External Analysis: the Identification of Opportunities and Threats

3167 words 13 pages
CHAPTER 2
External Analysis: The Identification of Opportunities and Threats
I. Overview
A. For a company to succeed, its strategy must either fit the industry environment in which it operates, or the company must be able to reshape the industry environment in which it operates to its advantage through its choice of strategy. Companies typically fail when their strategy no longer fits the environment in which they operate.
B. To achieve a good fit, managers must understand the forces that shape competition in their external environment. This understanding enables them to identify strategic opportunities and threats. Opportunities arise when a company can take advantage of conditions in its environment to formulate and implement
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The “bust” part of the cycle will continue until overall industry capacity is brought into line with demand (through bankruptcies), at which point prices may stabilize again.
b) Consolidated industries are interdependent, so that the competitive actions of one company directly affect the profitability of competitors, forcing a response from them. The consequence can be price wars like those the airline industry has experienced. Thus interdependence is a major threat. This threat can be reduced when tacit price-leadership agreements exist within the industry and when companies are successful in emphasizing nonprice competition.
2. Demand conditions also determine the intensity of rivalry among established companies. Growing demand moderates competition by providing room for expansion. Declining demand results in more competition as companies fight to maintain revenues and market share.
3. Cost conditions are another determinant of rivalry between firms. High fixed costs lead to a focus on volume of sales in order to cover these costs. This focus on volume can spark intense rivalry if demand is weakening and too many firms are involved in providing the same products. This situation will prompt firms in the industry to lower prices in order to capture sufficient sales to cover costs.
4. Exit barriers are a serious competitive threat, especially when demand is declining. Economic, strategic, and emotional

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