Transcript
McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved
Chapter 3: Evaluating a Chapter 3: Evaluating a Company’s External Company’s External
EnvironmentEnvironment
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University
““Analysis is the critical starting Analysis is the critical starting
point ofpoint of
strategic thinking.”strategic thinking.”
Kenichi OhmaeKenichi OhmaeConsultant and AuthorConsultant and Author
““Things are always different –Things are always different –
the art is figuring out which the art is figuring out which
differences matter.” differences matter.”
Laszlo BirinyiLaszlo BirinyiInvestments ManagerInvestments Manager
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Chapter Learning Objectives
1. To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions.
2. To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak.
3. To learn how to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability.
4. To understand why in-depth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a company’s situation.
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Chapter Roadmap
The Strategically Relevant Components of a Company’s External Environment
Thinking Strategically About a Company’s Industry and Competitive Environment
Question 1: What Are the Industry’s Dominant Economic Features?
Question 2: How Strong Are Competitive Forces? Question 3: What Forces Are Driving Industry Change and
What Impacts Will They Have? Question 4: What Market Positions Do Rivals Occupy—
Who Is Strongly Positioned and Who Is Not? Question 5: What Strategic Moves Are Rivals Likely to
Make Next? Question 6: What Are the Key Factors for Future
Competitive Success? Question 7: Does the Outlook for the Industry Offer the
Company a Good Opportunity to Earn Attractive Profits?
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Diagnosing a company’s situation has two facetsAssessing the company’s external or macro-
environment
Industry and competitive conditions
Forces acting to reshape this environment
Assessing the company’s internal ormicro-environment
Market position and competitiveness
Competencies, capabilities,resource strengths andweaknesses, and competitiveness
Understanding the Factors that Determine a Company’s Situation
Figure 3.1: From Thinking Strategically About theCompany’s Situation to Choosing a Strategy
Figure 3.2: The Components of a Company’s Macro-environment
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Thinking Strategically About aCompany’s Macro-environment
A company’s macro-environment includes all relevant factors and influences outside its boundaries
Diagnosing a company’s external situation involves assessing strategically important factors that have a bearing on the decisions a company’s makes about its
Direction Objectives Strategy Business model
Requires that company managers scanthe external environment to
Identify potentially important external developments Assess their impact and influence Adapt a company’s direction and strategy as needed
Key Questions Regarding theIndustry and Competitive Environment
What are the industry’s dominant economic traits?
How strong are competitive forces?
What forces are driving change in the industry?
What market positions do rivals occupy? What moves will they make next?
What are the key factors for competitive success?
How attractive is the industry from a profit perspective?
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Market size and growth rate Number of rivals Scope of competitive rivalry Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions Pace of technological change Vertical integration Economies of scale Learning and experience curve effects
Question 1: What are the Industry’sDominant Economic Traits?
Table 3.1: What to Consider in Identifyingan Industry’s Dominant Economic Features
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Learning/Experience Effects
Learning/experience effects exist when a company’s unit costs decline as its cumulative production volume increases because of
Accumulating production know-how
Growing mastery of the technology
The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
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Question 2: How Strong Are Competitive Forces?
Objectives are to identify
Main sources of competitive forces
Strength of these forces
Key analytical tool
Five Forces Model of Competition
Figure 3.3: The Five Forces Model of Competition
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Analyzing the Five Competitive Forces: How to Do It
Step 1: Identify the specific competitivepressures associated with each ofthe five forces
Step 2: Evaluate the strength of eachcompetitive force – fierce, strong,moderate to normal, or weak?
Step 3: Determine whether the collectivestrength of the five competitive forcesis conducive to earning attractive profits
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Usually the strongest of the five forces
Key factor in determining strength of rivalry
How aggressively are rivals using various weapons of competition to improve their market positions and performance?
Competitive rivalry is a combativecontest involving
Offensive actions
Defensive countermoves
Competitive PressuresAmong Rival Sellers
Figure 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry
What Are the TypicalWeapons for Competing?
Lower prices
More or different performance features
Better product performance
Higher quality
Stronger brand image and appeal
Wider selection of models and styles
Bigger/better dealer network
Low interest rate financing
Better or more ads
Stronger product innovation capabilities
Better customer service
Stronger capabilities to provide buyers with custom-made products
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Competitors are active in making fresh moves to improve market standing and business performance
Slow market growth Number of rivals increases and rivals are ofequal
size and competitive capability Buyer costs to switch brands are low Industry conditions tempt rivals to use price cuts or
other competitive weapons to boost volume A successful strategic move carries a big payoff Diversity of rivals increases in terms
of visions, objectives, strategies,resources, and countries of origin
Outsiders acquire weak firms in theindustry and use their resources to transformnew firms into major market contenders
What Causes Rivalry to be Stronger?
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Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals
Rapid market growth
Products of rivals are stronglydifferentiated and customer loyalty is high
Buyer costs to switch brands are high
There are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business
What Causes Rivalry to be Weaker?
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Test Your Knowledge
The rivalry among competing sellers in an industry intensifies
A. when buyer demand for the product is growing rapidly.
B. when customers are brand loyal and their costs to switch to competing brands or substitute products are relatively high.
C. when buyer demand is strong and sellers have little or no excess capacity and only minimal inventories.
D. as the number of rivals increases and as they become more equal in size and competitive capability.
E. when the products of rival sellers are highly differentiated products and the industry consists of so many rivals that any one company’s actions have little direct impact on rivals’ business.
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Seriousness of threat depends on
Size of pool of entry candidatesand available resources
Barriers to entry
Reaction of existing firms
Evaluating threat of entry involves assessing
How formidable entry barriers are for each type of potential entrant and
Attractiveness of growth and profit prospects
Competitive PressuresAssociated With Potential Entry
Figure 3.5: Factors Affecting Threat of Entry
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Sizable economies of scale
Cost and resource disadvantages independent of size
Brand preferences and customer loyalty
Capital requirements and/or otherspecialized resource requirements
Access to distribution channels
Regulatory policies
Tariffs and international trade restrictions
Ability of industry incumbents to launch vigorous initiatives to block a newcomer’s entry
Common Barriers to Entry
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There’s a sizable pool of entry candidates
Entry barriers are low
Industry growth is rapid and profit potential is high
Incumbents are unwilling or unable to contest a newcomer’s entry efforts
When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence
When Is the Threat of Entry Stronger?
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There’s only a small pool of entry candidates
Entry barriers are high
Existing competitors are struggling to earn good profits
Industry’s outlook is risky
Industry growth is slow or stagnant
Industry members will strongly contestefforts of new entrants to gain a market foothold
When Is the Threat of Entry Weaker?
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Competitive Pressures from Substitute Products
Substitutes matter when customersare attracted to the products of
firms in other industries
Sugar vs. artificial sweeteners
Eyeglasses and contact lensvs. laser surgery
Newspapers vs. TV vs. Internet
ConceptConcept
ExamplesExamples
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How to Tell Whether SubstituteProducts Are a Strong Force
Whether substitutes are readilyavailable and attractively priced
Whether buyers view substitutesas being comparable or better
How much it costs end usersto switch to substitutes
Figure 3.6: Factors Affecting Competition From Substitute Products
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There are many good substitutes readily available
Substitutes are attractively priced
The higher the quality and performance of substitutes
The lower the end user’s switching costs
End users grow more comfortable with using substitutes
When Is the CompetitionFrom Substitutes Stronger?
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Good substitutes are not readily available or do not exist
Substitutes are higher priced relative to performance they deliver
End users incur high costsin switching to substitutes
When Is the CompetitionFrom Substitutes Weaker?
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Whether supplier-seller relationships represent a weak or strong competitive force depends on
Whether suppliers can exercisesufficient bargaining leverage toinfluence terms of supply in their favor
Nature and extent of supplier-sellercollaboration in the industry
Competitive Pressures From Suppliersand Supplier-Seller Collaboration
Figure 3.7: Factors Affecting Bargaining Power of Suppliers
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Industry members incur highcosts in switching their purchasesto alternative suppliers
Needed inputs are in short supply Supplier provides a differentiated input
that enhances the quality of performanceof sellers’ products or is a valuablepart of sellers’ production process
There are only a few suppliers of a specific input
Some suppliers threaten to integrate forward
When Is the BargainingPower of Suppliers Stronger?
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Item being supplied is a commodity
Seller switching costs to alternative suppliers are low
Good substitutes exist or new ones emerge
Surge in availability of supplies occurs
Industry members account for a bigfraction of suppliers’ total sales
Industry members threatento integrate backward
Seller collaboration with selected suppliers provides attractive win-win opportunities
When Is the Bargaining Power of Suppliers Weaker?
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Industry members often forge strategic partnerships with select suppliers to
Reduce inventory and logistics costs
Speed availability ofnext-generation components
Enhance quality of parts being supplied
Squeeze out cost savings for both parties
Competitive advantage potential may accrue to those industry members (sellers) doing the best job of managing supply-chain relationships
Competitive Pressures: Collaboration Between Sellers and Suppliers
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Whether the relationships between industry members and buyers represent a weak or strong competitive force depends on
Whether buyers have sufficientbargaining leverage to influenceterms of sale in their favor
Extent and competitive importance ofstrategic partnerships between certain industry members and the buyers
Competitive Pressures From Buyersand Seller-Buyer Collaboration
Figure 3.8: Factors Affecting Bargaining Power of Buyers
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Buyer switching costs to competing brands or substitutes are low
Buyers are large and can demand concessions Large-volume purchases by buyers are important to
sellers Buyer demand is weak or declining Only a few buyers exists Identity of buyer adds prestige
to seller’s list of customers Quantity and quality of information
available to buyers improves Buyers have ability to postpone purchases until later Buyers threaten to integrate backward
When Is the BargainingPower of Buyers Stronger?
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Buyers purchase item infrequently or in small quantities
Buyer switching costs tocompeting brands are high
Surge in buyer demandcreates a “sellers’ market”
Seller’s brand reputation is important to buyer
A specific seller’s product delivers qualityor performance that is very important to buyer
Buyer collaboration with selected sellers provides attractive win-win opportunities
When Is the BargainingPower of Buyers Weaker?
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Partnerships between industry members and some/many of their customers can impact competitive pressures
Collaboration may result inmutual benefits regarding Just-in-time deliveries Order processing Electronic invoice payments Data sharing
Competitive advantage may accrue to those industry members doing the best job of partnering with their customers
Competitive Pressures: CollaborationBetween Sellers and Buyers
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For Discussion: Your Opinion
Explain why low switching costs and weakly
differentiated products tend to give buyers a
high degree of bargaining power.
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Competitive environment isunattractive from the standpointof earning good profits when
Rivalry is vigorous
Entry barriers are lowand entry is likely
Competition from substitutes is strong
Suppliers and customers haveconsiderable bargaining power
Strategic Implications ofthe Five Competitive Forces
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Competitive environment is ideal froma profit-making standpoint when
Rivalry is moderate
Entry barriers are highand no firm is likely to enter
Good substitutesdo not exist
Suppliers and customers arein a weak bargaining position
Strategic Implications ofthe Five Competitive Forces
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Objective is to craft a strategy to
Insulate firm fromcompetitive pressures
Initiate actions to producesustainable competitive advantage
Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry
Coping With theFive Competitive Forces
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Question 3: What Forces Are Driving Industry Change and What Impacts Will They Have?
Industries change because forcesare driving industry participantsto alter their actions
Driving forces are themajor underlying causesof changing industry andcompetitive conditions
Where do driving forces originate?Outer ring of macroenvironment
Inner ring of macroenvironment
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STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years
Usually no more than 3 - 4 factorsqualify as real drivers of change
STEP 2: Assess impactAre driving forces acting to cause market
demand for product to increase or decrease?Are driving forces acting to make competition
more or less intense?Will driving forces lead to higher or lower industry
profitability?
STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces
Analyzing Driving Forces: Three Key Steps
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Changes in long-term industry growth rate
Increasing globalization of industry
Emerging new Internet capabilitiesand applications
Changes in who buys theproduct and how they use it
Product innovation
Technological change/process innovation
Marketing innovation
Common Types of Driving Forces
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Entry or exit of major firms
Diffusion of technical knowledge
Changes in cost and efficiency
Consumer preferences shiftfrom standardized todifferentiated products (or vice versa)
Changes in degree of uncertainty and risk
Regulatory policies / government legislation
Changing societal concerns, attitudes, and lifestyles
Common Types of Driving Forces (con’t)
Table 3.2: The Most Common Driving Forces
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Question 4: What MarketPositions Do Rivals Occupy?
One technique to reveal different competitive positions of industry rivals isstrategic group mapping
A strategic group is a cluster of firms in an industry with similar competitiveapproaches and market positions
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Firms in same strategic grouphave two or more competitive characteristics in common Have comparable product line breadth
Sell in same price/quality range
Emphasize same distribution channels
Use same product attributes to appealto similar types of buyers
Use identical technological approaches
Offer buyers similar services
Cover same geographic areas
Strategic Group Mapping
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STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another
STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy space to same strategic group
STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales
Procedure for Constructing a Strategic Group Map
Example: Strategic Group Map of Selected Automobile Manufacturers
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Variables selected as axes should not be highly correlated
Variables chosen as axes should expose big differences in how rivals compete
Variables do not have to be either quantitative or continuous
Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group
If more than two good competitive variables can be used, several maps can be drawn
Guidelines: Strategic Group Maps
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Interpreting Strategic Group Maps
The closer strategic groups are on the map, the stronger the cross-group competitive rivalry tends to be
Not all positions on the mapare equally attractive
Driving forces and competitive pressures oftenfavor some strategic groups and hurt others
Profit potential of different strategicgroups varies due to strengths andweaknesses in each group’s market position
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Test Your Knowledge
A strategic group map is a helpful analytical tool for
A. assessing why competitive pressures and driving forces usually impact the biggest strategic groups more so than the smaller groups.
B. determining which companies have how big a competitive advantage and how good their prospects are for increasing their market shares.
C. determining which company is the most profitable in the industry and why it is doing so well.
D. determining who competes most closely with whom; evaluating whether industry driving forces and competitive pressures favor some strategic groups and hurt others; and ascertaining whether the profit potential of different strategic groups varies due to the strengths and weaknesses in each group’s respective market positions.
E. pinpointing which of the five competitive forces is the strongest and which is the weakest.
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A firm’s best strategic movesare affected by Current strategies of competitors
Future actions of competitors
Profiling key rivals involves gatheringcompetitive intelligence about Current strategies
Most recent actions and public announcements
Resource strengths and weaknesses
Efforts being made to improve their situation
Thinking and leadership styles of top executives
Question 5: What Strategic MovesAre Rivals Likely to Make Next?
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Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing Which rival has the best strategy? Which
rivals appear to have weak strategies?
Which firms are poised to gainmarket share, and which onesseen destined to lose ground?
Which rivals are likely to rank among the industry leaders five years from now? Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader?
Competitor Analysis
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Which rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue?
Which rivals have a strong incentive, along with resources, to make major strategic changes?
Which rivals are good candidates to be acquired? Which rivals have the resources to acquire others?
Which rivals are likely to enter new geographic markets?
Which rivals are likely to expand their product offerings and enter new product segments?
Things to Consider inPredicting Moves of Rivals
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For Discussion: Your Opinion
Why does a company need to bother with
studying competitors and trying to predict what
moves rivals will make next? Why can’t it just
choose whatever strategy it wants or make
whatever moves in the marketplace it wishes
without first worrying about what rivals are
going to do?
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Key Success Factors (KSFs) are competitive factors and attributes that affect every industry member’s ability to be competitively and financially successful
KSFs are those particular attributes that are so important that they spell the difference between Profit and loss Competitive success or failure
KSFs can relate to Specific strategy elements Product attributes Resources Competencies Competitive capabilities Market achievements
Question 6: What Are the KeyFactors for Competitive Success?
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The answers to 3 questions often help pinpoint an industry’s KSFs
On what basis do customers choosebetween competing brands of sellers?
What resources and competitive capabilities does a company need to have to be competitively successful?
What shortcomings are likely to place a company at a significant competitive disadvantage?
Rarely are there more than 5 - 6 factors that are truly key to the future financial and competitive success of industry members
Identifying Industry Key Success Factors
Table 3.3: Common Types of Industry Key Success Factors
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Access to distribution – to get a company’s brand stocked andfavorably displayed in retail outlets
Image – to induce consumers tobuy a particular company’s product(brand name and attractiveness of packaging are key deciding factors)
Low-cost production capabilities – to keep selling prices competitive
Sufficient sales volume – to achievescale economies in marketing expenditures
Example: KSFs for Bottled Water Industry
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Example: KSFs forReady-to-Wear Apparel Industry
Appealing designs and color combinations – to create buyer appeal
Low-cost manufacturing efficiency – to keep selling prices competitive
Strong network of retailers/company-owned stores – to allow storesto keep best-selling items in stock
Clever advertising – to effectivelyconvey a specific image to induce consumers to purchase a particular label
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Involves assessing whether the industry and competitive environment presents a company with an attractive or unattractive opportunity for earning good profits
Factors to consider: Industry growth potential Whether competitive forces are growing stronger/weaker Whether driving forces will favorable/unfavorably impact
industry profitability Degree of risk and uncertainty in industry’s future Whether the industry confronts severe problems Firm’s competitive position in industry vis-à-vis rivals Firm’s potential to capitalize on industry opportunities or
the vulnerabilities of weaker rivals Whether a firm has sufficient competitive strength to
defend against unattractive industry factors
Question 7: Does the Outlook for theIndustry Offer an Attractive Opportunity?
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Factors to Consider inAssessing Industry Attractiveness
As a general proposition If an industry’s overall profit prospects are
above average, the industry environment is basically attractive
If an industry’s overall profit prospects are below average, the industry environment is basically unattractive
However
Attractiveness is relative, not absolute
Conclusions about attractiveness have to be drawn from the perspective of a particular company
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An industry is unlikely to be equally attractive or unattractive to all industry members Industry environments attractive to strong
competitors may be unattractive to weak competitorsA favorably positioned company may survey an
industry environment and see opportunities that weak competitors have little or no ability to capture
Industry environments attractive to insiders may be unattractive to potential entrants
Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn good profits by taking sales and market share away from weaker competitors
Factors to Consider inAssessing Industry Attractiveness
Core Concept: AssessingIndustry Attractiveness
The degree to which an industry
is attractive or unattractive is not the
same for all industry participants
or potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
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Test Your Knowledge
Which of the following is not an important factor for company managers to consider in drawing conclusions about whether the industry presents an attractive opportunity?
A. Whether powerful competitive forces are squeezing industry profitability to subpar levels and whether competition appears destined to grow stronger or weaker
B. The industry’s growth potential and the degree of uncertainty and risk in the industry’s future
C. Whether industry profitability will be affected favorably or unfavorably by the prevailing driving forces
D. How many of the industry’s key success factors do companies in the industry typically incorporate into their strategies
E. The company’s ability to capitalize on the vulnerabilities of weakly positioned rivals and whether the company has sufficient competitive strength to defend against or counteract the factors that make the industry unattractive
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