Chapter 3: Analyzing a Company’s External Environment

Team 1: Godfrey Fenyi, Emmanuel Shirima and Matt Poole

• Two considerations

– Company’s external ormacro-environment

• Industry and competitive conditions

– Company’s internal ormicro-environment

• Competencies, capabilities,resource strengths and weaknesses,and competitiveness

What Is Situation Analysis?

Key Questions Regarding theIndustry and Competitive Environment

Industry’s dominant economic traits

Competitive forces and strength of each force

Drivers of change in the industry

Competitor analysis

Key success factors

Conclusions: Industry attractiveness

Question #1: What are the Industry’s Dominant Economic Traits?

• Market size and growth rate• Scope of competitive rivalry• Number of rivals• Buyer needs and requirements• Production capacity• Pace of technological change• Vertical integration• Product innovation• Degree of product differentiation• Economies of scale• Learning and experience curve effects

• Objectives are to identify

– Main sources of competitive forces

– Strength of these forces

• Key analytical tool

– Five Forces Modelof Competition

Question #2: What Kinds of Competitive Forces Are Industry Members Facing?

Question #2: What Kinds of Competitive Forces Are Industry Members Facing?

The Five Forces Model of Competition

What Are the Typical Weapons for Competing?

• Vigorous price competition

• 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

• Higher levels of advertising

• Stronger product innovation capabilities

• Better customer service

• Stronger capabilities to provide buyers with custom-made products

Strategic Implications of theFive Competitive Forces

• Competitive environment is unattractive fromthe standpoint of 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

• 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 of theFive Competitive Forces

Strategic Implications of theFive Competitive Forces

Question #3: What Factors Are Driving Industry Change?

• Industries change because forcesare driving industry participantsto alter their actions

• Driving forces are themajor underlying causesof changing industry andcompetitive conditions

Question #4: What Market Positions Do Rivals Occupy?

• One technique to revealdifferent competitive positionsof industry rivals isstrategic group mapping

• A strategic group is acluster of firms in an industrywith similar competitiveapproaches and market positions

Question #5: What Strategic Moves Are Rivals Likely to Make?

• A firm’s best strategic moves are 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 #6: What Are the Key Factors for Competitive Success?

• KSFs are those competitive factors most affecting every industry member’s ability to prosper. They concern

– Specific strategy elements

– Product attributes

– Resources

– Competencies

– Competitive capabilities

Question #7: Does the Outlook for the Industry Present an Attractive Opportunity?

• Involves assessing whether the industryand competitive environment is attractiveor unattractive for earning good profits

• Under certain circumstances, a firm uniquelywell-situated in an otherwise unattractive industry can still earn unusually good profits

– Attractiveness is relative, not absolute

– Conclusions have to be drawn from theperspective of a particular company

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Summary• Key Questions Regarding the

Industry and Competitive Environment– Question #1: What are the Industry’s Dominant

Economic Traits?– Question #2: What Kinds of Competitive Forces Are

Industry Members Facing?– The Five Forces Model of Competition– Question #3: What Factors Are Driving Industry

Change and What Impacts Will They Have?– Question #4: What Market Positions Do Rivals

Occupy?– Question #5: What Strategic Moves

Are Rivals Likely to Make?– Question #6: What Are the Key Factors for

Competitive Success?– Question #7: Does the Outlook for the Industry

Present an Attractive Opportunity?

Sources

• Thompson, A, Strickland III, A., Gamble, J. (2008). Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, 14/e McGraw Hill.

• McGraw-Hill Online Learning Center. Www.mhhe.com/thompson

• Www.utube.com

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