Chapter 3: Evaluating a

Company¶s External
Environment

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.
Troy University

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 c

ß nalysis is the critical starting
point of
strategic thinking.´

Kenichi Ohmae
Consultant and uthor
ßThings are always different ±
the art is figuring out which
differences matter.´

Laszlo Birinyi
Investments Manager
Chapter Learning Objectives
. 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.

. 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.


 Chapter Roadmap
ý The Strategically Relevant Components of a
Company¶s External Environment
ý Thinking Strategically bout a Company¶s Industry
and Competitive Environment
o  : What re the Industry¶s Dominant Economic
Features?
o : How Strong re Competitive Forces?
o !: What Forces re Driving Industry Change and
What Impacts Will They Have?
o ": What Market Positions Do Rivals Occupy²
Who Is Strongly Positioned and Who Is Not?
o #: What Strategic Moves re Rivals Likely to
Make Next?
o $: What re the Key Factors for Future
Competitive Success?
o %: Does the Outlook for the Industry Offer the
Company a Good Opportunity to Earn ttractive Profits?

 Understanding the Factors that
Determine a Company¶s Situation
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Figure 3.: From Thinking Strategically bout the
Company¶s Situation to Choosing a Strategy
Figure 3.2: The Components of a Company¶s Macro environment
Thinking Strategically bout a
Company¶s Macro environment
ý company¶s macro environment includes all
' '   outside its
boundaries
ý Diagnosing a company¶s external situation involves
assessing  ('  that have a
bearing on the decisions a company¶s makes about
its
Direction
Objectives
Strategy
Business model
ý Requires that company managers  
& to
Identify potentially important external developments
ssess their impact and influence
dapt a company¶s direction and strategy as needed

 Key Questions Regarding the
Industry and Competitive Environment

What are the

industry¶s
dominant
economic traits?

What forces
How strong are
are driving
competitive
change in the
forces?
industry?

What market What are the How attractive

positions do key factors for is the industry
rivals occupy? competitive from a profit
What moves will
success? perspective?
they make next?
Question : What are the Industry¶s
Dominant Economic Traits?
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Question 2: How Strong re
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 nalyzing the Five Competitive
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size and competitive capability
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other competitive weapons to boost volume
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of visions, objectives, strategies,
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What Causes Rivalry to be †)+

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 Test Your Knowledge
The rivalry among competing sellers in an industry
intensifies
. 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.
 22
 Competitive Pressures
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Figure 3.: Factors ffecting Threat of Entry
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Competitive Pressures From Suppliers
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 Test Your Knowledge
strategic group map is a helpful analytical tool for
. 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.
 8
Question : What Strategic Moves
re Rivals Likely to Make Next?
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Example: KSFs for Bottled Water Industry

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 Factors to Consider in
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 Core Concept: ssessing
Industry ttractiveness

The  to which an  (

is   or   is not the
same for all industry participants
or potential entrants.
The   an industry
presents  partly on a
(.*( to   them.
 Test Your Knowledge
Which of the following is  an important factor for company
managers to consider in drawing conclusions about whether
the industry presents an attractive opportunity?
. 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
 2