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The External Environment
●Is the broad environmental context in which a firm’s industry is situated.
- ●Includes strategically relevant components over which the firm has no direct control.
- uGeneral economic conditions
- uImmediate industry and competitive environment
The Five Competitive Forces
●Competition from rival sellers
●Competition from potential new entrants
●Competition from substitute products producers
●Supplier bargaining power
●Customer bargaining power
Competitive Pressures That Act to Increase the 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 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.
Competitive Pressures Associated
with the Threat of New Entrants
♦Entry Threat Considerations:
●Strength of barriers to entry
●Expected reaction of incumbent firms
●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
Competitive Pressures from the Sellers
of Substitute Products
♦Substitute Products Considerations:
●Ready availability of substitutes
●Pricing, quality, performance, and other relevant attributes of substitutes
●Switching costs that buyers incur
- ♦Indicators of Substitutes’ Competitive Strength:
- ●Increasing rate of growth in sales of substitutes
- ●Substitute producers adding output capacity
- ●Increasing profitability of substitute producers
Competitive Pressures Stemming from Supplier Bargaining Power
♦Supplier Bargaining Power Considerations:
●Ready availability of supplier products
●Criticality of supplier products as industry inputs
●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
Competitive Pressures Stemming from Buyer
Bargaining Power and Price Sensitivity
♦Buyer Bargaining Power Considerations:
●Buyer costs for switching to competing sellers
●Degree to which industry products are commoditized
●Number and size of buyers relative to sellers
●Strength of buyer demand for sellers’ products
●Buyer knowledge of products, costs and pricing
●Backward integration of buyers into sellers’ industry
●Buyer discretion in delaying purchases
- ●Buyer price sensitivity due to low profits, size of purchase, and consequences of
♦A Strategic Group
- ●Is a cluster of industry rivals that have similar competitive approaches and
- market positions:
uHave comparable product-line breadth
uSell in the same price/quality range
uEmphasize the same distribution channels
uUse the same product attributes to buyers
uDepend on identical technological approaches
uOffer similar services and technical assistance
Information about rivals that is useful in anticipating their next strategic moves
♦Key Success Factors
- ●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, as drivers of change and competitive conditions change
The rivalry among competing sellers in an industry intensifies
as the number of rivals increases and as they become more equal in size and competitive capability
Competitive pressures associated with the threat of new entrants grow stronger when
industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence, when current industry members are unable or unwilling to strongly contest the entry of newcomers, and when a newcomer can reasonably expect to earn attractive profits.
Which of the following conditions generally raise the barriers to entering an industry?
High capital requirements, difficulties in building a network of distributors-retailers and securing adequate space on retailers' shelves, and the likelihood that industry incumbents will strongly contest the efforts of new entrants to gain a market foothold
Competitive pressures stemming from substitute products are weaker when
substitutes are higher-priced, buyers don't believe substitute products have equal or better features, and buyers' costs of switching to substitutes are relatively high
Whether the buyers of an industry's product have strong or weak bargaining leverage over the terms and conditions of sale depends on
whether buyers purchase in relatively large or small quantities, whether the costs of switching to competing brands or to substitute products are high or low, and how well informed buyers are about sellers' prices, products, and costs
The task of driving forces analysis is to
identify what the driving forces are, assess whether the drivers of change are, on the whole, acting to make the industry more or less attractive, and determine what strategy changes are needed to prepare for the impacts of the driving forces
Strategic group mapping is a helpful analytical tool for
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.
An industry's key success factors
concern the particular strategy elements, product attributes, resources, competencies, competitive capabilities, and market achievements that spell the difference between being a strong competitor and a weak competitor—and sometimes between profit and loss