Chap 00300

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3Chapter

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy State University-Florida and Western Region

Analyzing a CompanysExternal Environment

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Analysis is the critical

starting point of strategicthinking.

Kenichi Ohmae

Things are always different --the

art is figuring out whichdifferences matter.

Laszlo Birinyi

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Chapter Roadmap

The Strategically Relevant Components of a Companys External Environment Thinking Strategically About a Companys Industry and CompetitiveEnvironment

Question 1: What Are the Industrys Dominant Economic Features? Question 2: What Kinds of Competitive Forces Are Industry MembersFacing?Question 3: What Factors Are Driving Industry Change and What ImpactsWill They Have?Question 4: What Market Positions Do Rivals Occupy Who Is StronglyPositioned and Who Is Not?Question 5: What Strategic Moves Are Rivals Likely to Make Next?Question 6: What Are the Key Factors for Future Competitive Success?Question 7: Does the Outlook for the Industry Present an AttractiveOpportunity?

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Two considerations

Companys external or macro-environment

Industry and competitive conditions

Companys internal or micro-environment

Competencies, capabilities,resource strengths and weaknesses,and competitiveness

What Is Situation Analysis?

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Fig. 3.1: From Thinking Strategicallyabout the Companys Situation

to Choosing a Strategy

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Fig. 3.2: The Components of aCompanys Macro -Environment

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Key Questions Regarding theIndustry and Competitive Environment

Industrysdominanteconomic traits

Competitiveforces andstrength of each force

Drivers of change in theindustry

Competitor analysis

Key successfactors

Conclusions:Industryattractiveness

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Q #1: What are the IndustrysDominant Economic Traits?

Market size and growth rateScope of competitive rivalry

Number of rivalsBuyer needs and requirementsProduction capacityPace of technological changeVertical integration

Product innovationDegree of product differentiationEconomies of scaleLearning and experience curve effects

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Learning/Experience Effects

L earning/exper ience effects exist when a companys unitcosts decline as its cumulative production volume increases

because of

Accumulating production know-how

Growing mastery of the technology

The bigger the learni ng or exper ience curve effect, the bigger the cost advantage of the firm with the largest cumulative

production volume

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Objectives are to identify

Main sources of competitive forces

Strength of these forces

Key analytical tool

F ive F orces M odel of Competi tion

Q #2: What Kinds of Competitive ForcesAre Industry Members Facing?

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Fig. 3.3: The Five ForcesModel of Competition

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Step 1: Identify the specific competitive pressures associated with each of the five forces

Step 2: Evaluate the str ength of each competi tive force -- fierce, strong,moderate to normal, or weak?

Step 3: Determine whether the collective str ength of the five competitive forces is conduciveto earning attractive profits

Analyzing the Five CompetitiveForces: How to Do It

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Rivalry Among Competing Sellers

Usually the strongest of the five forcesKey factor in determining strength of r ivalry

How aggressively are rivals using various weapons of

competition to improve their market positions and performance?

Competi tive r ivalry is a combative contest involving

Offensive actionsDefensive countermoves

Fig 3 4: Weapons for Competing and

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Fig. 3.4: Weapons for Competing andFactors Affecting Strength of Rivalry

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What Are the Typical Weapons for Competing?

Vigorous price competition

More or different performancefeatures

Better product performanceHigher quality

Stronger brand image andappeal

Wider selection of models andstyles

Bigger/better dealer network

Low interest rate financing

Higher levels of advertising

Stronger product innovationcapabilities

Better customer service

Stronger capabilities to provide buyers with custom-made products

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What Causes Rivalryto be Stronger?

Competitors engage in frequent and aggressive launches of new offensivesto gain sales and market shareSlow market growth

Number of rivals increases and rivals are of equal size and competitive capabilityBuyer costs to switch brands are lowIndustry conditions tempt rivals to use price cuts or other competitiveweapons to boost volumeA successful strategic move carries a big payoff

Diversity of rivals increases in terms of visions, objectives, strategies,resources, and countries of originStrong rivals outside the industry acquire weak firms in the industry anduse their resources to transform the new firms into major market contenders

h l

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What Causes Rivalryto be Weaker?

Industry rivals move only infrequently or in a non-aggressivemanner to draw sales from rivals

Rapid market growth

Products of rivals are strongly differentiatedand customer loyalty is high

Buyer costs to switch brands are high

There are fewer than 5 rivals or there are numerous rivals soany one firms actions has minimal impact on rivals business

C i i F

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Competitive Forceof Potential Entry

Seriousness of threat depends onSize of pool of entry candidates and available resources

Barriers to entry

Reaction of existing firms

Evaluating threat of entry involves assessing

How formidable entry barriers are for each type of potentialentrant and

Attractiveness of growth and profit prospects

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Fig. 3.5: Factors AffectingStrength of Threat of Entry

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Common Barriers to Entry

Sizable economies of scaleCost and resource disadvantages independent of size

Brand preferences and customer loyalty

Capital requirements and/or other specialized resource requirements

Access to distribution channels

Regulatory policies

Tariffs and international trade restrictions

Wh I th Th t

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When Is the Threatof Entry Stronger?

Theres a sizable pool of entry candidates

Entry barriers are low

Industry growth is rapid and profit potential is high

Incumbents are unwilling or unable to contest a newcomers entryefforts

When existing industry members have a strong incentive to expand intonew geographic areas or new product segments where they currently donot have a market presence

Wh I th Th t

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When Is the Threatof Entry Weaker?

Theres only a small pool of entry candidates

Entry barriers are high

Existing competitors are struggling to earn good profits

Industrys outlook is risky

Industry growth is slow or stagnant

C titi F f

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Substitutes matter when customers are attracted to the productsof firms in other industr ies

Concept

Eyeglasses and contact lensvs. laser surgery

Sugar vs. artificial sweeteners

Newspapers vs. TV vs. Internet

Examples

Competitive Force ofSubstitute Products

H T ll Wh h S b i

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Whether substitutes arereadily available and attractively

priced

Whether buyers view substitutes as being comparable or better

How much it costs end users to

switch to substitutes

How to Tell Whether SubstituteProducts Are a Strong Force

Fi 3 6 F Aff i

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Fig. 3.6: Factors AffectingCompetition From Substitute Products

When Is the Competition

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When Is the CompetitionFrom Substitutes Stronger?

There are many good substitutes that are readily available

The lower the price of substitutes

The higher the quality and performance of substitutes

The lower the users switching costs

C titi P F S li

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Competitive Pressures From Suppliersand Supplier-Seller Collaboration

Whether supplier-seller relationships represent aweak or strong competitive force depends on

Whether suppliers can exercisesufficient bargaining leverage toinfluence terms of supply in their favor

Nature and extent of supplier-seller collaboration in the industry

Fig. 3.7: Factors Affecting theB i i P f S li

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Bargaining Power of Suppliers

When Is the Bargaining

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When Is the BargainingPower of Suppliers Stronger?

Industry members incur high costs in switching their purchasesto alternative suppliers

Needed inputs are in short supply

Supplier provides a differentiated inputthat enhances the quality of performanceof sellers products or is a valuable part of sellers production process

There are only a few suppliers of a specific input

Some suppliers threaten to integrate forward


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Item being supplied is a commoditySeller switching costs to alternative suppliers are low

Good substitutes exist or new ones emerge

Surge in availability of supplies occurs

Industry members account for a bigfraction of suppliers total sales

Industry members threaten to integrate backward

Seller collaboration with selected suppliers provides attractivewin-win opportunities

When Is the BargainingPower of Suppliers Weaker?

Competitive Pressures: Collaboration

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Competitive Pressures: CollaborationBetween Sellers and Suppliers

Sellers are forging str ategic partnerships with select suppliers to

Reduce inventory and logistics costs

Speed availability of next-generationcomponents

Enhance quality of parts being supplied

Squeeze out cost savings for both parties

Competi tive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships

Competitive Pressures From Buyers

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Competitive Pressures From Buyersand Seller-Buyer Collaboration

Whether seller-buyer relationships represent aweak or strong competitive force depends on

Whether buyers have sufficient bargainingleverage to influence terms of sale in their favor

Extent and competitive importance of seller-buyer strategic partnershipsin the industry

Fig. 3.8: Factors AffectingBargaining Power of Buyers

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Bargaining Power of Buyers


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When Is the BargainingPower of Buyers Stronger?

Buyer switching costs to competing brands or substitutes are lowBuyers are large and can demand concessionsLarge-volume purchases by buyers are important to sellersBuyer demand is weak or declining

Only a few buyers existsIdentity of buyer adds prestigeto sellers list of customers Quantity and quality of information

available to buyers improvesBuyers have ability to postpone purchases until later Buyers threaten to integrate backward


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When Is the BargainingPower of Buyers Weaker?

Buyers purchase item infrequently or in small quantitiesBuyer switching costs to competing brands are high

Surge in buyer demand creates a sellers market

Sellers brand reputation is important to buyer

A specific sellers product delivers quality

or performance that is very important to buyer Buyer collaboration with selected sellers provides attractivewin-win opportunities

Competitive Pressures: Collaboration

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Competitive Pressures: CollaborationBetween Sellers and Buyers

Partnerships are an increasingly important competitiveelement in business-to-business relationships

Collaboration may result inmutual benefi ts regarding

Just-in-time deliveries

Order processing

Electronic invoice payments

Data sharing

Competi tive advantage potential may accrue to sellers doingthe best job of managing seller-buyer partnerships

Strategic Implications of the

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Strategic Implications of theFive Competitive Forces

Competitive environment is unattractive fromthe standpoint of earning good profits when

Rivalry is vigorous

Entry barriers are lowand entry is likely

Competition fromsubstitutes is strong

Suppliers and customers haveconsiderable bargaining power

Strategic Implications of the

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Competitive environment is ideal froma profit-making standpoint when

Rivalry is moderate

Entry barriers are highand no firm is likely to enter

Good substitutesdo not exist

Suppliers and customers arein a weak bargaining position

g pFive Competitive Forces

Coping With the

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p gFive Competitive Forces

Objective is to craft a strategy to

Insulate firm fromcompetitive pressures

I ni tiate actions to produce sustainable competi tive advantage

Allow firm to be the industrys mover and shaker with themost powerful strategy that defines thebusiness model for the industry

Q #3: What Factors Are Driving Industry

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Q g yChange and What Impacts Will They Have?

Industries change because forces are driving industry participants to alter their actions

Dr iving forces are themajor under lying causes of changing industry andcompetitive conditions

Analyzing Driving Forces

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Analyzing Driving Forces

1. Identify forces likely to exertgreatest

influence over next 1 - 3 years

Usually no more than 3 - 4 factorsqualify as real drivers of change

2. Assess impact Are the driving forces causing demand for product to increaseor decrease?

Are the driving forces acting to make competition more or lessintense?Will the driving forces lead to higher or lower industryprofitability?

Common Types of

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ypDriving Forces

Internet and e-commerce opportunitiesIncreasing globalization of industry

Changes in long-term industry growth rate

Changes in who buys the product andhow they use it

Product innovation

Technological change/process innovation

Marketing innovation

Common Types of

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Entry or exit of major firmsDiffusion of technical knowledge

Changes in cost and efficiency

Consumer preferences shift from standardized to differentiated products (or vice versa)

Changes in degree of uncertainty and risk

Regulatory policies / government legislation

Changing societal concerns, attitudes, and lifestyles

ypDriving Forces

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Question 4: What Market

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Positions Do Rivals Occupy?

One technique to revealdifferent competi tive posi tions of industry rivals isstrategic group mapping

A strategic group is a

cluster of firms in an industrywith similar competitiveapproaches and market positions

Strategic Group Mapping

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Strategic Group Mapping

Firms in same str ategic group have two or more competitive characteristics in common

Have comparable product line breadth

Sell in same price/quality range

Emphasize same distribution channels

Use same product attributes to appealto similar types of buyers

Use identical technological approachesOffer buyers similar services

Cover same geographic areas

Procedure for Constructing

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a Strategic Group Map

STEP 1: Identify competitive characteristics that differentiatefirms in an industry from one another

STEP 2: Plot firms on a two-variable map using pairs of these

differentiating characteristicsSTEP 3: Assign firms that fall in about the same strategy space

to same strategic group

STEP 4: Draw circles around each group, making circles proportional to size of groups respective share of totalindustry sales

Example: Strategic Group Map

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of Selected Retail Chains

Guidelines: Strategic Group Maps

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Guidelines: Strategic Group Maps

Variables selected as axes should not be highly correlatedVariables chosen as axes should expose big differences in howrivals compete

Variables do not have to be either quantitative or continuous

Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relativesizes of each strategic group

If more than two good competitive variables can be used,several maps can be drawn

Interpreting Strategic

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Group Maps

Driving forces and competitive pressures oftenfavor some strategic groups and hurt others

Profit potential of different strategic groups varies due to

strengths and weaknesses in each groups market position

The closer that strategic groups areon the map, the stronger thatcompetitive rivalry among themembers of these groups tends to be

Q #5: What Strategic Moves

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Are Rivals Likely to Make?

A firmsbest strategic moves

are affected byCurrent strategies of competitors

Future actions of competitors

Profiling key rivals involves gatheringcompeti tive intel l igence about

Current strategies

Most recent actions and public announcements

Resource strengths and weaknessesEfforts being made to improve their situation

Thinking and leadership styles of top executives

Competitor Analysis

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Competitor Analysis

Sizing up str ategies and competitive strengths andweaknesses of rivals involves assessing

Which rival has the best strategy? Which rivalsappear to have weak strategies?

Which firms are poised to gainmarket share, and which onesseen destined to lose ground?

Which rivals are likely to rank among the industry leaders fiveyears from now? Do any up-and-coming rivals have strategiesand the resources to overtake the current industry leader?

Considerations Involved inP di i M f Ri l

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Predicting Moves of RivalsWhich rivals need to increase their unit sales and marketshare? What strategies are rivals most likely to pursue?

Which rivals have a strong incentive, along with resources, tomake major strategic changes?

Which rivals are good candidates to be acquired? Which rivalshave the resources to acquire others?

Which rivals are likely to enter new geographic markets?Which rivals are likely to expand their product offerings andenter new product segments?

Q #6: What Are the Key Factorsf C i i S ?

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for Competitive Success?KSFs are those competitive factors most affecting every industry members ability to prosper. They concern

Specific strategy elements

Product attributes

ResourcesCompetencies

Competitive capabilities

that a company needs to have to be competitively successful

KSFs are attributes that spell the difference betweenProfit and loss

Competitive success or failure

Identifying IndustryK S F

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Key Success FactorsPinpointing KSF s involves determining

On what basis do customers choose between competing brands of sellers?

What resources and competitive capabilities does a seller need tohave to be competitively successful?

What does it take for sellers to achieve a sustainable competitiveadvantage?

KSFs consist of the 3 - 5 major determinants of financial and competitive success

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Example: KSFs forBeer Ind str

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Beer IndustryF ul l uti l ization of brewing capaci ty to keep manufacturing costs low

Strong network of wholesale distr ibutors to gain access to retail outlets

Clever adver ti sing to induce beer drinkers to buy a particular brand

Example: KSFs for ApparelManufacturing Industry

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Manufacturing Industry

Appealing designs and color combinations to create buyer appeal

L ow-cost manufactur ing efficiency to keep selling prices competitive

Example: KSFs for Tin andAluminum Can Industry

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Aluminum Can Industry

L ocating plants close to end-use customers to keep costs of shipping empty cans low

Ability to market plant output withineconomical shipping distances

Q #7: Does the Outlook for the IndustryPresent an Attractive Opportunity?

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Present an Attractive Opportunity?

Involves assessing whether the industryand competitive environment is attractive or unattractive for earning good profits

Under cer tain ci rcumstances, a fi rm uniquely well-situated in an otherwise unattractive industry can still earn unusually good profits

Attractiveness is relative, not absolute

Conclusions have to be drawn from the perspective of a particular company

Factors to Consider inAssessing Industry Attractiveness

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Assessing Industry Attractiveness

Industrys market size and growth potential Whether competitive forces are conducive to rising/falling industry

profitabilityWhether industry profitability will be favorably or unfavorablyimpacted by driving forcesDegree of risk and uncertainty in industrys future Severity of problems facing industryFirms competitive position in industry vis --vis rivalsFirms potential to capitalize on vulnerabilities of weaker rivalsWhether firm has sufficient resources todefend against unattractive industry factors

Core Concept: AssessingIndustry Attractiveness

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Industry Attractiveness

The degree to which an industry isattractive or unattractive is often not the

same for all industry participantsor potential entrants.The opportunities an industry

presents depend partly on acompanys ability to capture them.

Documents

Chap 00300