Strategic Management, Ambo University, 2007E.C/2015G.

Part Two: Strategy Formulation

Chapter Three
Environmental Analysis
Introduction
Before an organization can begin strategy formulation, it must scan the external environment to
identify possible opportunities and threats and its internal environment forstrengths and
weaknesses. Environmental scanningis the monitoring, evaluating, and disseminating of
information from the external and internal environments to keypeople within the corporation. It
is a tool that a corporation uses to avoid strategic surprise and ensure long-term health. Research
has found a positive relationshipbetween environmental scanning and profits.

Why Environmental Analysis For Strategy Formulation?

When the company ceases to adjust the environment to its strategy or does not react to the
demands of the environment by changing its strategy, the result is lessened achievement of
corporate objectives. From environmental analysis strategists get time to anticipate opportunities
and to plan to take optional responses to these opportunities. It also helps strategists to develop
an early warning system to prevent threats or to develop strategies which can turn a threat to the
firm's advantage. It is clear that because of the difficulty to assessing the future, not all future
events can be anticipated. But some can and are. To the extent that some or most are anticipated
by this analysis and diagnosis, managerial decisions are likely to be better. And the process
reduces the time pressures on the few which are not anticipated. Thus, the managers can
concentrate on these few instead of having to deal with all the environmental influences.

In general, environmental analysis has three basic goals as follows:

 First, the analysis should provide an understanding of current and potential changes
taking place in the environment. It is important that one must be aware of the existing
environment. At the same time one must have a long term perspective about the future
too.

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 Second, environmental analysis should provide inputs for strategic decision making.
Mere collection of data is not enough. The information collected must be useful for and
used in strategic decision making.

 Third, environment analysis should facilitate and foster strategic thinking in

organizations-typically a rich source of ideas and understanding of the context within
which a firm operates. It should challenge the current wisdom by bringing fresh
viewpoints into the organization.

4.1 The Nature/ Characteristics of External Environment

External environment exhibits many characteristics or natures. Some of the important – and
obvious – characteristics/ natures are:-

♦ Environment is complex: the environment consists of a number of factors, events, conditions

and influences arising from different sources. All these do not exist in isolation but interact
with each other to create entirely new sets of influences. It is difficult to comprehend at once
what factors constitute a given environment. All in all, environment is a complex that is
somewhat easier to understand in parts but difficult to grasp in totality.

♦ Environment is dynamic: the environment is constantly changing in nature. Due to the many
and varied influences operating; there is dynamism in the environment causing it to
continuously change its shape and character.

♦ Environment is multi-faceted: What shape and character an environment assumes depends

on the perception of the observer. A particular change in the environment, or a new
development, may be viewed differently by different observers. This is frequently seen when
the same development is welcomed as an opportunity by one company while another
company perceives it as a threat.

♦ Environment has a far reaching impact: The environment has a far reaching impact on
organizations. The growth and profitability of an organization depends critically on the
environment in which it exists. Any environment change has an impact on the organization in
several different ways.

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4.2 Sources of External Information

In undertaking environmental scanning, strategic managers must first be aware of the many
variables within a corporation’s natural, societal, and task environments. TheNatural
environment includes physical resources, wildlife, and climate that are an inherent part of
existence on Earth. These factors form an ecological system of interrelated life.
The societal environment is mankind’s social system that includes general forces that do not
directly touch on the short-run activities of the organization that can, and often do, influence its
long-run decisions.
These forces are as follows:
 Economic forces regulate the exchange of materials, money, energy, and information.
 Technological forces generate problem-solving inventions.
 Political–legal forces allocate power and provide constraining and protecting laws and
regulations.
 Socio-cultural forces regulate the values, mores, and customs of society.
The task environment includes those elements or groups that directly affect the corporation and,
in turn, are affected by it. These include governments, local communities, suppliers, competitors,
customers, creditors, employees, shareholders, labor unions, special-interest groups, and trade
associations. A corporation’s task environment can be thought of as the industry within which it
operates.
Industry analysis refers to an in-depth examination of key factors within a corporation’s task
environment. The natural, societal, and task environments must be monitored so that strategic
factors that are likely to have a strong impact on corporate success or failure can be detected.
ELEMENTS OF MACRO ENVIRONMENT OR EXTERNAL ENVIRONMENT

Macro environment is explained as one which is largely external to the enterprise and thus
beyond the direct influence and control of the organization, but which exerts powerful influence
over its functioning. The external environment of the enterprise consists of individuals, groups,
agencies, organizations, events, conditions and forces with which the organization comes into
frequent contact in the course of its functioning. It establishes interacting and interdependent
relations, conducts transactions, designs and administers appropriate strategies and policies to
cope with fluctuations therein and otherwise negotiates its way into the future.

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A. Demographic environment

The term demographics denote characteristics of population in an area, district, and country or in
world. It includes factors such as race, age, income, educational attainment, asset
ownership,home ownership, employment status and location. Data with respect to these factors
within a demographic variable, and across households, are both of interest, as well as trends over
time to businessmen in addition to economist. Marketers and other social scientists often group
populations into categories based on demographic variables. Some of the demographic factors
have great impact on the business. Factors such as general age profile, sex ratio, education,
growth rate affect the business with different magnitude.

Business Organizations need to study different demographic factors. Particularly, they need to
address following issues:

♦ What demographic trends will affect the market size of the industry?

♦ What demographic trends represent opportunities or threats?

B. Economic environment

The economic environment refers to the nature and direction of the economy in which a
company competes or may compete. The economic environment includes general economic
situation in the region and the nation, conditions in resource markets (money market, manpower
market, raw material components, services, supply markets and so on) which influence the
supply of inputs to the enterprise, their costs, quality, availability and reliability of supplies.

Economic environment determines the strength and size of the market. The purchasing power in
an economy depends on current income, prices, savings, and circulation of money, debt and
credit availability. Income distribution pattern determines the marketing possibilities. The
important point to consider is to find out the effect of economic prospect and inflation on the
operations of the firms. Strategists must scan, monitor, forecast, and assess a number of key
economic factors mentioned in both domestic and key international markets.

C. Political-Legal Environment

This is partly general to all similar enterprises and partly specific to an individual enterprise. It
includes such factors as the general state of political development, the degree of

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politicalizationof business and economic issues, the level of political morality, the law and order
situation, political stability, the political ideology and practices of the ruling party, the
purposefulness and efficiency of governmental agencies, the extent and nature of governmental
intervention in the economy and the industry, Government policies (fiscal, monetary, industrial,
labor and export-import policies), specific legal enactments and framework in which the
enterprise has to function and the degree of effectiveness with which they are implemented,
public attitude towards business in general and the enterprise in particular and so on. There are
three important elements in political-legal environment.
(i) Government: Business is highly guided and controlled by government policies. Hence the
type of government running a country is a powerful influence on business: A strategist
has to consider the changes in the regulatory framework and their impact on the business.

Taxes and duties are other critical area that may be levied and affect the business. For example,
introduction of Fringe benefits Tax has major impact on the business.

(ii) Legal: Business Organizations prefer to operate in a country where there is a sound legal
system. However, in any country businesses must have a good working knowledge of the
major laws protecting consumers, competitions and organizations. Businesses must
understand the relevant laws relating to companies, competition, intellectual property,
foreign exchange, labor and so on.

(iii) Political: Political pressure groups influence and limit organizations. Apart from sporadic
movements against certain products, service and organizations, politics has deeply seeped into
unions. Also special interest groups and political action committees put pressure on business
organizations to pay more attention to consumer’s rights, minority rights, and women rights.

D. Socio-Cultural environment

This is too general an entity which influences almost all enterprises in a similar manner. It is a
complex of factors such as social traditions, values and beliefs, level and standards of literacy
and education, the ethical standards and state of society, the extent of social stratification,
conflict and cohesiveness and so forth.

Socio-cultural environment consist of factors related to human relationships and the impact of
social attitudes and cultural values which has bearing on the business of the organization. The
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beliefs, values and norms of a society determine how individuals and organizations should be
interrelated. The core beliefs of a particular society tend to be persistent. It is difficult for
businesses to change these core values, which becomes a determinant of its functioning.

Some of the important factors and influences operating in this environment are:

♦ Social concerns, such as the role of business in society, environmental pollution, corruption,
use of mass media, and consumerism

♦ Social attitudes and values, such as expectations of society from business, social customs,
beliefs, rituals and practices, changing lifestyle patterns, and materialism.

♦ Family structure and changes in it, attitude towards and within the family, and family values

♦ Role of women in society, position of children and adolescents in family and society

♦ Educational levels, awareness and consciousness of rights, and work ethics of members of
society.

The social environment primarily affects the strategic management process within the
organization in the areas of mission and objective setting, and decisions related to products and
markets.

E. Technological environment
The most important factor, which is controlling and changing people’s life, is technology.
Technology has literally created wonder. Man could realize its dream of walking in the moon,
traveling in spaceships, and go to the other side of the globe within few hours. They have already
started dreaming of living of much extended life of hundreds years with the latest development
of genetic sciences and technology.

Technology has changed the way people communicate with the advent of Internet and
telecommunication system. Technology has changed the ways of how business operates now.
This is leading to many new business opportunities as well as making obsolete many existing
systems.

The following factors are to be considered for the technological environment:

♦ The pull of technological change.

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♦ Opportunities arising out of technological innovation.

♦ Risk and uncertainty of technological development

♦ Role of R&D in a country and government’s R&D budget

The technology and business are highly interrelated and interdependent also. The fruits of
technological research and development are available to society through business only and this
also improves the quality of life of the society. Hence, technology is patronized by business.
Then again technology also drives business and makes a total change on how it is carried out.
The interface between business and technology is explained in the figure: Interface between
Business & Technology. Important technology-related issues that might affect a broad variety of
companies include:

♦ Access to the "information highway" through the Internet which may enable large numbers of
employees to work from home or provide strategists with access to richer sources of
information,

♦ Business-to-business sales and exchanges,

♦ Providing customers with access to online shopping through the Internet

For example, Dell Computer Corporation reduces its paperwork flow, schedules its payments
more efficiently, and is able to coordinate its inventories efficiently and effectively by using the
capabilities of the Internet. This helps to eliminate/reduce paperwork, flatten companies, and
shrink time and distance, thus capturing a competitive premium for the company. Because the
technological aspects are so important, some of the key questions that can be asked in assessing
the technological environment are given below.

♦ What are the technologies {both manufacturing and information technologies} used by the
company?

♦ Which technologies are utilized in the company's business, products, or their parts?

♦ How critical is each technology to each of these products and businesses?

♦ Which external technologies might become critical and why? Will they remain available
outside the company?

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♦ What has been the investment in the product and in the process side of these technologies? For
the company and for its competitors, Design, Production, Implementation and service?

♦ What are the other applications of the company's technologies? In which applications does the
company currently participate and why? In which application does the company does not
participate and why?

♦ Which technological investments should be curtailed or eliminated?

♦ What additional technologies will be required in order to achieve the current corporate business
objectives?

♦ What are the implications of the technology and business portfolios for corporate strategy?

F. Global environment

Today's competitive landscape requires that companies must analyze global environment as it is
also rapidly changing. The new concept of global village has changed how individuals and
organizations relate to each other. Further, new migratory habits of the workforce as well as
increased offshore operation are changing the dynamics of business operation. Among the global
environmental factors that should be assessed are:

♦ Potential positive and negative impact of significant international events such as a sport meet
or a terrorist attack

♦ Identification of both important emerging global markets and global markets that are changing
this includes shifts in the newly industrialized countries in Asia that may imply the opening
of new markets for products or increased competition from emerging globally competitive
companies in countries such as South Korea and China.

♦ Differences between cultural and institutional attributes of individual global markets.

Due to economic reforms, Indian businessmen are also out to see beyond the physical boundaries
of the country. The Indian companies are acquiring business in different countries. The need to
think and act from global perspective is universal. For a long time businessmen everywhere
believed that home markets were adequate and safe. They never felt the need to explore the
overseas markets in a big way. "If they could pick up some extra sales through exporting, these

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businessmen were more than satisfied. The scenario is different now. The companies are
increasingly interested in globalizing.

4.3 Forecasting Tools and Techniques

I. Issues Priority Matrix:-One technique and tools to identify and analyze developments in
the external environment is to use the issues priority matrix.
1. Identify a number of likely trends emerging in the natural, societal, and task environments.
These are strategic environmental issues—those important trends that, if they happen, will
determine what various industries will look like in the near future.
2. Assess the probability of these trends actually occurring, from low to medium to high.
3. Attempt to ascertain the likely impact (from low to high) of each of these trends on the
corporation.
A corporation’s external strategic factors are the key environmental trends that are judged to
have both a medium to high probability of occurrence and a medium to high probability of
impact on the corporation. The issues priority matrix can then be used to help managers decide
which environmental trends should be merely scanned (low priority) and which should be
monitored as strategic factors (high priority). Those environmental trends judged to be a
corporation’s strategic factors are then categorized as potential opportunities and threats and are
included in strategy formulation.
Probable Impact on Corporation

High Medium Low

Probability of Occurrence

High Priority High Priority Medium Priority

High

High Priority Medium Priority Low Priority

Low Medium

Medium Priority Low Priority Low Priority

Fig. 4.1 Issues Priority Matrix

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II. Boston Consulting Group (BCG) Matrixis a four celled matrix (a 2 * 2 matrix)
developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a
graphic representation for an organization to examine different businesses in it’s portfolio on the
basis of their related market share and industry growth rates. It is a two dimensional analysis on
management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of
business potential and the evaluation of environment.

According to this matrix, business could be classified as high or low according to their industry
growth rate and relative market share.

Relative Market Share = SBU Sales this year leading competitors sales this year.
Market Growth Rate = Industry sales this year - Industry Sales last year.
The analysis requires that both measures be calculated for each SBU. The dimension of business
strength, relative market share, will measure comparative advantage indicated by market
dominance. The key theory underlying this is existence of an experience curve and that market
share is achieved due to overall cost leadership.

BCG matrix has four cells, with the horizontal axis representing relative market share and the
vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. If
all the SBU’s are in same industry, the average growth rate of the industry is used. While, if all
the SBU’s are located in different industries, then the mid-point is set at the growth rate for the
economy.

Resources are allocated to the business units according to their situation on the grid. The four
cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these
cells represents a particular type of business.

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10 x 1x 0.1 x

Figure 4.2: BCG Matrix

1. Stars- Stars represent business units having large market share in a fast growing industry.
They may generate cash but because of fast growing market, stars require huge
investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this
cell are attractive as they are located in a robust industry and these business units are
highly competitive in the industry. If successful, a star will become a cash cow when the
industry matures.
2. Cash Cows- Cash Cows represents business units having a large market share in a
mature, slow growing industry. Cash cows require little investment and generate cash that
can be utilized for investment in other business units. These SBU’s are the corporation’s
key source of cash, and are specifically the core business. They are the base of an
organization. These businesses usually follow stability strategies. When cash cows loose
their appeal and move towards deterioration, then a retrenchment policy may be pursued.
3. Question Marks- Question marks represent business units having low relative market
share and located in a high growth industry. They require huge amount of cash to
maintain or gain market share. They require attention to determine if the venture can be
viable. Question marks are generally new goods and services which have a good
commercial prospective. There is no specific strategy which can be adopted. If the firm
thinks it has dominant market share, then it can adopt expansion strategy, else

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retrenchment strategy can be adopted. Most businesses start as question marks as the
company tries to enter a high growth market in which there is already a market-share. If
ignored, then question marks may become dogs, while if huge investment is made, then
they have potential of becoming stars.
4. Dogs- Dogs represent businesses having weak market shares in low-growth markets.
They neither generate cash nor require huge amount of cash. Due to low market share,
these business units face cost disadvantages. Generally retrenchment strategies are
adopted because these firms can gain market share only at the expense of
competitor’s/rival firms. These business firms have weak market share because of high
costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim,
it should be liquidated if there is fewer prospects for it to gain market share. Number of
dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units
and makes it possible to compare many business units at a glance. But BCG Matrix is not free
from limitations, such as-

1. BCG matrix classifies businesses as low and high, but generally businesses can be
medium also. Thus, the true nature of business may not be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high costs also
involved with high market share.
4. Growth rate and relative market share are not the only indicators of profitability. This
model ignores and overlooks other indicators of profitability.
5. At times, dogs may help other businesses in gaining competitive advantage. They can
earn even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.

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[Link] Analysis

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition,

Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have
some measure of control. Also, by definition, Opportunities (O) and Threats (T) are considered
to be external factors over which you have essentially no control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic
position of the business and its environment. Its key purpose is to identify the strategies that will
create a firm specific business model that will best align an organization’s resources and
capabilities to the requirements of the environment in which the firm operates. In other words, it
is the foundation for evaluating the internal potential and limitations and the probable/likely
opportunities and threats from the external environment. It views all positive and negative
factors inside and outside the firm that affect the success. A consistent study of the environment
in which the firm operates helps in forecasting/predicting the changing trends and also helps in
including them in the decision-making process of the organization.
An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given
below-

1. Strengths- Strengths are the qualities that enable us to accomplish the organization’s
mission. These are the basis on which continued success can be made and
continued/sustained. Strengths can be either tangible or intangible. These are what you
are well-versed in or what you have expertise in, the traits and qualities your employees
possess (individually and as a team) and the distinct features that give your organization
its consistency. Strengths are the beneficial aspects of the organization or the capabilities
of an organization, which includes human competencies, process capabilities, financial
resources, products and services, customer goodwill and brand loyalty. Examples of
organizational strengths are huge financial resources, broad product line, no debt,
committed employees, etc.
2. Weaknesses- Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. These weaknesses deteriorate influences on the
organizational success and growth. Weaknesses are the factors which do not meet the
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standards we feel they should meet. Weaknesses in an organization may be depreciating

machinery, insufficient research and development facilities, narrow product range, poor
decision-making, etc. Weaknesses are controllable. They must be minimized and
eliminated. For instance - to overcome obsolete machinery, new machinery can be
purchased. Other examples of organizational weaknesses are huge debts, high employee
turnover, complex decision making process, narrow product range, large wastage of raw
materials, etc.
3. Opportunities- Opportunities are presented by the environment within which our
organization operates. These arise when an organization can take benefit of conditions in
its environment to plan and execute strategies that enable it to become more profitable.
Organizations can gain competitive advantage by making use of opportunities.
Organization should be careful and recognize the opportunities and grasp them whenever
they arise. Selecting the targets that will best serve the clients while getting desired
results is a difficult task. Opportunities may arise from market, competition,
industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom sector
and compete with existing firms for revenue.
4. Threats- Threats arise when conditions in external environment jeopardize the reliability
and profitability of the organization’s business. They compound the vulnerability when
they relate to the weaknesses. Threats are uncontrollable. When a threat comes, the
stability and survival can be at stake. Examples of threats are - unrest among employees;
ever changing technology; increasing competition leading to excess capacity, price wars
and reducing industry profits; etc.

SWOT is commonly used as part of strategic planning and looks at:

 Internal strengths
 Internal weaknesses
 Opportunities in the external environment
 Threats in the external environment

SWOT can help management in a business discover:

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 What the business does better than the competition

 What competitors do better than the business
 Whether the business is making the most of the opportunities available
 How a business should respond to changes in its external environment

The result of the analysis is a matrix of positive and negative factors for management to address:

Positive factors Negative factors

Internal factors Strengths Weaknesses

External factors Opportunities Threats

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it
involves a great subjective element. It is best when used as a guide, and not as a prescription.
Successful businesses build on their strengths, correct their weakness and protect against internal
weaknesses and external threats. They also keep a watch on their overall business environment
and recognize and exploit new opportunities faster than its competitors.

SWOT Analysis helps in strategic planning in following manner-

a. It is a source of information for strategic planning.

b. Builds organization’s strengths.
c. Reverse its weaknesses.
d. Maximize its response to opportunities.
e. Overcome organization’s threats.
f. It helps in identifying core competencies of the firm.
g. It helps in setting of objectives for strategic planning.
h. It helps in knowing past, present and future so that by using past and current data, future
plans can be chalked out.

There are certain limitations of SWOT Analysis which are not in control of management. These
include-

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a. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;
e. Searching a new market for the product which is not having overseas market due to
import restrictions; etc.

Internal limitations may include-

a. Insufficient research and development facilities;

b. Faulty products due to poor quality control;
c. Poor industrial relations;
d. Lack of skilled and efficient labor; etc

4.4 Competitive Analysis: Porter’s Five Forces Model

To gain a deep understanding of a company’s industry and competitive environment, managers

do not need to gather all the information they can find and waste a lot of time digesting it.
Rather, the task is much more focused. Thinking strategically about a company’s competitive
environment entails using some well defined concepts and analytical tools like Porter’s five force
model

The most influential analytical model for assessing the nature of competition in an industry is
Michael Porter's Five Forces Model, which is described below:

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Fig. 4.3 Porter’s Five Forces Model

Porter explains that there are five forces that determine industry attractiveness and long-run
industry profitability. These five "competitive forces" are:-

1. The threat of entry of new competitors (new entrants)

2. The threat of substitutes
3. The bargaining power of buyers
4. The bargaining power of suppliers
5. The degree of rivalry between existing competitors

1. Threat of New Entrants

New entrants to an industry can raise the level of competition, thereby reducing its attractiveness.
The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in
some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate
agency, restaurants). Key barriers to entry include:-

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 Economies of scale
 Capital / investment requirements
 Customer switching costs
 Access to industry distribution channels
 The likelihood of retaliation from existing industry players.

2. Threat of Substitutes

The presence of substitute products can lower industry attractiveness and profitability because
they limit price levels. The threat of substitute products depends on:

 Buyers' willingness to substitute

 The relative price and performance of substitutes
 The costs of switching to substitutes

3. Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry.

The cost of items bought from suppliers (e.g. raw materials, components) can have a significant
impact on a company's profitability. If suppliers have high bargaining power over a company,
then in theory the company's industry is less attractive. The bargaining power of suppliers will be
high when:

 There are many buyers and few dominant suppliers

 There are undifferentiated, highly valued products
 Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers
threatening to set up their own retail outlets)
 Buyers do not threaten to integrate backwards into supply
 The industry is not a key customer group to the suppliers

4. Bargaining Power of Buyers

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Buyers are the people / organizations who create demand in an industry.

The bargaining power of buyers is greater when

 There are few dominant buyers and many sellers in the industry
 Products are standardized
 Buyers threaten to integrate backward into the industry
 Suppliers do not threaten to integrate forward into the buyer's industry
 The industry is not a key supplying group for buyers

5. Intensity of Rivalry

The intensity of rivalry between competitors in an industry will depend on:

 The structure of competition - for example, rivalry is more intense where there are
many small or equally sized competitors; rivalry is less when an industry has a clear
market leader
 The structure of industry costs - for example, industries with high fixed costs
encourage competitors to fill unused capacity by price cutting
 Degree of differentiation - industries where products are commodities (e.g. steel, coal)
have greater rivalry; industries where competitors can differentiate their products have
less rivalry
 Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is
a significant cost associated with the decision to buy a product from an alternative
supplier
 Strategic objectives - when competitors are pursuing aggressive growth strategies,
rivalry is more intense. Where competitors are "milking" profits in a mature industry, the
degree of rivalry is less
 Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing
down factories) - then competitors tend to exhibit greater rivalry.

Note That: - The way one uses the five-force model to determine what competition is like in a
given industry is to build the picture of competition in three steps:

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Step 1: Identify the specific competitive pressures associated with each of the five forces.

Step 2: Evaluate how strong the pressures comprising each of the five forces are (fierce,
strong, moderate to normal, or weak). Step 3: Determine whether the collective strength
of the five competitive forces is conducive to learning attractive profits. (Fierce, strong,
moderate to normal, or weak)

Step 3: Determine whether the collective strength of the five competitive forces is
conducive to learning attractive profits.

The main objectives of doing competitor analysis can be summarized as follows:

To study the market;

To predict and forecast organization’s demand and supply;

To formulate strategy;

To increase the market share;

To study the market trend and pattern;

To develop strategy for organizational growth;

When the organization is planning for the diversification and expansion plan;

To study forthcoming trends in the industry;

Understanding the current strategy strengths and weaknesses of a competitor can suggest opportunities and threats that
will merit a response;

Insight into future competitor strategies may help in predicting upcoming threats and opportunities.

Competitors should be analyzed along various dimensions such as their size, growth and
profitability, reputation, objectives, culture, cost structure, strengths and weaknesses, business
strategies, exit barriers, etc.

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