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STRATEGIC MANAGEMENT

INDUSTRY AND COMPETITIVE ANALYSIS

Analysis is the critical starting point of strategic thinking.


Kenichi Ohmae

Things are always different--the art is figuring out which differences matter.
Laszlo Birinyi
What is Situation Analysis?

Company’s internal or micro-environment:


INDUSTRY & COMPETITIVE ANALYSIS

Competencies, capabilities, resource strengths and weaknesses, and

competitiveness.

Company’s external or macro-environment:

Dominant Industry Traits, Key Drivers, and overall Competitive conditions.

A firm spend time to do Situational Analysis to better know its available choices.
Components of Macro-environment
INDUSTRY & COMPETITIVE ANALYSIS

The Economy at
Large
Le
gi
o gy Re slat
ol gu ion
chn la
tio and
Te Suppliers Substitutes n

COMPANY
Rival
Buyers
Firms

New
S oc Entrants
ieta n
l
Lif Valu la ti o i c s
est e pu h
yl e s a n d  Po grap
s mo
IMMEDIATE INDUSTRY De
AND COMPETITIVE
ENVIRONMENT
Question#1: Industry’s Dominant Economic Traits?

Market size and growth rate.


INDUSTRY & COMPETITIVE ANALYSIS

Scope of competitive rivalry.

Number of competitors and their relative sizes & their growth trends.

Prevalence of backward/forward integration.

Entry/exit barriers.

Importance, Nature and pace of technological change.

Product and customer characteristics.

Scale economies and experience curve effects.

Capacity utilization and resource requirements.

Industry profitability.
The Experience Curve Effect

An experience curve exists when a company’s unit costs decline as its


INDUSTRY & COMPETITIVE ANALYSIS

cumulative production volume increases because of:

Accumulating production know-how.

Growing mastery of the technology.

The bigger the experience curve effect, the bigger the cost advantage of the

firm with the largest cumulative production volume.

$1
Cost per Unit

$1 .90
.80 .81 .729
.70 .64 .512
.49
.343

1 2 4 8
Million Million Million Million
Units Units Units Units
Relevance of Key Economic Features

ECONOMIC STRATEGIC IMPORTANCE


FEATURE
INDUSTRY & COMPETITIVE ANALYSIS

Market Size Small markets don’t tend to attract new firms; large markets attract firms looking to acquire
rivals with established positions in attractive industries
Market growth rate Fast growth breeds new entry; slow growth spawns increased rivalry & shake-out of weak
rivals
Capacity Surpluses push prices & profit margins down; shortages pull them up
surpluses/shortages
Industry profitability High-profit industries attract new entrants; depressed conditions lead to exit

Entry/exit barriers High barriers protect positions and profits of existing firms; low barriers make existing firms
vulnerable to entry
Product is big-ticket More buyers will shop for lowest price
item for buyers
Standard products Buyers have more power because it’s easier to switch from seller to seller
Rapid technological Raises risk; investments in technology facilities/equipment may become obsolete before
change they wear out
Capital requirements Big requirements make investment decisions critical; timing becomes important; creates a
barrier to entry and exit
Vertical integration Raises capital requirements; often creates competitive & cost differences among fully vs.
partially vs. non-integrated firms
Economies of scale Increases volume & market share needed to be cost competitive
Rapid product Shortens product life cycle; increases risk because of opportunities for leapfrogging
innovation
Question#2:
What is Competition Like & How Strong are the Competitive Forces?

FIVE FORCES MODEL OF COMPETITION


INDUSTRY & COMPETITIVE ANALYSIS

Potential
New Entrants

Rivalry
Suppliers of Key Among
Buyers
Inputs Competing
Sellers

Substitute Products
(of firms in
other industries)
Rivalry Among Competing Sellers

Usually the most powerful of the five forces; The big factor determining the
strength of rivalry is how actively and aggressively are rivals employing the
INDUSTRY & COMPETITIVE ANALYSIS

various weapons of competition in jockeying for a stronger market position and


seeking bigger sales:

Is price competition vigorous?

Active efforts to improve quality?

Are rivals racing to offer better performance features?

Are rivals racing to offer better customer service?

Lots of advertising/sales promotions?

Active efforts to build a stronger dealer network?

Active product innovation?

Active use of other weapons of rivalry?


What Causes Rivalry to be Stronger?

Active jockeying for position among rivals and frequent launches of new offensives

to gain sales and market share:


INDUSTRY & COMPETITIVE ANALYSIS

One or more firms initiates moves to bolster their standing at expense of rivals.

Lots of firms that are relatively equal in size and capability.

Slow market growth.

Industry conditions tempt some firms to go on the offensive to boost volume and

market share.

Customers have low costs in switching to rival brands.

A successful strategic move carries a big payoff.

Costs more to get out of business than to stay in.

Firms have diverse strategies, corporate priorities, resources, and countries of origin.
Competitive Force of Potential Entry

Seriousness of threat depends on:


INDUSTRY & COMPETITIVE ANALYSIS

Barriers to entry; barriers exist when:

Newcomers confront obstacles.

Economic factors put potential entrant at a disadvantage relative to


incumbent firms.

Reaction of existing firms to entry.


Common Barriers to Entry

Sizable economies of scale.

Inability to gain access to specialized technology.


INDUSTRY & COMPETITIVE ANALYSIS

Existence of strong learning/experience curve effects.

Strong brand preferences and customer loyalty.

Large capital requirements &/or other specialized resource requirements.

Cost disadvantages independent of size.

Difficulties in gaining access to distribution channels.

Regulatory policies, tariffs, trade restrictions.


Competitive Force of Substitute Products

Concept:
Substitutes matter when customers are attracted to the products of firms in other
INDUSTRY & COMPETITIVE ANALYSIS

industries.

Examples:
Eyeglasses vs. Contact Lens.
Sugar vs. Artificial Sweeteners.
Newspapers vs. TV vs. Internet.
eMail vs. Overnight Delivery.
How to Tell Whether Substitute Products are a Strong Force?

Competitive threat of substitutes is stronger when they are:


INDUSTRY & COMPETITIVE ANALYSIS

Readily available.

Attractively priced.

Believed to have comparable or better performance features.

Customer switching costs are low.

Key Indicators:

Rapid growth in sales/profits of substitutes.

Producers of substitutes planning to add capacity.


Competitive Pressures: Suppliers & Supplier-Seller Collaboration

Whether supplier-seller relationships represent a weak or strong competitive


INDUSTRY & COMPETITIVE ANALYSIS

force depends on:

Whether suppliers can exercise sufficient bargaining leverage to influence

terms of supply in their favor.

Extent and competitive importance of collaborative partnerships between one

or more sellers and their suppliers.


Competitive Force of Suppliers

Suppliers are a strong competitive force when:


INDUSTRY & COMPETITIVE ANALYSIS

Item makes up large portion of product costs, is crucial to production

process, and/or significantly affects product quality.

It is costly for buyers to switch suppliers.

They have good reputations and growing demand.

They can supply a component cheaper than industry members can make it

themselves.

They do not have to contend with substitutes.

Buying firms are not important customers.


Factors Affecting Supplier Bargaining Power

Suppliers of Raw Competitive


INDUSTRY & COMPETITIVE ANALYSIS

Rivalry
Materials, Parts, pressures stemming
Among
Components, or from supplier
Competing
Other Resource bargaining power
Sellers
Inputs and seller-supplier
collaboration

Supplier bargaining power is stronger when:


Seller switching costs to alternative suppliers are high.
Some suppliers are a threat to integrate forward into the business of their customers.
Needed inputs are in short supply.

Supplier bargaining power is weaker when:


Seller switching costs to alternative suppliers are low.
There is a surge in the availability of supplies.
Good substitute inputs exist or new ones emerge.
Supplier-seller collaboration/partnering provides attractive win-win opportunities.
Competitive Pressures: Sellers-Suppliers Collaboration

Rival sellers are forming long-term strategic partnerships with select suppliers
INDUSTRY & COMPETITIVE ANALYSIS

to:

Promote just-in-time deliveries and reduced inventory and logistic costs.

Speed availability of next-generation components.

Enhance quality of parts being supplied.

Reduce suppliers’ costs which paves way for lower prices on items supplied.

Competitive advantage potential may accrue to industry rivals doing the best
job of managing supply-chain relationships.

Suppliers are a stronger force the more they can exercise power over:
Prices charged.
Quality and performance of items supplied.
Reliability of deliveries.
Competitive Pressures: Buyers-Seller-Buyer Collaboration

Whether seller-buyer relationships represent a weak or strong competitive


INDUSTRY & COMPETITIVE ANALYSIS

force depends on:

Whether buyers have sufficient bargaining leverage to influence terms of


sale in their favor.

Extent and competitive importance of collaborative partnerships between


one or more sellers and their customers.
Competitive Force of Buyers

Buyers are a strong competitive force when:


INDUSTRY & COMPETITIVE ANALYSIS

They are large and purchase a sizable percentage of industry’s product.

They buy in large quantities.

They can integrate backward.

Industry’s product is standardized.

Their costs in switching to substitutes or other brands are low.

They can purchase from several sellers.

Product purchased does not save buyer money.


Competitive Pressures: Sellers-Buyers Collaboration

Partnerships are an increasingly important competitive element in business-to-


INDUSTRY & COMPETITIVE ANALYSIS

business relationships:

Collaboration may result in mutual benefits regarding:

Just-in-time deliveries.

Order processing.

Electronic invoice payments.

On-line sharing of sales at the cash register.

Competitive advantage potential may accrue to industry rivals who do the best
job of managing seller-buyer partnerships.
Factors Affecting Buyer Bargaining Power

Competitive pressures
Rivalry stemming from buyer
Among Competing Buyers
INDUSTRY & COMPETITIVE ANALYSIS

Sellers bargaining power and seller-


buyer collaboration

Buyer bargaining power is stronger when:


Buyer switching costs to competing brands are low.
Buyers are large and purchase in large quantities.
Quantity and quality of information available to buyers improves.
Some buyers are a threat to integrate backward into the business of sellers.
Buyer demand is weak or declining.

Buyer bargaining power is weaker when:


Buyer switching costs to competing brands are high.
There is a surge in buyer demand.
Seller-buyer collaboration / partnering provides attractive win-win opportunities.
Strategic Implications of the 5 Competitive Forces

Competitive environment is unattractive from the standpoint of earning


good profits when:
INDUSTRY & COMPETITIVE ANALYSIS

Rivalry is strong.

Entry barriers are low and entry is likely.

Competition from substitutes is strong.

Suppliers and customers have considerable bargaining power.

Competitive environment is ideal from a profit-making standpoint when:

Rivalry is moderate.

Entry barriers are high and no firm is likely to enter.

Good substitutes do not exist.

Suppliers and customers are in a weak bargaining position.


Coping with the 5 Competitive Forces

Objective is to craft a strategy:

To insulate firm from competitive forces.


INDUSTRY & COMPETITIVE ANALYSIS

To help make the “rules,” placing added pressure on rivals.

Which allows firm to define the business model for the industry.
Question#3:
What Forces are at Work to Change Industry Conditions?

Industries change because forces are driving industry participants to alter their
INDUSTRY & COMPETITIVE ANALYSIS

actions.

Driving forces are the major underlying causes of changing industry and competitive
conditions.

ANALYZING DRIVING FORCES

Identify those forces likely to exert greatest influence over next 1-3 years; Usually no
more than 3 - 4 factors qualify as real drivers of change.

• Assess impact: What difference will the forces make - favorable? unfavorable?
Common Types of Driving-Forces

e-commerce opportunities.
INDUSTRY & COMPETITIVE ANALYSIS

Globalization.

Long-term industry growth rate.

Who buys the product and how they use it.

Innovation: Product, Technological, Marketing etc.

Entry or exit of major firms.

Diffusion of technical knowledge.

Changes in cost and efficiency.

Market shift from standardized to differentiated products (or vice versa).

Policies / legislation.

Societal concerns, attitudes, and lifestyles.

Degree of uncertainty and risk.


Question#4: Assessment of Competitive Positions

STRATEGIC GROUP MAPPING


INDUSTRY & COMPETITIVE ANALYSIS

Firms in same strategic group have two or more competitive characteristics in


common:

Sell in same price/quality range.

Cover same geographic areas.

Be vertically integrated to same degree.

Have comparable product line breadth.

Emphasize same types of distribution channels.

Offer buyers similar services.

Use identical technological approaches.


World Automobile Industry – Strategic Groups Map
INDUSTRY & COMPETITIVE ANALYSIS
Video Game Industry – Strategic Groups Map
INDUSTRY & COMPETITIVE ANALYSIS

Arcades
Suppliers/Distribution Channels

Arcade
operators Publishers of
Types of Video Game

games on CD-
Home PCs ROMs
Sony, Sega,
Nintendo, several
others
Video game
consoles

MSN Gaming Zone,


Pogo.com, America
Online/Internet Online, HEAT, Engage,
Oceanline, TEN

Low Medium High


(Coin-operated (Console players cost (Use PC)
equipment) $100-$300)
Overall Cost to Players of Video Games