Understanding the businesss competitive advantage is the ______ step in an external analysis.

Analysis of a company's industry environment, including its competitive structure, competitive position, dynamics, and history

External analysis means examining the industry environment of a company, including factors such as competitive structure, competitive position, dynamics, and history. On a macro scale, external analysis includes macroeconomic, global, political, social, demographic, and technological analysis. The primary purpose of external analysis is to determine the opportunities and threats in an industry or any segment that will drive profitability, growth, and volatility.

Understanding the businesss competitive advantage is the ______ step in an external analysis.

Key Terms in External Analysis

To begin the discussion on external analysis, we must define two terms:

  • Industry is a group of companies offering products or services that are close substitutes for each other. Examples of an industry include soft drinks, mobile phones, and sportswear.
  • Market segments are distinct groups of customers within a market that can be differentiated from each other based on individual attributes and specific demands. Market segments can be separated by characteristics such as geography, demography, and behavior.

Supply Chain

In order to conduct a thorough external analysis, the company needs to analyze its supply chain. A company’s supply chain is the system involved in converting a product or service from raw materials into finished goods and then transporting finished goods from the supplier to the consumer. All logistical issues and steps are part of the supply chain.

The image below shows a common supply chain for a manufacturing company: Raw materials are brought from the supplier. The raw materials are moved to the manufacturer to make completed goods. The completed goods are distributed and moved across separate retailers, and then from the retailers, they end up in the hands of consumers.

Understanding the businesss competitive advantage is the ______ step in an external analysis.

Consider the supply chain for a smartphone. Raw materials such as glass, lithium, and aluminum are obtained from suppliers. Manufacturers take these raw materials and build smartphones at plants. The completed phones are then distributed and sold at retail locations (Best Buy, Walmart, Staples). The phones are sold to consumers from these retail locations.

Supply Chain for e-Commerce

The supply chain for e-Commerce companies differs from the traditional supply chain of brick and mortar stores. As the following graphic shows, we begin with the e-Commerce domain. Consumers select the products they want to purchase, and the payment is dealt with through a third-party payment manager (e.g., PayPal).

The selected products are moved to a warehouse wherein they are prepared for shipping. The products are shipped to customers who return to the same site and continue the cycle again. This is the common supply chain cycle for e-Commerce companies such as Amazon or Alibaba.

Strategic Groups

Strategic groups within an industry can be identified by factors such as:

  • Choice of distribution channels
  • Market segments
  • Level of product quality
  • Technological leadership
  • The degree of vertical integration
  • Pricing policy

A strategic group exists if the performance of a firm in an industry group is a function of group characteristics, controlling firm and industry characteristics. Customers tend to view products of companies in the same strategic group as direct substitutes for each other (Coke vs. Pepsi). Different strategic groups can have different relationships with each of the competitive forces. Thus, each strategic group may face a different set of opportunities and threats.

An initial step to identifying strategic groups is to build a strategic group map. A strategic group map plots clusters of rivals in a two-dimensional matrix using strategically relevant dimensions, which help identify the most probable competitively relevant companies. It is also useful for realizing mobility barriers that inhibit the repositioning of firms within industries from one strategic group to another.

Competitive Analysis

We now move into a competitive analysis of the industry. Market structure and competitive environment are defining factors in the future success of a business. There are six key factors that determine the level of competition in an industry:

1. Intensity of industry rivalry

It measures the levels of concentration of rivals. Factors to determine the intensity of industry rivalry include product homogeneity, brand loyalty, and consumer switching costs.

2. Threat of potential entrants (Barriers to entry)

It measures the difficulty for newcomers to enter the industry. Factors to determine barriers to entry include brand loyalty, excess production capacity, and government regulation.

3. Bargaining power of buyers

This measures how much power consumers have in determining the prevailing price in a market. Buyers’ bargaining power is high when buyers are large and concentrated, and buyers’ price sensitivity is high when there are many industry competitors and substitutes.

4. Bargaining power of suppliers

This measures how much a supplier of materials is able to restrict the company’s business strategy. The bargaining power of suppliers is high when suppliers are large or concentrated. Purchasers’ price inelasticity is high when there are few alternative suppliers and when there are few substitute inputs.

5. Threat of substitute goods/services

This measures the chances that competing goods of a similar nature will threaten a company’s offerings. It is more likely to occur when switching costs are low or when substitutes offer superior price to performance characteristics.

6. Power of complementary good/service providers

It measures the level of impact of companies that produce complementary products. Complements add value to products in an industry. If complements are weak and unattractive, they can become a threat that slows industry growth and limits profitability.

Industry Life Cycle

The industry life cycle describes the natural stages of an industry as time progresses. An industry life-cycle consists of start-up, growth, shakeout, maturity, and decline stages.

  • Start-up is characterized by very low competition. Barriers to entry are based on access to key technological know-how.
  • Growth is characterized by the low threat from potential competitors due to rapid growth in demand.
  • Shakeout is characterized by a rivalry between companies becoming intense; companies cut prices to increase demand.
  • Maturity is characterized by the threat of potential entrants decreasing and product segmentation.
  • Decline is characterized by fierce rivalry between established companies.

PEST Analysis

To round off external analysis, a company must conduct an examination of the Political, Economic, Social, and Technological landscape of the industry, otherwise known as a PEST analysis.

  • Political: Issues such as international trade barriers and regulatory environment change.
  • Economic: Issues such as interest rates, exchange rates, and inflation.
  • Socio-demographic (Social): Issues such as population and age cohort changes.
  • Technological: Issues such as scientific advances, R&D investment, and emerging technologies.

The main purpose of PEST analysis is to test for any major external shifts in the industry. Business plans and strategies need to be updated to conform to prevailing industry trends.

More Resources

Thank you for reading CFI’s guide to External Analysis. To help you keep learning and advance your career, check out the additional CFI resources below:

  • Absolute Advantage
  • Comparable Company Analysis
  • Demand Curve
  • SWOT Analysis

Take the quiz test your understanding of the key concepts covered in the chapter. Try testing yourself before you read the chapter to see where your strengths and weaknesses are, then test yourself again once you’ve read the chapter to see how well you’ve understood.

1. An organisation with an ‘outside-in’ approach focuses on the needs of the organisation first, and customers and the marketplace second. True or false?

True

False

2. In a SWOT analysis, strengths and weaknesses are external factors. True or false?

True

False

3. A business mission statement is an explicit form of words that captures the broad aims of the company. True or false?

True

False

4. Ansoff’s Matrix illustrates the ways companies can grow through increasing sales opportunities. True or false?

True

False

5. It is usually cheaper for an international company to sell standard consumer products all over the world, however cultural differences are likely to force them to make some adaptations. True or false?

True

False

6. XYZ Co has four sales teams: London & the South East, Wales & the Midlands, Northern England, and Scotland. What kind of organisational structure is this?

  1. matrix organisation
  2. market organisation
  3. network organisation
  4. product organisation
  5. geographic organisation

Answer:

e. geographic organisation

7. If a marketing department follows the ‘top down’ planning model, what does it do?

  1. Senior managers call meetings with their staff to develop plans.
  2. Middle management call meetings with their staff to develop plans.
  3. Senior managers set objectives which are passed down to marketing staff.
  4. Sales representatives suggest targets and these are totalled up to form marketing objectives.
  5. Sales teams set their own targets within limits specified by the Board.

Answer:

c. Senior managers set objectives which are passed down to marketing staff. 

8. Which of the following is not a typical characteristic of a market-oriented company?

  1. strong internal communication
  2. identifying and balancing stakeholder needs
  3. an effective marketing intelligence system
  4. sensitive to market trends
  5. emphasis on short-term objectives

Answer:

e. emphasis on short-term objectives

9. McKinsey’s 7S framework helps analyse organisations and improve their effectiveness. The seven elements to be coordinated are: shared values, structure, systems, style and what?

  1. strategy, service levels and specialisation
  2. strategy, staff and skills
  3. service levels, stock and staff
  4. specialisation, skills and standards
  5. standards, stock and SBUs

Answer:

b. strategy, staff and skills

10. What does SBU stand for?

  1. significant business undertaking
  2. special bureaucratic use
  3. standard business usage
  4. strategic business unit
  5. standard broker’s uplift

Answer:

d. strategic business unit

11. SWOT is one of the most commonly used analysis tools in business, but what does it analyse?

  1. the external marketing environment
  2. the internal marketing environment
  3. the competitive environment
  4. the organisation’s current situation
  5. the organisation’s strategy

Answer:

d. the organisation’s current situation 

12. Maria is the Marketing Manager for Wholefoods Ltd. She is working on the firm’s marketing plan. Her forecasts show that, if they carry on as they have been doing, they are likely to miss their sales revenue targets by £500,000. She needs some new ideas. What kind of analysis has Maria undertaken?

  1. PRESTCOM analysis
  2. SWOT analysis
  3. strategic gap analysis
  4. Ansoff’s matrix
  5. ratio analysis

Answer:

c. strategic gap analysis

13. Apart from business growth, there are a number of other good reasons for selling products internationally. Which of the following are valid reasons?

  1. to spread risk
  2. the firm has excess production capacity
  3. to extend the product life cycle
  4. all of the above
  5. none of the above

Answer:

d. all of the above 

14. What is the first stage of the marketing planning process?

  1. research and development
  2. evaluation
  3. objective setting
  4. situation analysis
  5. strategy development

Answer:

d. situation analysis 

15. Which one of the following is not a component of a good business mission statement?

  1. identification of the company’s philosophy, i.e. its approach to business
  2. specification of its product–market domain
  3. communication of key values
  4. close linkage to critical success factors
  5. a statement of financial assets

Answer:

e. a statement of financial assets

16. What are marketing metrics?

  1. ways to measure marketing effectiveness
  2. marketing tactics
  3. the elements of a marketing programme
  4. a sales promotion technique
  5. the value of the marketing budget

Answer:

a. ways to measure marketing effectiveness

17. Robert has recently been appointed Marketing Manager for a fashion company. He needs to know whether or not the company’s products have a sustainable advantage in the marketplace. What kind of analysis does he need to do?

  1. environmental analysis
  2. gap analysis
  3. competitor analysis
  4. market share/market growth analysis
  5. brand interrogation

Answer:

c. competitor analysis

18. Porter’s five forces is an industry analysis model. The five forces are: inter rivalry of competitors, bargaining power of customers, bargaining power of suppliers, threat of new entrants and what?

  1. barriers to entry
  2. threat of competitors
  3. brand strength
  4. threat of substitutes
  5. bargaining power of consumers

Answer:

d. threat of substitutes 

19. According to Ansoff’s matrix, a company that tries to increase sales by selling its existing products in a new market is following what kind of strategy?

  1. market development
  2. diversification
  3. focus
  4. market penetration
  5. product development

Answer:

a. market development 

20. Which of the following is a well-used marketing evaluation and control method?

  1. PEST
  2. acid test
  3. brand gap analysis
  4. all of the above
  5. none of the above

Answer:

e. none of the above

21. Just like business reports, marketing plans often have an ______ summary at the beginning.

22. When developing a corporate mission statement, it is important to think in terms of customer ______, rather than the products the company makes.

23. A Marketing information System (MkIS) comprises three main functions: data collection and storage, ______ and reporting.

24. Conferences and trade exhibitions are good places to gather competitive ______ quite openly.

25. Coca-Cola and Pepsi are two of the most powerful brands in the world and this presents a significant ______ to entry for other companies trying to launch new cola drinks.