External Analysis

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Chapter 3

• External Analysis
• Objective analyzing the external factors
  (consumers and competitors) to develop strategies

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External Analysis

• After the mission of the company is determined -
  where you want to go and what you want to
  accomplish it is time to analyze the external
  factors.
• Includes the analysis of the external factors
  that would influence the company strategies.
• The following external factors should be
  analyzed
• Customers
• Competitors
• Market
• Environment

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Affecting Strategic Decisions

• The external analysis process is crucial to
  generate (suggest), influence or evaluate the
  possible strategic options. It contributes to
  the investment decisions, functional and
  competitive strategies.
• Should existing businesses be liquidated, milked,
  maintained or invested for growth?
• Should there be market penetration, product
  expansion, or market expansion?
• What should be the positioning strategy?
• What are the key success factors?

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Part 1 Customer Analysis

• The first logical step in the strategic marketing
  planning process is to analyze the customers.
• Involves (1) identifying the companys current
  and potential customers and (2) understanding
  those customers.
• In order to identify and analyze the companys
  current situation, the customer is the best
  starting point. For effective strategic
  planning, it is essential to see the company from
  the perspective of the customer.

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Who are my customers?

• Under the customer analysis, one should identify
  not only the current primary or target markets,
  but also the potential markets outside the
  current customer base.
• In order to identify both current and potential
  customers,
• Define the products/services offered by the
  company. It is important to match the companys
  offerings with the customers.

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• Organize the current and potential customers into
  identifiable market segments. Write a
  description of the customers in each segment.
• Quantify the number of customers that the
  company have in each segment and the total number
  of customers available in each segment.

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Task 1 Defining the products and services

• In order to define the products/services of the
  company, first simply the inventory (or the list)
  of what the company sells should be recorded.
• Second, the product lines should be identified.
  The product line is the group of products that
  are similar or complement each other or are
  purchased as a set of products.
• Third, the product lines should be rated
  according to (1) quality, (2) service, and (3)
  price from the customers perspective.

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Task 2. Organizing customers into market segments

• Segmentation means the identification of customer
  groups that respond differently than other
  customer groups to competitive strategies. To
  deliver the right competitive offering to the
  segments, the following variables can be
  considered
• Benefits sought
• Usage
• Organization type
• Geographic location
• Customer perceptions and attitudes
• Price sensitivity

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How should the market be segmented into groups?

• The task of identifying segments is difficult.
  There are literally millions of ways to divide up
  the market. The variables need to be evaluated
  on the basis of their ability to identify
  segments for which different strategies are
  pursued.
• Then the identified segments should be judged
  according to size and cost-effectiveness.
• The most useful segmentation variables are
  benefit and price sensitivity.
• Two distinct segmentation strategies are
  possible. The first focuses on a single segment.
  The alternative involves multiple segments.

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Task 3 Quantify the number of customers

• Project a total number of customers for each
  segment based on existing customers and potential
  customers combined. This is important to answer
  such questions as follows Who are the biggest
  customers? The most profitable? The most
  attractive potential customers?

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Understanding Customers

• After identifying customer segments, the next
  step is to build a profile of them. The profile
  helps the company understand its customers and
  therefore discover its competitive advantages.
• By developing a profile for each segment, the
  company uncovers the motivations, the needs the
  thought processes of the customers.

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Customer Profiles

• Developing a profile is a matter of answering a
  series of questions. Those questions can be
  broken down into the following categories
• The decision making process
• Customer motivations/needs
• Customer benefits
• Buying criteria
• Unmet needs

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The Decision-Making Process

• Questions that would be answered under this
  category would be
• Who buys our product?
• Who influences a purchase?
• Where is the buying decision made?

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Customer Motivations/Needs

• What lies behind the customers purchase
  decision? E.g. the business air traveler /
  vacationer
• Why does the customer need this product in the
  first place?
• Why wouldnt some other type of product or brand
  be better?
• What services does the customer expect?

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Customer Benefits

• Like the question dealing with customer
  motivations/needs, responses here can cover a
  wide spectrum. However, together with
  motivations/needs, it provides insight into
  relevant assets and skills.
• The presence of a unique or strong assets or
  skill responsive to a motivation/need/benefit,
  can provide the basis for a sustainable
  competitive advantage (SCA). The absence can be
  fatal.

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Buying Criteria

• What products does the customer buy?
• What sales channel does the customer prefer?
• How much is the customer willing to spend?
• Where does the customer get information about the
  product?

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Unmet Needs

• What needs are not now being met by the existing
  product offerings?
• It is strategically important to identify unmet
  needs, because they represent opportunities for
  firms that want to increase their market share or
  break into a market. They also represent threats
  to established firms whose competitors can use
  those unmet needs to disrupt an established
  position.

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How to get answers to the questions

• There are two basic sources of information for
  answering the questions in the customer profiles
• The companys experience (employees) informal
  one-on-one meetings, group meetings, company-wide
  meetings, questionnaires.
• The customer
• Simply asking people what is important. However,
  they may say that all attributes are important
  and appear more logical than they actually are.

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• Identifying which attribute judgments are
  associated with actual purchase decisions. E.g.
  How would a mother select snacks for his
  children?
• Asking trade-off questions. Sacrifices? E.g. how
  would an airline passenger trade off convenient
  departure time with price?
• For the unmet needs Discussing with the
  customers in focus group settings about their
  experiences with the products.
• Termed problem research, developing a list of
  potential problems with the product. Then asking
  whether the problem is important, it occurs
  frequently, a problem solution exists.

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• Termed benefit structure analysis product users
  identify the benefits desired and the extent to
  which the product delivers those benefits.
• Customer satisfaction studies the identification
  of events leading to dissatisfaction can uncover
  unmet needs.
• Using lead users they are such users that face
  needs that will be general in the marketplace,
  but face them months or years before the bulk of
  the marketplace.

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Part 2 Competitor Analysis

• Competitor analysis is the second phase of the
  external analysis.
• Similar to the steps in customer analysis, the
  competitor analysis involves (1) identifying
  groups of competitors, and (2) understanding
  them. Plus (3) identifying areas of
  differentiation.
• The company must understand its competitors to
  position itself into a superior position with the
  customers.

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Identifying the Competitors

• There are different approaches to identify groups
  of competitors (also the potential competitors).
  The approach would be based on identifying
  companies that
• pursue the same group of customers, or pursue
  similar strategies (e.g. distribution channel)
• have similar assets, skills and other
  characteristics (e.g. quality, size)
• attempt to satisfy the same set of customer needs
• offer products for the same use situation
• are selected by the same group of customers

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Understanding Competitors

• To gain an understanding of competitors, it is
  useful to analyze them on the basis of several
  dimensions.
• Size, growth, profitability provide a gross
  measure of their relative importance.
• Competitors objectives and
• Past and current strategies can provide insight
  into their intentions.

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• Competitors organization and culture can limit
  the range of strategies that may be considered.
• Cost structure may indicate the competitors
  future pricing strategy and staying power.
• Strengths and Weaknesses the assessment starts
  with an identification of relevant assets and
  skills for the industry. Then the next step is
  to compare the companys assets and skills with
  the competitors (The Competitive Strength Grid).

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Competitive Strengths and Weaknesses

• In order to identify the relevant assets and
  skills, the following questions are helpful.
• Why are successful businesses successful? Why are
  unsuccessful businesses unsuccessful? What assets
  have contributed to their success? What assets or
  skills do they lack?
• What are the key customer motivations? What is
  really important to the customer?

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• What are the large value-added parts of the
  product or service? What are the large cost
  components?
• What are the mobility barriers (cost and
  difficulty of creating the assets and skills
  needed to support an SCA) in the industry?
• Consider the components of the value chain
  (primary value chain inbound logistics,
  operations, outbound logistics, marketing and
  sales, service secondary value chain
  information systems, technology development,
  human resources management, firm infrastructure).

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Methods

• There are different methods available to analyze
  the competitors.
• The Competitive Strength Grid
• Competitive Value Map
• Positioning Maps

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Competitive Strength Grid

• After the relevant assets and skills are
  identified, those are scaled (rated) for the own
  firm and the major competitors.
• It summarizes the posture of the competitors with
  respect to assets and skills.

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Competitive Value Map

• Provides a good pictorial comparison of all
  competitors company on a single chart. Some
  guidelines
• The direct competitor of the company should be in
  the same square or in a square immediately
  adjacent to it. Direct competitors are firms that
  take business directly away from the company,
  therefore, they have the greatest concern.
• Firms located in boxes not in the companys
  immediate area are secondary competitors. These
  are firms that take the companys customers, but
  their blend of products is not similar.

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Positioning Maps

• Provides the pictorial comparison of all
  competitors and the company on a graph.
• The map is drawn on the basis of customers
  perceptions on each firm.

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Competitive Differentiation

• After analyzing the competitors, the company can
  differentiate itself in a unique way.
  Differentiation is some aspect of how the company
  does business that the customer perceives as
  unique (important, valuable) from the way the
  competitors do business. Differentiation is the
  path to establish a sustainable competitive
  advantage (SCA).
• There are so many ways to differentiate one
  company from the competition. In the broadest
  sense, differentiation is possible in four
  categories

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• Product differentiation means that the customer
  perceives the companys product unique, valuable
  or important than the competitors product. E.g.
  product capabilities may be superior, product
  design may be more efficient.
• Service differentiation is the same as product
  differentiation, only it applies to the services
  offered. E.g. delivery capabilities, technical
  support, installation services, payment terms
  etc.
• Point-of-sale differentiation involves
  availability and accessibility. It is how the
  customer buys the companys products. Through
  point-of-sale, customers can easily access the
  company, learn about the company and purchase the
  companys products.

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• Price differentiation is a matter of extremes on
  the pricing scale. The company may offer premium
  products that can command a higher price. Or, the
  company may offer products equal to the
  competition at a lower price to differentiate
  itself.

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Obtaining Information

• Information on competitors is usually available
  from a variety of sources.
• Competitors usually communicate extensively to
  their suppliers, customers, distributors,
  security analysts, government legislators.
  Contacting them.
• Monitoring of trade magazines, trade shows,
  advertising, speeches, annual reports etc.
• Accessing databases including the internet
• Using market research e.g. telephone surveys,
  Which supermarket do you shop most often? Which
  has the lowest price? etc.