Chapter Two Analyzing a Company’s External Environment

Introduction  Managers are not prepared to act wisely in steering a company in different direction or altering its strategy until they have a deep understanding of the pertinent factors surrounding the company’s situation.  Two facets of the company’s situation  The industry and competitive environment in which the company operates and the forces acting to reshaped this environment  The company’s marketing position and competitiveness – resources, capabilities, strength and weaknesses of the rivals.

Introduction  Perceptive diagnosis of a company’s external & internal environment is a pre- requisite for managers in crafting a strategy.  Three criteria of a winning strategy:  Good fit with the company’s situation.  Capable of building competitive advantage.  Holds good prospect for boosting company performance.

The Strategically Relevant Components of a Company’s External Environment  Company’s macroenvironment  Includes all relevant factors and influences outside the company’s boundaries.  Relevant- important enough to have a bearing on the decisions the company ultimately makes about its direction, objectives, strategy and business model.  For most part, influences coming from the outer ring of the macroenvironment have low impact on a company’s business situation. (there are exception)  Shape only the edges of the company’s direction and strategy. (There are exceptional cases)

The Strategically Relevant Components of a Company’s External Environment  Company’s managers must be alert for potentially important outer-ring forces, assess their impact and influences, and adapt the company’s direction and strategy is needed.  The biggest strategy-shaping impact almost always pertain to the company’s immediate industry and competitive environment.

Company’s Industry and Competitive Environment  What are the industry’s strategy-shaping economic features?  What kinds of competitive forces are industry members facing, and how is each force?  What forces are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?  What market positions do industry rivals occupy – who is strongly positioned and who is not?  What strategic moves are rivals likely to make next?  What are the key factors for future competitive success?  Does the outlook for the industry present the company with sufficiently attractive prospects for profitability?

Identifying Strategically Relevant Industry Features  Industries differ so significantly in their basic character and structure.  Analyzing a company’s industry and competitive environment begins with an overview of the industry’s dominant economic features.  Sets the stage for the analysis to come  Promotes understanding of the kinds of strategic moves that industry members are likely to employ.

Economic Features  Market size and growth rate  Position in the life cycle  Number of rivals  Buyer needs and Requirements  Production capacity  Pace of technological change

Analyzing the Nature & Strength of Competitive Forces  The state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market: 1. Competitive pressures associated with the market maneuvering and jockeying for buyer patronage that goes on among rival sellers in the industry. 2. Competitive pressures associated with the threat of new entrants into the market.

Analyzing the Nature & Strength of Competitive Forces 3. Competitive pressures coming from the attempts of companies in other industries to win buyers over to their own substitute products 4. Competitive pressures stemming from supplier bargaining power and supplier- seller collaboration. 5. Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration.