3.

EXTERNAL ANALYSIS - Analysis

and evaluation of major external
environmental components.

General Environment: What are the industrys 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 industrys 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 firms competitive position in its industry
relative to rivals
How competently the firm performs industrys 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 members 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 industrys 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 capitalintensive/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 capabilitiesa 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 capitalintensive 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 industrys 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 companys external opportunities?

 Potential Market Opportunities

Serving additional customer groups or market
segments.
Expanding into new geographic markets.
Expanding the firms 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 Companys Future
Prospects
Increasing intensity of competition among industry
rivalsmay 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
industrys product.
Adverse demographic changes that threaten to
curtail demand for the industrys
product.
Vulnerability to unfavorable industry driving forces.
Restrictive trade policies on the part of foreign
governments.

 Costly new regulatory requirements.