Evaluating External Environment: DR Kapila Ariyadarshana Silva

Evaluating External Environment
Dr Kapila Ariyadarshana Silva

PhD (USJ-PIM),MSc (Management) (USJ), Dip M
(UK) ,MCIM(UK), MABE(UK),MISM(SL), ACIPM(SL)
Main Concerns of External Positions
• Economic activities / indicators
• How Strong Are Competitive Forces
• What Forces Are Driving Industry Change and
What Impacts Will They Have?
• What Market Positions Do Rivals Occupy?
• What Strategic Moves, Are Rivals Likely to
Make Next?
• Does the Outlook for the
Industry Offer an Attractive Opportunity?
What are the Industry’s Dominant Economic Traits?
• Market size and growth rate

• Number of rivals and scope
• Buyer needs and requirements
• Product innovation and degree of differentiation
• Supply/demand conditions
• Pace of technological change
• Vertical integration
• Economies of scale
• Learning and experience curve effects
Learning/Experience Effects
• Learning/experience effects exist when a

company’s unit costs decline as its cumulative
production volume increases because of
– Accumulating production know-how
– Growing mastery of the technology
• The bigger the learning or experience curve

effect, the bigger the cost advantage of the firm
with the largest cumulative production volume
How Strong Are Competitive Forces?
3-5
Competitive Pressures: Collaboration
Between Sellers and Buyers
• Partnerships between industry members and
some/many of their customers can impact competitive
pressures
• Collaboration may result in
mutual benefits regarding
– Just-in-time deliveries
– Order processing
– Electronic invoice payments
– Data sharing
• Competitive advantage may accrue to those industry
members doing the best job of partnering with their
customers
Strategic Implications of
the Five Competitive Forces
• Competitive environment is ideal from

a profit-making standpoint when
– Rivalry is moderate
– Entry barriers are high

and no firm is likely to enter
– Good substitutes
do not exist
– Suppliers and customers are

in a weak bargaining position
Coping With the
Five Competitive Forces
• Objective is to craft a strategy to
– Insulate firm from

competitive pressures
– Initiate actions to produce

sustainable competitive advantage
– Allow firm to be the industry’s “mover and shaker”

with the “most powerful” strategy that defines the
business model for the industry
What Forces Are Driving Industry Change and What
Impacts Will They Have?
• Industries change because forces are driving

industry participants to alter their actions
• Driving forces are the major underlying causes
of changing industry and competitive conditions
• Where do driving forces originate?
– Outer ring of macro-environment
– Inner ring of macro-environment
Analyzing Driving Forces:
Three Key Steps
STEP 1: Identify forces likely to exert greatest influence over next 1
- 3 years
– Usually no more than 3 - 4 factors
qualify as real drivers of change
STEP 2: Assess impact
– Are driving forces acting to cause market demand for
product to increase or decrease?
– Are driving forces acting to make competition more or
less intense?
– Will driving forces lead to higher or lower industry
profitability?
STEP 3: Determine what strategy changes are needed to prepare
for impacts of driving forces
Most Common Driving Forces
• Changes in Industry Growth

• Increased competition and Globalization
• Composition of byers, changing lifestyle and
preferences
• Emerging Technologies and its diffusion
• Product and Market Innovation
• Regulatory concerns
• Social Concerns
What Market
Positions Do Rivals Occupy?
• One technique to reveal different competitive

positions of industry rivals is
strategic group mapping
• A strategic group is a cluster of firms in an

industry with similar competitive
approaches and market positions
Procedure for Constructing
a Strategic Group Map
STEP 1: Identify competitive characteristics that

differentiate firms in an industry from one
another
STEP 2: Plot firms on a two-variable map using pairs of
these differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy
space to same strategic group
STEP 4: Draw circles around each group, making circles
proportional to size of group’s respective share
of total industry sales
Example: Strategic Group Map of Selected Automobile Manufacturers
3-14
Strategic Group Map –Food Retail
Shops
High
Pizza Hut
Price KFC
Indo Ceylon Paivas

Café
Low
Limited Menu Product Line Breath Full Menu
Interpreting Strategic Group Maps
• The closer strategic groups are

on the map, the stronger the cross-group
competitive rivalry tends to be
• Not all positions on the map
are equally attractive
– Driving forces and competitive pressures often
favor some strategic groups and hurt others
– Profit potential of different strategic
groups varies due to strengths and
weaknesses in each group’s market
position
What Strategic Moves
Are Rivals Likely to Make Next?
• A firm’s best strategic moves are affected by
– Current strategies of competitors
– Future actions of competitors
• Profiling key rivals involves gathering
competitive intelligence about
– Current strategies
– Most recent actions and public announcements
– Resource strengths and weaknesses
– Efforts being made to improve their situation
– Thinking and leadership styles of top executives
Competitor Analysis
• Sizing up strategies and competitive strengths
and weaknesses of rivals involves assessing
– Which rival has the best strategy? Which
rivals appear to have weak strategies?
– Which firms are poised to gain
market share, and which ones
seen destined to lose ground?
– Which rivals are likely to rank among the industry leaders five
years from now? Do any up-and-coming rivals have
strategies and the resources to overtake the current industry
leader?
Things to Consider in
Predicting Moves of Rivals
• Which rivals need to increase their unit sales and market

share? What strategies are rivals most likely to pursue?
• Which rivals have a strong incentive, along with resources,
to make major strategic changes?
• Which rivals are good candidates to be acquired? Which
rivals have the resources to acquire others?
• Which rivals are likely to enter new geographic markets?
• Which rivals are likely to expand their product offerings and
enter new product segments?
What Are the Key
Factors for Competitive Success?
• Key Success Factors (KSFs) are competitive factors and attributes

that affect every industry member’s ability to be competitively and
financially successful
• KSFs are those particular attributes that are so important that
they spell the difference between
– Profit and loss
– Competitive success or failure
• KSFs can relate to
– Specific strategy elements
– Product attributes
– Resources
– Competencies
– Competitive capabilities
– Market achievements
Identifying Industry Key Success Factors
• The answers to 3 questions often help pinpoint an

industry’s KSFs
– On what basis do customers choose
between competing brands of sellers?
– What resources and competitive capabilities does a company
need to have to be competitively successful?
– What shortcomings are likely to place a company at a significant
competitive disadvantage?
• Rarely are there more than 5 - 6

factors that are truly key to the future financial and
competitive success of industry members
Does the Outlook for the
Industry Offer an Attractive Opportunity?
Factors to consider for attractive or unattractive opportunity
– Industry growth potential

– Whether competitive forces are growing stronger/weaker
– Whether driving forces will favorable/unfavorably impact industry
profitability
– Degree of risk and uncertainty in industry’s future
– Whether the industry confronts severe problems
– Firm’s competitive position in industry vis-à-vis rivals
– Firm’s potential to capitalize on industry opportunities or the vulnerabilities
of weaker rivals
– Whether a firm has sufficient competitive strength to
defend against unattractive industry factors
Factors to Consider in
Assessing Industry Attractiveness
• As a general proposition
– If an industry’s overall profit prospects are above
average, the industry environment is basically attractive
– If an industry’s overall profit prospects are below
average, the industry environment is basically
unattractive
• However
– Attractiveness is relative, not absolute
– Conclusions about attractiveness have
to be drawn from the perspective of a
particular company
Factors to Consider in
Assessing Industry Attractiveness
• An industry is unlikely to be equally attractive or

unattractive to all industry members
– Industry environments attractive to strong competitors may be
unattractive to weak competitors
• A favorably positioned company may survey an industry
environment and see opportunities that weak
competitors have little or no ability to capture
– Industry environments attractive to insiders may be unattractive
to potential entrants
– Under certain circumstances, a firm uniquely well-situated in an
otherwise unattractive industry can still earn good profits by
taking sales and market share away from weaker competitors

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Evaluating External Environment

Dr Kapila Ariyadarshana Silva

• Market size and growth rate

• Learning/experience effects exist when a

• The bigger the learning or experience curve

• Competitive environment is ideal from

– Entry barriers are high

– Suppliers and customers are

• Objective is to craft a strategy to

– Insulate firm from

– Initiate actions to produce

– Allow firm to be the industry’s “mover and shaker”

• Industries change because forces are driving

• Changes in Industry Growth

• One technique to reveal different competitive

• A strategic group is a cluster of firms in an

STEP 1: Identify competitive characteristics that

Indo Ceylon Paivas

• The closer strategic groups are

• Which rivals need to increase their unit sales and market

• Key Success Factors (KSFs) are competitive factors and attributes

• The answers to 3 questions often help pinpoint an

• Rarely are there more than 5 - 6

Factors to consider for attractive or unattractive opportunity

– Industry growth potential

• An industry is unlikely to be equally attractive or

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