ANALYZING COMPANYS

EXTERNAL ENVIRONMENT
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INTRODUCTION
Strategy formulation begins with an analysis of the
forces that shape competition in the industry in
which a company is operate or based
Its purposes are to identify opportunities and threats
and then to be base for formulating strategies

Opportunities are when a company can take advantage of its environment

profitable
Threats are the situation endanger the integrity and profitability of the
companys business

INDUSTRY
a group of companies offering products
or services that are close substitutes
for each other-products that satisfy the
same basic customer needs.
(Hill & Jones, p:43, 2009)

Sector is a group of closely related

industries
Industries boundaries can change-computer and
telecommunication

SECTOR AND INDUSTRY (HILL & JONES)

COMPETITION IN AN INDUSTRY: HOW

STRONG ARE COMPETITIVE FORCES?

In general, competition within an industry

is driven by five basic competition forces
The Forces are:
Buyers, Rivalries, Suppliers, New
Entrants, and Product Substitutes
(as the collective strength of the forces) of
that industry

STRUCTURAL DETERMINANTS OF
THE INTENSITY OF COMPETITION
The strongest force or forces are governing
and become crucial from the point of
view of strategy formulation
An example: a company with a very strong position in
an industry would have no guarantee in gaining
expected profitability, if the company faces a
superior, lower-cost product substitution or low6
entry barrier (new entrants with big capital)

THE FIVE FORCES MODEL OF

COMPETITION

THREATS OF NEW POTENTIAL

ENTRANT
Depending on Barriers to Entry and the Reaction
from existing companies

Barriers to Entry:
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Government Policy

COST DISADVANTAGES INDEPENDENT OF SCALE (BARRIERS TO ENTRY)

Proprietary product technology

Airplane-maker

or aerospace, mining, machine for racing

cars, handwritten batik, patented products

Favorable access to raw materials

Close

Oil, gas, gold

Favorable locations

to Market (Asia region): China, Vietnam, Indonesia

Government subsidies

National companies: PT KAI

Learning or experience curve

Electronic, automotive product,

LEARNING/EXPERIENCE EFFECTS
Learning/experience effects exist when a
companys unit costs decline as its
cumulative production volume increases
(more efficient and specialized)
because of
Accumulating
Growing

production of know-how

mastery of the technology

Cost declines with experience do not relate to the

entire firm but arise from the individual operations
or functions that make up the firm

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LEARNING/EXPERIENCE EFFECTS
VERSUS
ECONOMIES OF SCALE
In comparison with economies of scale,
experience curve relates with cumulative
volume, while economies of scale are
dependent on volume per period;
Sharing operations or functions among related
business unit within a diversified companies: memory
for desktop and notebook computer

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SOME FACTORS WOULD CAUSE DEGREE OF

COMPETITION AMONG RIVALRY
Numerous
Market

growth

Products

Differentiation of Rivals

Customer
Buyer

or equally balanced Competitors

loyalty of Rivals

costs to switch brands

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POTENTIAL FACTORS LEADING TO BE THE

THREATS OF SUBSTITUTE
PRODUCTS
Substitutes

products are readily available and

attractively priced

Buyers

view substitutes as being comparable

or better

Low

costs for users to switch to substitute

products

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POTENTIAL FACTORS LEADING TO BE THE

BARGAINING POWER OF SUPPLIERS
High

costs in switching their purchases to

alternative suppliers
Needed inputs are in short supply
A quality or differentiated input
A few suppliers of a specific input
The threats of suppliers to integrate
forward

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POTENTIAL FACTORS LEADING TO BE

THE BARGAINING POWER OF BUYERS
Buyer

switching costs to competing brands or

substitutes
Buyer demand is weak or declining
Only a few buyers exists
Identity of buyer adds prestige to sellers list of
customers
Quantity and quality of information available
to buyers
Buyers have ability to postpone purchases
until later
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FIGURE OUT OF THE COMPETITION

Forces

Evidence

Strong

Actions

/Moderate/
Weak
Bargaining power of
suppliers
Bargaining power of
buyers
Threats of New
Entrants
Threats of Product
Substitutes
Competition with
Rivalry

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STRATEGIC IMPLICATIONS OF
THE FIVE COMPETITIVE FORCES
environment is
unattractive from the standpoint of
earning good profits when

Competitive

Rivalry
Entry

is vigorous

barriers are low and entry is likely

Competition

from substitutes is strong

Suppliers

and customers have considerable

bargaining power
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STRATEGIC IMPLICATIONS OF
THE FIVE COMPETITIVE FORCES
environment is ideal from
a profit-making standpoint when

Competitive
Rivalry
Entry

enter

Good

is moderate

barriers are high and no firm is likely to

substitutes do not exist

Suppliers

and customers are in a weak

bargaining position
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WHAT FORCES ARE DRIVING

INDUSTRY CHANGE AND WHAT
IMPACTS WILL THEY HAVE?

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FACTORS DRIVING INDUSTRY

CHANGE
change because forces
are driving industry participants
to alter their actions
Driving forces are the major
underlying causes of changing industry
and competitive conditions
Industries

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SOME FORCES DRIVING CHANGES

Emerging

new Internet capabilities and

applications
Increasing globalization of industry
Product innovation
Technological change/process innovation
Marketing innovation
Regulatory policies / government legislation
Changing societal concerns, attitudes, and
lifestyle
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STRATEGIC GROUP

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STRATEGIC GROUP
strategic group is a cluster of firms in an
industry with similar competitive approaches
(business models)

Strategic

group mapping is one technique to

reveal different competitive positions of
industry rivals

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STRATEGIC GROUP MAPPING

in same strategic group have two or
more competitive characteristics in common
(business models), such as
Product line breadth
Price/quality range
Use of distribution channels
Similar types of buyers
Use of identical technological approaches
Cover same geographic areas

Firms

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Strategic Group:
Mobility Barriers

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EXAMPLE: STRATEGIC GROUP MAP OF SELECTED RETAIL CHAINS

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INTERPRETING STRATEGIC
GROUP MAPS
The closer strategic groups are
on the map, the stronger the cross-group
competitive rivalry tends to be

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ANALYZING COMPETITORS:
Profiling key rivals involves gathering
competitive intelligence about
Current strategies
Most recent actions
Resource strengths and weaknesses

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WHAT ARE THE KEY

FACTORS FOR COMPETITIVE
SUCCESS?

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THE KEY FACTORS FOR

COMPETITIVE SUCCESS
KSFs

are those competitive factors most

affecting every industry members
ability to compete with successfully

Key

factors as request for companies

to compete with in an industry

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IDENTIFYING INDUSTRY KEY SUCCESS

FACTORS
On

what basis do customers choose

between competing brands of sellers?
What resources and competitive
capabilities does a seller need to have to
be competitively successful?
What does it take for companies
(competitor) to achieve a sustainable
competitive advantage?
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IMPORTANT MESSAGE: IN 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
companys ability to capture them
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