Chapter 3: Evaluating a Company’s External Environment

1. Chapter 3: Evaluating a Company’s External Environment Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. The Components of a Company’s Macro-environment 3-2

3. Key Questions Regarding theIndustry and Competitive Environment What are the industry’s dominant economic traits? How strong are competitive forces? What forces are driving change in the industry? How attractive is the industry from a profit perspective? What are the key factors for competitive success? What market positions do rivals occupy? What moves will they make next? 3-3

4. What are the Industry’sDominant Economic Traits? • Market size and growth rate • Number of rivals • Scope of competitive rivalry • Buyer needs and requirements • Degree of product differentiation • Product innovation • Supply/demand conditions • Pace of technological change • Vertical integration • Economies of scale • Learning and experience curve effects

5. Learning/Experience Effects • Learning/experience effectsexist when a company’s unit costs decline as its cumulativeproduction volume increases because of • Accumulating production know-how • Growing mastery of the technology • The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulativeproduction volume

6. The Five Forces Model of Competition 3-6

7. Common Barriers to Entry • Sizable economies of scale • Cost and resource disadvantages independent of size • Brand preferences and customer loyalty • Capital requirements and/or otherspecialized resource requirements • Access to distribution channels • Regulatory policies • Tariffs and international trade restrictions • Ability of industry incumbents to launch vigorous initiatives to block a newcomer’s entry

8. Common Types of Driving Forces • Changes in long-term industry growth rate • Increasing globalization of industry • Emerging new Internet capabilitiesand applications • Changes in who buys theproduct and how they use it • Product innovation • Technological change/process innovation • Marketing innovation

9. Common Types of Driving Forces (con’t) • Entry or exit of major firms • Diffusion of technical knowledge • Changes in cost and efficiency • Consumer preferences shiftfrom standardized todifferentiated products (or vice versa) • Changes in degree of uncertainty and risk • Regulatory policies / government legislation • Changing societal concerns, attitudes, and lifestyles

10. Example: Strategic Group Map of Selected Automobile Manufacturers 3-10

11. What Are the KeyFactors for Competitive Success? • Key Success Factors (KSFs) are competitive factors and attributes that affect every industry member’s ability to be competitively and financially successful • KSFs are those particular attributes that are so important that they spell the differencebetween • Profit and loss • Competitive success or failure • KSFs can relate to • Specific strategy elements • Product attributes • Resources • Competencies • Competitive capabilities • Market achievements

12. Example: KSFs for Bottled Water Industry • Access to distribution– to get a company’s brand stocked andfavorably displayed in retail outlets • Image – to induce consumers tobuy a particular company’s product(brand name and attractiveness of packaging are key deciding factors) • Low-cost production capabilities – to keep selling prices competitive • Sufficient sales volume – to achievescale economies in marketing expenditures