Managers are not prepared to act wisely in steering a company in a different direction or altering its strategy until they have a deep understanding of the pertinent factors surrounding the company's situation. As indicated in the opening paragraph of Chapter 1, one of the three central questions that managers must address in evaluating their company's business prospects is “What's the company's present situation?” Two facets of a company's situation are especially pertinent: (1) the industry and competitive environment in which the company operates and the forces acting to reshape this environment, and (2) the company's own market position and competitiveness—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 competitive advantage, and holds good prospect for boosting company performance—the three criteria of a winning strategy. As depicted in Figure 3.1, the task of crafting a strategy thus should always begin with an appraisal of the company's external and internal situation (as a basis for developing strategic vision of where the company needs to head), then move toward an evaluation of the most promising alternative strategies and business models, and culminate 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 the competitive arena in which a company operates, the drivers of market change, and what rival companies are doing. In Chapter 4 we explore the methods of evaluating a company's internal circumstances and competitiveness.