8.1 Gaining Advantages by Understanding the Competitive Environment
- What is strategic analysis, and why do firms need to analyze their competitive environment?
Strategic analysis is a systematic evaluation of a firm’s situation, both internally and with respect to what is happening in the outside world. This analysis examines what the firm itself is good or bad at, how rivals in its industry are competing against it for customers, and what factors in the world environment, such as economic indicators or demographic changes, might impact the firm’s ability to be successful.
Firms need to conduct this analysis in order to be aware of and prepared for changes in their competitive environment and to maximize their chance of successfully competing against rivals and sustaining their profitability and market share in their industry.
8.2 Using SWOT for Strategic Analysis
- What is a SWOT analysis, and what can it reveal about a firm?
SWOT is a traditional analytical tool that identifies a firm’s strengths, weaknesses, opportunities, and threats (SWOT is an acronym of these four factors). It is useful for conducting a quick look at the internal capabilities (strengths and weaknesses) and external events and situations (opportunities and threats) a firm is facing.
SWOT is not a comprehensive analytical tool, because the four categories for analysis are too broad and will not necessarily identify all of the factors important to a firm’s success that a more thorough analysis would.
8.3 A Firm's External Macro Environment: PESTEL
- What makes up a firm’s external macro environment, and what tools do strategists use to understand it?
The external environment of a firm is composed of two primary layers: the macro environment and the micro environment. The macro environment includes facts and situations that a firm must be aware of but cannot always influence. The macro environment is analyzed using the PESTEL analytical tool that considers a firm’s political and legal aspects, economic indicators, sociocultural trends, demographic facts, technological changes, and environmental aspects.
8.4 A Firm's Micro Environment: Porter's Five Forces
- What makes up a firm’s external micro environment, and what tools do strategists use to understand it?
The second layer of a firm’s external environment is its micro environment, which includes the components of a firm’s industry, such as competitors, suppliers, and customers. Porter’s Five Forces of industry competition (industry rivalry, threat of new entrants, threat of substitutes, supplier power, and buyer power) capture the dynamic relationships between these components.
8.5 The Internal Environment
- How and why do managers conduct an internal analysis of their firms?
Managers cannot lead their firms to success without understanding what the firm is able to do. An analysis of the firm’s resources and capabilities, as well as its gaps, is essential in determining the best path forward for the firm. A good strategy for competitive advantage capitalizes on a firm’s key resources and capabilities, as identified and evaluated using the VRIO (value, rarity, imitation, and organization) analytical tool.
Resources and capabilities that satisfy VRIO criteria are the key things that a firm is best at, and these should be leveraged so the firm can compete against rivals.
8.6 Competition, Strategy, and Competitive Advantage
- What does it mean to compete with other firms in a business environment, and what does it mean when a firm has a competitive advantage over its rivals and what generic strategies can a firm implement to gain advantage over its rivals?
Competition is the battle for customers. Firms compete against rivals offering similar products and services and try to attract customers by making sure their product or service is a little better or less expensive than those of their competitors. The firm that is most successful in this battle, measured in terms of profitability or in terms of market share, has a competitive advantage.
Generic competitive strategies are the basic templates for organizing firm activities in order to achieve competitive advantage in an industry. A firm will perform value chain activities, such as marketing and research and development, in order to support the overall competitive strategy it has chosen.
Following a generic cost-leadership strategy requires that a firm try to save money throughout the value chain so that it can offer customers low-priced goods and services. In contrast, differentiators add value to their products and services while performing value chain activities so that they can charge premium prices to consumers.
A third generic competitive strategy, focus, is chosen in combination with one of the other two strategies by firms who decide to target smaller geographic or demographic customer groups.
8.7 Strategic Positioning
- What elements go into determining a firm’s strategic position?
A firm develops a strategic position in response to the factors present in its competitive environment. Strategic analysis is essential in identifying and understanding the factors that a strategic position must address. The choice of strategic position factors in a firm’s key resources and capabilities when choosing a generic competitive strategy, product or service to be offered, target market, and geographic reach to compete successfully against rivals in an industry. To be successful in allowing a firm to achieve a competitive advantage in its industry, a firm’s strategic position should be different from its competitors’ positions in the same industry and should be hard for competitors to copy so that the firm’s competitive advantage lasts.