ANALYSIS OF EXTERNAL COMPETITIVE ENVIRONMENT

TERM PAPER SUBMITTED BY OTUN ADETUNJI OLUBUNMI

CONTENT

ABSTRACT INTRODUCTION COMPONENTS OF THE EXTERNAL ENVIRONMENT PROCESS INVOLVED IN THE ANALYSIS OF THE EXTERNAL ENVIRONMENT SWOT ANALYSIS FIVE FORCES ANALYSIS( PORTER’S MODEL) PROCESS INVOLVED IN COMPETITORS ANALYSIS CONCLUSION

ABSTRACT

The external environment of an organization comprises of the moves and the strategies adopted by its competitors. It also takes into account the changes in the general economy and other socio-cultural factors. It is imperative for the organization to precisely study its external environment and strategize accordingly to gain competitive advantage. To this effect, the organization uses various analytical tools. This term paper discusses three such tools: the SWOT analysis, Porter’s Five Forces Model and Competitor Analysis.

INTRODUCTION

The competitiveness of a business is measured by its ability to earn at least as much as its long-term cost of capital.

Competition works to drive the rate of return toward the rate for a “perfectly competitive industry”. Companies that don’t earn at least the rate of return on long term invested capital will eventually go out of business while companies that earn above the “Free Market Rate” attract new entrants to the industry or expansion by existing firms.

The strength of competitive forces in the industry determines the attractiveness of the industry. The attractiveness of an industry influences the flow of investment into the industry.

As investment flows in the rate of return is driven down, limiting the ability of firms to sustain above average returns.

The forces that shape an industry’s competitiveness and the profit potential of businesses within that industry exist in what is commonly referred to as the external environment.

COMPONENTS OF THE EXTERNAL ENVIRONMENT

The components of the external environment can be broadly divided into two major categories.

The Industry Environment The competitive Environment

The Industry Environment

The Industry environment is made up of the following

Economic Demographic Socio cultural

The Competitive Environment

The competitive environment is made up of the following

Political/Legal Technological Global

PROCESS INVOLVED IN THE ANALYSIS OF THE EXTERNAL ENVIRONMENT

The external environmental analysis process should be conducted on a continuous basis. This process includes four activities:

SCANNING: Identifying early signals of environmental changes and trends MONITORING: Detecting meaning through ongoing observations of

environmental changes and trends FORECASTING: Developing projections of anticipated outcomes based on

monitored changes and trends

ASSESSING: Determining the timing and importance of environmental changes and trends for firms' strategies and their management

THE SWOT ANALYSIS

This is the analysis of the Strength, weakness, opportunities and threats of the organization.

• It is an easy-to-use tool for developing an overview of a company’s strategic situation

– It forms a basis for matching your company’s strategy to its situation

• It provides an overview of the strategic situation.

• It provides the “raw material” to do more extensive internal and external analysis.

• An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment.

• Possible Opportunities:

– Emerging customer needs

– Quality Improvements

– Expanding global markets

– Vertical Integration

• A THREAT is a factor in your company’s external environment that poses a danger to its well-being.

• Possible Threats:

– New entry by competitors

– Changing demographics/shifting demand

– Emergence of cheaper technologies

– Regulatory requirements

• By examining opportunities, you can discover untapped markets, and new products or technologies, or identify potential avenues for diversification.

• By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.

THE FIVE FORCES ANALYSIS

The five forces are environmental forces that impact on a company’s ability to compete in a given market, they also determines the attractiveness of the industry.

The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

According to Michael Porter, the five forces are:

Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Rivalry Among Competing Firms in Industry

PROCESS INVOLVED IN COMPETITOR ANALYSIS

In analyzing the competition, various questions are asked, and proper responses provided. The questions are broadly divided into four (4) categories:

Assumptions : What assumptions do our competitors hold about the future of industry and themselves? Are we assuming stable competitive conditions, or that the future will be volatile?

Current Strategy : How are we currently competing? Does our current strategy support changes in the competitive environment?

Future Objectives : How do our goals compare to our competitors’ goals? Capabilities : What are our competitors’ strength and weaknesses? How do

our capabilities compare to our competitors?

The appropriate responses to these questions will also be considered vis a vis the following factors;

What will our competitors do in the future? Where do we have competitive advantage? How will this change our relationship with our competitors?

CONCLUSION

The various means of analyzing the external environment competitiveness are without their shortcomings. For a proper analysis there is no one size fit all, the effective combination of these three methods will bring about a holistic assessment of the competition.