or have low income.
Buyers are more price-sensitive if the product represents a large fraction of their total purchases.
Buyers are more price-sensitive if product performance has limited consequences. 7 Questions to Thinking Strategically about a Company's Industry and Competitive Environment These are analytical tools that are used to gain a deeper and better understanding of a company's industry and competitive environment.... Does the Industry Offer Attractive Opportunities for Growth? Growth
Not a guarantee of profitability
An indicator of how much customers value the industry's products/services
Looking at the market in a variety of ways helps assess the opportunities
-market size, industry growth rate, "industry life cycle"
Four stages: emergence, rapid growth, maturity, and decline Changes in the long-term industry growth rate
Increasing globalization
Changes in who buys the product and how they use it
Technological change
Emerging new Internet capabilities and applications
Product and marketing innovation
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 Most Common Drivers of Industry Change Assessing the Impact of Industry Change Factors 1. Overall, are the factors driving change causing demand for the industry’s product to increase or decrease?

2. Is the collective impact of the drivers of change making competition more or less intense?

3. Will the combined impacts of the change drivers lead to higher or lower industry profitability? Developing a Strategy Draw conclusions based on the observed changes in industry conditions
Decide what needs to be done or ceased immediately
Prepare for necessary future adjustments A strategic group map can be used as a visual aid to assess the market position of key competitors. Strategic group maps reveal which are close competitors and which are distant What Strategic Moves Are Rivals Likely to Make? Competitive Intelligence - Information about rivals that is useful in anticipating their next 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 What are the Key Factors for Future Success? Key Success Factors - 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. What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers?
What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace?
What shortcomings will put a firm at a significant competitive disadvantage? Does the Industry Offer Good Prospects for Attractive Profits? The industry’s overall growth potential
Effects of strong competitive forces
Effects of prevailing drivers of change in the industry
Competitive strength of the firm: its market position relative to its rivals, its capability to withstand competitive forces, and whether its position will change in the course of competitive interactions
The success of the firm’s strategy in delivering on the industry’s key success factors The five Competitive Forces Suppliers
Rivalry
New Entrants
Buyers
Firms in other industries with substitute products Rivals Buyer demand is growing slowly or declining.

It is becoming less costly for buyers to switch brands.

Industry products are becoming more alike.

There is unused production capacity, and\or products have high fixed costs or high storage costs.

The number of competitors is increasing and\or they are becoming more equal in size and competitive strength.

The diversity of competitors is increasing.

High exit barriers stop firms from exiting the industry Three steps of strategic analysis: Signals of the Likelihood of Strategic Moves: Identification of Key Success Factors: Industry Profitability Considerations: Is the Collective Strength of the Five
Competitive Forces Conductive to Good
Profitability?
Is the state of competition in the industry stronger than "normal"?
Can companies in this industry reasonably expect to earn decent profits in light of
the prevailing competitive forces?
Are some of the competitive
forces sufficiently powerful
to undermine industry
profitability? Matching Company Strategy to
Competitive Conditions

1. Pursuing avenues that shield the firm from
as many of the different competitive
pressures as possible.
2. Initiating actions calculated to shift the competitive
forces in the company's favor by
altering the underlying factors driving
the five forces.
3. Spotting attractive arenas for expansion, where
competitive pressures in the industry are
somewhat weaker. Building the picture of competition in 3 steps Competitive Pressures Associated with the Threat of New Entrants How serious the competitve threat of entry is depends on these factors:
barriers to entry
expected reaction of incumbent firms to new 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 Entry Barriers Facing New Entrants Economies of scale in production, distribution, advertising, or other areas of operation
Experience and learning curve effects
Unique cost advantages of industry incumbents
Strong brand preferences and customer loyalty
Strong “network effects” in customer demand
High capital requirements
Building a network of distributors or dealers and securing adequate space on retailers’ shelves
Restrictive government policies
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