19e Section6 LN Chapter03

Chapter 3 Evaluating a Company’s External Environment

CHAPTER 3

EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT CHAPTER SUMMARY Chapter 3 presents the concepts and analytical tools for assessing a company’s 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 company’s future market arena.

LECTURE OUTLINE I. Introduction 1. The task of crafting strategy begins with an appraisal of the company’s present situation. Two facets of a company’s situation are especially pertinent: a. The competitive conditions in the industry in which the company operates—its external environment. b. The company’s resources and organizational capabilities—its internal environment. 2. Figure 3.1, From Thinking Strategically about the Company’s Situation to Choosing a Strategy, depicts the sequence recommended for managers to pursue. II. Question 1: What are the Strategically Relevant Components of a Company’s Macro-Environment? 1. Every company operates in a broad “macro-environment” that comprises six principal components: a. 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. 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 company’s industry is situated.

569 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

569

Chapter 3 Evaluating a Company’sExternal 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 Company’s Macro-environment, identifies the arenas within an organization’s macro-environment, while table 3.1 provides descriptions of each of the seven components of the macro-environment. 3. A company’s macro-environment includes the most relevant factors and influences outside a company’s boundaries. 4. For the most part, influences coming from the outer ring of the macro-environment have a low impact on a company’s business situation and shape only the edges of the company’s direction and strategy. 5. The factors and forces in a company’s macro-environment having the biggest strategy-shaping impact almost always pertain to the company’s immediate competitive environment. III. Assessing the Company’s Industry and Competitive Environment 1. Thinking strategically about a company’s competitive environment requires the manager to examine six additional questions: a. How strong are the industry’s 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 occupy—who is strongly positioned and who is not? d. What strategic moves are rivals likely to make next? e. What are the industry’s 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 company’s external situation. IV. Question 2: How Strong are the Industry’s 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. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

570


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 industry’s 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 newcomer’s product offering) e. Additional customer services

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

571


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 industry’s 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 user’s 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 can’t 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


572


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 industry’s 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


573


•

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 industry’s profitability. X. Matching Company Strategy to Competitive Conditions Effectively matching a company’s 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 company’s 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 industry’s 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 industry’s 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. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

574


XIII. Identifying an Industry’s 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 industry’s product through a different mix of dealers and retail outlets. e. Technological change and manufacturing process innovation – Advances in technology can dramatically alter an industry’s 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.


575


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 industry’s 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 dynamics—where the real payoff for strategy making comes—is 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 industry’s 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


576


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 group’s 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 Pabst’s circle? Answer: The diagram reveals Anheuser-Bush’s 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-Bush’s circle is larger than Pabst’s 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 industry’s 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 Porter’s Framework for Competitor Analysis points to four indicators of a rival’s likely strategic moves and countermoves. These include a rival’s 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)? © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

577


4. Objectives – An appraisal of a rival’s 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 rival’s capabilities (and efforts to acquire new capabilities) serve as a strong signal of future strategic actions (and reactions to your company’s moves). Assessing a rival’s capabilities involves sizing up not only their strengths in this respect, but their weaknesses as well. 6. Assumptions – How a rival’s 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 Avon’s 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 competitor’s 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 industry’s 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 company’s product offering, resources, and capabilities measure up against and industry’s 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 industry’s key success factors: a. On what basis do buyers of the industry’s 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?


578


4. Only rarely are there more than five or six key factors for future competitive success. 5. Correctly diagnosing an industry’s KSFs raises the company’s 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 company’s 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). © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

579


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 & Sons’s 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.


580


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.


581

19e Section6 LN Chapter03

Recommend Documents