Analysis of Firm's External Environment for Strategy Making


Analysis of  a company's external situation involves finding answers to the following seven  main aspects or questions:

1. What are the industry's dominant economic features? 


Industries differ significantly on such factors as market size and growth rate, the number and relative sizes of both buyers and sellers, the geographic scope of competitive rivalry, the degree of product differentiation, the speed of product innovation, demand–supply conditions, the extent of vertical integration, and the extent of scale economies and experience/learning curve effects.

In addition to setting the stage for the analysis to come, identifying an industry's economic features also promotes understanding of the kinds of strategic moves that industry members are likely to employ (Question 5).


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


Porter's five force analysis is the basis for this step.

The strength of competition is a composite of five forces:
(1) competitive pressures stemming from the competitive maneuvering among industry rivals,
(2) competitive pressures associated with the market inroads being made by the sellers of substitutes, (3) competitive pressures associated with the threat of new entrants into the market,
(4) competitive pressures stemming from supplier bargaining power and supplier–seller collaboration, and
(5) competitive pressures stemming from buyer bargaining power and seller–buyer collaboration.

The nature and strength of the competitive pressures associated with these five forces have to be examined force by force to identify the specific competitive pressures they each comprise and to decide whether these pressures constitute a strong or weak competitive force.

The next step in competition analysis is to evaluate the collective strength of the five forces and determine whether the state of competition is conducive to good profitability.

Working through the five-forces model step by step not only aids strategy makers in assessing whether the intensity of competition allows good profitability but also promotes sound strategic thinking about how to better match company strategy to the specific competitive character of the marketplace. Effectively matching a company's strategy to the particular competitive pressures and competitive conditions that exist has two aspects: (1) pursuing avenues that shield the firm from as many of the prevailing competitive pressures as possible, and (2) initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in the company's favor, putting added competitive pressure on rivals, and perhaps even defining the business model for the industry.


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


In this step, variables in the economy that are driving the industry variables are analyzed.

Industry and competitive conditions change because forces are in motion that create incentives or pressures for change. The first phase is to identify the forces that are driving change in the industry; the most common driving forces include changes in the long-term industry growth rate, globalization of competition in the industry, emerging Internet capabilities and applications, changes in buyer composition, product innovation, technological change and manufacturing process innovation, marketing innovation, entry or exit of major firms, diffusion of technical know-how, changes in cost and efficiency, growing buyer preferences for differentiated versus standardized products (or vice versa), reductions in uncertainty and business risk, regulatory influences and government policy changes, and changing societal and lifestyle factors. The second phase of driving-forces analysis is to determine whether the driving forces, taken together, are acting to make the industry environment more or less attractive. Are the driving forces causing demand for the industry's product to increase or decrease? Are the driving forces acting to make competition more or less intense? Will the driving forces lead to higher or lower industry profitability?


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


This is a competitor position analysis most focused on individual players.

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 lesson of strategic group mapping is that some positions on the map are more favorable than others. The profit potential of different strategic groups varies due to strengths and weaknesses in each group's market position. Often, industry driving forces and competitive pressures favor some strategic groups and hurt others.


5. What strategic moves are rivals likely to make next? 


This competitor strategy analysis.

This analytical step involves identifying competitors' strategies, deciding which rivals are likely to be strong contenders and which are likely to be weak, evaluating rivals' competitive options, and predicting their next moves. Scouting competitors well enough to anticipate their actions can help a company prepare effective countermoves (perhaps even beating a rival to the punch) and allows managers to take rivals' probable actions into account in designing their own company's best course of action. Managers who fail to study competitors risk being caught unprepared by the strategic moves of rivals.


6. What are the key factors for competitive success? 


An industry's key success factors (KSFs) are the particular strategy elements, product attributes, competitive capabilities, and business outcomes that spell the difference between being a strong competitor and a weak competitor—and sometimes between profit and loss. KSFs by their very nature are so important to competitive success that all firms in the industry must pay close attention to them or risk becoming an industry also-ran. Correctly diagnosing an industry's KSFs raises a company's chances of crafting a sound strategy. The goal of company strategists should be to design a strategy aimed at stacking up well on all of the industry KSFs and trying to be distinctively better than rivals on one (or possibly two) of the KSFs. Indeed, using the industry's KSFs as cornerstones for the company's strategy and trying to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy approach.


7. Does the outlook for the industry present the company with sufficiently attractive prospects for profitability? 


If an industry's overall profit prospects are above average, the industry environment is basically attractive; if industry profit prospects are below average, conditions are unattractive. Conclusions regarding industry attractive are a major driver of company strategy. When a company decides an industry is fundamentally attractive, a strong case can be made that it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business. When a strong competitor concludes an industry is relatively unattractive, it may elect to simply protect its present position, investing cautiously if at all and looking for opportunities in other industries. A competitively weak company in an unattractive industry may see its best option as finding a buyer, perhaps a rival, to acquire its business. On occasion, an industry that is unattractive overall is still very attractive to a favorably situated company with the skills and resources to take business away from weaker rivals.


A competently conducted industry and competitive analysis generally tells a clear, easily understood story about the company's external environment. Different analysts can have different judgments about competitive intensity, the impacts of driving forces, how industry conditions will evolve, how good the outlook is for industry profitability, and the degree to which the industry environment offers the company an attractive business opportunity. However, while no method can guarantee a single conclusive diagnosis about the state of industry and competitive conditions and an industry's future outlook,  Managers become better strategists when they know  the answers given to the questions posed by experienced professionals.  There's no substitute for doing cutting-edge analysis of company's external situation—anything less weakens managers' ability to craft strategies that are well matched to industry and competitive conditions.

Reference

Summary of the chapter in Student Resources of the Thompson and Strickland Text.
http://highered.mcgraw-hill.com/sites/0073530425/student_view0/chapter3/
Kindly Bookmark and Share it:

6 comments:

  1. Webmastertoys.com offers free SEO tools for all webmasters to optimize their websites for Google and other search engines.

    ReplyDelete
  2. Jayem customized logistics solutions ensure that all your needs are met efficiently in the most cost effective manner.
    Best Logistics Company in India|Repair and Reverse Logistics

    ReplyDelete
  3. I’m really impressed with your article, such great & usefull knowledge you mentioned here vashikaran specialist

    World Best Vashikaran Black Magic Specialist Astrologer Solve Voodoo Love Spell, Attract Love Marriage, Husband Wife Problem Specialist Call +91-9116423593

    ReplyDelete
  4. Hello,

    I'm Dr Ogudugu a real and genuine spell caster with years of experience in spell casting and an expert in all spells, i specialize exclusively in LOVE SPELL/GET YOUR EX LOVER BACK, FRUIT OF THE WOMB SPELL, HIV CURE SPELL, BECOMING A MERMAID SPELL, BECOMING A VAMPIRE SPELL, SAVE CHILD BIRTH SPELL. If you have any problem and you need a real and genuine spell caster to solve your problems, contact me now through my personal Email Address...Note-you can also Call and WhatsApp.

    Contact me -
    Email: greatogudugu@gmail.com
    Phone No: +2348139793075
    WhatsApp No: +2348139793075


    Powerful Magic, Ring +2348139793075 This is the oldest, mystique and the most powerful magic rings and gemstones. This power organized by the great powerful magicians and greatly improved by the Pharaohs in Egypt.Call +2348139793075, The results of this ring are so great that this magic has now become well established. This power ring has got the powers of the angels of the seven planets. Now with this ring you will be the most powerful person in this whole world. This ring will affect your stars and will change you, give you success in love, business, make you look very attractive, protect you in your journey, it will prevent you from being fooled from other people, great miracles will come in your life, it will give you good luck and increase your personality, At the same time you will be the richest person in this world. You will dominate other peoples mind; change your bad luck into good luck. With this wonder ring you will even feel a powerful force protecting all, around you from evil powers, demons, witchcraft, black magic etc and even water and fire will not be able to harm you. All your enemies will become dumb and dare not talk bad about you. You will be the main source of attraction in every field... And so this powerful ring can do great wonders, some of the few examples that this wonder ring can do is: it will give you promotions in any field you want, always in examinations you will remember difficult answers, it will attract the opposite sex, whoever you want or wish will come to you, in business sky is the limit with this ring, any type of lotteries, pools, lotto's, bingo's etc will be won by you, you will be protected from black magic, evil powers, spirits etc so nobody will be able to talk bad about you and where ever you go you will be the center of attraction with this wonder power ring. The moment this ring is worn its powers in contact with the fingers produces a gentle current of light electricity which quickly circulates throughout every part of the body, blood, veins, muscles and tissues, recharges the whole system with powers-refills the nerve cells and every organ and destroys diseases, germs and bestows new energy and power to the weak body.
    contact Dr Ogudugu on, Cell & Whats-app +2348139793075.
    Email:greatogudugu@gmail.com

    ReplyDelete
  5. The ability to analyze it is a skill that is not inherent in every person. Humanities do not know how to analyze and therefore if you are a humanist, then you will not be able to analyze and I advise you to learn how to write papers ideal but to find such a good job as professional writers who work for the best essay writing service https://orderessay.net/writing-an-essay-about-yourself.html (that also propose writing essay that has a type "essay about yourself"/"essay about myself") have because the humanities have difficulties with finding work.

    ReplyDelete

 
Designed By An Insurance | Proudly Powered by Blogger