STRATEGIC MARKETING MANAGEMENT

Chapter 2 — External Analysis | Exam Revision Notes

Covers: External Analysis • Customer Analysis • Competitor Analysis • Market Analysis • Environmental Analysis

SECTION 1: OVERVIEW OF EXTERNAL ANALYSIS

What is External Analysis?

Definition: An analysis of the factors external to a business that can affect strategy. It is the
logical starting point of strategy development or review.

Warning: External analysis must be purposeful — without discipline it becomes an endless,

useless descriptive exercise. It should always be motivated by a desire to affect strategy.

4 Topics of External Analysis

1. Customer Analysis
2. Competitor Analysis
3. Market Analysis
4. Environmental Analysis

3 Strategic Contributions of External Analysis

5. Investment Decision (WHERE to compete) — liquidate, maintain, or invest for growth?
6. Functional Area Strategies (HOW to compete) — positioning, segmentation, distribution, etc.
7. Development of SCA (Sustainable Competitive Advantage) — key success factors, skills and
assets

3 Outputs of External Analysis

• Trends and future events
• Threats and opportunities
• Strategic questions — areas of uncertainty that could affect strategy outcomes
📌 Key Distinction: A strategic question focuses on uncertainty; a strategic decision focuses on action.

3 Ways to Handle Uncertainty (from External Analysis)

8. Make a sudden strategic decision — when the logic is convincing or delay is costly
9. Reduce uncertainty — through information acquisition (task force or monitoring effort)
10. Model it using Scenario Analysis — develop alternative future scenarios

When Should External Analysis Be Conducted?

Not just annually — the need for strategic review is often continuous.
• Annual planning can stimulate strategy review, but strategic change is ongoing
• Start with customer and competitor analyses — they define the relevant industry
SECTION 2: CUSTOMER ANALYSIS

3 Areas of Customer Analysis

11. Segmentation — Who are the customers and how are they grouped?
12. Customer Motivation — What drives their purchase decisions?
13. Unmet Needs — What needs are NOT being met by current offerings?

i) Segmentation
Key Questions for Segmentation
• Who are the biggest/most profitable/most attractive customers?
• Do customers fall into logical groups based on needs, motivations, or characteristics?
• How should the market be segmented to require unique strategies per group?

3 Approaches to Segmentation
14. Benefit Segmentation — segment by benefits sought (most useful approach)
Example: Restaurant market → calorie-conscious / health-focused / taste-focused / price-conscious
buyers
15. Application/Use Segmentation — segment by how the product is used
Example: Portable computer buyers → travel use vs. office storage vs. word processing vs. data
processing
16. Multiple vs. Focus Strategy
• Focus strategy: one segment (e.g., Walmart started in small towns under 25,000 population)
• Multiple segment strategy: different products for different segments (e.g., GM: Chevrolet =
price-conscious, Cadillac = high-end, Oldsmobile/Pontiac/Buick = in-between)

ii) Customer Motivation

Key Questions to Ask
• What elements of the product/service do customers value most?
• What are the customers' objectives — what are they really buying?
• How do segments differ in their motivation priorities?
• What changes are occurring in customer motivation?
📌 Exam Example: Air travelers: Business travelers value reliability & schedules; Vacationers value
price & feasible schedules.

iii) Unmet Needs

Definition: A customer need not currently met by existing product offerings.
Strategic Importance: Represents opportunities to gain market share OR threats when
competitors exploit them first.

3 Ways to Identify Unmet Needs

17. Using Customers directly — market research on actual product experiences, problems, desired
improvements
18. Using Lead Users (Von Hipper) — users who face needs that will become general in the
marketplace months/years before others; also positioned to benefit significantly from solutions
19. Creative Thinking — 3 principles:
• Separate ideation from evaluation (don't kill ideas early)
• Approach from different mental/physical perspectives
• Have a mechanism to improve most promising ideas
SECTION 3: COMPETITOR ANALYSIS

Who are Competitors? (3 Definitions)

20. All firms making the same product or class of products
21. All firms making products that supply the same service
22. All firms competing for the same consumer dollars
📌 Key Concept: Competitor Myopia = focusing only on direct competitors and missing indirect or new
competitors. E.g., Coca-Cola vs. Pepsi — but also vs. bottled water, juice, etc.

2 Ways to Identify Competitors

23. Customer-based approach — how customers choose between competing options (what would
they buy instead?)
24. Strategic groups approach — group firms by similar strategies, characteristics, and assets/skills

Strategic Groups
Definition: A group of firms that over time practice similar competitive strategies, have
similar characteristics, and share similar assets and skills.

Mobility barriers prevent firms from moving from one strategic group to another.
Value: Reduces the number of competitors that need to be individually analyzed; refines
investment decisions.

5 Sources of Potential Competitors

25. Market Expansion — firms from other geographic regions or countries
26. Product Expansion — firms expanding into adjacent product categories (e.g., Rossignol: skis →
clothing → tennis)
27. Backward Integration — customers becoming competitors (e.g., Campbell Soup making own
containers)
28. Forward Integration — suppliers becoming competitors (e.g., AST moving from add-on boards
to full computers)
29. Export of Assets or Skills — small competitor acquired by a firm that eliminates its weaknesses

Questions to Structure Competitor Analysis

i) WHO are the Competitors?
• Against whom do we usually compete? Who is most intense?
• Who makes substitute products?
• Can they be grouped into strategic groups?
• Who are potential entrants? What are their barriers to entry?

ii) EVALUATING Competitors (8 Dimensions)

Understand competitors across these areas:
 # Dimension & What to Look For
i. Size, Growth Sales, market share, growth rate — signals vitality. Deteriorating position =
& Profitability financial/org stress.
ii. Image & What associations does the competitor own? (e.g., Gillette = 'the best a man can
Positioning get'). Research customer perceptions.
iii. Objectives & Financial goals (market share, growth, profitability) + non-financial goals (tech
Commitment leadership, distribution). Predicts future strategy.
iv. Current & What has worked/failed before? What is their distribution, brand, cost structure,
Past Strategies focus area?
v. Organization Background of top management, org culture (tight vs. loose), ability to innovate or
& Culture discipline costs.
vi. Cost Direct vs. fixed costs, labor, materials, plant investment. Indicates pricing strategy
Structure and staying power.
vii. Exit Barriers Specialized assets, fixed cost commitments, relationships, government/social
constraints, managerial pride.
viii. Strengths & Identify assets/skills absent or present. Exploit competitor weakness with your
Weaknesses strength; neutralize their strength.

Identifying Assets & Skills for Competitor Strength/Weakness Analysis

Ask these questions to identify what matters:
• Why are successful businesses successful?
• Why are unsuccessful businesses unsuccessful?
• What are the key customer motivations?
• What are large cost components?
• What are the industry mobility barriers?
• Which components of the value chain can create competitive advantage?

4 Functional areas to analyze:

• Innovation — R&D, patents, new product capability, technical superiority
• Manufacturing — cost structure, flexible operations, raw material access, capacity
• Finance — access to capital, ability to use debt/equity, parent's willingness to finance
• Marketing — brand, product quality, distribution, sales force, customer service, market share

4 Benefits of Understanding Competitors

30. Reveals current strengths/weaknesses → identifies opportunities and threats
31. Insights into future strategies → predict emerging threats/opportunities
32. Helps forecast competitor reactions → informs your own strategic alternatives
33. Identifies strategic questions worth monitoring over time
SECTION 4: MARKET ANALYSIS

2 Objectives of Market Analysis

34. Determine market attractiveness — long-term profit potential for participants
35. Understand market dynamics — identify key success factors, trends, threats, and opportunities
📌 Key Concept: A Key Success Factor (KSF) is an asset or skill needed to 'play the game' — its
absence creates a critical weakness.

6 Dimensions of Market Analysis

36. Actual & Potential Market Size
37. Market Growth
38. Market Profitability (Porter's 5-Force Model)
39. Cost Structure
40. Distribution Systems
41. Trends & Key Success Factors

i) Market Size
• Start with total sales level; analyze at industry, submarket, and segment levels
• Use government sources, trade associations, competitor financial data, or customer surveys
• Potential market: consider new uses, new user groups, more frequent usage
📌 Insight: Small can be beautiful — avoid dismissing niche markets; most large markets were small at
the start. Avoiding small markets = always fighting first-mover advantage.

ii) Market Growth

• Growth → more sales/profits even without gaining share; less price pressure
• Decline → reduced sales, more price pressure as firms fight for a shrinking pie
• Nominal strategy: invest in growth contexts; avoid/disinvest in declining ones
• Exception: declining markets can be opportunities if competitors are exiting

Detecting Maturity & Decline (Key Indicators)

• Price pressure from overcapacity / lack of product differentiation
• Market saturation
• Buyer sophistication and knowledge
• No new growth sources
• Substitute products or technologies
• Customer disinterest

Forecasting Growth (Leading Indicators)

• Demographic data (e.g., birth rate → future education demand)
• Sales of related equipment (e.g., PC sales → future printer/supply demand)
iii) Market Profitability — Porter's 5-Force Model
Purpose: Estimate how profitable the average firm in a market will be. Developed by
Michael Porter (Harvard).

Force Key Factors That Increase the Threat

1. Existing Competitors Many competitors; similar size; similar products; high fixed costs;
significant exit barriers → intense price competition
2. Potential Entrants Low entry barriers = more entrants. Barriers include: capital
requirements, economies of scale, distribution access, product
differentiation, brand loyalty
3. Substitute Products Products that serve the same need at lower price (e.g., plastic vs.
metal cans; alarms vs. security guards) → caps profitability
4. Customer Power High when: customer buys large share of seller's output; alternative
suppliers exist; customer can integrate backward
5. Supplier Power High when: supplier industry is concentrated; switching costs for
customers are high (e.g., OPEC oil cartel)

iv) Cost Structure

• Conduct value-chain analysis to determine where value is added
• Aim to be the lowest-cost competitor at high value-added stages
📌 Example: In the metal can business, transportation is a high cost — a firm with plants near
customers has a significant cost advantage.

v) Distribution Systems — 3 Questions

42. What are the alternative distribution channels?
43. What are the trends? Which channels are growing or emerging?
44. Who has the power in the channel and how is that likely to shift?

vi) Key Success Factors (KSFs) — 2 Types

45. Strategic Necessities — needed to compete; absence = critical weakness (but having them
alone is not an advantage)
46. Strategic Strengths — areas where the firm excels and is superior to competitors; the basis for
advantage

Risks in High-Growth Markets

Growth markets attract attention but carry risks:
• Too many competitors enter — market gets overcrowded
• A competitor enters with a superior product or lower cost
• Key success factors shift and the firm cannot adapt
• Technology changes disrupt the market
• Market growth fails to meet expectations
• Resources are inadequate to sustain the growth rate
• Adequate distribution may not be available
SECTION 5: ENVIRONMENTAL ANALYSIS

5 Areas of Environmental Analysis (TGECD)

47. Technological — Are existing technologies maturing? What developments
could affect the industry?
48. Governmental — Regulation changes, tax incentives, political risks?
49. Economic — Economic prospects and inflation in operating countries?
50. Cultural — Trends in lifestyles, fashions, culture? Implications?
51. Demographic — Demographic trends affecting market size or segments?
📌 Memory Trick: TGECD — 'The Great Environment Can Disrupt'

Key Insights on Technology

• New technologies don't instantly kill old ones — safety razor sales rose 800% after electric razor
was introduced
• New technologies are expensive and crude at first; they often create new markets rather than
destroy old ones
• Example: Transistors started in hearing aids and pocket radios before mass adoption
• Firms have time to react — but must monitor continuously

5 Methods of Forecasting Environmental Trends

52. Asking the Right Questions — identify what trends will affect industry size and strategies
53. Trend Extrapolation — project historical trends; useful for demographic and slow-moving
patterns; establishes a baseline for detecting turning points
54. Asking Experts — interviews, surveys of trade magazine judgments, group discussions, or
Delphi study
55. Decomposing the Task — break the prediction into smaller, more manageable sub-questions
56. Cross-Impact Analysis — estimate how the probability of one event is affected by whether other
events occur

Delphi Study:
Structured questionnaire sent to experts → results summarized and returned → experts can revise
opinions or justify reasoning → repeated until consensus emerges.

SECTION 6: IMPACT ANALYSIS — MANAGING STRATEGIC

QUESTIONS

2 Dimensions for Ranking Strategic Questions

57. Impact — extent to which the issue affects SBUs, importance of those SBUs, and number
affected
58. Immediacy — probability the event/trend will occur; time frame; reaction time available vs.
required
Strategic Question Categories (2x2 Matrix)
IMMEDIACY: LOW IMMEDIACY: HIGH
IMPACT: HIGH Monitor & analyze; develop IN-DEPTH ANALYSIS + develop
contingent strategies reaction strategies NOW
IMPACT: LOW Low-level monitoring only Monitor & analyze (more depth)

SECTION 7: SCENARIO ANALYSIS

Definition: An alternative view of the future environment, prompted by an alternative

possible answer to a strategic question.
Purpose: Overcome the constraint of existing mental models; surface new strategies;
challenge old ones.

4 Stages of Scenario Analysis

59. Identify Scenarios — driven by strategic questions (highest priority from impact analysis)
60. Develop Scenario Strategies — relate scenarios to existing and new strategic options
e.g., Optimistic scenario → invest aggressively; Pessimistic scenario → avoid investment, stabilize
prices
61. Estimate Scenario Probabilities — use expert judgment and causal analysis of underlying
factors
62. Perform Regret Analysis — evaluate the outcomes if the wrong scenario is pursued; quantify
risk
📌 Regret Analysis: Expected value of a strategy = sum of (outcome under each scenario × scenario
probability).
SECTION 8: CASE STUDY GUIDE — CHAPTER 2

How to Structure a Chapter 2 Case Answer

Step 1: Identify WHICH external analysis area is relevant
Is it about customer analysis? Competitor analysis? Market profitability? Environmental
trends?

Step 2: Apply the correct framework

Segmentation → use benefit/application/focus approaches. Competitors → use 8 dimensions
or strategic groups. Market → use 6 dimensions + Porter's 5 Forces.

Step 3: Analyze using case evidence

Cite facts from the case. Link to theory (e.g., 'This is an example of competitor myopia...').

Step 4: Identify strategic implications

What opportunities or threats emerge? What are the strategic questions? What scenario
analysis is appropriate?

Sample Case Study: Coca-Cola Competitor Analysis

QUESTION: Apply competitor analysis concepts to Coca-Cola's market position.

1. Competitor Myopia: If Coca-Cola only sees Pepsi as a competitor, it suffers from

competitor myopia. A broader definition includes carbonated water, bottled water (Abyssinia,
Yes), energy drinks, and juices.

2. Strategic Groups: Coca-Cola, Pepsi = premium carbonated drinks (same group); mineral
water brands = different strategic group with different assets and distribution.

3. Porter's 5 Forces: Strong brand (reduces threat from new entrants); substitute threat is
high (water, juice); supplier power moderate; large retailers have buyer power.

4. Unmet Needs: Rising health-consciousness = unmet need for healthier carbonated

options. This is a strategic question: Will health trends reduce demand for traditional sodas?

Quick-Reference: Chapter 2 Concept → Framework Map

If the question is about... Use this framework Key list to cite
Dividing the market Segmentation approaches Benefit / Application / Focus
What customers want Customer motivation analysis Segment motivation grid
Product gaps Unmet needs framework 3 methods to identify
Who are the rivals? Competitor identification Customer-based + strategic
groups
Evaluating a rival 8-dimension competitor analysis Size, image, objectives,
 strategy, culture, cost, exit
barriers, S&W
New entrants 5 sources of potential Market/product expansion,
competitors backward/forward integration,
asset export
Market attractiveness Porter's 5-Force Model 5 Forces + barriers to entry
Predicting the future Scenario Analysis 4 stages: identify → strategize
→ probability → regret
Which issue to act on first Impact Analysis 2x2 matrix Impact vs. Immediacy
External environment TGECD Environmental Analysis Technology, Government,
Economy, Culture,
Demographics

Strategic Marketing Management — Chapter 2 | Exam Notes