19e Section6 LN Chapter03

Chapter 3 Evaluating a Companys External Environment
CHAPTER 3
EVALUATING A COMPANYS
EXTERNAL ENVIRONMENT
CHAPTER SUMMARY
Chapter 3 presents the concepts and analytical tools for assessing a companys external environment. Attention
centers on the competitive arena in which a company operates, together with the technological, societal,
regulatory, or demographic influences in the macro-environment that are acting to reshape the companys future
market arena.
LECTURE OUTLINE
I. Introduction
1. The task of crafting strategy begins with an appraisal of the companys present situation. Two facets of
a companys situation are especially pertinent:
a. The competitive conditions in the industry in which the company operatesits external environment.
b. The companys resources and organizational capabilitiesits internal environment.
2. Figure 3.1, From Thinking Strategically about the Companys Situation to Choosing a Strategy,
depicts the sequence recommended for managers to pursue.
II. Question 1: What are the Strategically Relevant Components of a Companys Macro-Environment?
1. Every company operates in a broad macro-environment that comprises six principal components:
a. Political factors, economic conditions in the firms general environment (local, country, regional,
worldwide), sociocultural forces, technological factors, environmental factors (concerning the
natural environment), and legal/regulatory conditions.
b. An analysis of the impact of these factors is often referred to as PESTEL analysis, an acronym that
serves as a reminder of the six components involved.
CORE CONCEPT
The macro-environment encompasses the broad environmental context in which a
companys industry is situated.
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Chapter 3 Evaluating a CompanysExternal Environment
CORE CONCEPT
PESTEL analysis focuses on the six principal components of strategic significance in
the macro-environment: Political, Economic, Social, Technological, Environmental, and
Legal forces.
2. Figure 3.2, The Components of a Companys Macro-environment, identifies the arenas within
an organizations macro-environment, while table 3.1 provides descriptions of each of the seven
components of the macro-environment.
3. A companys macro-environment includes the most relevant factors and influences outside a companys
boundaries.
4. For the most part, influences coming from the outer ring of the macro-environment have a low impact
on a companys business situation and shape only the edges of the companys direction and strategy.
5. The factors and forces in a companys macro-environment having the biggest strategy-shaping impact
almost always pertain to the companys immediate competitive environment.
III. Assessing the Companys Industry and Competitive Environment
1. Thinking strategically about a companys competitive environment requires the manager to examine six
additional questions:
a. How strong are the industrys competitive forces?
b. What are the driving forces in the industry, and what impact will they have on competitive intensity
and industry profitability?
c. What market positions do industry rivals occupywho is strongly positioned and who is not?
d. What strategic moves are rivals likely to make next?
e. What are the industrys key success factors?
f. Is the industry outlook conducive to good profitability?
2. Analysis-based answers to these six questions provide managers with the understanding needed to craft
a strategy that fits the companys external situation.
IV. Question 2: How Strong are the Industrys Competitive Forces?
1. The most powerful and widely used tool for systematically diagnosing the principal competitive
pressures in a market and assessing the strength and importance of each is the five-forces model of
competition.
2. Figure 3.3, The Five-Forces Model of Competition: A Key Analytical Tool, depicts this tool.
3. Using the five forces model to determine the nature and strength of competitive pressures in a given
industry involves three steps:
a. Step 1: For each of the five forces, identify the different parties involved, along with the specific
factors that bring about competitive pressures.
b. Step 2: Evaluate how strong the pressures stemming from each of the five forces are (strong,
moderate, or weak).
c. Step 3: Determine whether the strength of the five forces, overall, is conducive to earning attractive
profits in the industry.
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V. Competitive Pressures Created by the Rivalry among Competing Sellers

1. The strongest of the five competitive forces is often the rivalry for buyer patronage among competing
sellers of a product or service.
2. The intensity of rivalry among competing sellers within an industry depends on a number of identifiable
factors. These factors are summarized in Figure 3.4 Factors Affecting the Strength of Rivalry. In
general:
a. Rivalry increases when buyer demand is growing slowly or declining.
b. Rivalry increases as it becomes less costly for buyers to switch brands.
c. Rivalry increases as the products of rival sellers become less strongly differentiated.
d. Rivalry is more intense when there is excess supply or unused production capacity, especially if the
industrys product has high fixed costs or high storage costs.
e. Rivalry intensifies as the number of competitors increases and they become more equal in size and
capability.
f. Rivalry becomes more intense as the diversity of competitors increases in terms of long-term
directions, objectives, strategies, and countries of origin.
g. Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the industry.
3. Evaluating the strength of rivalry in an industry is a matter of determining whether the factors stated
here, taken as a whole, indicate that the rivalry is relatively strong, moderate, or weak.
4. With the analysis complete, rivals must select which competitive weapons to employ.
5. Competitive weapons used in these highly dynamic contests will have a primary effect on price (P),
cost (C), or value (V). Table 3.2, Common Weapons for Competing with Rivals, examines the most
common weapons along with their respective impacts.
VI. Competitive Pressures Associated with the Threat of New Entrants
1. Several factors affect the strength of the competitive threats of potential entry in a particular industry.
2. Figure 3.5, Factors Affecting the Strength of Threat of Entry, identifies several factors that affect
how strong the competitive threat of potential entry is in a particular industry.
3. The competitive threat of entry is in a particular market depends on two classes of factors: the expected
reaction of incumbent firms to new entry and what are known as barriers to entry.
4. Industry incumbents can make it hard for a new entrant to gain a sufficient market foothold to survive
and eventually become profitable. Defensive maneuvers employed may include:
a. Price discounts (especially to the very customer groups a newcomer is seeking to attract)
b. Ramped-up advertising
c. Special sales promotions
d. New product features (to match or beat the newcomers product offering)
e. Additional customer services
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5. The barriers to entry most widely encountered include:

a. Cost advantages enjoyed by industry incumbents.
b. Strong brand preferences and high degrees of customer loyalty.
c. Strong network effects in customer demand.
d. High capital requirements.
e. The difficulties of building a network of distributors or dealers and securing adequate space on
retailers shelves.
f. Restrictive government policies.
6. The threat of entry changes as the industrys prospects grow brighter or dimmer and as entry barriers rise
or fall.
VII.
Competitive Pressures from the Sellers of Substitute Products
1. Companies in one industry come under competitive pressure from the actions of companies in a closely
adjoining industry whenever buyers view the products of the two industries as good substitutes.
2. Figure 3.6, Factors Affecting Competition from Substitute Products, illustrates how strong the
competitive pressures are from sellers of substitute products depends on three factors:
a. Whether substitutes are readily available and attractively priced
b. Whether buyers view the substitutes as being comparable or better in terms of quality, performance,
and other relevant attributes
c. How much it costs end-users to switch to substitutes
3. As a rule, the lower the price of substitutes, the higher their quality and performance, and the lower the
users switching costs, the more intense the competitive pressures posed by substitute products.
VIII. Competitive Pressures Stemming from Supplier Bargaining Power
1. Whether the suppliers of industry members represent a weak or strong competitive force depends on
the degree to which suppliers have sufficient bargaining power to influence the terms and conditions of
supply in their favor.
2. Supplier bargaining power is stronger when:

Supplier products/services are in short supply
Supplier products/services are differentiated
Industry members incur high costs in switching their purchases to alternative suppliers
The supplier industry is more concentrated than the industry it sells to and is dominated by a few
large companies
Suppliers products/services account for a small percentage of industry members costs
Industry members cant integrate backward and self-supply
There are no good substitutes for what the suppliers provide
Suppliers are not dependent on the industry for a large portion of their revenues
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3. Supplier bargaining power is weaker when:

There is a surge in the availability of supplies
The item being supplied is a commodity
Industry members switching costs to alternative suppliers are low
Industry members account for a big fraction of suppliers sales
The number of suppliers is large relative to the number of industry members and there are no
suppliers with large market shares
Suppliers products accounts for a large fraction of industry costs
Industry members have the potential to integrate backward
Good substitutes for supplier products/services exist
Industry members are major customers of suppliers
4. Figure 3.7, Factors Affecting the Bargaining Power of Suppliers, summarizes the conditions that
tend to make supplier bargaining power strong or weak
IX. Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity
1. Whether seller-buyer relationships represent a weak or strong competitive force depends on whether
some or many of the buyers have sufficient bargaining leverage to obtain price concessions and other
favorable terms and conditions of sale, and the extent to which buyers are price sensitive .
2. Buyer bargaining power is stronger when:

Buyer demand is weak in relation to industry supply
The industrys products are standardized or undifferentiated
Buyer costs of switching to competing products are low
Buyers are large and few in number relative to the number of industry sellers
Buyers are well informed about the quality, prices, and costs of sellers
Buyers have the ability to integrate backward into the business of sellers
Buyers have the ability to postpone purchases
Buyers are price-sensitive
Buyers earn low profits or low income
The product represents a significant fraction of their purchases
Product performance is not a critical consideration
3. Buyer bargaining power is weaker when:

There is a shortage of industry goods relative to buyer demand
Sellers products are differentiated
Buyer costs of switching to competing products are high
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Buyers are small and numerous relative to sellers
Buyers information regarding sellers is limited in quantity and quality
Buyers cannot credibly threaten to integrate backward
Buyers cannot easily postpose purchases
Buyers are not very price-sensitive (high profits or income; small part of cost structure or total
purchases; product performance really matters)
4. Figure 3.8, Factors Affecting the Bargaining Power of Buyers, summarizes the circumstances that
make for strong or weak bargaining power on the part of buyers.
CORE CONCEPT
The strongest of the five forces determines the extent of the downward pressure on
an industrys profitability.
X. Matching Company Strategy to Competitive Conditions
Effectively matching a companys business strategy to prevailing competitive conditions has two aspects:

Pursuing avenues that shield the firm from as many of the different competitive pressures as possible.
Initiating actions calculated to shift the competitive forces in the companys favor by altering the
underlying factors driving the five forces.
XI. Question 3: What Factors are Driving Industry Change and What Impacts Will They Have?
1. An industrys present conditions do not necessarily reveal much about the strategically relevant ways in
which the industry environment is changing.
2. All industries are characterized by trends and new developments that gradually or speedily produce
changes important enough to require a strategic response from participating firms.
XII. The Concept of Drivers of Change
1. Industry and competitive conditions change because certain forces are enticing or pressuring industry
participants to alter their actions.
2. Drivers of Change are those that have the biggest influence on what kinds of changes will take place in
the industrys structure and competitive environment.
3. Analyzing Industry Dynamics has three steps:
a. Identifying what the driving forces are
b. Assessing whether the drivers of change are, on the whole, acting to make the industry more or less
attractive
c. Determining what strategy changes are needed to prepare for the impacts of the anticipated change
CORE CONCEPT
Driving forces are the major underlying causes of change in industry and
competitive conditions.
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XIII. Identifying an Industrys Drivers of Change

1. Many developments can affect an industry powerfully enough to qualify as driving forces. Some are
unique and specific to a particular industry situation, but most drivers of change fall into one of the
following categories:
a. Changes in the long-term industry growth rate Shifts in industry growth are a driving force for
industry change, affecting the balance between industry supply and buyer demand, entry and exit,
and the character and strength of competition.
b. Increasing globalization of the industry Competition begins to shift from primarily a regional
or national focus to an international or global focus when industry members begin seeking out
customers in foreign markets or when production activities begin to migrate to countries where
costs are lowest.
c. Emerging new Internet capabilities and applications The Internet and the adoption of Internet
technology applications represent a driving force of historical and revolutionary proportions
d. Changes in who buys the product and how they use it Shifts in buyer demographics and new ways
of using the product can alter the state of competition by opening the way to market an industrys
product through a different mix of dealers and retail outlets.
e. Technological change and manufacturing process innovation Advances in technology can
dramatically alter an industrys landscape, making it possible to produce new and better products at
lower cost and opening up whole new industry frontiers.
f. Product and marketing innovation Competition in an industry is always affected by rivals racing
to be first to introduce one new product or product enhancement after another. Many firms are
successful in introducing new ways to market their products, they can spark a burst of buyer interest,
widen industry demand, increase product differentiation, and lower unit costs-any or all of which
can alter the competitive positions of rival firms and force strategy revisions.
g. Entry or exit of major firms The entry of one or more foreign companies into a geographic market
once dominated by domestic firms nearly always shakes up competitive conditions.
h. Diffusion of technical know-how across more companies and more countries As knowledge about
how to perform a particular activity or execute a particular manufacturing technology spreads, the
competitive advantage held by firms originally possessing this know-how erodes.
i. Changes in cost and efficiency in closely adjoining markets Widening or shrinking differences in
the costs among key competitors tend to dramatically alter the state of competition.
j. Reductions in uncertainty and business risk An emerging industry is typically characterized by
much uncertainty over potential market size, how much time and money will be needed to surmount
technological problems, and what distribution channels and buyer segments to emphasize.
k. Regulatory influences and government policy changes Government regulatory actions can often
force significant changes in industry practices and strategic approaches.
l. Changing societal concerns, attitudes, and lifestyles Emerging social issues and changing attitudes
and lifestyles can be powerful instigators of industry change.
2. Table 3.3, The Most Common Driving Forces, summarizes these 12 most common forces.
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XIV. Assessing the Impact of Factors Driving Industry Change

1. The second phase of driving forces analysis is to determine whether the driving forces are acting to
make the industry environment more or less attractive. Answers to three questions are needed here:
a. Are the factors driving change causing demand for the industrys product to increase or decrease?
b. Is the collective impact of the drivers of change making competition more or less intense?
c. Will the combined impacts of the change drivers lead to higher or lower industry profitability?
2. Getting a handle on the collective impact of the driving forces usually requires looking at the likely
effects of each force separately, since the driving forces may not all be pushing change in the same
direction.
XV. Adjusting Strategy to Prepare for the Impacts of Driving Forces
1. The third step in the strategic analysis of industry dynamicswhere the real payoff for strategy making
comesis for managers to draw some conclusions about what strategy adjustments will be needed to
deal with the impacts of the driving forces.
2. Importantly, to the extent that managers are unclear about the drivers of industry change and their
impacts, or if their views are off-base, the chances of making astute and timely strategy adjustments are
slim.
XVI. Question 4: How are the Industry Rival s Positioned in the Market?
1. Understanding which companies are strongly positioned and which are weakly positioned is an integral
part of analyzing an industrys competitive structure.
2. The best technique for revealing the market positions of industry competitors is strategic group
mapping.
CORE CONCEPT
Strategic group mapping is a technique for displaying the different market or
competitive positions that rival firms occupy in the industry.
XVII. Using Strategic Group Maps to Assess the Market Positions of Key Competitors
1. A strategic group consists of those industry members with similar competitive approaches and positions
in the market.
CORE CONCEPT
A strategic group is a cluster of industry rivals that have similar competitive
approaches and market positions.
2. The procedure for constructing a strategic group map is straightforward:
a. Identify the competitive characteristics that differentiate firms in the industry
b. Plot the firms on a two-variable map using pairs of these differentiating characteristics
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c. Assign firms that fall in about the same strategy space to the same strategic group
d. Draw circles around each strategic group, making the circles proportional to the size of the groups
respective share of total industry sales revenue.
3. Illustration Capsule 3.1, Comparative Market Positions of Producers in the U.S. Beer Industry: A
Strategic Group Map Example, represents a two-dimensional diagram for this industry.
ILLUSTRATION CAPSULE 3.1
Comparative Market Positions of Producers in the U.S. Beer Industry:

A Strategic Group Map Example
Discussion Question: 1. According to the diagram, which companies comprise the strategic group
of firms to which Anheuser-Bush? Why is the circle containing Anheuser-Bush and Inbev larger than
Pabsts circle?
Answer: The diagram reveals Anheuser-Bushs strategic group members to be Inbev, Miller, Coors,
and Pabst. The most significant competition is provided by Inbev with similar overall price/quality
and large geographic scope. Anheuser-Bushs circle is larger than Pabsts due to a much higher
share of overall industry revenue.
XVIII. The Value of Strategic Group Maps?
1. Generally speaking, the closer strategic groups are to each other on the map, the stronger the crossgroup competitive rivalry tends to be.
2. Not all locations in a group map are equally attractive due to profit prospects, prevailing competitive
pressures, and drivers of change. There are two primary reasons:
a. Prevailing competitive pressures from the industrys five forces may cause the profit potential of
different strategic groups to vary.
b. Industry driving forces may favor some strategic groups and hurt others.
XIX. Question 5: What Strategic Moves Are Rivals Likely to Make Next?
1. Unless a company pays attention to what competitors are doing and knows their strengths and
weaknesses, it ends up flying blind into competitive battle.
2. Having good information about the strategic direction and likely moves of key competitors allows a
company to prepare defensive countermoves, to craft its own strategic moves with some confidence
about what market maneuvers to expect from rivals in response, and to exploit any openings that arise
from competitors missteps.
XX. A Framework for Competitor Analysis
1. Michael Porters Framework for Competitor Analysis points to four indicators of a rivals likely
strategic moves and countermoves. These include a rivals current strategy, objectives, capabilities, and
assumptions about itself and the industry.
2. Figure 3.9, A Framework for Competitor Analysis, illustrates how to develop a strategic profile of a
rival firm.
3. Current Strategy Questions to consider include: How is the competitor positioned in the market?
What is the basis for its competitive advantage (if any)? What kinds of investments is it making (as an
indicator of its growth trajectory)?
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4. Objectives An appraisal of a rivals objectives should include not only its financial performance
objectives, but strategic ones as well (such as those concerning market share). The appraisal should also
examine how well they are meeting them.
5. Capabilities A rivals capabilities (and efforts to acquire new capabilities) serve as a strong signal
of future strategic actions (and reactions to your companys moves). Assessing a rivals capabilities
involves sizing up not only their strengths in this respect, but their weaknesses as well.
6. Assumptions How a rivals top managers think about their strategic situation can have a big impact on
how they behave.
7. Information regarding these four components can often be found by examining public documents such
as press releases, web sites, and SEC filings.
ILLUSTRATION CAPSULE 3.2
Business Ethics and Competitive Intelligence

Discussion Question: 1. In what way were Avons efforts to gain information about their largest rival
unethical?
Answer: Just because an activity in business is legal, does not mean it is ethical. Organizations and
individuals sometimes confuse the idea of must vs. must not with should vs. should not. Must vs. must
not deals with legal standards while should vs. should not deals with value based standards. While
going through a competitors garbage is not illegal (it does not violate the law), the action does not
represent the values of honesty and fair competition (it does violate organizational values), making
the actions unethical.
XXI. Question 6: What are the Key Factors?
1. An industrys key success factors (KSF) are those competitive factors that most affect industry
members ability to prosper in the marketplace.
CORE CONCEPT
Key success factors are the strategy elements, product and service attributes,
operational approaches, resources, and competitive capabilities with the greatest
impact on competitive success in the marketplace.
2. How well a companys product offering, resources, and capabilities measure up against and industrys
KSFs has a direct bearing on company profitability and determines just how financially and competitively
successful that company will be.
3. The answer to three questions help identify an industrys key success factors:
a. On what basis do buyers of the industrys product choose between the competing brands of sellers?
What product attributes and service characteristics are crucial?
b. What resources and competitive capabilities does a company need to have to be competitively
successful?
c. What shortcomings are almost certain to put a company at a significant competitive disadvantage?
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4. Only rarely are there more than five or six key factors for future competitive success.
5. Correctly diagnosing an industrys KSFs raises the companys chances of crafting a sound strategy.
6. Being distinctly better than rivals on one or two key success factors tends to translate into competitive
advantage.
XXII. Is the Industry Outlook Conducive to Good Profitability?
1. Thus, the final step in evaluating the industry and competitive environment is to use the results of
the analyses performed in answering Questions 1 to 6 to determine whether the industry presents the
company with strong prospects for competitive success and attractive profits.
2. The important factors on which to base a conclusion include:
a. How the company is being impacted by the state of the macro-environment.
b. Whether strong competitive forces are squeezing industry profitability to subpar levels.
c. Whether industry profitability will be favorably or unfavorably affected by the prevailing driving
forces.
d. Whether the company occupies a stronger market position than rivals.
e. Whether this is likely to change in the course of competitive interactions.
f. How well the companys strategy delivers on the industry key success factors.
3. It is a mistake to think of a particular industry as being equally attractive or unattractive to all industry
participants and all potential entrants.
4. When a company decides an industry is fundamentally attractive and presents good opportunities, a
strong case can be made that it should invest aggressively to capture the opportunities it sees and to
improve its long-term competitive position in the business.
ASSURANCE OF LEARNING EXERCISES

1. Prepare a brief analysis of the coffee industry using the information provided on the industry trade association
websites. Of the list of macro-economic factors found in Table 3.1 , which do you think might be strategically
relevant for this industry? On the basis of information provided on the trade association websites, draw a five
forces diagram for this industry and briefly discuss the nature and strength of each of the five competitive
forces. What factors are driving change in the industry?
Answer: The student should draw a five-forces diagram similar to figure 3.3 in the text. The diagram
should show that the five forces are: (1) firms in other industries offering substitute products, (2) buyers,
(3) potential new entrants, (4) suppliers of raw materials, parts, components, or other resource inputs, and
(5) rivalry among competing sellers in the industry. Suggested student responses for discussing the nature
and strength of the five competitive forces in the coffee industry may include (numbers correspond to the
numbered items above): (1) competitive pressures stemming from the attempts of companies outside the
industry to win buyers over to their products energy drink suppliers strength is strong, (2) competitive
pressures stemming from buyer bargaining power and seller-buyer collaboration different consumers and
varying preferences strength is moderate to strong, (3) competitive pressures coming from the threat of
entry of new rivals any established specialty food company or niche-based company strength is moderate
to strong, (4) competitive pressures coming from supplier bargaining and supplier-seller collaboration
provider of coffee beans strength is strong, and (5) competitive pressures created by jockeying for better
market position, increased sales and market share, and competitive advantage established competitors
such as Starbucks, Caribou Coffee, and McCafe (McDonalds).
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The student should identify the shift towards cost conscious consumer behavior in the specialty coffee
industry as a key driver for change. This is resulting in a shift in market from long-time specialty leaders like
Starbucks to established lower cost leaders such as McDonalds (McCafe).
2. Based on the strategic group map in Illustration Capsule 3.1, who are Yuengling & Sonss closest competitors?
Between which two strategic groups is competition the strongest? Why do you think no beer producers
are positioned in the lower left corner of the map? Which company / strategic group faces the weakest
competition from the members of other strategic groups?
Answer: The student should identify that Yuengling & Sons competes in the high price/quality end of the
industry. The closest completion is provided by primarily Microbreweries and secondarily by Boston Beer.
The student should identify that the combination of narrow geographic scope and low/price quality does not
provide an attractive business model. Lower price (profit margin) products require a higher volume in order
to achieve profitability.
The student should identify that Microbreweries face their weakest competition from the industry leaders
such as Anheuser-Bush/Inbev/Miller/Coors/Pabst. The target market for Microbreweries are locally focusedhigh quality consumers as opposed to broad based lower quality consumers. The student might also consider
that this puts Yuengling & Sons in a difficult position with a broader geographic base that might put it at odds
with the locally focused high quality consumer.
3. The Snack Food Association publishes an annual state-of-the-industry report that can be found at www.sfa.
org. Based on information in the latest report, does it appear that the economic characteristics of the industry
will present industry participants with attractive opportunities for growth and profitability? Explain.
The snack food industry consists of companies primarily engaged in the manufacturing of salted snacks (i.e.
potato chips, corn chips, tortilla chips, popped popcorn, pretzels and similar snacks), salted and roasted nuts
and seeds, consumer-ready packaged chocolate and non-chocolate candies, cookies and crackers, unpopped
popcorn and meat snacks. The annual growth rate is approximately 4.5 %.
The student could use a five-forces diagram similar to figure 3.3 in the text in order to conduct this analysis.
The diagram should show that the five forces are: (1) firms in other industries offering substitute products,
(2) buyers, (3) potential new entrants, (4) suppliers of raw materials, parts, components, or other resource
inputs, and (5) rivalry among competing sellers in the industry.
Suggested student responses for discussing the nature and strength of the five competitive forces in the snack
food industry may include (numbers correspond to the numbered items above): (1) competitive pressures
stemming from the attempts of companies outside the industry to win buyers over to their products other
food providers strength is strong, (2) competitive pressures stemming from buyer bargaining power and
seller-buyer collaboration different consumers and varying preferences strength is moderate to strong,
(3) competitive pressures coming from the threat of entry of new rivals any established food company
or niche-based company strength is moderate to strong, (4) competitive pressures coming from supplier
bargaining and supplier-seller collaboration provider of raw materials, including key commodities such as
oil, corn, sugar and oats (increasing costs along with volatile fluctuations in costs); strength is strong, and
(5) competitive pressures created by jockeying for better market position, increased sales and market share,
and competitive advantage established competitors such as PepsiCo and Kraft Foods strength is strong.
Potential driving forces operating in the snack food industry include:
a. Growing consumer interest in healthy, nutritional snacks, such as fruit, vegetables, nuts, and cereal
grains.
b. Increasing sales of private label snack foods competitive pricing combined with the effort of private
label manufacturers to develop healthy snacks has helped them garner market share away from branded
snacks.
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c. Rising prices of key commodities, such as oil, corn, sugar and oats.
d. Product innovation consumer preferences for new, diverse flavors of snack foods.
e. Marketing innovation.
The student should conclude their analysis with a statement indicating that while the competitive landscape
is challenging, the profit outlook for the industry is favorable. Importantly, only industry members that are
leading the way in responding to the competitive forces and industry driving forces will be able to take a
market lead.

Note to the instructor Assurance of learning questions 4 through 8 allow the student to apply the structured
external analysis tools developed in the chapter to their existing organization and industry. Depending on
the level of the student population, the instructor might need to supply a company/industry for the student
for these questions. Industries experiences high velocity change will be better candidates for these questions
as they will spark more discussion and divergent opinions. Some recommendations include the Alternative
Energy Sector or the Tablet PC Industry.
4. What are the factors affecting the intensity of rivalry in the industry in which your company is competing?
Use Figure 3.4 and the accompanying discussion to help you in pinpointing the specific factors most affecting
competitive intensity. Would you characterize the rivalry and jockeying for better market position, increased
sales, and market share among the companies in your industry as fierce, very strong, strong, moderate, or
relatively weak? Why?
5. Are there any driving forces in the industry in which your company is competing? What impact will these
driving forces have? Will they cause competition to be more or less intense? Will they act to boost or
squeeze profit margins? List at least two actions your company should consider taking in order to combat
any negative impacts of the driving forces.
6. Draw a strategic group map showing the market positions of the companies in your industry. Which
companies do you believe are in the most attractive position on the map? Which companies are the most
weakly positioned? Which companies do you believe are likely to try to move to a different position on the
strategic group map?
7. What do you see as the key factors for being a successful competitor in your industry? List at least three.
8. Does your overall assessment of the industry suggest that industry rivals have sufficiently attractive
opportunities for growth and profitability? Explain.
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Chapter 3 Evaluating a Companys External Environment

Chapter 3 Evaluating a CompanysExternal Environment

Chapter 3 Evaluating a CompanysExternal Environment

V. Competitive Pressures Created by the Rivalry among Competing Sellers

Chapter 3 Evaluating a CompanysExternal Environment

5. The barriers to entry most widely encountered include:

Competitive Pressures from the Sellers of Substitute Products

Supplier products/services are in short supply

Supplier products/services are differentiated

Suppliers products/services account for a small percentage of industry members costs

Industry members cant integrate backward and self-supply

There are no good substitutes for what the suppliers provide

Chapter 3 Evaluating a CompanysExternal Environment

3. Supplier bargaining power is weaker when:

There is a surge in the availability of supplies

The item being supplied is a commodity

Industry members switching costs to alternative suppliers are low

Industry members account for a big fraction of suppliers sales

Suppliers products accounts for a large fraction of industry costs

Industry members have the potential to integrate backward

Good substitutes for supplier products/services exist

Industry members are major customers of suppliers

Buyer demand is weak in relation to industry supply

The industrys products are standardized or undifferentiated

Buyer costs of switching to competing products are low

Buyers have the ability to postpone purchases

Buyers are price-sensitive

Buyers earn low profits or low income

The product represents a significant fraction of their purchases

Product performance is not a critical consideration

3. Buyer bargaining power is weaker when:

There is a shortage of industry goods relative to buyer demand

Sellers products are differentiated

Buyer costs of switching to competing products are high

Chapter 3 Evaluating a CompanysExternal Environment

Buyers are small and numerous relative to sellers

Buyers information regarding sellers is limited in quantity and quality

Buyers cannot credibly threaten to integrate backward

Buyers cannot easily postpose purchases

Chapter 3 Evaluating a CompanysExternal Environment

XIII. Identifying an Industrys Drivers of Change

Chapter 3 Evaluating a CompanysExternal Environment

XIV. Assessing the Impact of Factors Driving Industry Change

Chapter 3 Evaluating a CompanysExternal Environment

ILLUSTRATION CAPSULE 3.1

Comparative Market Positions of Producers in the U.S. Beer Industry:

Chapter 3 Evaluating a CompanysExternal Environment

ILLUSTRATION CAPSULE 3.2

Business Ethics and Competitive Intelligence

Chapter 3 Evaluating a CompanysExternal Environment

ASSURANCE OF LEARNING EXERCISES

Chapter 3 Evaluating a CompanysExternal Environment

Chapter 3 Evaluating a CompanysExternal Environment

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