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Evaluating A Company’s External Environment, concepts and analytical tools

Chapter Summary
Chapter 3 presents the concepts and analytical tools for assessing a single-business company’s external environment. Attention centers on the competitive arena in which a company operates, together with the technological, societal, regulatory, or demographic influences in the macro-environment that are acting to reshape the company’s future market arena.

Lecture Outline

I. Introduction

1. In the opening paragraph of Chapter 1, we said that one of the three central questions that manager’s must address in evaluating their company business prospects is “What’s the company’s present situation?” Two facets of a company’s situation are especially pertinent:

a. The industry and competitive environment in which the company operates

b. The company’s collection of resources and capabilities, its strengths and weaknesses as compared to its rivals, and its windows of opportunities.

2. Managers must be able to insightfully analyze a company’s external and internal environments to succeed in crafting a strategy that is an excellent fit with the company’s situation, is capable of building competitive advantage, and holds good prospect for boosting a company performance – the three criteria of a winning strategy.

3. Developing company strategy begins with a strategic appraisal of the company’s external and internal situations to form a strategic vision of where the company needs to head, and then moves toward an evaluation of the most promising alternative strategies and business models, and finally culminates in a choice of strategy.

4. See Figure 3.1 – From Thinking Strategically about the Company’s Situation to Choosing a Strategy

5. Core Concept: The macro-environment encompasses the broad environmental context in which a company’s industry is situated.

II. The Strategically Relevant Components of a Company’s External Environment

1. All companies operate in a macro-environment shaped by influences emanating from the economy at large, population demographics, societal values and lifestyles, governmental legislation and regulation, technological factors, and the industry and competitive arena in which the company operates.

2. See Figure 3.2 – The Components of a Company’s Macro-environment

3. Table 3.1 provides descriptions of each of the seven components of the macro-environment.

4. Strictly speaking, a company’s macro-environment includes all relevant factors and influences outside a company’s boundaries.

5. For the most part, influences coming from the outer ring of the macro-environment have a low impact on a company’s business situation and shape only the edges of the company’s direction and strategy. There are exceptions to this, of course, such as the cigarette industry.

6. There are enough strategically relevant trends and developments in the outer-ring of the macro-environment to justify managers maintaining a watchful eye.

7. The factors and forces in a company’s macro-environment having the biggest strategy-shaping impact almost always pertain to the company’s immediate competitive environment.

III. Thinking Strategically About a Company’s Industry and Competitive Environment

1. Thinking strategically about a company’s competitive environment entails using some well-defined concepts and analytical tools to get clear answers to seven questions:

a. Does the industry offer attractive opportunities for growth?

b. What kinds of competitive forces are industry members facing and how strong is each force?

c. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?

d. What market positions do industry rivals occupy—who is strongly positioned and who is not?

e. What strategic moves are rivals likely to make next?

f. What are the key factors for competitive success in the industry?

g. Does the outlook for the industry offer good prospects for attractive profits?

IV. Question 1: Does the industry offer attractive opportunities for growth?

1. Because industries differ so significantly, analyzing a company’s industry and competitive environment begins with identifying the attractiveness of available opportunities for growth.

2. An industry’s dominant economic features are defined by such factors as:

a. Overall size and market growth rate

b. Number and sizes of buyers and sellers

c. Geographic boundaries of the market

d. The degree to which sellers products are differentiated

e. The pace of product innovation

f. Market supply/demand conditions

g. The extent of vertical integration

h. Extent to which costs are affected by scale economies

i. Learning/experience curve effects

V. Question 2: What kinds of competitive forces are industry members facing and how strong is each force?

1. The character, mix, and subtleties of the competitive forces operating in a company’s industry are never the same from one industry to another.

2. The most powerful and widely used tool for systematically diagnosing the principal competitive pressures in a market and assessing the strength and importance of each is the Five-Forces Model of Competition.

3. See Figure 3.3 – The Five-Forces Model of Competition: A Key Analytical Tool

4. This model holds that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market:

a. Competitive pressures associated with the market maneuvering and jockeying for buyer patronage that goes on among rival sellers in the industry

b. Competitive pressures associated with the threat of new entrants into the market

c. Competitive pressures coming from the attempts of companies in other industries to win buyers over to their own substitute products

d. Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration

e. Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration

5. The way one uses the five-forces model to determine what competition is like in a given industry is to build the picture of competition in three steps:

a. Step One: Identify the specific competitive pressures associated with each of the five forces

b. Step Two: Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak)

c. Step Three: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits

6. Competitive Pressures Associated with the Jockeying among Rival Sellers

a. The strongest of the five competitive forces is nearly always the rivalry among competing sellers – the marketing maneuvering and jockeying for buyer patronage that continually go on.

b. In effect, a market is a competitive battlefield where it is customary and expected that rival sellers will employ whatever resources and weapons they have in their business arsenal to improve their market positions and performance.

c. See Table 3.2 – Common Weapons for Competing with Rivals

d. Rivalry intensifies when competing sellers are active in launching fresh actions to boost their market standing and business performance.

e. See Figure 3.4 – Factors Affecting the Strength of Rivalry

f. Other indicators of the intensity of rivalry among industry members include:

i. Whether industry members are racing to offer better performance features or higher quality or improved customer service or a wider product selection

ii. How frequently rivals resort to such marketing tactics as special sales promotions, heavy advertising, or rebates or low interest rate financing to drum up additional sales

iii. How actively industry members are pursuing efforts to build stronger dealer networks or establish positions in foreign markets or otherwise expand their distribution capabilities and market presence

iv. How hard companies are striving to gain a market edge over rivals by developing valuable expertise and capabilities

g. Normally, industry members are proactive in drawing upon their competitive arsenal of weapons and deploying their organizational resources in a manner calculated to strengthen their market position and performance.

h. Additional factors that influence the tempo of rivalry among industry competitors include:

i. Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capability

ii. Rivalry is usually stronger in slow-growing markets and weaker in fast-growing markets

iii. Rivalry is usually weaker in industries comprised of so many rivals that the impact of any one company’s actions is spread thinly across all industry members, likewise, it is often weak when there are fewer than five competitors

iv. Rivalry increases when buyer demand falls off and sellers find themselves with excess capability and/or inventory.

v. Rivalry increases as it becomes less costly for buyers to switch brands

vi. Rivalry increases as the products of rival sellers become more standardized

vii. Rivalry is more intense when industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volumes

viii. Rivalry increases in proportion to the size of the payoff from a successful strategic move

ix. Rivalry becomes more volatile and unpredictable as the diversity of competitors increases in terms of visions, strategic intents, objectives, strategies, resources, and countries of origin

x. Rivalry increases when strong companies outside acquire weak firms in the industry and launch aggressive, well-funded moves to transform their newly acquired competitors into major market contenders

xi. A powerful, successful competitive strategy employed by one company greatly intensifies the competitive pressures on its rivals to develop effective strategic responses or be relegated to also-ran status

i. See Figure 3.5 – Factors Affecting the Strength of Threat of Entry

j. One factor relates to the size of the pool of likely entry candidates and the resources at their command. As a rule, competitive pressures intensify as the pool of entry candidates increases in size.

k. Frequently, the strongest competitive pressures associated with potential entry come not from outsiders but from current industry participants looking for growth opportunities.

l. Existing industry members are often strong candidates to enter market segments or geographic areas where they currently do not have a market presence.

m. A second factor concerns whether the likely entry candidates face high or low entry barriers. The most widely encountered barriers that entry candidates must hurdle include:

i. The presence of sizable economies of scale in production or other areas of operation – When incumbent companies enjoy cost advantages associated with large-scale operation, outsiders must either enter on a large scale or accept a cost disadvantage and consequently lower profitability.

ii. Cost and resource disadvantages not related to size – Existing firms may have low unit costs as a result of experience or learning-curve effects, key patents, partnerships with the best and cheapest suppliers of raw materials and components, proprietary technology know-how not readily available to newcomers, favorable locations, and low fixed costs.

iii. Strong brand preferences and high degree of customer loyalty – In some industries, buyers are strongly attached to established brands.

iv. High capital requirements – The larger the total dollar investment needed to enter the market successfully, the more limited the pool of potential entrants.

v. The difficulties of building a network of distributors or retailers and securing adequate space on retailers’ shelves.

vi. Restrictive regulatory policies – Government agencies can limit or even bar entry by requiring licenses and patents.

vii. Tariffs and international trade restrictions – National governments commonly use tariffs and trade restrictions to raise entry barriers for foreign firms and protect domestic producers from outside competition.

viii. The ability and willingness of industry incumbents to launch vigorous initiatives to block a newcomer’s successful entry.

n. In evaluating whether an industry’s entry barriers ought to be considered strong or weak, company managers must also look at:

i. How formidable the entry barriers are for each type of potential entrant

ii. How attractive the growth and profit prospects are for new entrants

o. The best test of whether potential entry is a strong or weak competitive force in the marketplace is to ask if the industry’s growth and profit prospects are strongly attractive to potential entry candidates.

p. The stronger the threat of entry, the more that incumbent firms are driven to seek ways to fortify their positions against newcomers, pursuing strategic moves to not only protect their market shares, but also make entry more costly or difficult.

q. The threat of entry changes as the industry’s prospects grow brighter or dimmer and as entry barriers rise or fall.

7. Competitive Pressures from the Sellers of Substitute Products

a. Companies in one industry come under competitive pressure from the actions of companies in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes.

b. Just how strong the competitive pressures are from sellers of substitute products depends on three factors:

i. Whether substitutes are readily available and attractively priced

ii. Whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes

iii. How much it costs end-users to switch to substitutes

c. Figure 3.6, Factors Affecting Competition from Substitute Products, lists factors affecting the strength of competitive pressures from substitute products and signs that indicate substitutes are a strong competitive force.

d. As a rule, the lower the price of substitutes, the higher their quality and performance, and the lower the user’s switching costs, the more intense the competitive pressures posed by substitute products.

8. Competitive Pressures Stemming from Supplier Bargaining Power and Supplier-Seller Collaboration

a. Whether supplier-seller relationships represent a weak or strong competitive force depends on:

i. Whether the major suppliers can exercise sufficient bargaining power to influence the terms and conditions of supply in their favor

ii. The nature and extent of supplier-seller collaboration

b. How Supplier Bargaining Power Can Create Competitive Pressures: When the major suppliers to an industry have considerable leverage in determining the terms and conditions of the item they are supplying, they are in a position to exert competitive pressures on one or more rival sellers.

c. The factors that determine whether any of the suppliers to an industry are in a position to exert substantial bargaining power or leverage are fairly clear-cut:

i. Whether certain needed inputs are in short supply

ii. Whether certain suppliers provide a differentiated input that enhances the performance or quality of the industry’s product

iii. Whether the item being supplied is a commodity that is readily available from many suppliers at the going market price

iv. Whether a few large suppliers are the primary sources of a particular item

v. Whether it is difficult or costly for industry members to switch their purchases from one supplier to another or to switch to attractive substitute inputs

vi. Whether there are good substitutes available for supplier’s products.

vii. Whether industry members account for a sizable fraction of supplier’s total sales.

viii. Whether the supplier industry is dominated by a few large companies and whether it is more concentrated than the industry it sells to.

ix. Whether it makes good economic sense for industry members to integrate backward and self-manufacture items they have been buying from suppliers

d. See Figure 3.7 – Factors Affecting the Bargaining Power of Suppliers

9. Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity

a. Whether seller-buyer relationships represent a weak or strong competitive force depends on:

i. Whether some or many of the buyers have sufficient bargaining leverage to obtain price concessions and other favorable terms and conditions of sale

ii. The extent to which buyers are price sensitive

b. How Buyer Bargaining Power Can Create Competitive Pressures: The leverage that certain types of buyers have in negotiating favorable terms can range from weak to strong.

c. Even if buyers do not purchase in large quantities or offer a seller important market exposure or prestige, they gain a degree of bargaining leverage in the following circumstances:

i. Buyer bargaining power is greater when their costs of switching to competing brands or substitutes are relatively low.

ii. Buyer power increases when industry goods are standardized or differentiated.

iii. Buyers have more power when they are large and few in number relative to the number of sellers.

iv. Buyer power increases when buyer demand is weak and industry members are scrambling to sell more units.

v. Buyers gain leverage if they are well informed about sellers’ products, prices, and costs.

vi. Buyers’ bargaining power is greater when they pose a credible threat of integrating backward into the business of sellers.

vii. Buyer leverage increases if buyers have discretion to delay their purchases or perhaps not even make a purchase at all.

d. See Figure 3.8 – Factors Affecting the Bargaining Power of Buyers

e. Not all buyers of an industry’s product have equal degrees of bargaining power with sellers and some may be less sensitive than others to price, quality, or service differences.

f. Even if buyers are interested in purchasing goods and services, their sensitivity to price varies:

i. Buyer price sensitivity increases when buyers are earning low profits or have low income.

ii. Buyers are more price-sensitive if the product represents a large fraction of their total purchases.

iii. Buyers are more price-sensitive if product performance has limited consequences.

10. Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?

a. Scrutinizing each competitive force one by one provides a powerful diagnosis of what competition is like in a given market.

b. Is the Industry Competitively Attractive or Unattractive? As a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants.

c. Core Concept: The strongest of the five forces determines how strong the forces of competition are overall and the extent of the downward pressure on an industry’s level of profitability.

d. The most extreme case of a competitively unattractive industry is when all five forces are producing strong competitive pressures. Fierce to strong competitive pressures coming from all five directions nearly always drive industry profitability to unacceptably low levels, frequently producing losses for many industry members and forcing some out of business. Intense competitive pressures from just two or three of the five forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business.

e. In contrast, when the collective impact of the five competitive forces is moderate to weak, an industry is competitively attractive in the sense that industry members can reasonably expect to earn good profits and a nice return on investment.

f. The ideal competitive environment for earning superior profits is one in which both suppliers and customers are in weak bargaining positions, there are no good substitutes, high barriers block further entry, and rivalry among present sellers generates only moderate competitive pressures.

11. Matching Company Strategy to Competitive Conditions? Working through the five-forces model step-by-step not only aides strategy makers in assessing whether the intensity of competition allows good profitability but it also promotes sound strategic thinking about how to better match company strategy to the specific competitive character of the marketplace.

a. Effectively matching a company’s strategy to the particular competitive pressures and competitive conditions that exist has three aspects:

i. Pursuing avenues that shield the firm from as many of the prevailing competitive pressures as possible

ii. Initiating actions calculated to produce sustainable competitive forces in the company’s favor by altering the underlying factors driving the five forces.

iii. Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.

VI. Question 3: What Factors are Driving Industry Change and What Impacts Will They Have?

1. An industry’s present conditions do not necessarily reveal much about the strategically relevant ways in which the industry environment is changing.

2. All industries are characterized by trends and new developments that gradually or speedily produce changes important enough to require a strategic response from participating firms.

3. The popular hypothesis that industries go through a life cycle of takeoff, rapid growth, early maturity, market saturation, and stagnation or decline helps explain industry change – but it is far from complete.

4. The Concept of Drivers of Change

a. Although it is important to judge what growth stage an industry is in, there is more analytical value in identifying the specific factors causing fundamental industry and competitive adjustments.

b. Industry and competitive conditions change because certain forces are enticing or pressuring industry participants to alter their actions.

c. Drivers of Change are those that have the biggest influence on what kinds of changes will take place in the industry’s structure and competitive environment.

d. Analyzing Industry Dynamics has three steps:

i. Identifying the drivers of change

ii. Assessing whether the drivers of change are individually or collectively acting to make the industry more or less attractive

iii. Determining what strategy changes are needed to prepare for the impacts of the anticipated change

e. Core Concept: Dynamic industry analysis involves determining how the drivers of change are affecting industry and competitive conditions.

5. Identifying an Industry’s Drivers of Change

a. Many developments can affect an industry powerfully enough to qualify as driving forces. Some are unique and specific to a particular industry situation, but most drivers of change fall into one of the following categories:

i. Changes in the long-term industry growth rate – Shifts in industry growth are a driving force for industry change, affecting the balance between industry supply and buyer demand, entry and exit, and the character and strength of competition.

ii. Increasing globalization of the industry – Competition begins to shift from primarily a regional or national focus to an international or global focus when industry members begin seeking out customers in foreign markets or when production activities begin to migrate to countries where costs are lowest.

iii. Changes in who buys the product and how they use it – Shifts in buyer demographics and new ways of using the product can alter the state of competition by opening the way to market an industry’s product through a different mix of dealers and retail outlets.

iv. Technological change – Advances in technology can dramatically alter an industry’s landscape, making it possible to produce new and better products at lower cost and opening up whole new industry frontiers.

v. Emerging new Internet capabilities and applications – The Internet and the adoption of Internet technology applications represent a driving force of historical and revolutionary proportions

vi. Product and marketing innovation – Competition in an industry is always affected by rivals racing to be first to introduce one new product or product enhancement after another. Many firms are successful in introducing new ways to market their products, they can spark a burst of buyer interest, widen industry demand, increase product differentiation, and lower unit costs-any or all of which can alter the competitive positions of rival firms and force strategy revisions.

vii. Entry or exit of major firms – The entry of one or more foreign companies into a geographic market once dominated by domestic firms nearly always shakes up competitive conditions.

viii. Diffusion of technical know-how across more companies and more countries – As knowledge about how to perform a particular activity or execute a particular manufacturing technology spreads, the competitive advantage held by firms originally possessing this know-how erodes.

ix. Improvements in cost and efficiency in closely adjoining markets – Widening or shrinking differences in the costs among key competitors tend to dramatically alter the state of competition.

x. Reductions in uncertainty and business risk – An emerging industry is typically characterized by much uncertainty over potential market size, how much time and money will be needed to surmount technological problems, and what distribution channels and buyer segments to emphasize.

xi. Regulatory influences and government policy changes – Government regulatory actions can often force significant changes in industry practices and strategic approaches.

xii. Changing societal concerns, attitudes, and lifestyles – Emerging social issues and changing attitudes and lifestyles can be powerful instigators of industry change.

b. See Table 3.3 – The Most Common Driving Forces

c. The large number of different potential driving forces explains why it is too simplistic to view industry change only in terms of the life-cycle model and why a full understanding of the causes underlying the emergence of new competitive conditions is a fundamental part of industry analysis.

d. Company strategists must resist the temptation to label every change they see as a driving force; the analytical task is to evaluate the forces of industry and competitive change carefully enough to separate major factors from minor ones.

6. Assessing the Impact of Factors Driving Industry Change

a. The second phase of driving forces analysis is to determine whether the driving forces are acting to make the industry environment more or less attractive. Answers to three questions are needed here:

i. Overall, are the factors driving change causing demand for the industry’s product to increase or decrease?

ii. Is the collective impact of the drivers of change making competition more or less intense?

iii. Will the combined impacts of the change drivers lead to higher or lower industry profitability?

b. Getting a handle on the collective impact of the driving forces usually requires looking at the likely effects of each force separately, since the driving forces may not all be pushing change in the same direction.

7. Developing a Strategy That Takes the Changes in Industry Conditions into Account

a. Driving-forces analysis, when done properly, pushes company managers to think about what’s around the corner and what the company needs to be doing to get ready for it. The real payoff of driving-forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces.

b. Sound analysis of an industry’s drivers of change is a prerequisite to sound strategy making.

c. Dynamic Industry analysis is not something to take lightly; it has practical value and is basic to the task of thinking strategically about where the industry is headed and how to prepare for the changes.

VII. Question 4: What Market Positions Do Rivals Occupy—Who is Strongly Positioned and Who is Not?

1. Understanding which companies are strongly positioned and which are weakly positioned is an integral part of analyzing an industry’s competitive structure.

2. The best technique for revealing the market positions of industry competitors is strategic group mapping. This analytical tool is useful for comparing the market positions of each firm separately or for grouping them into like positions when an industry has so many competitors that it is not practical to examine each one in depth.

3. Core Concept: Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.

4. Using Strategic Group Maps to Assess the Market Positions of Key Competitors

a. A strategic group consists of those industry members with similar competitive approaches and positions in the market.

b. Core Concept: A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.

c. The procedure for constructing a strategic group map is straightforward:

i. Identify the competitive characteristics that differentiate firms in the industry

ii. Plot the firms on a two-variable map using pairs of these differentiating characteristics

iii. Assign firms that fall in about the same strategy space to the same strategic group

iv. Draw circles around each strategic group, making the circles proportional to the size of the group’s respective share of total industry sales revenue

d. See Illustration Capsule 3.1, Comparative Market Positions of Selected Retail Chains: A Strategic Group Map Application

5. What Can Be Learned from Strategic Group Maps

a. Core Concept: Strategic group maps reveal which companies are close competitors and which are distant competitors.

b. Generally speaking, the closer strategic groups are to each other on the map, the stronger the cross group competitive rivalry tends to be.

c. Not all locations in a group map are equally attractive due to profit prospects, prevailing competitive pressures, and drivers of change.

VIII. Question 5: What Strategic Moves Are Rivals Likely to Make Next?

1. Unless a company pays attention to what competitors are doing and knows their strengths and weaknesses, it ends up flying blind into competitive battle.

2. Competitive intelligence about rivals’ strategies, their latest actions and announcements, their resource strengths and weaknesses, the efforts being made to improve their situation, and the thinking and leadership styles of their executives is valuable for predicting or anticipating the strategic moves competitors are likely to make next in the marketplace. Good competitive intelligence on rivals provide a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace.

3. Developing Competitive Intelligence

a. Keeping close tabs on a competitor’s strategy entails monitoring what the rival is doing in the marketplace, what its management is saying in company press releases, information posted on the company’s Web site, and such public documents as annual reports and 10-K filings, articles in the business media, and the reports of securities analysts.

b. Those who gather competitive intelligence on rivals, however, can sometimes cross the fine line between honest inquiry and unethical or even illegal behavior.

c. See Illustration Capsule 3.2 – Business Ethics and Competitive Intelligence

d. In sizing up the strategies and the competitive strengths and weaknesses of competitors, it makes sense for company strategists to make these assessments:

i. Which competitors have strategies that are producing good results?

ii. Which competitors are losing ground in the marketplace or are struggling to develop a good strategy?

iii. Which competitors are poised to gain market share, and which ones seem destined to lose ground?

iv. Which competitors are likely to rank among the industry leaders five years from now? Do one or more up-and-coming competitors have powerful strategies and sufficient capabilities to overtake the current industry leader?

v. Which rivals badly need to increase their unit sales and market share?

4. Predicting the next strategic moves of competitors is the hardest yet most useful part of competitor analysis

a. Since the moves a competitor is likely to make are generally predicated on the views their executives have about the industry’s future and their beliefs about their firm’s situation, it makes sense to closely scrutinize the public pronouncements of rival company executives about where the industry is headed and what it will take to be successful, what they are saying about their firm’s situation, information from the grapevine about what they are doing, and their past actions and leadership styles.

b. Considerations in trying to predict what strategic moves rivals are likely to make next include the following:

i. Which rivals are likely to enter new geographic markets?

ii. Which rivals are strong candidates to expand their product offerings and enter new product segments where they do not currently have a presence?

iii. Which rivals are good candidates to be acquired?

c. To succeed in predicting a competitor’s next moves, company strategists need to have a good feel for each rival’s situation, how its managers think, and what its best options are.

IX. Question 6: What are the Key Factors for Future Competitive Success?

1. An industry’s key success factors (KSF) are those competitive factors that most affect industry members’ ability to prosper in the marketplace.

2. Core Concept: Key success factors are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities with the greatest impact on competitive success in the marketplace.

3. How well a company’s product offering, resources, and capabilities measure up against and industry’s KSFs has a direct bearing on company profitability and determines just how financially and competitively successful that company will be.

4. The answer to three questions helps to identify an industry’s key success factors:

a. On what basis do buyers of the industry’s product choose between the competing brands of sellers? What product attributes and service characteristics are crucial?

b. What resources and competitive capabilities does a company need to have to be competitively successful?

c. What shortcomings are almost certain to put a company at a significant competitive disadvantage?

5. Only rarely are there more than five or six key factors for future competitive success.

6. Correctly diagnosing an industry’s KSFs raises the company’s chances of crafting a sound strategy.

7. Being distinctly better than rivals on one or two key success factors tends to translate into competitive advantage.

X. Question 7: Does the Industry Offer Good Prospects for Attractive Profits?
1. The final step in evaluating the industry and competitive environment is to use the preceding analysis to decide whether the outlook for the industry presents the company with sufficiently attractive prospects for profitability and growth.

2. The important factors on which to base such a conclusion include:

a. The industry’s growth potential

b. Whether strong competitive forces are squeezing industry profitability to subpar levels

c. Whether industry profitability will be favorably or unfavorably affected by the prevailing drivers of change in the industry

d. Whether the company occupies a stronger market position than rivals

e. How well the company’s strategy delivers on the industry key success factors

3. As a general proposition, if an industry’s overall profit prospects are above average, the industry environment is basically attractive; if industry profit prospects are below average, conditions are unattractive.

4. When a company decides an industry is fundamentally attractive and presents good opportunities, a strong case can be made that it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business.

5. The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants; the attractiveness of the opportunities an industry presents depends partly on a company has the resource strengths and competitive capabilities to capture them.