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Analyzing a Companys External Environment

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What Is Situation Analysis?


Two considerations
Companys external or macro-environment
Industry and competitive conditions

Companys internal or micro-environment


Competencies, capabilities, resource strengths and weaknesses, and competitiveness
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The Components of a Companys Macro-Environment

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Key Questions Regarding External Analysis


What are the Industrys dominant economic traits/ features What are the Competitive forces/pressures and strength of each force What the Drivers of change in the industry What are the relative position of the competitors (Competitor analysis) What are the Key Success Factors (KSF) of the industry Conclusions: Is the Industry is attractive to remain or invest more?
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Q #1: What are the Industrys Dominant Economic Traits?



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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 Learning and experience curve effects
2005 The McGraw-Hill Companies, Inc. All rights reserved.

Q #2: What Kinds of Competitive Forces Are Industry Members Facing?

Objectives are to identify


Main sources of competitive forces

Strength of these forces

Key analytical tool


Five Forces Model of Competition
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Five Forces Model of Competition

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Strategic Implications of the Five Competitive Forces


Competitive environment is unattractive from the standpoint of earning good profits when
Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power

Competitive environment is ideal from a profit-making standpoint when


Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist Suppliers and customers are in a weak bargaining position

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Q #3: What Factors Are Driving Industry Change and What Impacts Will They Have?

Driving forces are the major underlying causes of changing industry and competitive conditions
Industries change because forces are driving industry participants to change their actions

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Question 4: What Market Positions Do Rivals Occupy?


One technique to reveal different competitive positions of industry rivals is strategic group mapping

A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions
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common characteristics of Strategic Group


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 appeal to similar types of buyers Use identical technological approaches Offer buyers similar services Cover same geographic areas
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Q #5: What Strategic Moves Are Rivals Likely to Make?


A firms best strategic moves are affected by
Current strategies of competitors Future actions of competitors

Profiling key rivals involves gathering competitive 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
2005 The McGraw-Hill Companies, Inc. All rights reserved.

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Q #6: What Are the Key Factors for Competitive Success?


KSFs are those competitive factors most affecting every industry members ability to prosper. They concern
Specific strategy elements Product attributes Resources Competencies Competitive capabilities

that a company needs to have to be competitively successful KSFs are attributes that spell the difference between
Profit and loss Competitive success or failure

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Q #7: Does the Outlook for the Industry Present an Attractive Opportunity?
Attractiveness is relative, not absolute

Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn unusually good profits

Invest, Remain, or Divest


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