Evaluating a Company’s External Environment

1. Evaluating a Company’s External Environment Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region

2. Understanding the Factors that Determine a Company’s Situation • Diagnosing a company’s situation has two facets • Assessing the company’s external ormacro-environment • Industry and competitive conditions • Forces acting to reshape this environment • Assessing the company’s internal ormicro-environment • Market position and competitiveness • Competencies, capabilities, resource strengthsand weaknesses, and competitiveness

3. Fig. 3.1: From Thinking Strategically about theCompany’s Situation to Choosing a Strategy

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

5. Thinking Strategically about aCompany’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 bearingon the decisions a company’s makes about its • Direction • Objectives • Strategy • Business model • Requires that company managers scanthe external environment to • Identify potentially important external developments • Assess their impact and influence • Adapt a company’s direction and strategy as needed

6. What are the industry’s dominant economic traits? How strong are competitive forces? What forces are driving change in the industry? How attractive is the industry from a profit perspective? What are the key factors for competitive success? What market positions do rivals occupy? What moves will they make next? Key Questions Regarding theIndustry and Competitive Environment

7. Question 1: What are the Industry’sDominant 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

9. Question 2: What Kinds of CompetitiveForces Are Industry Members Facing? • Objectives are to identify • Main sources of competitive forces • Strength of these forces • Key analytical tool • Five Forces Modelof Competition

10. Fig. 3.3: The Five Forces Model of Competition

11. Analyzing the Five Competitive Forces: How to Do It Step 1:Identify the specific competitivepressures associated with each ofthe five forces Step 2:Evaluate the strength of eachcompetitive force -- fierce, strong,moderate to normal, or weak? Step 3:Determine whether the collectivestrength of the five competitive forcesis conducive to earning attractive profits

12. Fig. 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry

13. Fig. 3.5: Factors Affecting Threat of Entry

14. Fig. 3.6: Factors Affecting Competition From Substitute Products

15. Fig. 3.7: Factors Affecting Bargaining Power of Suppliers

16. Fig. 3.8: Factors Affecting Bargaining Power of Buyers

17. Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have? • Industries change because forcesare driving industry participantsto alter their actions • Driving forces are themajor underlying causesof changing industry andcompetitive conditions • Where do driving forces originate? • Outer ring of macroenvironment • Inner ring of macroenvironment

19. Question 4: What Market PositionsDo 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

20. 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 appealto similar types of buyers • Use identical technological approaches • Offer buyers similar services • Cover same geographic areas

21. Question 5: What Strategic Moves AreRivals 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 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

22. Competitor Analysis • Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing • Which rival has the best strategy? Whichrivals appear to have weak strategies? • Which firms are poised to gainmarket share, and which onesseen 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?

23. Question 6: What Are the KeyFactors 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

25. 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 about attractiveness have to be drawn from the perspective of a particular company