3

Analyzing a
Chapter Title
Company’s
External
Environment

Screen graphics created by:

16/e PPT Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

 Understanding the Factors that
Determine a Company’s Situation
 Diagnosing a company’s situation has two
facets
 Assessingthe company’s external or
macro-environment
 Industry and competitive conditions
 Forces acting to reshape this environment
 Assessingthe company’s internal or
micro-environment
 Market position and competitiveness
 Competencies, capabilities, resource strengths
and weaknesses, and competitiveness
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 Fig. 3.1: From Thinking Strategically about the
Company’s Situation to Choosing a Strategy

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Fig. 3.2: The Components of a Company’s Macro-environment

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 Thinking Strategically about a
Company’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 scan
the external environment to
 Identify potentially important external developments
 Assess their impact and influence
 Adapt a company’s direction and strategy as needed
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 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?
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 Question 1: What are the Industry’s
Dominant Economic Traits?
 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
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 Question 2: What Kinds of Competitive
Forces Are Industry Members Facing?

 Objectives are to identify

 Main sources of competitive forces

 Strength of these forces

 Key analytical tool

 Five Forces Model

of Competition

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Fig. 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 competitive
pressures associated with each of
the five forces

Step 2: Evaluate the strength of each

competitive force -- fierce, strong,
moderate to normal, or weak?

Step 3: Determine whether the collective

strength of the five competitive forces
is conducive to earning attractive profits
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Fig. 3.4: Weapons for Competing and Factors
Affecting Strength of Rivalry

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Fig. 3.5: Factors Affecting Threat of Entry

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Fig. 3.6: Factors Affecting Competition From Substitute Products

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Fig. 3.7: Factors Affecting Bargaining Power of Suppliers

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Fig. 3.8: Factors Affecting Bargaining Power of Buyers

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Question 3: What Factors Are Driving Industry
Change and What Impacts Will They Have?

 Industries change because forces

are driving industry participants
to alter their actions
 Driving forces are the
major underlying causes
of changing industry and
competitive conditions
 Where do driving forces originate?
 Outer ring of macroenvironment
 Inner ring of macroenvironment
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 Question 4: What Market Positions
Do Rivals Occupy?

 One technique to reveal

different competitive positions
of industry rivals is
strategic group mapping

A strategic group is a
cluster of firms in an industry
with similar competitive
approaches and market positions
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 Strategic Group Mapping

 Firms
in same strategic group have 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 appeal
to similar types of buyers
 Use identical technological approaches
 Offer buyers similar services
 Cover same geographic areas
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 Question 5: What Strategic Moves Are
Rivals Likely to Make Next?
A firm’s best strategic moves are affected by
 Current strategies of competitors
 Future actions of competitors
 Profiling
key rivals involves gathering
competitive 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
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 Competitor Analysis

 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 gain
market share, and which ones
seen 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?
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 Question 6: What Are the Key
Factors for Competitive Success?
 KSFs are those competitive factors most affecting
every industry member’s ability to prosper
 KSFs concern
 Specific strategy elements
 Product attributes
 Resources
 Competencies
 Competitive capabilities
that a company needs to be competitively successful
 KSFs are attributes that spell the difference between
 Profit and loss
 Competitive success or failure
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Question 7: Does the Outlook for the Industry
Present an Attractive Opportunity?
 Involves assessing whether the industry
and competitive environment is attractive
or unattractive for earning good profits
 Under certain circumstances, a firm uniquely
well-situated in an otherwise unattractive
industry can still earn unusually good profits
 Attractiveness is relative, not absolute
 Conclusions about attractiveness have
to be drawn from the perspective of a
particular company

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