Chapter3.pdf - Strategy: Core Concepts and Analytical...

Strategy: Core Concepts and Analytical Approaches
Arthur A. Thompson, The University of Alabama 7th Edition, 2022-2023
An e-book marketed by McGraw Hill Education
Chapter 3
Evaluating a Company’s
External Environment
Analysis is the critical starting point of strategic thinking.
—Kenichi Ohmae, consultant and author
Things are always different—the art is figuring out which differences matter.
—Laszlo Birinyi, investments manager
In essence, the job of a strategist is to understand and cope with competition.
—Michael E. Porter, Harvard Business School professor
No matter what it takes, the goal of strategy is to beat the competition.
—Kenichi Ohmae, consultant and author
I
n order to wisely chart a company’s strategic course, managers must first develop a deep understanding
of the company’s present situation. Two facets of a company’s situation are especially relevant: (1) the
industry and competitive environment in which the company operates and the forces acting to reshape
this environment, and (2) the company’s internal environment—its resources and capabilities, its strengths
and weaknesses vis-à-vis rivals, and its windows of opportunity.
Insightful diagnosis of a company’s external and internal environment is a prerequisite for managers to
succeed in crafting a strategy that is an excellent fit with the company’s situation, is capable of building
a competitive advantage, and has good prospects for boosting company performance—the three criteria
of a winning strategy. As depicted in Figure 3.1, the task of crafting a strategy begins with appraisals of
the company’s external and internal environments (as a basis for deciding upon a long-term direction and
developing a strategic vision), moves toward an evaluation of the most promising alternative strategies and
business models, and culminates in choosing a specific strategy.
This chapter presents the concepts and analytical tools for zeroing in on those aspects of a single-business
company’s external environment that should be considered in making strategic choices. Attention centers on
analyzing the broad aspects of the company’s “macro-environment,” the specific market arena in which the
company operates, the drivers of market change, the market positions and likely actions of rival companies,
and the factors that determine competitive success. In Chapter 4, we explore the analytical methods of
evaluating a company’s internal circumstances and competitive capabilities.
Copyright © 2022 by Arthur A. Thompson. All rights reserved.
Reproduction and distribution of the contents are expressly prohibited without the author’s written permission
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Chapter 3 • Evaluating a Company’s External Environment
Copyright © 2022 by Arthur A. Thompson. All rights reserved.
Reproduction and distribution of the contents are expressly prohibited without the author’s written permission
FIGURE 3.1 From Analyzing the Company’s Situation to Choosing a Strategy
Form a
strategic
vision of
where the
company
needs to head
Analyzing a
company’s
external
environment
Analyzing a
company’s
internal
environment
Identify
promising
strategic
options
for the
company
Select the
best
strategy
and
business
model for
the company
THE STRATEGICALLY RELEVANT FACTORS
INFLUENCING A COMPANY’S EXTERNAL ENVIRONMENT
A company’s external environment includes not only its immediate industry and competitive environment
and but also a broader “macro-environment” (see Figure 3.2). This broader macro-environment is shaped