External 4 2011

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EXTERNAL ANALYSIS(INDUSTRY AND COMPETITION)

Payne(4)

Analysis is the critical starting point of

strategic thinking. Kenichi Ohmae

Key Text Readings: Chapter 2, Chapter 3,

Appendix A

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Environmental

Scanning

Environmental

Monitoring

Competitive

Intelligence

Forecasts

Forecasting: Involves thedevelopment of plausibleprojections about the direction,scope, speed and intensity of

environmental change.

Assessing

Formulation& Planningprojections

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Environmental Analysis Levels

Connect

Connect

Firm

Industry Level

Macro Level

CompetitorsSuppliers

Substitutes Customers

Demographic

TechnologicalPolitical/Legal

Social

Economic

Global

EXTERNAL or

MACRO-ENVIRONMENT

Industry and

competitive conditions

(opportunities andthreats)

INTERNAL or MICRO-ENVIRONMENT

Its competencies,

capabilities, resources,and competitiveness

(strengths and

weaknesses)

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Environmental Analysis Levels(of a Health Care Organization)

GeneralEnvironment

Government Institutions Educational Institutions Religious Institutions Research Organizations Consumers

Health CareEnvironment

Planning / Regulatory Primary Providers Secondary Providers Provider Representative Consumers/Patients

Service Area

Competitors

Government Services Businesses Non-profits Other Locals Educational Institutions Individuals/Consumers

Organization

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Macro Environment (1)

Socio-cultural segment

Women in the workplace

Workforce diversity

Attitudes about quality of worklife

Concerns about environment

Shifts in work and career preferences Shifts in product and service preferences

Political/Legal Segment

Antitrust laws Taxation laws

Deregulation philosophies

Labor training laws

Educational philosophies and policies

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Economic segment

Inflation rates Interest rates

Trade deficits or surpluses

Budget deficits or surpluses

Personal savings rate Business savings rates

Gross domestic product


Technological Segment

Product innovations Applications of knowledge

Focus of private and government-supported R&D

expenditures

New communication technologies

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Global Segment Important political events

Critical global markets

Newly industrialize countries

Different cultural and institutional attributes


Demographic

Population size

Age structure

Geographic distribution

Ethnic mix

Income distribution

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Segment/Trends/Events Industry Positive Neutral Negative

DemographicAging population

Rising affluence

Health CareBaby products

Brokerage services

Fast foods

Upscale pets and supplies

SocioculturalMore women in the

workforce

Greater concern forhealth & fitness

Clothing

Baking Products (staples)

Home exercise equipment

Meat products

Political/legalTort reform

ADA (Americans with

Disabilities Act)

Legal Services

Auto Manufacturing

Retail

Manufacturers of elevators, escalators & ramps

TechnologicalGenetic engineering

Pollution/globalwarming

PharmaceuticalPublishing

Engineering ServicesPetroleum

EconomicInterest Rate Increases Residential construction

Most common grocery products

GlobalIncreasing Global Trade

Emergence of China asan economic power

Shipping

Personal service

Soft drinks

Defense

Impact of General Environmental Trends onVarious Industries

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Five Forces Model of CompetitionSubstitute

Products(of firms in

other industries)

Rivalry Intensity

Among

Competing

Sellers

Potential

New

Entrants

Suppliers of

Key InputsBuyers

Threat of New Entrants

BargainingPowerofB

uyers

Threat of Substitutes

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Analyzing the Five CompetitiveForces: How to Do It

Assessstrength of each competitive force(Strong? Moderate? Weak? )

Rivalry among competitors

Substitute products

Potential entry

Bargaining power of suppliers

Bargaining power of buyers

Explain how each force acts to createcompetitive pressure

Decide whetheroverall competitionis brutal,

fierce, strong, normal/moderate, or weak

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Rivalry Among Competing Sellers

Usually themost powerfulof the five forces

Check which weapons of competitive rivalry

are most actively used by rivals in jockeying

for position

Price Quality

Performance features offered

Customer service

Warranties/guarantees Advertising/promotions

Dealer networks

Product innovation

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What Causes Rivalry to Be Stronger?

Lots of firms, more equal in size and capability

Slow market growth

Industry conditions tempt some firms to go on theoffensive to boost volume and market share

Customers have low costs in switching brands One or more firms initiates moves to bolster their

standing at expense of rivals

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

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Competitive Force of Threat ofNew Entry

Seriousness of threat depends primarily on:

Barriers to entry

Reaction of existing firms to entry

Barriers exist when:

Newcomers confrontobstacles

Economic factors put potential entrant at a

disadvantage relative to incumbent firms

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Common Barriers to Entry

Economies of scale

Inability to gain access to specialized

technology

Existence of learning/experience curve effects

Strong brand preferences and customer loyalty

Capital requirements and/or other specialized

resource requirements

Cost disadvantages independent of size Access to distribution channels

Regulatory policies, tariffs, trade restrictions

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How to Tell Whether SubstituteProducts Are a Strong Force

Sales of substitutes are growing rapidly

Producers of substitutes are planning to

add new capacity

Substitutes profits are up

The competitive threat ofsubstitutes isstronger when

they are:

Readily available

Attractively priced

Believed to have comparable or better performancefeatures

Customer switching costs are low

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Competitive Force of Substitute Products

Substitutesmatter when customers are attracted to

the products or services of firms in other industries

Concept

Eyeglasses vs. Contact Lens

MD vs. DPM vs. DC

Plastic vs. Glass vs. Metal

Examples

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Competitive Force of Suppliers

Suppliers are astrongcompetitive force when:

Item makes up large portion of product costs, is crucial toproduction process, and/or significantly affects productquality

It is costly for buyers to switch suppliers

They have good reputations and growing demand

They can supply a component cheaper than industry memberscan make it themselves

They do not have to contend with substitutes

Buying firms are not important customers

Suppliers are astronger force the more they can exercise powerover: Prices charged Quality/performance of items supplied Amounts and delivery times

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Competitive Force of Buyers Buyers are astrong competitive force when:

They are large and purchase a sizable percentage ofindustrys product

They buy in volume quantities

They can integrate backward

Industrys product is standardized

Their costs in switching to substitutes or other brands arelow

They can purchase from several sellers

Product purchased does not save buyer money

Buyers are astronger competitive force the more they have

leverage to bargain over:

Price or Quality or Service

Other terms and conditions of sale

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Strategic Implications of the Five Forces

Competitive environment is unattractive when:

Rivalry is strong Entry barriers are low

Competition from substitutes is strong

Suppliers and customers have considerable bargaining power

Competitive environment is idealwhen: Rivalry is moderate

Entry barriers are high

Good substitutes do not exist

Suppliers and customers are in a weakbargaining position

Objective is to craft a strategy that will: Insulate firm from competitive forces

Influence competitive pressures in ways that favor firm

Build a sustainable competitive advantage

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Stakeholder Analysis

Stakeholder B Stakeholder C

Stakeholder A

Focal Firm

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Who are Stakeholders?

Identifying stakeholders is one way of sizing up the

internal and external constituents that influence the firm.

Stakeholders are individuals and groups who can affect and are

affected by a firms strategic outcomes and who have

enforceable claims on its performance

Stakeholders include individuals, groups, and other

organizations who have an interest in the actions of an

organization and who have the ability to influence it

Stakeholders may be categorized as internal, interface and

external.

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Building Stakeholder Relationships

Managing down Relationships with subordinates

Managing up

Relationships with bosses and corporate staff

Managing out

Relationships with customers and suppliers

Managing across

Relationships with peers

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Stakeholder Analysis

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Internal stakeholdersManagementProfessionals

Support Personnel

Interface stakeholdersShareholders

Board of Directors

Medical Staff

External stakeholdersSuppliers

Competitors

Government Agencies

Patients

Examples of Stakeholder Groups

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Relationships with Stakeholders

Organizations have dependency relationships with

stakeholders

Firms are not equally dependent on all

stakeholders and not every stakeholder has thesame level of influence

An effective organization strategy requires

consensus from a plurality of key stakeholdersabout what it should be doing and how these

things should be done

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Key Success Factors

KSFs or CSFs are competitive elements that most

affect every strategic group membersability toprosper in the marketplace:

Specific strategy elements

Product attributes

Resources or Competencies

Competitive capabilities

KSFsspell difference between:

Profit and loss Competitive success or failure

Ask: For our organization to be successful, we

MUST be especially good at ___________?

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Key Success Factors

A sound strategy incorporates efforts to becompetent on allindustry key success

factors and to excel on at least one factor!

KSF 1

KSF 2KSF 3

OptimizePerformance

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Identifying Key Success Factors

Answers to three questions pinpointKSFs On what basis do customers choose between

competing brands or offerings of sellers?

What must a seller/provider do to be competitively

successful -- what resources and competitive

capabilities does it need?

What does it take for sellers/providers to achieve a

sustainable competitive advantage? KSFs consist of the3 - 5 reallymajor determinants of

financial and competitive success in a strategic group.

(Recall our discussion on developing objectives?)

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Common Types of Key Success Factors

Technology-related

Manufacturing-related

Distribution-

related

Marketing-related

Skills-related

Organizational

capability

Other types

Scientific research expertise; Product innovation capability; Expertise in a

given technology; Capability to use Internet to conduct various businessactivitiesLow-cost production efficiency; Quality of manufacture; High use offixed assets; Low-cost plant locations; High labor productivity; Low-costproduct design; Flexibility to make a range of productsStrong network of wholesale distributors/dealers; Gaining ample space onretailer shelves; Having company-owned retail outlets; Low distributioncosts; Fast deliveryFast, accurate technical assistance; Courteous customer service; Accuratefilling of orders; Breadth of product line; Merchandising skills; Attractivestyling; Customer guarantees; Clever advertisingSuperior workforce talent; Quality control know-how; Design expertise;Expertise in a particular technology; Ability to develop innovative

products; Ability to get new products to market quicklySuperior information systems; Ability to respond quickly to shiftingmarket conditions; Superior ability to employ Internet to conductbusiness; More experience & managerial know-howFavorable image/reputation with buyers; Overall low-cost; Convenientlocations; Pleasant, courteous employees; Access to financial capital;Patent protection

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Example: KSFs for the Refractive Eye SurgeryIndustry

High numbers of procedures, which is a

component of price, experience, and

service.

Low rate of complications and high rate of

success (20/20)

Positive word-of-mouth and reputation

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Strategic Group Mapping

One technique for revealing the different competitive

positions of industry rivals is strategic group mapping

Astrategic group consists of those rivals with similar

competitive approaches in an industry

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Strategic Group Mapping

Firms insame 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

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Procedure: Constructing a StrategicGroup Map

STEP 1: Identify competitive characteristics thatdifferentiate firms in an industry from

one another

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

pairs of these differentiatingcharacteristics

STEP 3: Assign firms that fall in about the same

strategy space to same strategic groupSTEP 4: Draw circles around each group, making

circles proportional to size of groups

respective share of total industry sales

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Example: Strategic Group Map ofRetail Jewelry Industry

P

rice/Quality/Image

High

Low

Medium

Product Line / Merchandise Mix

Specialty Jewelers Full-line JewelersLimited-category

Retailers

Broad-category

Retailers

Outlet Mall Retailers

National, Regional, &

Local Guild - Fine

Jewelry Stores

National

Jewelry Chains

Local Jewelers Credit

Jewelers Catalog

Showrooms

Off-Price

Retailers

Small

Independent

Guild Jewelers

Prestige

Departmentalized

RetailersUpscale

Department

Stores

Chains

Discounters

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Guidelines: Strategic Group Maps

Variables selected as axes shouldnot be highlycorrelated

Variables chosen as axes should exposebigdifferences in how rivals compete

Variables donot have to be either quantitative orcontinuous

Drawing sizes of circles proportional to combinedsales of firms in each strategic group allows map

to reflect relative sizes of each strategic group If more than two good competitive variables can

be used, several maps can be drawn

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Interpreting Strategic Group Maps(i.e., Implications of the Strategic Groups Concept)

Driving forces and competitive pressures often favorsome strategic groups and hurt otherssuchrecognition may be the key to developing acompetitive advantage.

Profit potential of different strategic groups variesdue to strengths and weaknesses in each groupsmarket position. Important niches may be identifiedthat are not currently being filled by competitors.

The closer strategic groups are on map, the strongerthe competitive rivalry among member firms tends tobe(Organizations most like yours are the mostdangerous.)

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P

rice/Quality/Image

High

Low

Medium

Product Line / Merchandise Mix

SpecialtyFull-line

Providers

Limited-category

Retailers

Broad-category

Retailers

Within or Between Strategic Groups

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FerrariLamborghini

PorscheToyota

Ford

General

Motors

Chrysler*

Honda

Nissan

Mercedes*

BMW

High

Hyundai

KiaHigh

Breadth of Product LineLowLow

Price

The World Automobile Industry

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Geographical Scope

0 10 20 30 40 50 60 70 80

VerticalBalance

0

0.5

1.0

1.5

2.0

NATIONAL

PRODUCTIONCOMPANIES

INTEGRATED

INTERNATIONAL

MAJORS

NATIONALLY-FOCUSED

DOWNSTREAM COMPANIES

INTEGRATED

DOMESTIC

OIL COMPANIES

Royal Dutch

-Shell Gp.

Exxon

-Mobil

Statoil

PDVSA

Kuwait Petroleum

Petronas

Petrobras

RepsolNippon

Sunoco

BP-Amoco

Chevron

Texaco

Phillips

Pemex

Indian Oil

ENI

INTEGRATED OIL

MAJORS

INTERNATIONAL

UPSTREAM,

REGIONALLY

FOCUSED

DOWNSTREAM

IranNOC

Neste

Ashland

Conoco Phillips

ENI

Elf-Fina-Total

Repsol YPF INTERNATIONALDOWNSTREAM

OIL COMPANIES

INTERNATIONAL

UPSTREAM

COMPANIES

Dana Petroleum

Premier

Oil

PetroChinaLukoil

Apache

Valero

Strategic Groups Within the World Petroleum Industry

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Competitor Analysis and Strength Assessment

Successful strategists take great pains in scoutingcompetitors

Understanding their strategies

Watching their actions

Evaluating their vulnerability to driving forces andcompetitive pressures

Sizing up their resource strengths and weaknesses andtheir capabilities

Trying to anticipate rivals next moves

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Predicting Strategic Moves of Rivals

A firms own best strategic moves are affected by: Current strategies of competitors

Actions competitors are likely to take next

Predicting rivals next moves involves:

Analyzing their current competitive positions Examining public pronouncements about what it will take to

be successful in industry

Gathering information from grapevine about current

activities and potential changes

Studying past actions and leadership

Determining who has flexibility to make major strategic

changes and who is locked into pursuing same basic strategy

C i i h Obj i d

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Categorizing the Objectives andStrategies of Competitors

CompetitiveScope

Strategic IntentMarket Share

ObjectiveCompetitive

PositionStrategicPosture

CompetitiveStrategy

Local Be dominantleader

Aggressiveexpansion via

acquisition &

internal growth

Gettingstronger; on the

move

Mostlyoffensive

Regional Overtakeindustry leader

Well-entrenched

Mostlydefensive

National Be amongindustry leaders

Expansion viainternal growth

Stuck in themiddle of the

pack

Combination ofoffensive &

defensive

Multi-country Move to top 10 Expansion viaacquisition

Going after adifferent

position

Aggressiverisk-taker

Global Move up anotch in

rankings

Hold on to

present share

Struggling;

losing ground

Conservative

follower

Maintaincurrent position

Give uppresent share to

achieve short-

term profits

Retrenching toa position that

can be defended Just survive

Striving forlow-cost

leadership

Mostlyfocusing on a

market niche

Pursuingdifferentiationbased on

QualityServiceTechnologysuperiority

Breadth of

product lineImage &reputation

More valuefor the money

Otherattributes

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Assessing a Companys CompetitiveStrength versus Key Rivals

1. List industry key success factors and other relevantmeasures of competitive strength

2. Rate firm and key rivals on each factor using rating

scale of 1 - 10 (1 = weak; 10 = strong)3. Decide whether to use a weightedor unweighted

rating system

4. Sum individual ratings to get overall measure of

competitive strength for each rival5. Determine whether the firm enjoys a competitive

advantage or suffers from competitive disadvantage

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Unweighted Competitive Strength Assessment

KSF/Strength Measure

Quality/product performance

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Relative cost position

Customer service capability

Overall strength rating

ABC Co. Rival 1 Rival 2

8 5 10

8 7 10

2 10 4

10 1 7

9 4 10

9 4 10

5 10 7

5 10 3

5 7 10

61 58 71

Rival 3

1

1

5

3

5

5

3

1

1

25

Rival 4

6

6

1

8

1

1

1

4

4

32

Rating Scale: 1 = Very weak; 10 = Very strong

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A Weighted Competitive Strength Assessment

KSF/Strength Measure

Quality/product performance

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Relative cost position

Customer service capability

Rival 1 Rival 2

5/0.50 10/1.00

7/0.70 10/1.00

10/1.00 4/0.40

1/0.05 7/0.35

4/0.20 10/0.50

4/0.20 10/0.50

10/1.00 7/0.70

10/3.50 3/1.05

7/1.05 10/1.50

ABC Co.

8/0.80

8/0.80

2/0.20

10/0.50

9/0.45

9/0.45

5/0.50

5/1.75

5/0.75

Rival 3

1/0.10

1/0.10

5/0.50

3/0.15

5/0.25

5/0.25

3/0.30

1/0.35

1/0.15

Rival 4

6/0.60

6/0.60

1/0.10

8/0.40

1/0.05

1/0.05

1/0.10

4/1.40

4/1.60

Weight

0.10

0.10

0.10

0.05

0.05

0.05

0.10

0.35

0.15

Sum of weights 1.00

Overall strength rating 6.20 8.20 7.00 2.10 2.90

Rating Scale: 1 = Very weak; 10 = Very strong

Documents

External 4 2011