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see dox, also need two answer

Two-part HW, Part 1: Learning Objectives need 1.5 pages answer; Part 2: Discussion Question (need 0.5-0.75-page answer) total 3 pages

Only use the pdf I provided as a reference! ! ! !

Your answers must be relevant to the textbook. The answers are easy to find under each chapter (pdf), just use some words and explanations from the textbook. Also, you must write down the page number (where the topic came from) after your answer.

ALL answers should from your own words or the textbook.

ALL answers should from your own words or the textbook.

Learning Objectives Chapters 3-4

CH.3 Evaluating a Company’s External Environment

LO 1 How to recognize the factors in a company’s broad macro-environment that may have strategic significance.

LO 2 How to use analytic tools to diagnose the competitive conditions in a company’s industry.

LO 3 How to map the market positions of key groups of industry rivals.

LO 4 How to determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability.

CH. 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness

LO 1 How to take stock of how well a company’s strategy is working.

LO 2 Why a company’s resources and capabilities are centrally important in giving the company a competitive edge over rivals.

LO 3 How to assess the company’s strengths and weaknesses in light of market opportunities and external threats.

LO 4 How a company’s value chain activities can affect the company’s cost structure and customer value proposition.

LO 5 How a comprehensive evaluation of a company’s competitive situation can assist managers in making critical decisions about their next strategic moves.

Discussion Question (CH 3-4) (need 0.5-0.75-page answer)

Briefly discuss the value of the “Framework for Competitor Analysis” and if you believe these four cover the basic framework for an analysis or should another dimension be added. And, if one needs to be added in your opinion, what do you suggest the fifth or even sixth dimension should be??

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CHAPTER 3

Evaluating a
Company’s
External
Environment

Learning Objectives

THIS CHAPTER WILL HELP YOU UNDERSTAND:

LO 1 How to recognize the factors in a company’s broad macro-environment that may have
strategic significance.

LO 2 How to use analytic tools to diagnose the competitive conditions in a company’s
industry.

LO 3 How to map the market positions of key groups of industry rivals.

LO 4 How to determine whether an industry’s outlook presents a company with sufficiently
attractive opportunities for growth and profitability.

© Bull’s Eye/Image Zoo/Getty Images

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No matter what it takes, the goal of strategy is to beat
the competition.

Kenichi Ohmae—Consultant and author

There is no such thing as weak competition; it grows
all the time.

Nabil N. Jamal—Consultant and author

Sometimes by losing a battle you find a new way to
win the war.

Donald Trump—President of the United States and

founder of Trump Entertainment Resorts

Every company operates in a broad “macro-environment”  that comprises six
principal components: political factors; economic conditions in the firm’s general
environment (local, country, regional, worldwide); sociocultural forces; technologi-
cal 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 (see Figure 3.2). 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 (political, economic, sociocultural, techno-
logical, environmental, legal/regulatory).

THE STRATEGICALLY RELEVANT FACTORS IN
THE COMPANY’S MACRO-ENVIRONMENT

LO 1

How to recognize
the factors in a
company’s broad
macro-environment
that may have
strategic significance.

In order to chart a company’s strategic course
wisely, managers must first develop a deep under-
standing of the company’s present situation. Two
facets of a company’s situation are especially
pertinent: (1) its external environment—most nota-
bly, 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 a basis for deciding on a long-
term direction and developing a strategic vision),
moves toward an evaluation of the most promising
alternative strategies and business models, and
culminates in choosing a specific strategy.

This chapter presents the concepts and analytic
tools for zeroing in on those aspects of a compa-
ny’s external environment that should be consid-
ered 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 the factors that determine
competitive success. In Chapter 4, we explore
the methods of evaluating a company’s internal
circumstances and competitive capabilities.

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CORE CONCEPT

PESTEL analysis can
be used to assess the
strategic relevance of the
six principal components
of the macro-environment:
Political, Economic,
Social, Technological,
Environmental, and Legal/
Regulatory forces.

FIGURE 3.1 From Thinking Strategically about the Company’s Situation to
Choosing a Strategy

Identify
promising
strategic
options
for the

company

Select the
best

strategy
and

business
model
for the

company

Form a
strategic
vision of
where the
company
needs to

head

Thinking
strategically

about a
company’s

external
environment

Thinking
strategically

about a
company’s

internal
environment

Since macro-economic factors affect different industries in different ways and
to different degrees, it is important for managers to determine which of these repre-
sent the most strategically relevant factors outside the firm’s industry boundaries.
By strategically relevant, we mean important enough to have a bearing on the deci-
sions the company ultimately makes about its long-term direction, objectives, strat-
egy, and business model. The impact of the outer-ring factors depicted in Figure 3.2
on a company’s choice of strategy can range from big to small. But even if those
factors change slowly or are likely to have a low impact on the company’s business
situation, they still merit a watchful eye.

For example, the strategic opportunities of cigarette producers to grow their
businesses are greatly reduced by antismoking ordinances, the decisions of
governments to impose higher cigarette taxes, and the growing cultural stigma
attached to smoking. Motor vehicle companies must adapt their strategies to cus-
tomer concerns about high gasoline prices and to environmental concerns about
carbon emissions. Companies in the food processing, restaurant, sports, and fit-
ness industries have to pay special attention to changes in lifestyles, eating habits,
leisure-time preferences, and attitudes toward nutrition and fitness in fashioning
their strategies. Table 3.1 provides a brief description of the components of the
macro-environment and some examples of the industries or business situations
that they might affect.

As company managers scan the external environment, they must be alert for
potentially important outer-ring developments, 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 biggest 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 that we concentrate the bulk of
our attention in this chapter.

CORE CONCEPT

The macro-environment
encompasses the broad
environmental context in
which a company’s industry
is situated.

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FIGURE 3.2 The Components of a Company’s Macro-Environment

Political
Factors

MACRO-E
NVIRONMENT

Economic Conditions

Legal/
Regulatory

Factors

Environmental
Forces

Technological
Factors

Sociocultural
Forces

COMPANY

Substitute
Products

Suppliers

Rival
Firms

New
Entrants

Buyers

Im
me

diat
e Ind

ustry and Competitive Environment

Thinking strategically about a company’s industry and competitive environment
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.

ASSESSING THE COMPANY’S INDUSTRY
AND COMPETITIVE ENVIRONMENT

LO 2

How to use analytic
tools to diagnose
the competitive
conditions in a
company’s industry.

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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.

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, university-
sponsored technology incubators, patent and copyright laws, and government control over
the Internet. Technological change can encourage the birth of new industries, such as the
connected wearable devices, and disrupt others, such as the recording industry.

Environmental
forces

These include ecological and environmental forces such as weather, climate, climate change,
and associated factors like 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.

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, such as minimum
wage legislation, affect certain types of industries (low-wage, labor-intensive industries) more
than others.

TABLE 3.1 The Six Components of the Macro-Environment

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 frame-
work.1 This framework, depicted in Figure 3.3, holds that competitive pressures on

THE FIVE FORCES FRAMEWORK

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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.

FIGURE 3. 3 The Five Forces Model of Competition: A Key Analytic Tool

Buyers

Competitive
pressures
stemming

from supplier
bargaining

power

Competitive pressures
coming from other firms in

the industry

Competitive pressures coming from
the threat of entry of new rivals

Competitive
pressures
stemming
from buyer
bargaining

power

Potential
New Entrants

Firms in Other
Industries O?ering
Substitute Products

Rivalry among
Competing

Sellers

Competitive pressures coming
from the producers of substitute

products

Suppliers

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.

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· 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:

FIGURE 3.4 Factors Affecting the Strength of Rivalry

Suppliers

Rivalry among Competing Sellers

Rivalry increases and becomes a stronger force when:

Rivalry decreases and becomes a weaker force under the opposite
conditions.

Substitutes

New Entrants

Buyers

• Buyer demand is growing slowly.
• Buyer costs to switch brands are low.
• The products of industry members are commodities or else
weakly di?erentiated.
• 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.

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· Rivalry increases when buyer demand is growing slowly or declining. Rapidly
expanding 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 pro-
motions, 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 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 switch-
ing 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.

· 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 buy-
ers 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.

· Rivalry is more intense when industry members have too much inventory or
significant 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 des-
perate effort to cope with the unsold inventory. A similar effect occurs when a prod-
uct 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, com-
panies 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 com-
petitors, 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.

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· 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 com-
mitted 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 of this sort 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 mar-
ket 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 particu-
lar competitive force.

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 market-
ing 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 pres-
ence. 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

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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, increasing the number of
styles to provide greater product
selection

Increases product differentiation and value (V ), strengthens buyer demand,
boosts total sales volume and market share, likely to increase unit costs (C)

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 low-
interest financing

Increases product differentiation and value (V), increases unit costs (C),
increases buyer switching costs, boosts total sales volume and market share

TABLE 3.2 Common “Weapons” for Competing with Rivals

to deter new entrants. Just how serious the threat of entry is in a particular market
depends on two classes of factors: (1) the expected reaction of incumbent firms to
new entry and (2) what are known as barriers to entry. The threat of entry is low in
industries where incumbent firms are likely to retaliate against new entrants with
sharp price discounting and other moves designed to make entry unprofitable (due
to the expectation of such retaliation). The threat of entry is also low when entry
barriers are high (due to such barriers). Entry barriers are high under the following
conditions:2

· There are sizable economies of scale in production, distribution, advertising, or
other activities. When incumbent companies enjoy cost advantages associated
with large-scale operations, outsiders must either enter on a large scale (a costly
and perhaps risky move) or accept a cost disadvantage and consequently lower
profitability.

· Incumbents have other hard to replicate cost advantages over new entrants.
Aside from enjoying economies of scale, industry incumbents can have cost
advantages that stem from the possession of patents or proprietary technology,

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exclusive partnerships with the best and cheapest suppliers, favorable locations,
and low fixed costs (because they have older facilities that have been mostly
depreciated). Learning-based cost savings can also accrue from experience in
performing certain activities such as manufacturing or new product develop-
ment or inventory management. The extent of such savings can be measured
with learning/experience curves. The steeper the learning/experience curve,
the bigger the cost advantage of the company with the largest cumulative pro-
duction volume. The microprocessor industry provides an excellent example
of this:

Manufacturing unit costs for microprocessors tend to decline about 20 percent each time
cumulative production volume doubles. With a 20 percent experience curve effect, if the
first 1 million chips cost $100 each, once production volume reaches 2 million, the unit
cost would fall to $80 (80 percent of $100), and by a production volume of 4 million, the
unit cost would be $64 (80 percent of $80).3

· Customers have strong brand preferences and high degrees of loyalty to seller.
The stronger the attachment of buyers to established brands, the harder it is for a
newcomer to break into the marketplace. In such cases, a new entrant must have
the financial resources to spend enough on advertising and sales promotion to
overcome customer loyalties and build its own clientele. Establishing brand rec-
ognition and building customer loyalty can be a slow and costly process. In addi-
tion, if it is difficult or costly for a customer to switch to a new brand, a new
entrant may have to offer a discounted price or otherwise persuade buyers that its
brand is worth the switching costs. Such barriers discourage new entry because
they act to boost financial requirements and lower expected profit margins for new
entrants.

· Patents and other forms of intellectual property protection are in place. In a
number of industries, entry is prevented due to the existence of intellectual
property protection laws that remain in place for a given number of years. Often,
companies have a “wall of patents” in place to prevent other companies from
entering with a “me too” strategy that replicates a key piece of technology.

· There are strong “network effects” in customer demand. In industries where buy-
ers are more attracted to a product when there are many other users of the product,
there are said to be “network effects,” since demand is higher the larger the net-
work of users. Video game systems are an example because users prefer to have
the same systems as their friends so that they can play together on systems they all
know and can share games. When incumbents have a large existing base of users,
new entrants with otherwise comparable products face a serious disadvantage in
attracting buyers.

· Capital requirements are high. The larger the total dollar investment needed to
enter the market successfully, the