MODULE-3

ANALYSING A
COMPANY’S
EXTERNAL
ENVIRONMENT

Bharath Bhushan B
The Strategically Relevant Components of a Company’s
Macro-Environment

Every company operates in a larger environment that

goes well beyond just the industry in which it operates;
this “macro-environment” includes seven principal
components:
1.General Economic Conditions
2.Demographics
3.Political/Regulatory/Legal Factors
4.Technological Factors
5.Social Forces
6.Global Forces
7.The Natural Environment
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General Economic Conditions
- Include rate of economic growth, unemployment rates,
inflation rates, interest rates, trade deficits or
surpluses, savings rates, and per capita domestic
product.

Demographics
- Includes the size, growth rate, and age distribution of
the different sectors of the population.

Political/Regulatory/Legal Factors
- Include political policies and processes, as well as the
regulations and laws which companies must comply.

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Technological Factors
- Include creating new knowledge and controlling the use
of technology, such as R&D consortia, university
sponsored technology incubators, patent and copyright
laws, and government control over the internet.

Social Forces
- Include the societal values, attitudes, cultural factors,
and lifestyles that impact businesses.

Global Forces
- Include conditions and changes in global markets,
including political events and policies toward
international trade.

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Natural Environment
- Includes ecological and environmental forces such as
weather, climate change, and associated factors like
water shortages.

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 Thinking Strategically about a Company’s Industry and
Competitive Environment
The managers have to focus directly on using well defined
concepts and analytical tools to get clear answers to seven
questions:
1.Does the industry offer attractive opportunities for
growth?
2.What kinds of competitive forces are industry members
facing, and how strong is each force?
3.What factors are driving changes in the industry, and
what impact will these changes have on competitive
intensity and industry profitability?
4.What market positions do industry rivals occupy – who is
strongly positioned and who is not?
5. What strategic moves are rivals likely to make next?

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6. What are the key factors for competitive success in
the industry?
7. Does the industry offer good prospects for attractive
profits?

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1. DOES THE INDUSTRY OFFER ATTRACTIVE
OPPORTUNITIES FOR GROWTH?
 Growth is an indicator of how much customers value the
industry’s products (or services)and whether the
industry demand is strong enough to support profitable
sales growth.
 Key economic indicators of an industry’s growth
prospects include market size and industry growth rate.
 Assessing the market size and growth rate depends on
- Whether the industry is defined broadly or
narrowly.
- Geographic boundary
- Region (Europe vs. Asia)
- Demographic market segment (Gen Y vs Baby
Boomers)
- Industrial Life Cycle
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2. WHAT KINDS OF COMPETITIVE FORCES ARE
INDUSTRY MEMBERS FACING, AND HOW STRONG
ARE THEY?

The character and strength of the competitive forces

operating in an industry are never the same from one
industry to another.
The most powerful and widely used tool for systematically
diagnosing the principal competitive pressures in a market
is the five forces model of competition.

Michael E. Porter’s five force model, helps managers to

analyze competitive forces in the industry environment to
identify opportunities and threats.

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The five competitive forces include:
1.Competition from rival sellers.
2.Competition from potential new entrants to the
industry.
3.Competition from producers of substitute products.
4.Supplier bargaining power.
5.Customer bargaining power.

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Using five forces model to determine the nature and
strength of competitive pressures in a given industry
involves building the picture of competition in three steps:
Step 1: For each of the five forces, identify the different
parties involved, along with the specific factors that bring
about competitive pressures.

Step 2: Evaluate how strong the pressures stemming from

each of the five forces are (strong, moderate or normal, or
weak)

Step 3: Determine whether the strength of the five

competitive forces, overall, is conducive to earning
attractive profits in the industry.

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 Firms in Other
Industries
Offering
Substitute
Products

Competitive pressures coming from the producers

Of substitute products

Competitive Competitive
pressures Rivalry among pressures
stemming Competing Sellers stemming
Suppliers from supplier Competitive from buyer Buyers
bargaining Pressures coming bargaining
from other firms in
power the industry
power

Competitive pressures coming from

the threat of entry of new rivals

Potential New
Entrants

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MISCELLANEOUS\Porters Five Force Model.doc
Competitive Pressures Created by the Rivalry among
Competing Sellers
 Strongest among the five forces
 Craft a strategy that produces a competitive edge over
rivals

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3. WHAT FACTORS ARE DRIVING INDUSTRY CHANGE,
AND WHAT IMPACTS WILL THEY HAVE?

It is important to understand that the intensity of

competitive forces and the level of an industry’s
attractiveness are subject to change.

Analyzing industry dynamics involves three steps:

1.Identifying the drivers of change
2.Assessing whether the drivers of change are, individually or
collectively, acting to make the industry more or less
attractive, and
3.Determining what strategy changes are needed to prepare
for the impacts of the anticipated change.

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 Identifying the drivers of change/Industry Driving
Forces
Changes in an industry’s long-term growth rate
Increasing globalisation
Changes in who buys the product and how they use it.
 Technological change
 Emerging new internet capabilities and applications
 Product and marketing innovations
 Entry or exit of major firms
 Diffusion of technical know-how across companies and
countries
 Reductions in uncertainty and business risk
 Regulatory influences and government policy changes
 Changing societal concerns, attitudes, and lifestyles.

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Assessing the Impact of the Factors Driving Industry
Change
The next step in dynamic industry analysis is to determine
whether the prevailing change drivers, on the whole, are
acting to make the industry environment more or less
attractive.
Answers to three questions are needed:
1.Overall, are the factors driving change causing demand
for the industry’s product increase or decrease?
2.Is the collective impact of the drivers of change making
competition more or less intense?
3.Will the combined impacts of the change drivers lead to
higher or lower industry profitability?

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4. HOW ARE INDUSTRY RIVALS POSITIONED – WHO
IS STRONGLY POSITIONED AND WHO IS NOT?

 Understanding which companies are strongly positioned and

which are weakly positioned is an integral part of analysing
an industry’s competitive structure.
 The best technique for revealing the market positions of
industry competitors is strategic group mapping.
 Strategic Group Mapping is a technique for displaying the
different market or competitive positions that rival firms
occupy in the industries.
 A Strategic group consists of those industry members
with similar competitive approaches and positions in the
market.

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Comparative Market Positions of Selected Retail
Chains: A Strategic Group Map Example

High
Neiman Polo
Marcus, Ralph
Saks fifth Lauren
Avenue
Price/Quality

Macy’s
Nordstrom, Sears
Dillard’s Gap,
Banana
Republic
T.J. Target
Kohl’s
Maxx
Wal-Mart
Kmart

Low

Few Localities Geographic Coverage Many Localities

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The procedure for constructing a strategic group map is:
1.Identify the competitive characteristics that
differentiate firms in the industry.
2.Plot the firms on a two-variable map using pairs of these
differentiating characteristics.
3.Assign firms occupying about the same map location to
the same strategic group.
4.Draw circles around each strategic group, making the
circles proportional to the size of the group’s share of
total industry sales revenues.

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5. WHAT STRATEGIC MOVES ARE RIVALS LIKELY
TO MAKE NEXT ?

Unless a company pays attention to the strategies and

situations of competitors and has some inkling of what
moves they will be making, it ends up flying blind into
competitive battle.

Competitive intelligence about rivals strategies, their

latest actions and announcements, their financial
performance, their strengths and weaknesses, and the
thinking and leadership styles of their executives is
valuable for anticipating the strategic moves competitors
are likely to make next.

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Some of the indicators of the types of moves a rival is
likely to make are:
 Financial performance
 Company press releases
 Information posted on the company’s websites
 Annual reports
 Exhibits at trade shows
 From conversations with a rival’s customers, suppliers,
and former employees.

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6. WHAT ARE THE KEY FACTORS FOR FUTURE
COMPETITIVE SUCCESS?

An industry’s Key Success Factors (KSFs)/Critical Success

Factors (CSF’s) are those competitive factors that affect
industry members ability to survive and prosper in the
marketplace – the particular strategy elements, product
attributes, operational approaches, resources, and
competitive capabilities that spell the difference between
being a strong competitor and a weak competitor and between
profit and loss.

Any industry’s key success factors can always be deduced by

asking the three questions:
 On what basis do buyers of the industry’s product choose
between the competing brands of sellers? That is, what
product attributes and service characteristics are crucial?
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 Given the nature of competitive rivalry and the competitive
forces prevailing in the marketplace, what resources and
competitive capabilities must a company have to be
competitively successful?
 What shortcomings are almost certain to put a company at
a significant competitive disadvantage?

Examples:
Shoe Manufacturing: High product quality, low cost, flexible
product mix, product mix.
Food Processing: High quality product, packaging, efficient
distribution network, sales promotion.
Toothpaste Industry: Styling, strong dealer network,
manufacturing cost control, ability to meet environmental
standards.
Courier Service: Speed, dispatch, reliability and price.

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Implementation of KSF’s
Implementing KSF’s involves four steps:
1. Determining customers want.
2. Determining what firm need to do to survive
competition.
3. Identifying KSF’s/CSF’s
Miscellaneous\Key Success Factors.doc
4. Build organisation around “KSF’s/CSF’s”.

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7. DOES THE INDUSTRY OFFER GOOD PROSPECTS
FOR ATTRACTIVE PROFITS?
The final step in evaluating the industry and competitive
environment is to use the results of the analysis performed
in answering questions 1 to 6 to determine whether the
industry presents the company with strong prospects for
attractive profits.

The important factors on which to base a conclusion

include:
 The industry’s growth potential
 Whether strong competitive forces are squeezing
industry profitability to subpar levels.
 Whether industry profitability will be favourable or
unfavourably affected by the prevailing drivers of
change in the industry.
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 Whether the company occupies a stronger market
position than rivals and whether this is likely to change
in the course of competitive interactions.
 How well the company’s strategy delivers on the industry
key success factors.

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Porters/Industry’s Dominant Economic Features
 Market size and growth rate
 Scope of competitive rivalry
 Number of rivals
 Buyer needs and requirements
 Production capacity
 Pace of technological change
 Vertical integration
 Product innovation
 Degree of product differentiation
 Economies of scale.

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