SESSION 3 & 4

EVALUATING A
COMPANY’S EXTERNAL
ENVIRONMENT

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 Learning Objectives

1. To gain command of the basic concepts and analytical tools widely used to
diagnose a company's industry and competitive conditions.

2. To become adept at recognizing the factors that cause competition in an industry

to be fierce, more or less normal, or relatively weak.

3. To learn how to determine whether an industry's outlook presents a company

with sufficiently attractive opportunities for growth and profitability.

4. To understand why in-depth evaluation of specific industry and competitive

conditions is a prerequisite to crafting a strategy well matched to a company's
situation .

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 WHAT ARE THE STRATEGICALLY RELEVANT
FACTORS IN THE MACRO-ENVIRONMENT?

• PESTEL Analysis
– Focuses on principal components of strategic
significance in the macro-environment:
• Political factors
• Economic conditions (local to worldwide)
• Sociocultural forces
• Technological factors
• Environmental factors (the natural environment)
• Legal/regulatory conditions

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 HOW STRONG ARE THE INDUSTRY’S
COMPETITIVE FORCES?

• The Five Competitive Forces:

– Competition from rival sellers
– Competition from potential new entrants
– Competition from producers of substitute
products
– Supplier bargaining power
– Customer bargaining power

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 USING THE FIVE-FORCES MODEL OF
COMPETITION

For each of the five forces, identify the different parties

Step 1 involved, and the specific factors that bring about
competitive pressures.

Evaluate how strong the pressures stemming from each of

Step 2
the five forces are (strong, moderate, or weak).

Determine whether the collective strength of all five

Step 3 competitive forces is conducive to earning attractive
profits in the industry.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 COMPETITIVE PRESSURES ASSOCIATED WITH
THE THREAT OF NEW ENTRANTS

• Entry Threat Considerations:

– Expected defensive reactions of incumbent firms
– Strength of barriers to entry
– Attractiveness of a particular market’s growth
in demand and profit potential
– Capabilities and resources of potential entrants
– Entry of existing competitors into market
segments
in which they have no current presence

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 MARKET ENTRY BARRIERS FACING
NEW ENTRANTS

• Incumbent cost advantages related to learning and

experience, proprietary patents and technology, favorable
locations, and lower fixed costs
• Strong brand preferences and customer loyalty
• Strong “network effects” in customer demand
• High capital requirements
• Building a network of distributors or dealers and securing
adequate space on retailers’ shelves
• Restrictive government policies

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 COMPETITIVE PRESSURES FROM THE SELLERS
OF SUBSTITUTE PRODUCTS

• Substitute Products Considerations:

1. Readily available and attractively priced?
2. Comparable or better in terms of quality,
performance, and other relevant attributes?
3. Offer lower switching costs to buyers?
• Indicators of Substitutes’ Competitive Strength:
– Increasing rate of growth in sales of substitutes
– Substitute producers adding new output capacity
– Increasing profitability of substitute producers

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 COMPETITIVE PRESSURES STEMMING FROM
SUPPLIER BARGAINING POWER

• Supplier Bargaining Power Depends On:

– Strength of demand for and availability of suppliers’ products.
– Whether suppliers provide a differentiated input that enhances the
performance of the industry’s product.
– Industry members’ costs for switching among suppliers
– Size of suppliers relative to size of industry members
– Fraction of the cost of the supplier’s product relative to the total cost
of the industry’s product
– Number of suppliers relative to the number of industry members
– Possibility of backward integration into suppliers’ industry
– Availability of good substitutes for suppliers’ products
– Whether industry members are major customers of suppliers.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 COMPETITIVE PRESSURES STEMMING FROM BUYER
BARGAINING POWER AND PRICE SENSITIVITY

• Buyer Bargaining Power Considerations:

– Strength of buyers’ demand for sellers’ products
– Degree to which industry goods are differentiated
– Buyers’ costs for switching to competing sellers or substitutes
– Number and size of buyers relative to number of sellers
– Buyers’ knowledge of products, costs and pricing
– Threat of buyers’ integration into sellers’ industry
– Buyers’ discretion in delaying purchases
– Buyers’ price sensitivity due to low profits, size of purchase, and
consequences of purchase

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 MATCHING COMPANY STRATEGY
TO COMPETITIVE CONDITIONS

Effectively matching a firm’s business strategy to

prevailing competitive conditions has two aspects:

1.Pursuing avenues that shield the firm from as

many competitive pressures as possible.

2.Initiating actions calculated to shift competitive

forces in the firm’s favor by altering underlying
factors driving the five forces.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 WHAT FACTORS ARE DRIVING INDUSTRY
CHANGE, AND WHAT IMPACTS WILL THEY HAVE?

• Driving forces analysis has three steps:

1. Identifying what the driving forces are.
2. Assessing whether the driving forces are,
on the whole, acting to make the
industry more or less attractive.
3. Determining what strategy changes are
needed to prepare for the impact of the
driving forces.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 ASSESSING THE IMPACT OF THE FACTORS
DRIVING INDUSTRY CHANGE

1. Are the driving forces as a whole causing

demand for the industry’s product to
increase or decrease?
2. Is the collective impact of the driving forces
making competition more or less intense?
3. Will the combined impacts of the driving
forces lead to higher or lower industry
profitability?

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 HOW ARE INDUSTRY RIVALS POSITIONED IN
THE MARKET?

• Strategic Group
– Consists of those industry members with similar
competitive approaches and positions in the
market:
• Having comparable product-line breadth
• Emphasizing the same distribution channels
• Depending on identical technological approaches
• Offering the same product attributes to buyers
• Offering similar services and technical assistance

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 USING STRATEGIC GROUP MAPS TO ASSESS
THE MARKET POSITIONS OF KEY COMPETITORS

• Constructing a strategic group map:

– Identify the competitive characteristics that
delineate strategic approaches used in the industry.
– Plot the firms on a two-variable map using pairs of
the competitive characteristics.
– Assign firms occupying about the same map
location to the same strategic group.
– Draw circles around each strategic group, making
the circles proportional to the size of the group’s
share of total industry sales revenues.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 GUIDELINES FOR CREATING
GROUP MAPS

1. Variables selected as map axes should not be highly correlated.

2. Variables should reflect important (sizable) differences among rival
approaches.
3. Variables may be quantitative, continuous, discrete and\or defined in
terms of distinct classes and combinations.
4. Drawing group circles proportional to the combined sales of firms in
each group will reflect the relative sizes of each strategic group.
5. Drawing maps using different pairs of variables will show the different
competitive positioning relationships present in the industry’s
structure.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 WHAT STRATEGIC MOVES ARE RIVALS LIKELY
TO MAKE NEXT?

• Competitive Intelligence
– Information about rivals that is useful in
anticipating their next strategic moves.
• Signals of the Likelihood of Strategic Moves:
– Rivals under pressure to improve financial
performance
– Rivals seeking to increase market standing
– Public statements of rivals’ intentions
– Profiles developed by competitive intelligence
units
SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 CREATING A STRATEGIC PROFILE
OF A RIVAL COMPETITOR FIRM

• Current Strategy
– How is the competitor positioned in the market?
– What is the basis for its competitive advantage?
– What kinds of investments is it making (as an indicator
of its expected growth trajectory)?
• Objectives
– What are its financial performance objectives?
– What are its strategic objectives?
– How well is it performing in meeting its objectives?
– Is it under pressure to improve its performance?

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 CREATING A STRATEGIC PROFILE
OF A RIVAL COMPETITOR FIRM (cont’d)

• Capabilities
– What are the competitor’s current capabilities?
– What weaknesses does it have?
– Which capabilities is it making efforts to obtain?
• Assumptions
– What do the competitor’s top managers believe
about their strategic situation?
– How will their beliefs affect the competitor’s
behavior in the market?

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 WHAT ARE THE INDUSTRY’S KEY SUCCESS
FACTORS?

• Key Success Factors (KSFs)

– Are the strategy elements, product and service
attributes, operational approaches, resources,
and competitive capabilities that are necessary
for competitive success by any and all firms in an
industry.
– Vary from industry to industry, and over time
within the same industry, and in importance as
drivers of change and competitive conditions
change.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 IS THE INDUSTRY OUTLOOK CONDUCIVE TO
GOOD PROFITABILITY?

• The anticipated industry environment is

fundamentally attractive if it presents a
company with good opportunity for above-
average profitability.
• The industry outlook is fundamentally
unattractive if a firm’s profit prospects are
unappealingly low.

SOURCE:
Arthur A. Thompson, Jr., A.]. Strickland III and John E. Gamble (2009). Crafting & Executing Strategy
The Quest For Competitive Advantage: Concepts And Cases. Mcgraw-hill Learning Solutions
 Industry Analysis: The External Factor
Evaluation (EFE) Matrix

Summarize & Evaluate

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

Source: David, F., & David, F. R. (2016). Strategic management: A

competitive advantage approach, concepts and cases. Pearson–Prentice Hall.
 Industry Analysis: The External Factor
Evaluation (EFE) Matrix

Source: David, F., & David, F. R. (2016). Strategic management: A

competitive advantage approach, concepts and cases. Pearson–Prentice Hall.
 Industry Analysis: The External Factor
Evaluation (EFE) Matrix

Total weighted score of 4.0

• Organization response is outstanding to threats and
weaknesses

Total weighted score of 1.0

• Firm’s strategies not capitalizing on opportunities or
avoiding threats

Source: David, F., & David, F. R. (2016). Strategic management: A

competitive advantage approach, concepts and cases. Pearson–Prentice Hall.
 Industry Analysis: Competitive
Profile Matrix (CPM)

Identifies firm’s major competitors and

their strengths & weaknesses in
relation to a sample firm’s strategic
positions

Source: David, F., & David, F. R. (2016). Strategic management: A

competitive advantage approach, concepts and cases. Pearson–Prentice Hall.
 Gateway Apple Dell
CSF’s Wt Rating Wt’d
Score
Ratin
g
Wt’d
Score
Rating Wt’d
Score
Market share 0.15 3 0.45 2 0.30 4 0.60
Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin. position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15

Source: David, F., & David, F. R. (2016). Strategic management: A

competitive advantage approach, concepts and cases. Pearson–Prentice Hall.
 UST—Key External Factors Weight Rating
Weighted
Opportunities score

Global markets untapped .15 1 .15

Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30
Threats
Legislation against the tobacco industry .10 2 .20
Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Clinton Administration .20 1 .20
TOTAL 1.00 2.10
Source: David, F., & David, F. R. (2016). Strategic management: A
Ch 6 -27
competitive advantage approach, concepts and cases. Pearson–Prentice Hall.
 (CPM) Procter
Avon L’Oreal & Gamble

Critical Success Factor Weight Rating Score Rating Score Rating Score

Advertising 0.20 1 0.20 4 0.80 3 0.60

Product Quality 0.10 4 0.40 4 0.40 3 0.30
Price Competition 0.10 3 0.30 3 0.30 4 0.40
Management 0.10 4 0.40 3 0.30 3 0.30
Financial Position 0.15 4 0.60 3 0.45 3 0.45
Customer Loyalty 0.10 4 0.40 4 0.40 2 0.20
Global Expansion 0.20 4 0.80 2 0.40 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15

Total 1.00 3.15 3.25 2.80

Source: David, F., & David, F. R. (2016). Strategic management: A
competitive advantage approach, concepts and cases. Pearson–Prentice Hall.
Session Ends
 Disclaimer
The information provided in this module is derived from Mcgraw-hill
Learning Solutions and other sources. All information is provided in
good faith for educational purposes only. Iqra University claims no
ownership of this information, and will not be liable for any claims
arising thereof, now or in the future.