Description
Find an article about a specific company that will allow you to address one of the
strategies from these three chapters, listed on the preceding page.
o Paragraph of article summary. 5 points
o Identify what specific strategy your company is using, supporting your
assertion with detailed information from the relevant chapter and the
article. 10 points
o Using information from past chapters, determine whether the choice of
this strategy was motivated by external factors (Chapter 3) or internal
factors (Chapter 4). 8 points
o Explain whether this was a good or bad move (you MUST select one,
no fence-sitting) using chapter and article information. This cannot
just be your opinion, you need chapter support! 7 points
Each bullet should be its own section, separated by white space or a new paragraph.
Failure to provide the full article reference: -5 points
Chapter 6:
– Strategic offensives
– Blue-ocean strategy
– First-mover advantage and disadvantage
– Horizontal scope of the firm
– Vertical scope of the firm
– Vertically integrated firm
– Backward integration
– Forward integration
– Merger
– Acquisition
– Outsourcing
– Strategic alliance
– Joint venture
Chapter 7:
– Export strategies
– Licensing strategies
– Franchising strategies
– Foreign subsidiary strategies
– Alliance and joint venture strategies
– International strategy
– Multi-domestic strategy or think-local, act-local strategy
– Global strategy or think-global, act-global strategy
– Transnational strategy or think-global, act-local strategy
– Cross-market subsidization
– Mutual restraint
Chapter 8:
– Tests of corporate advantage
– Synergy
– Acquisition premium
– Corporate venturing
– Transactional costs
– Related business diversification
– Unrelated business diversification
– Strategic fit
– Specialized vs. general resources and capabilities
– Economics of scope
– Corporate parenting
UNIT 4 Strategies
– Umbrella brand
– Restructuring
– Retrenching
– Parenting advantage
– Industry attractiveness competitive strength matrix
– Resource fit
– Portfolio approach (cash hog, cash cow)
– Spin-off
– Companywide restructuring
Only legitimate business sources may be used for the BP assignments: Forbes, Fortune,
BusinessWeek, Wall Street Journal, Inc., CNN, Fox, etc. No Wikipedia, Investopedia, etc., or
other random websites. A really good place to find Business Press articles is via Flipster. On the
university website, type “flipster” into the search function in the upper right. Follow the links. Under
“Business” you get Forbes, Fortune, and BusinessWeek.
Each BP assignment starts with one paragraph to summarize the article. Then your task is to use
chapter concepts to analyze your article according to the given Unit’s assignment in Content, and
in the format described in the previous section of the syllabus. Also be sure of the following:
• Specific facts from the BP article must be used. As an example, “They had really good
sales.” is not specific, you need to give the actual numbers the article provided: “Their
sales grew 30% in 2022.”
• These are essay answers and must be detailed. Flesh out your ideas; do not use bullet
points.
• If an assignment asks you to ID two things, both things need chapter concept support.
• On multi-part questions, start a new paragraph or section for each question.
Each question or each part of a multi-part question must have at least one full chapter concept
as its basis. (See the example below for what constitutes a full concept) This concept will be
highlighted and cited, by most immediate heading in the book and then the paragraph number
following that heading (see below). Then use your own words to apply the concept(s) in analysis
of your article situation or quiz question. Be very specific in applying the concept to the article
situation or the quiz question, generic arguments are not analytical.
Example:
Question: What strategy is your firm employing?
Wrong answer #1: This company is using a low price strategy. They have lower prices than all
their rivals and thus they get more customers.
Why this is wrong: It doesn’t use any concepts from the chapter, so it has nothing highlighted and
no citations. It also has no specifics from the student’s chosen article. This answer would earn
zero points.
Wrong answer #2: This company is using a broad low-cost strategy. They are trying to keep
their costs low so they can pass on low prices to their customers.
Why this is wrong: It uses a term from the book and highlights it, but not the full concept of the
broad low-cost strategy. There is no citation. It also offers no detail from the article about what
the company is doing to lower costs. This answer would earn less than 50% credit.
Right answer: This company is using a broad low-cost strategy, defined in the chapter as
striving to achieve lower costs than rivals targeting a broad spectrum of buyers (Broad
Low-Cost Strategies, paragraph 1). They are doing this by reducing their transportation costs
through strategic alliances and by increasing their purchase volumes to lower per-unit materials
costs. However, it’s important for broad low-cost firms to incorporate features and services
that buyers consider essential (Broad Low-Cost Strategies, paragraph 1), so they are also
adding simpler touch-screen controls and a stronger online support system.
Why this is right: Chapter concepts are highlighted and cited, they are beyond just the general
term, there are several (not just in the topic sentence), and they are used to analyze article
specifics. This answer earns full credit. Well done, Dr. Mullane!
NOTE: Use bold or underline to highlight chapter concepts on the BP assignments.
Grammar and Usage
1. Do not use contractions in business writing (can’t, don’t).
2. Where possible, use third person. Avoid using first person unless the assignment has you
writing about a personal experience or opinion.
3. Commas and periods are always placed inside closing quotations. Even if you are only quoting
one “word,” place the comma or period inside the closing quotation.
4. In a list of phrases, make sure the form of the phrase is consistent. Instead of, “One would
prefer living in Montana, to buy groceries at Albertson’s, and a nice apartment,” write, “One
would prefer living in Montana, buying groceries at Albertson’s, and renting a nice apartment.”
5. Make sure your verbs match the plurality of the subject.
6. Always use complete sentences. This sounds so obvious, but I frequently see phrases that
students intend to be sentences but lack the properties of a sentence (both a subject and
predicate).
7. It is very common for students to be prolific with commas. Comma rules can be confusing.
You are more likely to get into trouble with commas if you are writing conversationally or
using sentences that are long and unorganized. Do not use commas to set off phrases unless (1)
it is a phrase that could be eliminated from the sentence, or (2) the phrase contains a subject
and predicate (is a full sentence on its own). An example of proper comma usage for (1) is
“The students liked the class, especially the experience with computers.” An example of proper
comma usage for (2) is “The students liked the class, and they enjoyed their experience with
computers.” Note that in this second example, you are required to use a comma because it is a
compound sentence. See #10 below. An example of improper comma usage is: “The students
like the class, that included experience with computers.”
8. Properly denote possessive nouns and pronouns. Often students leave apostrophes out or put
them in the wrong place. The most common error: “The company announced who would be
it’s new CEO”. “It’s” always stands for “it is.”
9. Use pronouns that are of the correct plurality. The most common error is “Microsoft released
their earnings.” (company=singular, their=plural pronoun) The correct way is “Microsoft
released its earnings.”
10. This is a very common improper usage of a comma: “We went out to eat at the Montana Club
on Wednesday night, and watched the boxing matches at the Wilma.” The comma is not
necessary because the two phrases that it separates are NOT complete sentences. To correct
this, either remove the comma or insert a subject in the second phrase (“We went…. night, and
we watched …”).
Effective Writing
1. Use headings and subheadings. Not only will this force you to organize your thoughts, but it
will also provide the reader information about where you are going in your paper.
2. Provide transitional paragraphs when switching between two marginally related topics. When
switching between two closely related topics, transition in the first sentence of the new topic or
the last sentence of the old topic.
3. Watch paragraph length. Often a long paragraph really contains discussion of several main
ideas, so it could be broken into several shorter paragraphs.
4. Do not be too casual in your writing. Students tend to write like they speak, which can be very
informal and “chatty.” Professional business writing should not sound like a casual
conversation when it is read. Casual writing carries an unintended aura of not being serious
about your subject or assignment.
5. If the paper has been composed by more than one person, be sure the different writing styles
are not blatant. If a paper is divided up in a group, designate one person to integrate the parts.
This person will need to make changes to the other members’ parts to make the paper more like
his/her writing style throughout the paper.
6. Use charts, illustrations, tables, and figures as appropriate. Place them in the body of the paper
at the appropriate point.
7. Properly introduce and summarize your topic with opening and closing paragraphs.
8. Designate your sources in some format preferred by your instructor. Some assignments and
papers will have formal guidelines on footnoting, while others will not. Even if there is no
formal requirement for footnotes, you should list your sources in a reference or bibliography
list.
9. Do not plagiarize. When you are answering questions about a reading or summarizing a
reading, it is tempting to copy and paste the words from the reading. If you do this without
placing the words in quotations and footnoting the source, this is plagiarism. This is illegal and
constitutes a violations of the Student Conduct Code. Reword the content in your own words.
This shows thought and understanding of the topic.
http://www.business.umt.edu/Faculty/herron/writing…
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chapter 3
Evaluating a Company’s
External Environment
Learning Objectives
After reading this chapter, you should be able to:
LO 3-1 Recognize the factors in a company’s broad macroenvironment that may have strategic significance.
LO 3-2 Use analytic tools to diagnose the competitive
conditions in a company’s industry.
LO 3-3 Map the market positions of key groups of industry
rivals.
LO 3-4 Determine whether an industry’s outlook presents a
company with sufficiently attractive opportunities for
growth and profitability.
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No matter what it takes, the goal of strategy is to beat the
competition.
Kenichi Ohmae—Consultant and author
Continued innovation is the best way to beat the
competition.
Thomas A Edison—Inventor and Businessman
Companies that solely focus on competition will die. Those
that focus on value creation will thrive.
Edward de Bono—Author and consultant
In Chapter 2, we learned that the strategy formulation, strategy execution process begins with an
appraisal of the company’s present situation. Two
facets of a company’s situation are especially pertinent: (1) its external environment—most notably, the competitive conditions of the industry in
which the company operates; and (2) its internal
environment—particularly the company’s resources
and organizational capabilities.
Insightful diagnosis of a company’s external and
internal environments is a prerequisite for managers to succeed in crafting a strategy that is an
excellent fit with the company’s situation—the first
test of a winning strategy. As depicted in Figure 3.1,
strategic thinking begins with an appraisal of the
company’s external and internal environments (as
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a basis for deciding on a long-term direction and
developing a strategic vision). It then moves toward
an evaluation of the most promising alternative
business models, and strategies and finally culminates in choosing a specific strategy.
This chapter presents the concepts and analytic
tools for zeroing in on those aspects of a company’s external environment that should be considered in making strategic choices. Attention centers
on the broad environmental context, the specific
market arena in which a company operates, the
drivers of change, the positions and likely actions
of rival companies, and key success factors. In
Chapter 4, we explore the methods of evaluating a
company’s internal circumstances and competitive
capabilities.
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FIGURE 3.1
From Analyzing the Company’s Situation to Choosing a Strategy
Analyzing the
company’s
external
environment
Analyzing the
company’s
internal
environment
Form a
strategic
vision of
where the
company
needs to
head
Identify
promising
strategic
options
for the
company
Select the
best
business
model and
strategy
for the
company
ASSESSING THE COMPANY’S INDUSTRY
AND COMPETITIVE ENVIRONMENT
Thinking strategically about a company’s industry and competitive environment
entails using some well-validated concepts and analytical tools to get clear answers to
seven questions:
1. Do macro-environmental factors and industry characteristics offer sellers opportunities for growth and attractive profits?
2. What kinds of competitive forces are industry members facing, and how strong is
each force?
3. What forces are driving industry change, and what impact will these changes have
on competitive intensity and industry profitability?
4. What market positions do industry rivals occupy—who is strongly positioned and
who is not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors of competitive success?
7. Does the industry outlook offer good prospects for profitability?
Analysis-based answers to these questions are prerequisites for a strategy offering good fit with the external situation. The remainder of this chapter is devoted to
describing the methods of obtaining solid answers to these seven questions.
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chapter 3
Evaluating a Company’s External Environment
53
ANALYZING THE COMPANY’S
MACRO-ENVIRONMENT
A company’s external environment includes the immediate industry and competitive
environment and a broader “macro-environment” (see Figure 3.2). This macro-environment
comprises six principal components: political factors; economic conditions in the
firm’s general environment (local, country, regional, worldwide); sociocultural
forces; technological factors; environmental factors (concerning the natural environment); and legal/regulatory conditions. Each of these components has the potential
to affect the firm’s more immediate industry and competitive environment, although
some are likely to have a more important effect than others. An analysis of the
impact of these factors is often referred to as PESTEL analysis, an acronym that
FIGURE 3.2
• LO 3-1
Recognize the factors
in a company’s broad
macro-environment
that may have strategic significance.
The Components of a Company’s Macro-Environment
ENVIRONMENT
MACRO-
Economic Conditions
and Competitive
dustry
Env
te In
iron
a
i
d
e
me
m
nt
Im
Political
Factors
Sociocultural
Forces
Producers of
Substitute Products
Suppliers
COMPANY
Rival
Firms
Legal/
Regulatory
Factors
Buyers
New
Entrants
Technological
Factors
Environmental
Forces
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PART 1
54
Concepts and Techniques for Crafting and Executing Strategy
serves as a reminder of the six components involved (Political, Economic, Sociocultural,
Technological, Environmental, Legal/regulatory).
Since macro-economic factors affect different industries in different ways and to
different
degrees, it is important for managers to determine which of these represent the
CORE CONCEPT
most
strategically
relevant factors outside the firm’s industry boundaries. By strategically
The macro-environment
relevant,
we
mean
important enough to have a bearing on the decisions the company
encompasses the broad
ultimately makes about its long-term direction, objectives, strategy, and business model.
environmental context in
The impact of the outer-ring factors depicted in Figure 3.2 on a company’s choice of
which a company’s industry
is situated.
strategy can range from big to small. Those factors that are likely to a bigger impact
deserve the closest attention. But even factors that have a low impact on the company’s
business situation merit a watchful eye since their level of impact may change.
For example, when stringent new federal banking regulations are announced, banks
must rapidly adapt their strategies and lending practices to be in compliance. Cigarette
producers must adapt to new antismoking ordinances, the decisions of governments to
impose higher cigarette taxes, the growing cultural stigma attached to smoking and
CORE CONCEPT newly emerging e-cigarette technology. The homebuilding industry is affected by such
macro-influences as trends in household incomes and buying power, rules and regulaPESTEL analysis can be
tions that make it easier or harder for homebuyers to obtain mortgages, changes in
used to assess the strategic relevance of the
mortgage interest rates, shifting preferences of families for renting versus owning a
six principal components
home, and shifts in buyer preferences for homes of various sizes, styles, and price
of the macro-environment:
ranges. Companies in the food processing, restaurant, sports, and fitness industries
Political, Economic,
have to pay special attention to changes in lifestyles, eating habits, leisure-time preferSocial, Technological,
ences, and attitudes toward nutrition and fitness in fashioning their strategies. Table 3.1
Environmental, and Legal/
provides a brief description of the components of the macro-environment and some
Regulatory forces.
examples of the industries or business situations that they might affect.
TABLE 3.1
The Six Components of the Macro-Environment
Component
Description
Political factors
Pertinent political factors include matters such as tax policy, fiscal policy, tariffs, the political
climate, and the strength of institutions such as the federal banking system. Some political
policies affect certain types of industries more than others. An example is energy policy, which
clearly affects energy producers and heavy users of energy more than other types of businesses.
Economic conditions
Economic conditions include the general economic climate and specific factors such as interest
rates, exchange rates, the inflation rate, the unemployment rate, the rate of economic growth,
trade deficits or surpluses, savings rates, and per-capita domestic product. Some industries,
such as construction, are particularly vulnerable to economic downturns but are positively
affected by factors such as low interest rates. Others, such as discount retailing, benefit when
general economic conditions weaken, as consumers become more price-conscious.
Sociocultural forces
Sociocultural forces include the societal values, attitudes, cultural influences, and lifestyles
that impact demand for particular goods and services, as well as demographic factors such
as the population size, growth rate, and age distribution. Sociocultural forces vary by locale
and change over time. An example is the trend toward healthier lifestyles, which can shift
spending toward exercise equipment and health clubs and away from alcohol and snack
foods. The demographic effect of people living longer is having a huge impact on the health
care, nursing homes, travel, hospitality, and entertainment industries.
(continued)
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TABLE 3.1
Evaluating a Company’s External Environment
55
(continued)
Component
Description
Technological factors
Technological factors include the pace of technological change and technical developments
that have the potential for wide-ranging effects on society, such as genetic engineering,
nanotechnology, and solar energy technology. They include institutions involved in creating
new knowledge and controlling the use of technology, such as R&D consortia, universitysponsored technology incubators, patent and copyright laws, and government control
over the Internet. Technological change can encourage the birth of new industries, such as
drones, virtual reality technology, and connected wearable devices. They can disrupt others,
as cloud computing, 3-D printing, and big data solution have done, and they can render
other industries obsolete (film cameras, music CDs).
Environmental forces
These include ecological and environmental forces such as weather, climate, climate change,
and associated factors like flooding, fire, and water shortages. These factors can directly
impact industries such as insurance, farming, energy production, and tourism. They may
have an indirect but substantial effect on other industries such as transportation and utilities.
The relevance of environmental considerations stems from the fact that some industries
contribute more significantly than others to air and water pollution or to the depletion of
irreplaceable natural resources, or to inefficient energy/resource usage, or are closely
associated with other types of environmentally damaging activities (unsustainable agricultural
practices, the creation of waste products that are not recyclable or biodegradable). Growing
numbers of companies worldwide, in response to stricter environmental regulations and also
to mounting public concerns about the environment, are implementing actions to operate in
a more environmentally and ecologically responsible manner.
Legal and regulatory
factors
These factors include the regulations and laws with which companies must comply, such as
consumer laws, labor laws, antitrust laws, and occupational health and safety regulation. Some
factors, such as financial services regulation, are industry-specific. Others affect certain types
of industries more than others. For example, minimum wage legislation largely impacts lowwage industries (such as nursing homes and fast food restaurants) that employ substantial
numbers of relatively unskilled workers. Companies in coal-mining, meat-packing, and steelmaking, where many jobs are hazardous or carry high risk of injury, are much more impacted
by occupational safety regulations than are companies in industries such as retailing or
software programming.
As the events surrounding the coronavirus pandemic of 2020 made abundantly
clear, there is a class of macro-level external factors that is not included as part
of PESTEL analysis. This is the set of factors that occurs more irregularly and
unpredictably, unlike the categories within PESTEL that can be expected to affect
firms in an ongoing and more foreseeable manner. This additional set of factors can
be thought of as societal shocks to the macro-environment; they include terrorism
(whether by domestic or foreign agents), civil war, foreign invasion or occupation, and
epidemics and pandemics. Societal shocks such as these also affect different industries and companies to varying degrees, but they are much harder for companies to
anticipate and prepare for since they often begin with little warning. The coordinated terrorist attacks by al-Qaeda against the United States now referred to as 9/11
(since they occurred on September 11, 2001) offer an example. These attacks had a
significant economic impact, not only within the United States, but on world markets
as well. New York City’s businesses suffered enormously, particularly those located
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ILLUSTRATION
CAPSULE 3.1
The Differential Effects of the
Coronavirus Pandemic of 2020
While the world had suffered through a number of other
pandemics, including the Spanish Flu (which caused
somewhere between 20 to 50 million deaths in 1918–1919),
the Coronavirus pandemic of 2020 was predicted to
be even more devastating. Not only was the world now
more interconnected due to globalization, but the disease causing the pandemic, known as Covid-19, was easily
transmissible. By April 1, 2020, there were already more
than 31,000 deaths worldwide, despite the fact that the
disease had not yet peaked in some of the world’s most
populous countries.
The virus was new to the world and identified as
such in early January, 2020. First appearing in Wuhan, a
Chinese city of 11 million, it spread around the globe rapidly, reaching at least 170 countries by the end of March.
Different countries were affected by the pandemic at
different rates and handled the crisis in different ways.
Nations that were particularly hard hit by Covid-19
include China, Italy (with 1/3 of the deaths as of April 1,
2020), Spain, France, Iran, and the United States. Italy’s
high death rate may be explained in part due to demographics, since its much older population was more susceptible to the disease. But in contrast to South Korea,
which utilized extensive testing to identify and control
the spread of the disease, Italy failed to test widely. The
United States also found itself with insufficient test kits
to implement South Korea’s strategy, a situation exacerbated by the Trump administration’s downplaying the
seriousness of the threat until March.
The economic impact of the pandemic was catastrophic, despite a $2 trillion U.S. fiscal stimulus package
and similar measures elsewhere designed to combat its
economic consequences. Emerging markets seemed
destined to absorb much of the hit, as international
investment dried up, tourism collapsed, and demand
for commodities fell. But even wealthy nations were not
immune from dire consequences, although different
sectors and industries were affected to varying degrees.
In the United States, the hospitality and transportation
industries were hard hit, along with retail, oil and gas,
Shutterstock / theskaman306
live sports and other forms of entertainment. Small businesses and low-margin industries, with little ability to
weather a significant downturn, were particularly vulnerable. Some industries, such as health care, online retail,
and delivery services found themselves facing demand
in excess of their capabilities, especially in light of supply chain breakdowns. A number of large companies
responded to the crisis by switching to the production
of supplies needed for managing the crisis. GM, Ford,
and other automakers aided the efforts to produce critically needed ventilators, while distilleries such as Tito’s
Handmade Vodka and Dillon’s Distillery began making
hand sanitizers. Fashion companies, such as Inditex (with
its Zara brand) and Los Angeles Apparel, turned their
production capabilities toward making hospital gowns
and face masks. Virtually no company was unaffected
by the pandemic, but those which quickly adopted
practices to remain nimble, control costs, minimize job
losses, support their workers and suppliers, and join in
the effort to combat the crisis were best positioned to
weather it.
Sources: “Timeline: How the new coronavirus spread, Aljazeera news, March 29, 2020; “These companies are switching gears to help
address coronavirus shortages”, by Chloe Hadavas, Slate, March 23, 2020; SlateStatista.com (accessed April 1, 2020).
within and nearby the World Trade Center complex. Industries suffering an outsized
effect include the airline industry, which had to cut back travel capacity by nearly 20%,
and the export industry. Illustration Capsule 3.1 illustrates how another such societal
shock—the coronavirus pandemic of 2020—affected industries, businesses, geographies, and countries differentially.
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Evaluating a Company’s External Environment
57
As company managers scan the external environment, they must be alert for potentially important outer-ring developments (whether in the form of societal shocks or
among the components of PESTEL analysis), assess their impact and influence, and
adapt the company’s direction and strategy as needed. However, the factors in a company’s environment having the greatest strategy-shaping impact typically pertain to the
company’s immediate industry and competitive environment. Consequently, it is on a
company’s industry and competitive environment (depicted in the center of Figure 3.2)
that we concentrate the bulk of our attention in this chapter.
ASSESSING THE COMPANY’S INDUSTRY
AND COMPETITIVE ENVIRONMENT
After gaining an understanding of the industry’s general economic characteristics,
attention should be focused on the competitive dynamics of the industry. This entails
using some well-validated concepts and analytic tools. These include the five forces
framework, the value net, driving forces, strategic groups, competitor analysis, and key
success factors. Proper use of these analytic tools can provide managers with the understanding needed to craft a strategy that fits the company’s situation within their industry environment. The remainder of this chapter is devoted to describing how managers
can use these tools to inform and improve their strategic choices.
• LO 3-2
Use analytic tools
to diagnose the
competitive conditions
in a company’s
industry.
The Five Forces Framework
The character and strength of the competitive forces operating in an industry are never
the same from one industry to another. The most powerful and widely used tool for
diagnosing the principal competitive pressures in a market is the five forces framework.1
This framework, depicted in Figure 3.3, holds that competitive pressures on companies within an industry come from five sources. These include (1) competition from
rival sellers, (2) competition from potential new entrants to the industry, (3) competition
from producers of substitute products, (4) supplier bargaining power, and (5) customer
bargaining power.
Using the five forces model to determine the nature and strength of competitive
pressures in a given industry involves three steps:
• Step 1: For each of the five forces, identify the different parties involved, along with
the specific factors that bring about competitive pressures.
• Step 2: Evaluate how strong the pressures stemming from each of the five forces are
(strong, moderate, or weak).
• Step 3: Determine whether the five forces, overall, are supportive of high industry
profitability.
Competitive Pressures Created by the Rivalry among
Competing Sellers
The strongest of the five competitive forces is often the rivalry for buyer patronage
among competing sellers of a product or service. The intensity of rivalry among competing sellers within an industry depends on a number of identifiable factors. Figure 3.4
summarizes these factors, identifying those that intensify or weaken rivalry among
direct competitors in an industry. A brief explanation of why these factors affect the
degree of rivalry is in order:
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FIGURE 3.3
Concepts and Techniques for Crafting and Executing Strategy
The Five Forces Model of Competition: A Key Analytic Tool
Firms in Other
Industries Offering
Substitute Products
Competitive pressures coming
from the producers of substitute
products
Competitive
pressures
stemming
from supplier
bargaining
power
Suppliers
Rivalry among
Competing
Sellers
Competitive pressures
coming from other firms in
the industry
Competitive
pressures
stemming
from buyer
bargaining
power
Buyers
Competitive pressures coming from
the threat of entry of new rivals
Potential
New Entrants
Sources: Adapted from M. E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 57, no. 2 (1979), pp. 137–145;
M. E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review 86, no. 1 (2008), pp. 80–86.
• Rivalry increases when buyer demand is growing slowly or declining. Rapidly expand-
ing buyer demand produces enough new business for all industry members to grow
without having to draw customers away from rival enterprises. But in markets
where buyer demand is slow-growing or shrinking, companies eager to gain more
business are likely to engage in aggressive price discounting, sales promotions, and
other tactics to increase their sales volumes at the expense of rivals, sometimes to
the point of igniting a fierce battle for market share.
• Rivalry increases as it becomes less costly for buyers to switch brands. The less costly
(or easier) it is for buyers to switch their purchases from one seller to another,
the easier it is for sellers to steal customers away from rivals. When the cost of
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FIGURE 3.4
Evaluating a Company’s External Environment
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Factors Affecting the Strength of Rivalry
Substitutes
Rivalry among Competing Sellers
Rivalry increases and becomes a stronger force when:
• Buyer demand is growing slowly or declining.
• Buyer costs to switch brands are low.
• The products of industry members are commodities or else
weakly differentiated.
• The firms in the industry have excess production capacity
and/or inventory.
• The firms in the industry have high fixed costs or high storage costs.
• Competitors are numerous or are of roughly equal size and
competitive strength.
• Rivals have diverse objectives, strategies, and/or countries of origin.
• Rivals have emotional stakes in the business or face high exit barriers.
Suppliers
Buyers
Rivalry decreases and becomes a weaker force under the opposite
conditions.
New Entrants
switching brands is higher, buyers are less prone to brand switching and sellers
have protection from rivalrous moves. Switching costs include not only monetary
costs but also the time, inconvenience, and psychological costs involved in switching brands. For example, retailers may not switch to the brands of rival manufacturers because they are hesitant to sever long-standing supplier relationships or incur
the additional expense of retraining employees, accessing technical support, or testing the quality and reliability of the new brand. Consumers may not switch brands
because they become emotionally attached to a particular brand (e.g. if you identify
with the Harley motorcycle brand and lifestyle).
• Rivalry increases as the products of rival sellers become less strongly differentiated. When
the offerings of rivals are identical or weakly differentiated, buyers have less reason
to be brand-loyal—a condition that makes it easier for rivals to convince buyers to
switch to their offerings. Moreover, when the products of different sellers are virtually identical, shoppers will choose on the basis of price, which can result in fierce
price competition among sellers. On the other hand, strongly differentiated product
offerings among rivals breed high brand loyalty on the part of buyers who view the
attributes of certain brands as more appealing or better suited to their needs.
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Concepts and Techniques for Crafting and Executing Strategy
• Rivalry is more intense when industry members have too much inventory or sig-
nificant amounts of idle production capacity, especially if the industry’s product
entails high fixed costs or high storage costs. Whenever a market has excess supply (overproduction relative to demand), rivalry intensifies as sellers cut prices
in a desperate effort to cope with the unsold inventory. A similar effect occurs
when a product is perishable or seasonal, since firms often engage in aggressive
price cutting to ensure that everything is sold. Likewise, whenever fixed costs
account for a large fraction of total cost so that unit costs are significantly lower
at full capacity, firms come under significant pressure to cut prices whenever
they are operating below full capacity. Unused capacity imposes a significant
cost-increasing penalty because there are fewer units over which to spread fixed
costs. The pressure of high fixed or high storage costs can push rival firms into
offering price concessions, special discounts, and rebates and employing other
volume-boosting competitive tactics.
• Rivalry intensifies as the number of competitors increases and they become more equal
in size and capability. When there are many competitors in a market, companies
eager to increase their meager market share often engage in price-cutting activities
to drive sales, leading to intense rivalry. When there are only a few competitors,
companies are more wary of how their rivals may react to their attempts to take
market share away from them. Fear of retaliation and a descent into a damaging
price war leads to restrained competitive moves. Moreover, when rivals are of comparable size and competitive strength, they can usually compete on a fairly equal
footing—an evenly matched contest tends to be fiercer than a contest in which
one or more industry members have commanding market shares and substantially
greater resources than their much smaller rivals.
• Rivalry becomes more intense as the diversity of competitors increases in terms of
long-term directions, objectives, strategies, and countries of origin. A diverse group of
sellers often contains one or more mavericks willing to try novel or rule-breaking
market approaches, thus generating a more volatile and less predictable competitive environment. Globally competitive markets are often more rivalrous, especially
when aggressors have lower costs and are intent on gaining a strong foothold in
new country markets.
• Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the
industry. In industries where the assets cannot easily be sold or transferred to other
uses, where workers are entitled to job protection, or where owners are committed to remaining in business for personal reasons, failing firms tend to hold on
longer than they might otherwise—even when they are bleeding red ink. Deep price
discounting typically ensues, in a desperate effort to cover costs and remain in business. This sort of rivalry can destabilize an otherwise attractive industry.
The previous factors, taken as whole, determine whether the rivalry in an industry is relatively strong, moderate, or weak. When rivalry is strong, the battle for market share is generally so vigorous that the profit margins of most industry members
are squeezed to bare-bones levels. When rivalry is moderate, a more normal state,
the maneuvering among industry members, while lively and healthy, still allows most
industry members to earn acceptable profits. When rivalry is weak, most companies in
the industry are relatively well satisfied with their sales growth and market shares and
rarely undertake offensives to steal customers away from one another. Weak rivalry
means that there is no downward pressure on industry profitability due to this particular competitive force.
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The Choice of Competitive Weapons
Competitive battles among rival sellers can assume many forms that extend well beyond
lively price competition. For example, competitors may resort to such marketing tactics
as special sales promotions, heavy advertising, rebates, or low-interest-rate financing to
drum up additional sales. Rivals may race one another to differentiate their products
by offering better performance features or higher quality or improved customer service
or a wider product selection. They may also compete through the rapid introduction
of next-generation products, the frequent introduction of new or improved products,
and efforts to build stronger dealer networks, establish positions in foreign markets,
or otherwise expand distribution capabilities and market presence. Table 3.2 displays
the competitive weapons that firms often employ in battling rivals, along with their
primary effects with respect to price (P), cost (C), and value (V)—the elements of an
effective business model and the value-price-cost framework, discussed in Chapter 1.
Competitive Pressures Associated with the Threat
of New Entrants
New entrants into an industry threaten the position of rival firms since they will compete fiercely for market share, add to the number of industry rivals, and add to the
industry’s production capacity in the process. But even the threat of new entry puts
added competitive pressure on current industry members and thus functions as an
important competitive force. This is because credible threat of entry often prompts
industry members to lower their prices and initiate defensive actions in an attempt
TABLE 3.2
Common “Weapons” for Competing with Rivals
Types of Competitive Weapons
Primary Effects
Discounting prices, holding clearance
sales
Lowers price (P), increases total sales volume and market share, lowers profits
if price cuts are not offset by large increases in sales volume
Offering coupons, advertising items
on sale
Increases sales volume and total revenues, lowers price (P), increases unit
costs (C), may lower profit margins per unit sold (P – C)
Advertising product or service
characteristics, using ads to enhance
a company’s image
Boosts buyer demand, increases product differentiation and perceived value
(V), increases total sales volume and market share, but may increase unit costs
(C) and lower profit margins per unit sold
Innovating to improve product
performance and quality
Increases product differentiation and value (V), boosts buyer demand, boosts
total sales volume, likely to increase unit costs (C)
Introducing new or improved features, Increases product differentiation and value (V), strengthens buyer demand,
boosts total sales volume and market share, likely to increase unit costs (C)
increasing the number of styles to
provide greater product selection
Increasing customization of product
or service
Increases product differentiation and value (V), increases buyer switching
costs, boosts total sales volume, often increases unit costs (C)
Building a bigger, better dealer
network
Broadens access to buyers, boosts total sales volume and market share, may
increase unit costs (C)
Improving warranties, offering lowinterest financing
Increases product differentiation and value (V), increases unit costs (C),
incre
