Thinking strategically about a company's external situation involves probing for answers to the following seven questions:
What are the industry's strategy-shaping economic features? Industries differ significantly on such factors as market size and growth rate, the geographic scope of competitive rivalry, the number and relative sizes of both buyers and sellers, the ease of entry and exit, the extent of vertical integration, how fast basic technology is changing, the extent of scale economies and learning-curve effects, the degree of product standardization or differentiation, and overall profitability. In addition to setting the stage for the analysis to come, identifying an industry's economic features also promotes understanding of the kinds of strategic moves that industry members are likely to employ.
What kinds of competitive forces are industry members facing, and how strong iseach force? The strength of competition is a composite of five forces: the rivalry among competing sellers, the presence of attractive substitutes, the potential for new entry, the competitive pressures stemming from supplier bargaining power and supplier-seller collaboration, and the competitive pressures stemming from buyer bargaining power and seller-buyer collaboration. These five forces have to be examined one by one to identify the specific competitive pressures they each comprise and to decide whether these pressures constitute a strong or weak competitive force. The next step in competition analysis is to evaluate the collective strength of the five forces and determine whether the state of competition is conducive to good profitability. Working through the five-forces model step by step not only aids strategy makers in assessing whether the intensity of competition allows good profitability but also promotes sound strategic thinking about how to better match company strategy to the specific competitive character of the marketplace. Effectively matching a company's strategy to the particular competitive pressures and competitive conditions that exist has two aspects: (a) pursuing avenues that shield the firm from as many of the prevailing competitive pressures as possible, and (b) initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in the company's favor, putting added competitive pressure on rivals, and perhaps even defining the business model for the industry.
What forces are driving changes in the industry, and what impact will thesechanges have on competitive intensity and industry profitability? Industry and competitive conditions change because forces are in motion that create incentives or pressures for change. The first phase is to identify the forces that are driving change in the industry; the most common driving forces include the Internet and Internet technology applications, globalization of competition in the industry, changes in the long-term industry growth rate, changes in buyer composition, product innovation, entry or exit of major firms, changes in cost and efficiency, changing buyer preferences for standardized versus differentiated products or services, regulatory influences and government policy changes, changing societal and lifestyle factors, and reductions in uncertainty and business risk. The second phase of driving-forces analysis is to determine whether the driving forces, taken together, are acting to make the industry environment more or less attractive. Are the driving forces causing demand for the industry's product to increase or decrease? Are the driving forces acting to make competition more or less intense? Will the driving forces lead to higher or lower industry profitability?
What market positions do industry rivals occupy—who is strongly positioned andwho is not? Strategic group mapping is a valuable tool for understanding the similarities, differences, strengths, and weaknesses inherent in the market positions of rival companies. Rivals in the same or nearby strategic groups are close competitors, whereas companies in distant strategic groups usually pose little or no immediate threat. The lesson of strategic group mapping is that some positions on the map are more favorable than others. The profit potential of different strategic groups varies due to strengths and weaknesses in each group's market position. Often, industry driving forces and competitive pressures favor some strategic groups and hurt others.
What strategic moves are rivals likely to make next? This analytical step involves identifying competitors' strategies, deciding which rivals are likely to be strong contenders and which are likely to be weak, evaluating rivals' competitive options, and predicting their next moves. Scouting competitors well enough to anticipate their actions can help a company prepare effective countermoves (perhaps even beating a rival to the punch) and allows managers to take rivals' probable actions into account in designing their own company's best course of action. Managers who fail to study competitors risk being caught unprepared by the strategic moves of rivals.
What are the key factors for competitive success? An industry's key success factors (KSFs) are the particular strategy elements, product attributes, competitive capabilities, and business outcomes that spell the difference between being a strong competitor and being a weak competitor—and sometimes between profit and loss. KSFs by their very nature are so important to competitive success that all firms in the industry must pay close attention to them or risk becoming an industry alsoran. Correctly diagnosing an industry's KSFs raises a company's chances of crafting a sound strategy. The goal of company strategists should be to design a strategy aimed at stacking up well on all of the industry KSFs and trying to be distinctivelybetter than rivals on one (or possibly two) of the KSFs. Indeed, using the industry's KSFs as cornerstones for the company's strategy and trying to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy approach.
Does the outlook for the industry present the company with sufficiently attractiveprospects for profitability? The answer to this question is a major driver of company strategy. An assessment that the industry and competitive environment is fundamentally attractive typically suggests employing a strategy calculated to build a stronger competitive position in the business, expanding sales efforts, and investing in additional facilities and equipment as needed. If the industry is relatively unattractive, outsiders considering entry may decide against it and look elsewhere for opportunities, weak companies in the industry may merge with or be acquired by a rival, and strong companies may restrict further investments and employ cost-reduction strategies or product innovation strategies to boost longterm competitiveness and protect their profitability. On occasion, an industry that is unattractive overall is still very attractive to a favorably situated company with the skills and resources to take business away from weaker rivals.
A competently conducted industry and competitive analysis generally tells a clear, easily understood story about the company's external environment. Different analysts can have different judgments about competitive intensity, the impacts of driving forces, how industry conditions will evolve, how good the outlook is for industry profitability, and the degree to which the industry environment offers the company an attractive business opportunity. However, while no method can guarantee a single conclusive diagnosis about the state of industry and competitive conditions and an industry's future outlook, this doesn't justify shortcutting hard-nosed strategic analysis and relying instead on opinion and casual observation. Managers become better strategists when they know what questions to pose and what tools to use. This is why this chapter has concentrated on suggesting the right questions to ask, explaining concepts and analytical approaches, and indicating the kinds of things to look for. There's no substitute for staying on the cutting edge of what's happening in the industry—anything less weakens managers' ability to craft strategies that are well matched to the industry and competitive situation.
