Evaluating a Company’s External Environment - Summary and Key Points

Crafting and Executing Strategy: Concepts and Readings

20TH EDITION

By Arthur Thompson and A. J. Strickland III and John Gamble
Copyright: 2016, Mcgraw Hill
Publication Date: January 19, 2015

Observing, studying and analyzing company's external situation involves probing for answers to the following seven questions. These seven questions form the strategic analysis of external environment which is essential to develop effective strategy.

Does the industry offer attractive opportunities for growth? 

Identifying the industry's basic economic features and growth potential sets the stage for the analysis to come, since they play an important role in determining an industry's potential for providing sales revenue and profits. Industries differ significantly on such factors as market size and growth rate, geographic scope, life-cycle stage, the number and size of competitors,  industry capacity, and other conditions that describe the industry's demand-supply balance and opportunities for growth.

What kinds of competitive forces are industry members facing, and how strong is each force? 

This analysis examines: (1) competitive pressures exerted by industry rivals, (2) competitive pressures created by the sellers of substitutes, (3) Threat of new entrants into the market, (4) supplier bargaining power, and (5) buyer bargaining power. The nature and strength of the competitive pressures have to be examined force by force and their collective strength must be evaluated. Porter's five-forces model forces strategy makers to assess competitive forces and come out with ideas of capturing or growing market share in the presence of the competitive forces. How do you neutralize the competitive force and gain your market share and profit is determined in the competitive force analysis.

What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability? 

Industry and competitive conditions change because due to industry's macro-environment and changes originating within the industry. Such changes include: increasing globalization, changing buyer demographics, technological change, Internet-expansion, product and marketing innovations, entry or exit of major firms, diffusion of know-how, efficiency improvements in adjacent markets, reductions in uncertainty and business risk, government policy changes, and changing societal factors. Once an industry's change drivers have been identified, the analytical task becomes one of determining  the effect on of them industry growth and competition.

Are the change drivers causing demand for the industry's product to increase or decrease?
Are they acting to make competition more or less intense?
Will they lead to higher or lower industry profitability?

What market positions do industry rivals occupy—who is strongly positioned and who is not?

Strategic group mapping is a valuable tool for understanding the similarities, differences, strengths, and weaknesses inherent in the market positions of rival companies. Rivals in the same or nearby strategic groups are close competitors, whereas companies in distant strategic groups usually pose little or no immediate threat. The profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position. Often, industry competitive pressures and change drivers favor some strategic groups and hurt others. A strategic group analysis can be done to select the most profitable and suitable strategic group in which the company wants to enter, or even shift. The second use is that of creating a competitive strategy within the strategic group.

What strategic moves are rivals likely to make next? 

Competitor intelligence is collected to  anticipate their actions and take effective counteraction. Managers have to take rivals' probable actions into account in designing their own company's best course of action. Managers who fail to study competitors and know their strategies, risk being caught unprepared by the strategic moves of rivals.

What are the key factors for competitive success? 

An industry's key success factors (KSFs) are the strategy elements, product attributes,   and capabilities that all industry members must have in order to survive and prosper in the industry. KSFs vary by industry and may vary over time as well.

For any industry, KSFs can be deduced by answering three basic questions:

(1)Customer related - On what basis do buyers of the industry's product choose between the competing brands of sellers,

(2) Competition related - what resources and competitive capabilities must a company have to be competitively successful, and

(3) Weaknesses -  what shortcomings are almost certain to put a company at a significant competitive disadvantage?

Correctly diagnosing an industry's (KSFs) raises a company's chances of crafting a sound strategy.

What is the outlook for the company in the industry with the present strategy?  

Analysis of economy and industry analysis has to be summed to provide a forecast of performance of the company with the present strategy.  Clearly, insightful diagnosis of a company's external situation is an essential first step in crafting strategies that are well matched to industry and competitive conditions.

To do cutting-edge strategic thinking about the external environment, managers have to use analytical tools to answer the relevant questions.

Analytical Tools

PESTEL Analysis

Competitive Weapons for Increasing Market Share

Discounts, Clearance Sales
Offering discounts through coupons
Improving warranties
Offering attractive financing terms
Building a bigger and better dealer network
Increasing Advertising
Innovating and increasing product features and benefits
Innovating and improving quality so that external failures are minimum
Innovating and reducing cost and decreasing the price
Increasing the number packsizes, flavours, styles etc. so that customer gets a bigger choice
Increasing the customisation of the product or service

What weapons are being used by competitors?