Introduction
In Topic 1 we learned that there are many different strategic options
available for managers to choose between, and that there are
'winning' strategies and so so strategies. The first test of a winning
strategy which we looked at in Chapter 1 was 'How well does the
strategy fit with the company's situation?' . That is, the strategy
chosen for the organisation must 'fit' with the company's external
and internal environments. Some strategies will 'fit' in some
industries but not in others, some strategies will 'fit' in some
organisations but not in others. In deciding on the company's long-
term direction, developing the customer value proposition, setting
objectives and crafting the strategy, managers must first have a
good understanding of the external and internal environments.
In this topic we will look at the concepts and analytical tools for
assessing the external environment of a business. In particular, we
will attempt to answer 7 questions, which together give managers a
good understanding of the situation and competitive pressures in
the external environment.
The 7 questions below will guide us through assessing the
company's industry and competitive environment:
1. Do macro-environmental factors and industry characteristics offer
sellers opportunities for growth and attractive profits?
2. What kinds of competitive forces are industry members facing, and
how strong is each force?
3. What forces are driving industry change, 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 industry offer good prospects for profitability?
The internal environment of an organisation is discussed in Chapter
4.
Chapter 3 Evaluating a company's
external environment
We are going to assess the external environment in regards to the 7
questions outlined above in the Introduction. By following these 7
questions, we can gain a comprehensive understanding of the
industry and competitive environment. There are also a number of
tools/models which we will use in the assessment.
Question 1 - What are the strategically relevant
components of the macro-environment?
When you analyse a company your first concern should always be
for the external environment in which the company operates.
The macro-environment encompasses the broad environmental
context in which a company is situated and is comprised of six
principal components: political factors, economics conditions,
sociocultural forces, technological factors, environmental factors,
and legal/regulatory conditions. PESTEL analysis can be used to
assess the strategic relevance of the six components of the macro-
environment.
That means, what is going on outside of the company itself and in
the greater political and economic environment in which the
company and its competitors function. This includes things like the
technological changes that might be taking place in an industry, is
the industry being affected unduly by taxes or design rules? Has a
raw material ceased to be available or perhaps has become too
expensive? Has a change in the world political scene affected the
export of the product - or perhaps effected the importing of a
needed component. What will be the effect of proposed trading
blocs? How will currency fluctuations affect the supply of raw
material and also export potential? How will changes in the
international environment increase or lessen competition from
foreign products. Many of these things could be described as being
in the company’s macro environment, and not controlled by the
organisation.
Gamble, Peteraf& Thompson, 2019, p.38
It is very easy to think of a huge list of things that effect the
external (or macro) environment of the organisation - and the good
strategic manager has to be across all of these. The good strategic
manager also has an excellent understanding of micro economic
theory and how that will affect the company. Likewise, the manager
must have an excellent understanding of demographic change and
of consequences of change in government monetary and fiscal
policy.
If your company is going to function in another country, then you
have to be comfortable with all of the above issues in both your own
country and the host country.
No wonder the very best managers are paid so much money!
Macro-enviromental forces should be monitored and assessed for
their potential impact and influence, and the company should
respond accordingly.
The factors and forces in the company's external environment that
have the biggest strategy-shaping impact are typically in the
industry and competitive environment. These factors impact on all
competitors in an industry, and the individual firms still has very
little control over them, but they can develop strategies to respond
and compete.
Question 2 - How strong are the industry's
competitive forces?
In assessing the external environment is important to consider the
competitive forces in the industry. The Five Forces Model of
Competition developed by Michael Porter is a widely used tool, and
considers that the competitive forces in an industry go beyond the
direct competitors, and includes additional sources of competitive
pressures.
The five competitive forces affecting industry attractiveness are:
Competitive pressures stemming from buyer bargaining power
Competitive pressures coming from companies in other industries to
win buyers over to substitute products
Competitive pressures stemming from supplier bargaining power
Competitive pressures associated with the threat of new entrants
into the market
Competitive pressures associated with rivalry among competing
sellers to attract customers.
Porter, 1979, cited in Gamble, Peteraf & Thompson, 2019, p.40
Assessing each of the five competitive forces one by one provides a
powerful overview of what competition is like in a given market.
Then we need to evaluate the 'collective' strength of the five forces
(put them all together), and determine an overall assessment of the
competitiveness in an industry. This overall assessment of the five
forces will indicate whether or not a company could expect to earn
decent profits. The stronger the forces of competition, the harder it
becomes for industry members to earn attractive profits. In
contrast, when the collective impact of the five forces is moderate
to weak, an industry is competitively attractive and companies can
reasonably expect to earn good profits.
Question 3 - What are the Industry's driving
forces of change, and what impact will they
have?
Driving forces are the major underlying causes of change in
industry and competitive conditions. It is important for managers to
understand how an industry is changing, and the impact those
changes will have. Then, managers can determine changes which
will be needed to the strategy to prepare for the impact of the
driving forces.
The common driving forces are outlines in Gamble, Peteraf &
Thompson (2019).
The driving forces will be different for different industries, and there
might be many forces of change at work in each industry. The
important thing here is to identify the three or four true driving
forces which are powerful enough to be the major determinants of
why and how the industry is changing. Again, these are forces
affecting an entire industry.
Question 4 - How are industry rivals
positioned?
Question 5 - What strategic moves are rivals
likely to make next?
Question 6 - What are the industry Key
Success Factors (KSFs)
Question 7 - Does the industry offer good
prospects for attractive profits?
Investigate
Write a summary of each of the above questions
(questions 4-7), and identify the key points of each
aspect of assessing the external environment.
Using the fast food industry as an example, identify 3
driving forces of change, and the impact they are
likely to have on the fast food industry.