Strategy: External Analysis

Evaluating a company’s a macro-environment begins with understanding the external factors affecting your company’s industry and competitive landscape. In this 2nd post of our 4-part strategy series, we’ll dig into understanding your company’s competitive environment.

External Analysis of your Industry’s Macroenvironment

Doing so requires addressing 7 critical questions:

  1. What are the industry’s dominant economic features?
  2. What kinds of competitive forces are industry members facing, and how strong is each force?
  3. What forces are driving change 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?
  6. What are the key factors for competitive success?
  7. Does the outlook for the industry present the company with sufficiently attractive prospects for profitability?

A lot to think about, so let’s get started…


1. Industry Economics

Understand the reality of the industry.

Industry and Market
  • What is the market size of the industry?
  • What is the growth/decline rate of the industry?
  • What stage of the industry life cycle is it in?
Buyers and Rivals
  • Is market demand fragmented amongst many buyers/competitors or concentrated among a few?
  • Is there a surplus of capacity (supply) pushing prices and profits down?
  • Is there a surplus of demand resulting in competitive profit margins?
  • What roles do vertical or horizontal integration play in creating competitive opportunity?
Products and Technology
  • How differentiated are my products from my competitors offerings?
  • Is the pace of change characterized by rapid innovation or slow product life-cycles?
  • What role do emerging technologies and strong technical capabilities play in building competitive advantages?
Advantages
  • Is the industry characterized by economies of scale or cost advantages?
  • Is the industry characterized by strong learning and experience curves?
  • Is the industry characterized by significant partnerships, regulations, or supplier contracts?

2. Competitive Forces

Assess the forces shaping your competition.

porters-5-forces

Use Michael Porter’s Five Forces Model to determine the degree of each competitive force to influence and shape the competitive landscape:

  1. Buyers: Ability to switch between sellers, integrating backwards and demanding lower prices and concessions.
  2. Suppliers: Ability to create high switching cost, control supplies, and create differentiated offerings.
  3. Substitutes: Ability to deliver comparable or better performance features at a reasonable switching cost.
  4. New Entrants: Ability to capitalize on a growing buyer demand and offer disruptive and radically innovative product offerings.
  5. Rivalry (Incumbents/Sellers): Ability of existing sellers to leverage economies of scale, brand loyalty, regulatory policies and resource constraints to consolidate their market position.

3. Driving Forces

Identify the forces that drive change in your industry’s outlook.

  1. Shifts in long-term growth rates
  2. Increasing globalization
  3. Shifts in buyer demographics and preferences
  4. Increasing use of emerging technologies
  5. Product innovation and differentiation
  6. Marketing and distribution innovations
  7. Changes in costs and supply chain efficiencies
  8. Shifts in regulations and government policies
  9. Shifts in societal concerns, attitudes, and lifestyles

4. Market Positioning

Understand the size and market position of your competitors.

Use strategic group maps to cluster industry rivals based on similar competitive approaches. The process is the following:

  1. Identify the competitive characteristics that build competitive advantage
  2. Plot firms on an x-y axis based on their strategic approaches
  3. Cluster firms into strategic groups
  4. Make the size of a firm proportional to its market share

strategic-group-map

5. Strategic Rivalry

Leverage your Customer Intelligence to try to predict your competitors’ next moves. Consider:

  • Each rival’s current market and financial situation
  • Each rival’s past behaviours, preferences and actions
  • Each rival’s management and leadership styles
  • Each rival’s product development and launch trends
  • Each rival’s competitive landscape for market expansion

6. Key Success Factors

Key success factors are defined as: “the strategy elements, product attributes, competitive capabilities, or intangible assets with the greatest impact on future success in the marketplace.

In order to identify your industry’s KSFs, ask yourself the following:

  1. What product attributes drive buyer preferences and lead them to choose a specific brand over other competing offerings?
  2. What resources and capabilities are necessary to compete in the marketplace?
  3. What mistakes and shortcomings lead to competitive disadvantages?

7. Profitability Outlook

Determine if the industry provides a significant opportunity for your company to capture market share and generate profits. Holistically consider the:

  • Industry’s growth potential
  • Forces driving competition
  • Forces shaping the industry’s future reality
  • Your company’s ability to differentiate and outperform its competition against the industry’s key success factors

Main Takeaways

Defining a winning strategy begins with understanding the reality of the competitive environment in which your company competes. It’s about taking a holistic view of the macro-environment and synthesizing these into a series of assumptions on the market opportunity.

That’s it for now! In my next post, I’ll dig into the assessment of your company’s internal environment.

Cheers ’till next time!

One thought on “Strategy: External Analysis

  1. Pingback: Competition & Competitive Dynamics | Beto's Blog

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