3. EXTERNAL ANALYSIS - Analysis and evaluation of major external environmental components.

General Environment: What are the industry’s economic characteristics? (chapter 3)

Do the dominant economic characteristics of the industry offer sellers’ opportunities for growth and attractive profits?

Involves assessing whether the industry and competitive environment is attractive or unattractive for earning good profits.

Draws upon all the previous analysis:

The industry’s growth potential

The effect of the intensity of competition on industry profitability

Whether industry profitability will be favorably or unfavorably affected by the prevailing driving forces

The firm’s competitive position in its industry relative to rivals

How competently the firm performs industry’s key success factors

Industry Analysis: What forces are driving change in the industry? (chapter 3)

Key success factors (or KSFs) are competitive factors most affecting every industry member’s ability to prosper. (chapter 3)

Specific product attributes

Necessary resources, competencies, and capabilities

Specific intangible assets

Competitive capabilities

On what basis do buyers of the industry’s product choose between the competing brands of sellers? That is, what product attributes are crucial?

Given the nature of the competitive forces prevailing in the marketplace, what resources and competitive capabilities must a firm possess to be competitively successful?

What shortcomings are almost certain to put a firm at a significant competitive disadvantage?

Manufacturing related KSF

Ability to achieve scale economies and/or capture experience curve effects (important to achieving low production costs)

Quality control know-how (important in industries where customers insist on product reliability)

High utilization of fixed assets (important in capital-intensive/high fixed-cost industries)

Access to attractive supplies of skilled labor

High labor productivity (important for items with high labor content)

Low-cost product design and engineering (reduces manufacturing costs)

Ability to manufacture or assemble products that are customized to buyer specifications

Skills- and capability-related KSFs

A talented workforce (superior talent is important in professional services such as accounting and investment banking)

National or global distribution capabilities

Product innovation capabilities (important where rivals are racing to be first to market with new product attributes or performance features)

Design expertise (important in fashion and apparel industries)

Short delivery time capability

Supply chain management capabilities

Strong e-commerce capabilities—a user-friendly website and/or skills in using Internet applications to streamline internal operations

Other types of KSFs

Overall low costs (not just in manufacturing) to be able to meet low-price expectations of customers

Convenient locations (important in many retailing businesses)

Ability to provide fast, convenient, after-the-sale repairs and service

A strong balance sheet and access to financial capital (important in newly emerging industries with high degrees of business risk and in capital-intensive industries)

Patent protection

Competitor Analyses: How strong are the competitive forces at play? (chapter 3)

What market positions do rivals occupy and what moves are they likely to make next?

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

What strategic moves are rivals likely to make next?

What are the key factors of competitive success?

FIVE FORCES (chapter 3)

Buyers

Substitute Products

Suppliers

New Entrants

Rivalry among Competitive Sellers

Strengths

Cutthroat (brutal): Competitors engage in protracted price wars or habitually employ other aggressive tactics that are mutually destructive to profitability

Fierce (strong): The battle for market share is so vigorous that the profit margins of most industry members are squeezed to bare-bones levels.

Moderate (normal): The maneuvering among industry members, while lively and healthy, still allows most industry members to earn acceptable profits

Weak: Most industry members are satisfied with their sales growth and market share and rarely undertake offensives against their competitors

An industry’s competitive environment tends to be unattractive from a profit-making standpoint when: (chapter 3)

Internal rivalry among competitors is strong

Low entry barriers make new competitor entry likely

Good substitutes exist for industry products

Suppliers and customers are in strong bargaining positions

thereby producing competitive pressures that are very intense or fierce!

Section should end with a clear identification of key

opportunities

What are the key factors for future competitive success?

What are the company’s external opportunities?

Potential Market Opportunities

Serving additional customer groups or market segments.

Expanding into new geographic markets.

Expanding the firm’s product line to meet a broader range of customer needs.

Utilizing existing company skills or technological know-how to enter new product lines or new businesses.

Falling trade barriers in attractive foreign markets.

Acquiring rival firms or companies with attractive technological expertise or capabilities.

Threats

Potential External Threats to a Company’s Future Prospects

Increasing intensity of competition among industry rivals—may squeeze profit

margins.

Slowdowns in market growth.

Likely entry of potent new competitors.

Growing bargaining power of customers or suppliers.

A shift in buyer needs and tastes away from the industry’s product.

Adverse demographic changes that threaten to curtail demand for the industry’s

product.

Vulnerability to unfavorable industry driving forces.

Restrictive trade policies on the part of foreign governments.

Costly new regulatory requirements.