CHAPTER 3
EVALUATING A COMPANY’S
EXTERNAL ENVIRONMENT
THIS CHAPTER WILL HELP YOU UNDERSTAND:
LO 1 How to recognize the factors in a company’s broad macroenvironment that may have strategic significance.
LO 2 How to use analytic tools to diagnose the competitive
conditions in a company’s industry.
LO 3 How to map the market positions of key groups of industry
rivals.
LO 4 How to use multiple frameworks to determine whether an
industry’s outlook presents a company with sufficiently
attractive opportunities for growth and profitability.
3–2
FIGURE 3.1
From Thinking Strategically about the Company’s Situation
to Choosing a Strategy
Chapter 3
Chapter 4
3–3
I. ASSESSING A COMPANY’S
MACRO-ENVIRONMENT
3–4
CORE CONCEPT
♦ The macro-environment encompasses the
broad environmental context in which a
company’s industry is situated that includes
strategically relevant components over which
the firm has no direct control.
3–5
CORE CONCEPT
♦ PESTEL analysis focuses on the six principal
components of strategic significance in the
macro-environment:
●
Political
●
Economic
●
Social
●
Technological
●
Environmental
●
Legal
3–6
FIGURE 3.2
The Components of a Company’s Macro-Environment
3–7
Discussion question: For a retailer (e.g., Target or Walmart), how these
six macro-environment factors have an impact on the firm’s business?
3–8
Discussion question: For a retailer (e.g., Target or Walmart), how these
six macro-environment factors have an impact on the firm’s business?
3–9
II. ASSESSING A COMPANY’S INDUSTRY AND
COMPETITIVE ENVIRONMENT
3–10
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
3–11
FIGURE 3.3
The Five-Forces Model
of Competition: A Key
Analytical Tool
Where does the primary
competitive pressure come from
for the following industry?
• Car making industry (e.g. GM)
• Taxi industry
• Restaurant industry
• Home decoration industry
3–12
COMPETITIVE PRESSURES THAT INCREASE
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, 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 keep firms from exiting the industry.
Business in the News: Smartphone Sales Will Decline For
the First Time Ever In 2018 | Fortune
3–13
FIGURE 3.4
Factors Affecting the
Strength of Rivalry
Switching Cost:
•
•
Switching from Netflix
to Hulu
Switching from
Windows OS to iOS
3–14
COMPETITIVE PRESSURES ASSOCIATED WITH
THE THREAT OF NEW ENTRANTS
◆
Entry Threat Considerations:
●
Expected defensive reactions of incumbent firms
●
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
New brands in the smart phone industry?
3–15
MARKET ENTRY BARRIERS
FACING NEW ENTRANTS
◆
Incumbent cost advantages related to learning and
experience, proprietary patents and technology,
favorable locations, and lower fixed costs
◆
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 regulatory and trade policies
What are the entry barriers for a potential new comer in
the smart phone industry?
3–16
FIGURE 3.5
Factors Affecting
the Threat of Entry
3–17
COMPETITIVE PRESSURES FROM THE SELLERS
OF SUBSTITUTE PRODUCTS
◆
Substitute Products Considerations:
1. Readily available and attractively priced?
2. Comparable or better in terms of quality,
performance, and other relevant attributes?
3. 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
Uber vs. Taxi
Airbnb vs. Hotel
3–18
FIGURE 3.6
Factors Affecting
Competition from
Substitute Products
3–19
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.
Does Microsoft or Intel have strong bargaining power that
influences PC industry’s profitability/attractiveness?
3–20
FIGURE 3.7
Factors
Affecting the
Bargaining
Power of
Suppliers
3–21
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
Does Walmart or Amazon have strong bargaining power
3–22
over small manufacturers?
●
FIGURE 3.8
Factors Affecting
the Bargaining
Power of Buyers
3–23
IS THE COLLECTIVE STRENGTH OF THE FIVE
COMPETITIVE FORCES CONDUCIVE TO GOOD
PROFITABILITY?
◆
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 force may be enough to make the
industry unattractive in terms of its profit potential
Is the industry attractive or not?
3–24
CORE CONCEPT
♦ The strongest of the five forces determines the
extent of the downward pressure on an
industry’s profitability.
♦ Having more than one strong force means that
an industry has multiple competitive challenges
with which to cope.
3–25
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.
3–26
CORE CONCEPT
♦ Complementors are the producers of
complementary products, which are products
that enhance the value of the focal firm’s
products when they are used together.
3–27
FIGURE 3.9
The Value Net
3–28
FIGURE 3.9
The Value Net
E.g., HP (Printer)
Which is a competitor and which is a
complementor for HP Printer? How
do they have a distinctive impact on
HP Printer’s profitability?
A. Apple iMac
B. Brother Printer
3–29
INDUSTRY DYNAMICS AND
THE FORCES DRIVING CHANGE
◆
Driving forces analysis has three steps:
1. Identifying what the driving forces are.
2. Assessing whether the drivers of change are,
on the whole, acting to make the industry more or
less attractive.
3. Determining what strategy changes are needed to
prepare for the impact of the driving forces.
3–30
3–31
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
3–32
CORE CONCEPTS
♦ A strategic group is a cluster of industry
rivals that have similar competitive approaches
and market positions.
♦ Strategic group mapping is a technique for
displaying the different market or competitive
positions that rival firms occupy in the industry.
3–33
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.
●
Plot the firms on a two-variable map using pairs of
the 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.
3–34
TYPICAL VARIABLES USED
IN CREATING GROUP MAPS
◆
Price/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)
3–35
ILLUSTRATION
CAPSULE 3.1
Comparative Market Positions of Producers
in the U.S. Beer Industry: A Strategic Group
Map Example
• Can you draw a Comparative
Market Positions for Higher
Education Industry?
• Based on the two dimensions,
where should JU locate and
who is the close competitor
for JU?
Footnote: Circles are drawn roughly proportional to the sizes of the chains, based on revenues.
3–36
THE VALUE OF STRATEGIC GROUP MAPS
◆
Maps are useful in identifying which industry
members are close rivals and which are distant
rivals.
◆
Not all map positions are equally attractive:
1. Prevailing competitive pressures from the
industry’s five forces may cause the profit potential
of different strategic groups to vary.
2. Industry driving forces may favor some strategic
groups and hurt others.
3–37
III. ASSESSING A COMPANY’S
COMPETITORS
3–38
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
3–39
FIGURE 3.10 A Framework for Competitor Analysis
Apple’s move on autonomous car:
• The first details on the Apple Car
started leaking out at the beginning
of 2015.
• In August 2018, rumors suggested
Apple could potentially be exploring
the idea of a full Apple-branded
vehicle once again.
3–40
A 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 capabilities
●
The rival firm’s assumptions
about itself and its industry
3–41
CREATING A STRATEGIC PROFILE
OF A RIVAL COMPETITOR FIRM
◆
◆
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 (as an
indicator of its expected growth trajectory)?
Objectives
●
What are its financial performance objectives?
●
What are its strategic objectives?
●
How well is it performing in meeting its objectives?
●
Is it under pressure to improve its performance?
3–42
CREATING A STRATEGIC PROFILE
OF A RIVAL COMPETITOR FIRM (cont’d)
◆
◆
Capabilities
●
What are the competitor’s current capabilities?
●
What weaknesses does it have?
●
Which capabilities is it making efforts to obtain?
Assumptions
●
What do the competitor’s top managers believe about
their strategic situation?
●
How will their beliefs affect the competitor’s behavior
in the market?
3–43
IV. IDENTIFYING KEY SUCCESS FACTORS
(KSFs)
3–44
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.
●
Vary from industry to industry, and over time within
the same industry, and in importance as drivers of
change and competitive conditions change.
What is your BSG company’s Key Success Factors?
3–45
IDENTIFICATION OF KEY SUCCESS FACTORS
1. On what basis do buyers of the industry’s product
choose between the competing brands of sellers? That
is, what product attributes and service characteristics
are crucial to competitive success?
2. Given the nature of competitive rivalry prevailing in the
marketplace, what resources and competitive
capabilities must a firm have to be competitively
successful?
3. What shortcomings are almost certain to put a firm
at a significant competitive disadvantage?
3–46
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.
3–47
FACTORS TO CONSIDER IN ASSESSING
INDUSTRY ATTRACTIVENESS
◆
How the firm is being 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.
3–48
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.
3–49
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.
3–50
CHAPTER 4
Evaluating a
Company’s
Resources,
Capabilities, and
Competitiveness
QUESTION 1: HOW WELL IS THE FIRM’S
PRESENT STRATEGY WORKING?
The three best indicators of how well a
company’s strategy is working are:
1. Whether the company is achieving its
stated financial and strategic objectives
2. Whether its financial performance is
above the industry average
3. Whether it is gaining customers and
increasing its market share
SPECIFIC INDICATORS OF
STRATEGIC SUCCESS
• Trends in the firm’s sales and earnings growth
• Trends in the firm’s stock price
• The firm’s overall financial strength
• The firm’s customer retention rate
• The rate at which new customers are acquired
• Evidence of improvement in internal processes
such as defect rate, order fulfillment, delivery
times, days of inventory, and employee
productivity
STRATEGIC MANAGEMENT PRINCIPLE (1 of 14)
Sluggish financial performance and second-rate
market accomplishments almost always signal
weak strategy, weak execution, or both.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (1 of 8)
Profitability
Ratios
How Calculated
What It Shows
Gross profit margin
Sales revenues − Cost of goods sold
Sales revenues
Shows the percentage of
revenues available to cover
operating expenses and yield a
profit.
Operating profit
margin (or return on
sales)
Sales revenues − Operating expenses
Sales revenues
or
Operating income
Sales revenues
Shows the profitability of current
operations without regard to
interest charges and income
taxes. Earnings before interest
and taxes is known as EBIT in
financial and business
accounting.
Net profit margin (or
net return on sales)
Profits after taxes
Sales revenues
Shows after-tax profits per dollar
of sales.
Profits after taxes + Interest
Total assets
A measure of the return on total
investment in the enterprise.
Interest is added to after-tax
profits to form the numerator,
since total assets are financed
by creditors as well as by
stockholders.
Total return on
assets
Jump to Appendix 2 long image description
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (2 of 8)
Profitability Ratios
How Calculated
Net return on total assets
(ROA)
Profits after taxes
Total assets
What It Shows
A measure of the return
earned by stockholders on
the firm’s total assets.
Return on stockholders’
equity (ROE)
Profits after taxes
Total stockholders’ equity
The return stockholders are
earning on their capital
investment in the enterprise.
A return in the 12%–15%
range is average.
Return on invested
capital (ROIC)—
sometimes referred to as
return on capital
employed (ROCE)
Profits after taxes
Long-term debt +
Total stockholders’ equity
A measure of the return that
shareholders are earning on
the monetary capital invested
in the enterprise. A higher
return reflects greater
bottom-line effectiveness in
the use of long-term capital.
Jump to Appendix 2 long image description
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (3 of 8)
Liquidity Ratios
Current ratio
Working capital
How Calculated
What It Shows
Current assets
Current liabilities
Shows a firm’s ability to pay
current liabilities using assets that
can be converted to cash in the
near term. Ratio should be higher
than 1.0.
Current assets − Current liabilities
The cash available for a firm’s
day-to-day operations. Larger
amounts mean the company has
more internal funds to (1) pay its
current liabilities on a timely basis
and (2) finance inventory
expansion, additional accounts
receivable, and a larger base of
operations without resorting to
borrowing or raising more equity
capital.
Jump to Appendix 3 long image description
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (6 of 8)
Activity Ratios
How Calculated
Days of inventory
Inventory
Cost of goods sold ÷
365
Inventory turnover
Cost of goods sold
Inventory
Average collection
period
Accounts receivable
Total sales ÷ 365
or
Accounts receivable
Average daily sales
What It Shows
Measures inventory management
efficiency. Fewer days of inventory are
better.
Measures the number of inventory turns
per year. Higher is better.
Indicates the average length of time the
firm must wait after making a sale to
receive cash payment. A shorter collection
time is better.
Jump to Appendix 4 long image description
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (7 of 8)
Other Ratios
How Calculated
What It Shows
Dividend yield
on common
stock
Annual dividends
per share
Current market price
per share
A measure of the return that shareholders
receive in the form of dividends. A “typical”
dividend yield is 2%–3%. The dividend yield
for fast-growth companies is often below
1%; the dividend yield for slow-growth
companies can run 4%–5%.
Price-toearnings (P/E)
ratio
Current market price
per share
Earnings per share
P/E ratios above 20 indicate strong investor
confidence in a firm’s outlook and earnings
growth; firms whose future earnings are at
risk or likely to grow slowly typically have
ratios below 12.
Annual dividends
per share
Earnings per share
Indicates the percentage of after-tax profits
paid out as dividends.
Dividend payout
ratio
Jump to Appendix 5 long image description
QUESTION 2: WHAT ARE THE FIRM’S MOST
IMPORTANT RESOURCES AND CAPABILITIES,
AND WILL THEY GIVE THE FIRM A LASTING
COMPETITIVE ADVANTAGE OVER RIVAL
COMPANIES?
◆
Competitive assets
●
Are the firm’s resources and capabilities
●
Are the determinants of its competitiveness and
ability to succeed in the marketplace
●
Are what a firm’s strategy depends on to develop
sustainable competitive advantage over its rivals
CORE CONCEPTS (1 of 9)
A resource is a competitive asset that is owned or
controlled by a firm.
A capability or competence is the capacity of a
firm to perform an internal activity competently
through deployment of a firm’s resources.
A firm’s resources and capabilities represent its
competitive assets and are determinants of its
competitiveness and ability to succeed in the
marketplace.
STRATEGIC MANAGEMENT PRINCIPLE (2 of 14)
Resource and capability analysis is a powerful tool
for sizing up a firm’s competitive assets and
determining if they can support a sustainable
competitive advantage over market rivals.
TABLE 4.2 Types of Company Resources (1 of 2)
Tangible resources
• Physical resources: land and real estate; manufacturing plants, equipment, or
distribution facilities; the locations of stores, plants, or distribution centers,
including the overall pattern of their physical locations; ownership of or access
rights to natural resources (such as mineral deposits)
• Financial resources: cash and cash equivalents; marketable securities; other
financial assets such as a company’s credit rating and borrowing capacity
• Technological assets: patents, copyrights, production technology, innovation
technologies, technological processes
• Organizational resources: IT and communication systems (satellites, servers,
workstations, etc.); other planning, coordination, and control systems; the
company’s organizational design and reporting structure
Jump to Appendix 6 long image description
TABLE 4.2 Types of Resources (2 of 2)
Intangible resources
•
Human assets and intellectual capital: the education, experience, knowledge, and talent
of the workforce, cumulative learning, and tacit knowledge of employees; collective learning
embedded in the organization, the intellectual capital and know-how of specialized teams
and work groups; the knowledge of key personnel concerning important business functions;
managerial talent and leadership skill; the creativity and innovativeness of certain personnel
•
Brands, company image, and reputational assets: brand names, trademarks, product or
company image, buyer loyalty and goodwill; company reputation for quality, service, and
reliability; reputation with suppliers and partners for fair dealing
•
Relationships: alliances, joint ventures, or partnerships that provide access to
technologies, specialized know-how, or geographic markets; networks of dealers or
distributors; the trust established with various partners
•
Company culture and incentive system: the norms of behavior, business principles, and
ingrained beliefs within the company; the attachment of personnel to the company’s ideals;
the compensation system and the motivation level of company personnel
Jump to Appendix 6 long image description
IDENTIFYING CAPABILITIES
• An organizational capability
•
Is the intangible but observable capacity of a firm to
perform a critical activity proficiently using a related
combination (cross-functional bundle) of its resources
•
Is knowledge-based, residing in people and in a firm’s
intellectual capital or in its organizational processes
and systems, emboding tacit knowledge
CORE CONCEPTS (2 of 9)
A resource bundle is a linked and closely
integrated set of competitive assets centered
around one or more cross-functional capabilities.
The VRIN Test for sustainable competitive
advantage asks if a resource is Valuable, Rare,
Inimitable, and Non-substitutable.
VRIN TESTING: RESOURCES AND
CAPABILITIES
◆
Identifying the firm’s resources and capabilities
by testing the competitive power of its
resources and capabilities:
●
Is the resource (or capability) competitively valuable?
●
Is the resource rare—is it something rivals lack?
●
Is the resource hard to copy (inimitable)?
●
Is the resource invulnerable to the threat of
substitution of different types of resources and
capabilities (non-substitutable)?
VRIN: FOUR TESTS OF A RESOURCE’S
COMPETITIVE POWER
Support for competitive
advantage?
Support for sustained
competitive advantage?
Valuable
Inimitable
Resource
Rare
Nonsubstitutable
Jump to Appendix 7 long image description
CORE CONCEPTS (3 of 9)
Social complexity (company culture, interpersonal
relationships among managers or R&D teams,
trust-based relations with customers or suppliers)
and causal ambiguity are two factors that inhibit the
ability of rivals to imitate a firm’s most valuable
resources and capabilities.
Causal ambiguity makes it very hard to figure out
how a complex resource contributes to competitive
advantage and therefore exactly what to imitate.
STRATEGIC MANAGEMENT PRINCIPLE (3 of 14)
A firm requires a dynamically evolving portfolio of
resources and capabilities to sustain its
competitiveness and help drive improvements in
its performance.
CORE CONCEPT (4 of 9)
A dynamic capability is the ongoing capacity
of a firm to modify its existing resources and
capabilities or create new ones by:
• Improving existing resources and capabilities
incrementally
• Adding new resources and capabilities
to the firm’s competitive asset portfolio
MANAGING RESOURCES AND
CAPABILITIES DYNAMICALLY
◆
◆
Threats to resources and capabilities
●
Rivals providing better substitutes over time
●
Capabilities decaying from benign neglect
●
Disruptive competitive environment change
Manage capabilities dynamically by:
●
Attending to the ongoing modification of existing
competitive assets
●
Taking advantage of any opportunities to develop
totally new kinds of capabilities
QUESTION 3: WHAT ARE THE FIRM’S
STRENGTHS AND WEAKNESSES IN
RELATION TO MARKET OPPORTUNITIES
AND EXTERNAL THREATS?
◆
SWOT Analysis
●
Is a powerful tool for sizing up a firm’s:
❖
Internal strengths (the basis for strategy)
❖
Internal weaknesses (deficient capabilities)
❖
Market opportunities (strategic objectives)
❖
External threats (strategic defenses)
CORE CONCEPT (5 of 9)
SWOT analysis is a simple but powerful tool for
sizing up a company’s strengths and weaknesses,
its market opportunities, and the external threats to
its future well-being.
STRATEGIC MANAGEMENT PRINCIPLE (4 of 14)
Basing a company’s strategy on its most
competitively valuable strengths gives the
company its best chance for market success.
IDENTIFYING A COMPANY’S INTERNAL
STRENGTHS
◆
A competence:
●
◆
A core competence:
●
◆
Is an activity that a firm has learned to perform with
proficiency—a true capability
Is a proficiently performed internal activity that is
central to a firm’s strategy and competitiveness
A distinctive competence:
●
Is a competitively valuable activity that a firm
performs better than its rivals
CORE CONCEPTS (6 of 9)
A competence is an activity that a firm has
learned to perform with proficiency—a capability,
in other words.
A core competence is an activity that a firm
performs proficiently and that is also central to its
strategy and competitive success.
A distinctive competence is a competitively
important activity that a firm performs better than
its rivals—it thus represents a competitively
superior internal strength.
IDENTIFYING A FIRM’S
WEAKNESSES AND COMPETITIVE
DEFICIENCIES
◆
A weakness (competitive deficiency):
●
◆
Is something a firm lacks or does poorly (in
comparison to others) or a condition that puts it at
a competitive disadvantage in the marketplace
Types of weaknesses
●
Inferior skills, expertise, or intellectual capital
●
Deficiencies in physical, organizational, or
intangible assets
●
Missing or competitively inferior capabilities
in key areas
CORE CONCEPTS (7 of 9)
A firm’s strengths represent its competitive assets.
A firm’s weaknesses are shortcomings that
constitute competitive liabilities.
IDENTIFYING A COMPANY’S
MARKET OPPORTUNITIES
◆
Characteristics of market opportunities
An absolute “must pursue” market:
❖ Represents much potential but is hidden
in “fog of the future”
● A marginally interesting market:
❖ Presents high risk and questionable profit
potential
● An unsuitable or mismatched market:
❖ Is best avoided as the firm’s strengths are
not matched to market factors
●
STRATEGIC MANAGEMENT PRINCIPLE (5 of 14)
A company is well advised to pass on a particular
market opportunity unless it has or can acquire the
competencies needed to capture it.
IDENTIFYING THREATS TO A FIRM’S
FUTURE PROFITABILITY
◆
◆
Types of threats:
●
Normal course-of-business threats
●
Sudden-death (survival) threats
Considering threats
●
Identify the threats to the firm’s future prospects
●
Evaluate what strategic actions can be taken to
neutralize or lessen their impact
TABLE 4.3 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats (1 of 4)
Potential Strengths and Competitive Potential Weaknesses and Competitive
Assets
Deficiencies
•
Competencies that are well matched to
industry key success factors
•
No clear strategic vision
•
Ample financial resources to grow the
business
•
No well-developed or proven core
competencies
•
Strong brand-name image or company
reputation
•
No distinctive competencies or competitively
superior resources
•
Economies of scale or learning- and
experience-curve advantages over rivals
•
Lack of attention to customer needs
•
Other cost advantages over rivals
•
A product or service with features and
attributes that are inferior to those of rivals
•
Attractive customer base
•
Weak balance sheet, few financial resources
to grow the firm, too much debt
•
Proprietary technology, superior
technological skills, important patents
•
Higher overall unit costs relative to those of
key competitors
TABLE 4.3 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats (2 of 4)
Potential Strengths and Competitive
Assets (continued)
Potential Weaknesses and Competitive
Deficiencies (continued)
• Strong bargaining power over
suppliers or buyers
• Too narrow a product line relative to
rivals
• Resources and capabilities that are
valuable and rare
• Weak brand image or reputation
• Resources and capabilities that are
hard to copy and for which there are
no good substitutes
• Weaker dealer network than key rivals
or lack of adequate distribution
capability
• Superior product quality
• Lack of management depth
• Wide geographic coverage or strong
global distribution capability
• A plague of internal operating problems
or obsolete facilities
• Alliances or joint ventures that
provide access to valuable
technology competencies, or
attractive geographic markets
• Too much underutilized plant capacity
• Resources that are readily copied or
for which there are good substitutes
TABLE 4.3 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats (3 of 4)
Potential Market Opportunities
Potential External Threats to a
Company’s Future Profitability
• Meeting sharply rising buy demand for
the industry’s product
• Increasing intensity of competition
among industry rivals—may
squeeze profit margins
• Serving additional customer groups or
market segments
• Slowdowns in market growth
• Expanding into new geographic markets
• Likely entry of potent new
competitions
• Expanding the company’s product line to
meet a broader range of customer needs
• Growing bargaining power of
customers or suppliers
• Utilizing existing company skills or
technological know-how to enter new
product lines or new businesses
• A shift in buyer needs and tastes
away from the industry’s product
• Adverse demographic changes
that threaten to curtail demand for
the industry’s product
TABLE 4.3 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats (4 of 4)
Potential Market Opportunities
(continued)
Potential External Threats to a
Company’s Future Profitability
(continued)
• Taking advantage of failing trade
barriers in attractive foreign markets
• Adverse economic conditions that
threaten critical suppliers or
distributors
• Acquiring rival firms or companies with
attractive technological expertise or
capabilities
• Changes in technology—particularly
disruptive technology that can
undermine the company’s distinctive
competencies
• Taking advantage of emerging
technological developments to
innovate
• Entering into alliances or joint ventures
to expand the firm’s market coverage
or boost its competitive capability
•
•
•
•
Restrictive foreign trade policies
Costly new regulatory requirements
Tight credit conditions
Rising prices on energy or other key
inputs
STRATEGIC MANAGEMENT PRINCIPLE (6 of 14)
Simply making lists of a company’s strengths,
weaknesses, opportunities, and threats is not
enough.
The payoff from SWOT analysis comes from the
conclusions about a company’s situation and the
implications for strategy improvement that flow
from the four lists.
FIGURE 4.2 The Steps Involved in SWOT Analysis: Identify the Four
Components of SWOT, Draw Conclusions, Translate Implications into
Strategic Actions
Jump to Appendix 8 long image description
QUESTION 4: HOW DO A FIRM’S VALUE CHAIN
ACTIVITIES IMPACT ITS COST STRUCTURE
AND CUSTOMER VALUE PROPOSITION?
◆
Signs of a firm’s competitive strength:
●
Its prices and costs are in line with rivals
●
Its customer-value proposition is competitive and cost
effective
●
Its bundled capabilities are yielding a sustainable
competitive advantage
STRATEGIC MANAGEMENT PRINCIPLE (7 of 14)
The higher a firm’s costs are above those of close
rivals, the more competitively vulnerable it
becomes.
Conversely, the greater the amount of customer
value that a firm can offer profitably relative to
close rivals, the less competitively vulnerable the
firm becomes.
THE CONCEPT OF A COMPANY
VALUE CHAIN
The value chain:
●
Identifies the inner workings of the firm's
customer value proposition and business model
●
Permits a deep look at the firm’s cost structure
and its ability to profitably offer low prices
●
Reveals the emphasis that a firm places on
activities that enhance differentiation and
support higher prices
CORE CONCEPT (8 of 9)
A company’s value chain identifies the primary
activities and related support activities that create
customer value.
FIGURE 4.3 A Representative Company
Value Chain
Jump to Appendix 9 long image description
CORE CONCEPT (9 of 9)
Benchmarking is a potent tool for improving a
company’s own internal activities that is based on
learning how other companies perform them and
borrowing their “best practices.”
USING BENCHMARKING TO
ASSESS A FIRM’S VALUE CHAIN
ACTIVITIES
◆
◆
Benchmarking:
●
Involves improving a firm’s internal activities based
on learning from other firms’ “best practices”
●
Assesses whether the cost competitiveness and
effectiveness of a firm’s value chain activities are in
line with its competitors’ activities
Sources of benchmarking information
●
Reports, trade groups, analysts, and customers
●
Visits to benchmark companies
●
Data from consulting firms
STRATEGIC MANAGEMENT PRINCIPLE (9 of 14)
Benchmarking the costs of a firm's activities
against those of rivals provides hard evidence of
whether the firm is cost-competitive.
STRATEGIC MANAGEMENT PRINCIPLE (10 of 14)
Performing value chain activities with capabilities
that permit the firm to either outmatch rivals on
differentiation or beat them on costs will give the
firm a competitive advantage.
QUESTION 5: IS THE FIRM
COMPETITIVELY STRONGER OR
WEAKER THAN KEY RIVALS?
◆
Assessing the firm’s overall competitive
strength
●
How does the firm rank relative to competitors on
each of the important factors that determine market
success?
●
Does the firm have a net competitive advantage or
disadvantage versus major competitors?
STRATEGIC MANAGEMENT PRINCIPLE (11 of 14)
High-weighted competitive strength ratings signal
a strong competitive position and possession of
competitive advantage; low ratings signal a weak
position and competitive disadvantage.
STEPS IN THE COMPETITIVE
STRENGTH ASSESSMENT PROCESS
1. Make a list of the industry’s key success factors and
measures of competitive strength or weakness.
2. Assign weights to each competitive strength measure
based on its perceived importance.
3. Score competitors on each competitive strength measure
and multiply by each measure by its corresponding weight.
4. Sum the weighted strength ratings on each factor to get an
overall measure of competitive strength for each company.
5. Use overall strength ratings to draw conclusions about the
company’s net competitive advantage or disadvantage and
to take specific note of areas of strength and weakness.
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