Companys The External Environment
Part 1 Question 2: What kind of competitive forces do industry members face? Question 3: What factors drive industry change?
Thinking Strategically About a Companys Industry Company and Competitive Environment
Question 1: What Are the Industrys Dominant Industry Economic Features? Question 2: What Kinds of Competitive Forces Are Industry Members Facing, and How Strong Is Each Force? Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have? Question 4: What Market Positions Do Rivals Occupy 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 Present an Attractive Opportunity?
Question 2: What Kinds of Competitive Forces Are Industry Members Facing, and How Strong Is Each Force?
Key analytical tool: The fivefiveforces model of competition.
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Fig. 3.3: The Five Forces Model of Competition
Analyzing the Five Competitive Forces: How to Do It
Step 1: Identify the specific competitive 1: pressures associated with each of the five forces Step 2: Evaluate the strength of each 2: competitive force -- fierce, strong, moderate to normal, or weak? Step 3: Determine whether the collective 3: strength of the five competitive forces is conducive to earning attractive profits
Force 1: Rivalry Among Competing Sellers
Usually the strongest competitive force.
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What Are the Typical Ways of 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 Higher levels of advertising Stronger product innovation capabilities Better customer service Ability to provide buyers with custom-made products custom-
What Causes Rivalry to be Stronger?
Competitors are actively attempting to improve market standing and business performance Slow market growth Number of rivals increases Buyer costs to switch brands are low Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume Diversity of rivals increases Outsiders acquire weak firms in the industry
What Causes Rivalry to be Weaker?
Industry rivals move only infrequently or in a nonnonaggressive 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 so many rivals that any one firms actions firm has minimal impact on rivals business (or there are rivals very few rivals).
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Force 2: Competitive Pressures Associated With Potential Entry
Are the firms in your industry threatened by new entrants? Evaluating the threat of entry involves assessing 1. How formidable entry barriers are in the industry. Economies of scale Legal barriers Strong brand loyalty High capital requirements Resource barriers 2. Attractiveness of growth and profit prospects
When Is the Threat of Entry Stronger?
Theres a sizable pool of entry candidates There Entry barriers are low Industry growth is rapid and profit potential is high Incumbents are unwilling or unable to contest a newcomers entry efforts newcomer 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 Weaker?
Theres only a small pool of entry candidates There Entry barriers are high Profits are low Industrys outlook is risky Industry Industry growth is slow or stagnant Industry members will strongly contest efforts of new entrants to gain a market foothold
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Force 3: Competitive Pressures from Substitute Products Substitutes matter when customers are attracted to the products of firms in other industries Examples
Sugar vs. artificial sweeteners Eyeglasses and contact lens vs. laser surgery Newspapers vs. TV vs. Internet
When Is the Competition From Substitutes Stronger?
There are many good substitutes readily available Substitutes are attractively priced The higher the quality and performance of substitutes The lower the end users switching costs user users End are comfortable with using substitutes
Force 4: Competitive Pressures From Suppliers
Whether supplier-seller relationships represent a supplierWeak 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 suppliercollaboration in the industry
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When Is the Bargaining Power of Suppliers Stronger?
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 sellers of sellers production process sellers There are only a few suppliers of a specific input Some suppliers threaten to integrate forward
When Is the Bargaining Power of Suppliers Weaker?
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 suppliers
Force 5: Competitive Pressures From Buyers
Whether seller-buyer relationships represent sellera 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 seller-buyer strategic partnerships sellerin the industry
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When Is the Bargaining Power of Buyers Stronger?
It is easy for buyers to switch to competing brands or substitutes Buyers are large and can demand concessions Large-volume purchases by buyers are important to Largesellers Buyer demand is weak or declining Only a few buyers exists Identity of buyer adds prestige to sellers list of customers seller Quantity and quality of information available to buyers improves Buyers can postpone purchases until later
When Is the Bargaining Power of Buyers Weaker?
Buyers purchase item infrequently or in small quantities It is hard for buyer to switch to competing brands Strong demand creates a sellers market sellers market Sellers brand reputation is important to buyer Seller A specific sellers product delivers quality seller or performance that is very important to buyer
Strategic Implications of the Five Competitive Forces
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 considerab...