External Analysis: the Identification of Opportunities and Threats

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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…show more content…
Cost advantages might include factors such as patents, control of a specific raw material, or access to cheaper funds. 4 When customer switching costs—that is, costs that accrue to a consumer that intends to switch from the product offering of an established company to the product offering of a new entrant—are high, potential new entrants are discouraged. 5. Government regulations, such as establishing a protected monopoly, tend to protect established firms, and thus constitutes a barrier to entry. When industries are deregulated new entrants usually proliferate. C. Another of Porter’s five forces is rivalry among established companies. Strong rivalry tends to lower prices and raise costs, which constitutes a threat to established companies, whereas weak rivalry creates an opportunity to earn greater returns. The extent of rivalry among established firms depends on several factors. 1. One factor is industry competitive structure, which refers to the number and size distribution of companies within an industry. Structures vary from fragmented (made up of many small- and medium-sized companies) to consolidated (dominated by a small number of large companies). Different competitive structures have different implications for rivalry. a) Many fragmented industries are characterized by low entry barriers and commodity-type-products that are hard to differentiate. These characteristics tend to result in boom-and-bust cycles, with a flood of new entrants, excess
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