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INDUSTRY AND COMPETITIVE ANALYSIS
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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?What is Situation Analysis?
Company’s internal or micro-environment:
Competencies, capabilities, resource strengths and weaknesses, and
competitiveness.
Company’s external or macro-environment:
Dominant Industry Traits, Key Drivers, and overall Competitive conditions.
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A firm spend time to do Situational Analysis to better know its available choices.A firm spend time to do Situational Analysis to better know its available choices.
Components of Macro-environmentComponents of Macro-environment
Legislation and
Regulation
Societal Values and
LifestylesPopulation
Demographics
Technology
The Economy at Large
COMPANY
Suppliers Substitutes
Buyers
NewEntrants
Rival Firms
IMMEDIATE INDUSTRY
AND COMPETITIVE ENVIRONMENT
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Question#1: Industry’s Dominant Economic Traits?Question#1: Industry’s Dominant Economic Traits?
Market size and growth rate.
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.
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The Experience Curve EffectThe Experience Curve Effect
An experience curve exists when a company’s unit costs decline as its
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.
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$1$1 .90
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.729
.512
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1MillionUnits
2MillionUnits
4MillionUnits
8MillionUnits
Cos
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Relevance of Key Economic FeaturesRelevance of Key Economic Features
ECONOMIC FEATURE
Market Size
Market growth rate
Capacity surpluses/shortages
Industry profitability
Entry/exit barriers
Product is big-ticket item for buyers
Standard products
Rapid technological change
Capital requirements
Vertical integration
Economies of scale
Rapid product innovation
STRATEGIC IMPORTANCE
Small markets don’t tend to attract new firms; large markets attract firms looking to acquire rivals with established positions in attractive industries
Fast growth breeds new entry; slow growth spawns increased rivalry & shake-out of weak rivals
Surpluses push prices & profit margins down; shortages pull them up
High-profit industries attract new entrants; depressed conditions lead to exit
High barriers protect positions and profits of existing firms; low barriers make existing firms vulnerable to entry
More buyers will shop for lowest price
Buyers have more power because it’s easier to switch from seller to seller
Raises risk; investments in technology facilities/equipment may become obsolete before they wear out
Big requirements make investment decisions critical; timing becomes important; creates a barrier to entry and exit
Raises capital requirements; often creates competitive & cost differences among fully vs. partially vs. non-integrated firms
Increases volume & market share needed to be cost competitive
Shortens product life cycle; increases risk because of opportunities for leapfrogging
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FIVE FORCES MODEL OF COMPETITION
PotentialNew Entrants
Suppliers of Key Inputs
Buyers
Substitute Products(of firms in
other industries)
RivalryAmong
CompetingSellers
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Question#2: What is Competition Like & How Strong are the Competitive Forces?
Question#2: What is Competition Like & How Strong are the Competitive Forces?
Rivalry Among Competing SellersRivalry 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
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?
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What Causes Rivalry to be Stronger?What Causes Rivalry to be Stronger?
Active jockeying for position among rivals and frequent launches of new offensives
to gain sales and market share:
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.
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Competitive Force of Potential EntryCompetitive Force of Potential Entry
Seriousness of threat depends on:
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.
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Common Barriers to EntryCommon Barriers to Entry
Sizable economies of scale.
Inability to gain access to specialized technology.
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.IND
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Concept:
Substitutes matter when customers are attracted to the products of firms in other
industries.
Examples:
Eyeglasses vs. Contact Lens.
Sugar vs. Artificial Sweeteners.
Newspapers vs. TV vs. Internet.
eMail vs. Overnight Delivery.
Competitive Force of Substitute ProductsCompetitive Force of Substitute Products
How to Tell Whether Substitute Products are a Strong Force?How to Tell Whether Substitute Products are a Strong Force?IN
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Competitive threat of substitutes is stronger when they are:
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 CollaborationCompetitive Pressures: Suppliers & Supplier-Seller Collaboration
Whether supplier-seller relationships represent a weak or strong competitive
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.
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Competitive Force of SuppliersCompetitive Force of Suppliers
Suppliers are a strong competitive force when:
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.
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Competitive Pressures: Sellers-Suppliers CollaborationCompetitive Pressures: Sellers-Suppliers Collaboration
Rival sellers are forming long-term strategic partnerships with select suppliers
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.
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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 CollaborationCompetitive Pressures: Buyers-Seller-Buyer Collaboration
Whether seller-buyer relationships represent a weak or strong competitive
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.
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Competitive Force of BuyersCompetitive Force of Buyers
Buyers are a strong competitive force when:
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.
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Competitive Pressures: Sellers-Buyers CollaborationCompetitive Pressures: Sellers-Buyers Collaboration
Partnerships are an increasingly important competitive element in business-to-
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.
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Strategic Implications of the 5 Competitive ForcesStrategic Implications of the 5 Competitive Forces
Competitive environment is unattractive from the standpoint of earning
good profits when:
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 ForcesCoping with the 5 Competitive Forces
Objective is to craft a strategy:
To insulate firm from competitive forces.
To help make the “rules,” placing added pressure on rivals.
Which allows firm to define the business model for the industry.
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Question#3:What Forces are at Work to Change Industry Conditions?
Question#3:What Forces are at Work to Change Industry Conditions?
Industries change because forces are driving industry participants to alter their
actions.
Driving forces are the major underlying causes of changing industry and competitive
conditions.
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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-ForcesCommon Types of Driving-Forces
e-commerce opportunities.
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.
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Question#4: Assessment of Competitive PositionsQuestion#4: Assessment of Competitive PositionsIN
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STRATEGIC GROUP MAPPINGSTRATEGIC GROUP MAPPING
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 MapWorld Automobile Industry – Strategic Groups MapIN
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Video Game Industry – Strategic Groups MapVideo Game Industry – Strategic Groups MapT
ypes
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Overall Cost to Players of Video Games
Low(Coin-operated
equipment)
Medium (Console players cost
$100-$300)
High (Use PC)
Arcades
Home PCs
Video game consoles
Online/Internet
Sony, Sega, Nintendo, several
others
Arcade operators Publishers of
games on CD-ROMs
MSN Gaming Zone, Pogo.com, America
Online, HEAT, Engage, Oceanline, TEN
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