Written Case Assignment #1 – Case: ____________ (100 points total)

profilejackal
Chap003-lecture.ppt
Home>Business & Finance homework help>Management homework help>Written Case Assignment #1 – Case: ____________ (100 points total)

McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3: Evaluating a Company’s External Environment

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.

Troy University

*

McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

“Analysis is the critical starting point of
strategic thinking.”

Kenichi Ohmae

Consultant and Author

*

McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

“Things are always different –

the art is figuring out which differences matter.”

Laszlo Birinyi

Investments Manager

*

3-*

Chapter Learning Objectives

To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions.

To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak.

To learn how to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability.

To understand why in-depth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a company’s situation.

*

3-*

Chapter Roadmap

  • The Strategically Relevant Components of a Company’s External Environment
  • Thinking Strategically About a Company’s Industry and Competitive Environment
  • Question 1: What Are the Industry’s 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 Company a Good Opportunity to Earn Attractive Profits?

*

3-*

  • Diagnosing a company’s situation has two facets
  • Assessing the company’s external or macro-environment
  • Industry and competitive conditions
  • Forces acting to reshape this environment
  • Assessing the company’s internal or
    micro-environment
  • Market position and competitiveness
  • Competencies, capabilities,
    resource strengths and
    weaknesses, and competitiveness

Understanding the Factors that Determine a Company’s Situation

*

3-*

Figure 3.1: From Thinking Strategically About the
Company’s Situation to Choosing a Strategy

3-*

*

3-*

Figure 3.2: The Components of a Company’s Macro-environment

3-*

*

3-*

Thinking Strategically About a
Company’s Macro-environment

  • A company’s macro-environment includes all relevant factors and influences outside its boundaries
  • Diagnosing a company’s external situation involves assessing strategically important factors that have a bearing on the decisions a company’s makes about its
  • Direction
  • Objectives
  • Strategy
  • Business model
  • Requires that company managers scan
    the external environment to
  • Identify potentially important external developments
  • Assess their impact and influence
  • Adapt a company’s direction and strategy as needed

*

3-*

Key Questions Regarding the
Industry and Competitive Environment

3-*

What are the industry’s dominant economic traits?

How strong are competitive forces?

What forces are driving change in the industry?

What market positions do rivals occupy? What moves will they make next?

What are the key factors for competitive success?

How attractive is the industry from a profit perspective?

*

3-*

  • 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

Question 1: What are the Industry’s
Dominant Economic Traits?

3-*

Table 3.1: What to Consider in Identifying
an Industry’s Dominant Economic Features

3-*

*

3-*

Learning/Experience Effects

  • Learning/experience effects exist when a company’s unit costs decline as its cumulative production 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 cumulative production volume

3-*

Question 2: How Strong Are Competitive Forces?

  • Objectives are to identify
  • Main sources of competitive forces
  • Strength of these forces
  • Key analytical tool
  • Five Forces Model
    of Competition

*

3-*

Figure 3.3: The Five Forces Model of Competition

3-*

*

3-*

Analyzing the Five Competitive Forces: How to Do It

Step 1: Identify the specific competitive
pressures associated with each of
the five forces

Step 2: Evaluate the strength of each
competitive force – fierce, strong,
moderate to normal, or weak?

Step 3: Determine whether the collective
strength of the five competitive forces
is conducive to earning attractive profits

3-*

  • 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 is a combative
    contest involving
  • Offensive actions
  • Defensive countermoves

Competitive Pressures
Among Rival Sellers

*

3-*

Figure 3.4: Weapons for Competing and Factors
Affecting Strength of Rivalry

3-*

*

3-*

What Are the Typical
Weapons for Competing?

  • Lower prices
  • More or different performance features
  • Better product performance
  • Higher quality
  • Stronger brand image and appeal
  • Wider selection of models and styles
  • Bigger/better dealer network
  • Low interest rate financing
  • Better or more ads
  • Stronger product innovation capabilities
  • Better customer service
  • Stronger capabilities to provide buyers with custom-made products

3-*

*

3-*

  • Competitors are active in making fresh moves to improve market standing and business performance
  • Slow market growth
  • Number of rivals increases and rivals are ofequal size and competitive capability
  • Buyer costs to switch brands are low
  • Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume
  • A successful strategic move carries a big payoff
  • Diversity of rivals increases in terms
    of visions, objectives, strategies,
    resources, and countries of origin
  • Outsiders acquire weak firms in the
    industry and use their resources to transform
    new firms into major market contenders

What Causes Rivalry to be Stronger?

3-*

  • Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals
  • Rapid market growth
  • Products of rivals are strongly
    differentiated and customer loyalty is high
  • Buyer costs to switch brands are high
  • There are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business

What Causes Rivalry to be Weaker?

3-*

Test Your Knowledge

The rivalry among competing sellers in an industry intensifies

A. when buyer demand for the product is growing rapidly.

B. when customers are brand loyal and their costs to switch to competing brands or substitute products are relatively high.

C. when buyer demand is strong and sellers have little or no excess capacity and only minimal inventories.

D. as the number of rivals increases and as they become more equal in size and competitive capability.

E. when the products of rival sellers are highly differentiated products and the industry consists of so many rivals that any one company’s actions have little direct impact on rivals’ business.

Answer: D

3-*

  • Seriousness of threat depends on
  • Size of pool of entry candidates
    and available resources
  • Barriers to entry
  • Reaction of existing firms
  • Evaluating threat of entry involves assessing
  • How formidable entry barriers are for each type of potential entrant and
  • Attractiveness of growth and profit prospects

Competitive Pressures
Associated With Potential Entry

*

3-*

Figure 3.5: Factors Affecting Threat of Entry

3-*

*

3-*

  • Sizable economies of scale
  • Cost and resource disadvantages independent of size
  • Brand preferences and customer loyalty
  • Capital requirements and/or other
    specialized 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

Common Barriers to Entry

3-*

  • There’s a sizable pool of entry candidates
  • Entry barriers are low
  • Industry growth is rapid and profit
    potential is high
  • Incumbents are unwilling or unable to contest a newcomer’s entry efforts
  • When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence

When Is the Threat of Entry Stronger?

*

3-*

  • There’s only a small pool of entry candidates
  • Entry barriers are high
  • Existing competitors are struggling to earn good profits
  • Industry’s outlook is risky
  • Industry growth is slow or stagnant
  • Industry members will strongly contest
    efforts of new entrants to gain a market foothold

When Is the Threat of Entry Weaker?

*

3-*

Competitive Pressures from Substitute Products

Substitutes matter when customers
are attracted to the products of
firms in other industries

  • Sugar vs. artificial sweeteners
  • Eyeglasses and contact lens
    vs. laser surgery
  • Newspapers vs. TV vs. Internet

Concept

Examples

*

3-*

How to Tell Whether Substitute
Products Are a Strong Force

  • Whether substitutes are readily
    available and attractively priced
  • Whether buyers view substitutes
    as being comparable or better
  • How much it costs end users
    to switch to substitutes

*

3-*

Figure 3.6: Factors Affecting Competition From Substitute Products

3-*

*

3-*

  • There are many good substitutes readily available
  • Substitutes are attractively priced
  • The higher the quality and
    performance of substitutes
  • The lower the end user’s switching costs
  • End users grow more comfortable with using substitutes

When Is the Competition
From Substitutes Stronger?

*

3-*

  • Good substitutes are not readily available or do not exist
  • Substitutes are higher priced relative to performance they deliver
  • End users incur high costs
    in switching to substitutes

When Is the Competition
From Substitutes Weaker?

*

3-*

  • Whether supplier-seller relationships represent a weak or strong competitive force depends on
  • Whether suppliers can exercise
    sufficient bargaining leverage to
    influence terms of supply in their favor
  • Nature and extent of supplier-seller
    collaboration in the industry

Competitive Pressures From Suppliers
and Supplier-Seller Collaboration

*

3-*

Figure 3.7: Factors Affecting Bargaining Power of Suppliers

3-*

*

3-*

  • Industry members incur high
    costs in switching their purchases
    to alternative suppliers
  • Needed inputs are in short supply
  • Supplier provides a differentiated input
    that enhances the quality of performance
    of sellers’ products or is a valuable
    part of sellers’ production process
  • There are only a few suppliers of a specific input
  • Some suppliers threaten to integrate forward

When Is the Bargaining
Power of Suppliers Stronger?

*

3-*

  • Item being supplied is a commodity
  • Seller switching costs to alternative suppliers are low
  • Good substitutes exist or new ones emerge
  • Surge in availability of supplies occurs
  • Industry members account for a big
    fraction of suppliers’ total sales
  • Industry members threaten
    to integrate backward
  • Seller collaboration with selected suppliers provides attractive win-win opportunities

When Is the Bargaining
Power of Suppliers Weaker?

*

3-*

  • Industry members often forge strategic partnerships with select suppliers
    to
  • Reduce inventory and logistics costs
  • Speed availability of
    next-generation components
  • Enhance quality of parts being supplied
  • Squeeze out cost savings for both parties
  • Competitive advantage potential may accrue to those industry members (sellers) doing the best job of managing supply-chain relationships

Competitive Pressures: Collaboration Between Sellers and Suppliers

*

3-*

  • Whether the relationships between industry members and buyers represent a weak or strong competitive force depends on
  • Whether buyers have sufficient
    bargaining leverage to influence
    terms of sale in their favor
  • Extent and competitive importance of
    strategic partnerships between certain industry members and the buyers

Competitive Pressures From Buyers
and Seller-Buyer Collaboration

*

3-*

Figure 3.8: Factors Affecting Bargaining Power of Buyers

3-*

*

3-*

  • Buyer switching costs to competing brands or substitutes are low
  • Buyers are large and can demand concessions
  • Large-volume purchases by buyers are important to sellers
  • Buyer demand is weak or declining
  • Only a few buyers exists
  • Identity of buyer adds prestige
    to seller’s list of customers
  • Quantity and quality of information
    available to buyers improves
  • Buyers have ability to postpone purchases until later
  • Buyers threaten to integrate backward

When Is the Bargaining
Power of Buyers Stronger?

*

3-*

  • Buyers purchase item infrequently or in small quantities
  • Buyer switching costs to
    competing brands are high
  • Surge in buyer demand
    creates a “sellers’ market”
  • Seller’s brand reputation is important to buyer
  • A specific seller’s product delivers quality
    or performance that is very important to buyer
  • Buyer collaboration with selected sellers provides attractive win-win opportunities

When Is the Bargaining
Power of Buyers Weaker?

*

3-*

  • Partnerships between industry members and some/many of their customers can impact competitive pressures
  • Collaboration may result in
    mutual benefits regarding
  • Just-in-time deliveries
  • Order processing
  • Electronic invoice payments
  • Data sharing
  • Competitive advantage may accrue to those industry members doing the best job of partnering with their customers

Competitive Pressures: Collaboration
Between Sellers and Buyers

*

3-*

For Discussion: Your Opinion

Explain why low switching costs and weakly differentiated products tend to give buyers a high degree of bargaining power.

Buyers with low switching costs can more readily switch brands or sources from several sellers than buyers who have high switching costs. When the products of rivals are virtually identical, i.e. weakly differentiated, it is relatively easy for buyers to switch from seller to seller at little or no cost.

3-*

  • Competitive environment is
    unattractive from the standpoint
    of earning good profits when
  • Rivalry is vigorous
  • Entry barriers are low
    and entry is likely
  • Competition from
    substitutes is strong
  • Suppliers and customers have
    considerable bargaining power

Strategic Implications of
the Five Competitive Forces

*

3-*

  • 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

Strategic Implications of
the Five Competitive Forces

*

3-*

  • Objective is to craft a strategy to
  • Insulate firm from
    competitive pressures
  • Initiate actions to produce
    sustainable competitive advantage
  • Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry

Coping With the
Five Competitive Forces

*

3-*

Question 3: What Forces Are Driving Industry Change and What Impacts Will They Have?

  • Industries change because forces
    are driving industry participants
    to alter their actions
  • Driving forces are the
    major underlying causes
    of changing industry and
    competitive conditions
  • Where do driving forces originate?
  • Outer ring of macroenvironment
  • Inner ring of macroenvironment

*

3-*

STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years

  • Usually no more than 3 - 4 factors
    qualify as real drivers of change

STEP 2: Assess impact

  • Are driving forces acting to cause market demand for product to increase or decrease?
  • Are driving forces acting to make competition more or less intense?
  • Will driving forces lead to higher or lower industry profitability?

STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces

Analyzing Driving Forces:
Three Key Steps

*

3-*

  • Changes in long-term industry growth rate
  • Increasing globalization of industry
  • Emerging new Internet capabilities
    and applications
  • Changes in who buys the
    product and how they use it
  • Product innovation
  • Technological change/process innovation
  • Marketing innovation

Common Types of Driving Forces

3-*

  • Entry or exit of major firms
  • Diffusion of technical knowledge
  • Changes in cost and efficiency
  • Consumer preferences shift
    from standardized to
    differentiated products (or vice versa)
  • Changes in degree of uncertainty and risk
  • Regulatory policies / government legislation
  • Changing societal concerns, attitudes, and lifestyles

Common Types of Driving Forces (con’t)

3-*

Table 3.2: The Most Common Driving Forces

3-*

*

3-*

Question 4: What Market
Positions Do Rivals Occupy?

  • One technique to reveal different competitive positions of industry rivals is
    strategic group mapping
  • A strategic group is a cluster of firms in an industry with similar competitive
    approaches and market positions

*

3-*

  • Firms in same strategic group
    have two or more competitive characteristics in common
  • Have comparable product line breadth
  • Sell in same price/quality range
  • Emphasize same distribution channels
  • Use same product attributes to appeal
    to similar types of buyers
  • Use identical technological approaches
  • Offer buyers similar services
  • Cover same geographic areas

Strategic Group Mapping

3-*

STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another

STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics

STEP 3: Assign firms that fall in about the same strategy space to same strategic group

STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

Procedure for Constructing
a Strategic Group Map

3-*

Example: Strategic Group Map of Selected Automobile Manufacturers

3-*

*

3-*

  • Variables selected as axes should not be highly correlated
  • Variables chosen as axes should expose big differences in how rivals compete
  • Variables do not have to be either quantitative or continuous
  • Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group
  • If more than two good competitive variables can be used, several maps can be drawn

Guidelines: Strategic Group Maps

3-*

Interpreting Strategic Group Maps

  • The closer strategic groups are
    on the map, the stronger the cross-group
    competitive rivalry tends to be
  • Not all positions on the map
    are equally attractive
  • Driving forces and competitive pressures often
    favor some strategic groups and hurt others
  • Profit potential of different strategic
    groups varies due to strengths and
    weaknesses in each group’s market
    position

3-*

Test Your Knowledge

A strategic group map is a helpful analytical tool for

A. assessing why competitive pressures and driving forces usually impact the biggest strategic groups more so than the smaller groups.

B. determining which companies have how big a competitive advantage and how good their prospects are for increasing their market shares.

C. determining which company is the most profitable in the industry and why it is doing so well.

D. determining who competes most closely with whom; evaluating whether industry driving forces and competitive pressures favor some strategic groups and hurt others; and ascertaining whether the profit potential of different strategic groups varies due to the strengths and weaknesses in each group’s respective market positions.

E. pinpointing which of the five competitive forces is the strongest and which is the weakest.

Answer: D

3-*

  • A firm’s best strategic moves
    are affected by
  • Current strategies of competitors
  • Future actions of competitors
  • Profiling key rivals involves gathering
    competitive intelligence about
  • 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

Question 5: What Strategic Moves
Are Rivals Likely to Make Next?

*

3-*

  • 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?

Competitor Analysis

3-*

  • Which rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue?
  • Which rivals have a strong incentive, along with resources, to make major strategic changes?
  • Which rivals are good candidates to be acquired? Which rivals have the resources to acquire others?
  • Which rivals are likely to enter new geographic markets?
  • Which rivals are likely to expand their product offerings and enter new product segments?

Things to Consider in
Predicting Moves of Rivals

3-*

For Discussion: Your Opinion

Why does a company need to bother with studying competitors and trying to predict what moves rivals will make next? Why can’t it just choose whatever strategy it wants or make whatever moves in the marketplace it wishes without first worrying about what rivals are going to do?

Having good information to predict the strategic direction and likely next moves of key rivals allows a company to prepare defensive countermoves, to craft its own strategic moves with some confidence about what market maneuvers to expect from rivals, and to exploit any openings that arise from competitors’ missteps or strategy flaws. If a company neglects studying its competitors, it risks being caught unaware when rivals make fresh, bold strategic moves; thus, a company is likely to lose ground in the marketplace.

3-*

  • 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 difference between
  • Profit and loss
  • Competitive success or failure
  • KSFs can relate to
  • Specific strategy elements
  • Product attributes
  • Resources
  • Competencies
  • Competitive capabilities
  • Market achievements

Question 6: What Are the Key
Factors for Competitive Success?

*

3-*

  • The answers to 3 questions often help pinpoint an industry’s KSFs
  • On what basis do customers choose
    between competing brands of sellers?
  • What resources and competitive capabilities does a company need to have to be competitively successful?
  • What shortcomings are likely to place a company at a significant competitive disadvantage?
  • Rarely are there more than 5 - 6
    factors that are truly key to the future financial and competitive success of industry members

Identifying Industry Key Success Factors

3-*

Table 3.3: Common Types of Industry Key Success Factors

3-*

*

3-*

  • Access to distribution – to get a company’s brand stocked and
    favorably displayed in retail outlets
  • Image – to induce consumers to
    buy 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 achieve
    scale economies in marketing expenditures

Example: KSFs for Bottled Water Industry

*

3-*

Example: KSFs for
Ready-to-Wear Apparel Industry

  • Appealing designs and color combinations – to create buyer appeal
  • Low-cost manufacturing efficiency – to keep selling prices competitive
  • Strong network of retailers/company-owned stores – to allow stores
    to keep best-selling items in stock
  • Clever advertising – to effectively
    convey a specific image to induce consumers to purchase a particular label

*

3-*

  • Involves assessing whether the industry and competitive environment presents a company with an attractive or unattractive opportunity

for earning good profits

  • Factors to consider:
  • Industry growth potential
  • Whether competitive forces are growing stronger/weaker
  • Whether driving forces will favorable/unfavorably impact industry profitability
  • Degree of risk and uncertainty in industry’s future
  • Whether the industry confronts severe problems
  • Firm’s competitive position in industry vis-à-vis rivals
  • Firm’s potential to capitalize on industry opportunities or the vulnerabilities of weaker rivals
  • Whether a firm has sufficient competitive strength to
    defend against unattractive industry factors

Question 7: Does the Outlook for the
Industry Offer an Attractive Opportunity?

*

3-*

Factors to Consider in
Assessing Industry Attractiveness

  • As a general proposition
  • If an industry’s overall profit prospects are above average, the industry environment is basically attractive
  • If an industry’s overall profit prospects are below average, the industry environment is basically unattractive
  • However
  • Attractiveness is relative, not absolute
  • Conclusions about attractiveness have
    to be drawn from the perspective of a
    particular company

*

3-*

  • An industry is unlikely to be equally attractive or unattractive to all industry members
  • Industry environments attractive to strong competitors may be unattractive to weak competitors
  • A favorably positioned company may survey an industry environment and see opportunities that weak competitors have little or no ability to capture
  • Industry environments attractive to insiders may be unattractive to potential entrants
  • Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn good profits by taking sales and market share away from weaker competitors

Factors to Consider in
Assessing Industry Attractiveness

3-*

Core Concept: Assessing
Industry Attractiveness

The degree to which an industry
is attractive or unattractive is not the same for all industry participants
or potential entrants.

The opportunities an industry
presents depend partly on a
company’s ability to capture them.

3-*

*

3-*

Test Your Knowledge

Which of the following is not an important factor for company managers to consider in drawing conclusions about whether the industry presents an attractive opportunity?

A. Whether powerful competitive forces are squeezing industry profitability to subpar levels and whether competition appears destined to grow stronger or weaker

B. The industry’s growth potential and the degree of uncertainty and risk in the industry’s future

C. Whether industry profitability will be affected favorably or unfavorably by the prevailing driving forces

D. How many of the industry’s key success factors do companies in the industry typically incorporate into their strategies

E. The company’s ability to capitalize on the vulnerabilities of weakly positioned rivals and whether the company has sufficient competitive strength to defend against or counteract the factors that make the industry unattractive

Answer: D