Microenvironment analysis

Awareness of competitive forces can

help a company stake out a position

in its industry that is less vulnerable

to attack.

Michael E. Porter

Competitive Strategy

The Objectives of Competitive Analysis

The Objectives of Competitive Analysis

• To understand how industry structure drives competition, which determines the level of industry profitability

• To assess industry attractiveness

• To use evidence on changes in industry structure to forecast future profitability

• To formulate strategies to change industry structure to improve industry profitability

• To identify Key Success Factors

Competitive Forces AssessmentPorter’s Five Forces

Competitive Forces AssessmentPorter’s Five Forces

Who is my competitor?

Industry Competition:Rivalry Among Competitors (2)

• Industry Growth– If the industry is growing, there’s more

room for everybody; less pressure on the firm

• Product Differentiation– If products are differentiated, markets are

in a sense, segmented

Strategic Group Analysis

• Strategic groups is a cluster of companies in an industry

• Groups of companies clustered around prezent a similar competitive approach or strategic position

• Companies in a group are similar to each other but different from companies in other groups

Procedure for Constructing a Strategic Group Map

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

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

STEP 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 group’s respective share of total industry sales

Variables to be used

• Variables selected as axes should NOT be highly correlated

• Variables chosen as axes should expose BIG differences in how rivals compete

• Variables do NOT have to be either quantitative or continuous

Video Game IndustryT

ypes

of

Vid

eo G

ame

Su

pp

lier

s/D

istr

ibu

tio

n C

han

nel

s

Overall Cost to Players of Video Games

Low(Coin-operated

equipment)

Medium (Video players

cost $100-$300)

High (Use PC)

Video arcades,coin-operated

machines

Home PCs

Video game consoles

Online game sites

Sony, Sega, Nintendo, several

others

Arcade operators Publishers

of games on CD-ROMs

MSN Gaming Zone, Pogo.com,

America Online, HEAT, Engage, Oceanline, TEN

Interpretation

• Identify factors that prevent firms in one groups from competing with companies in other groups

• Evaluate the degree of rivalry between groups

• Recognize group’s strengths and weaknesses

• Identify the strategic group that represents the greatest opportunity

Identify next step

• Create a new group

• Move to a better group

• Strengthen the existing group

• Strengthen company’s position within existing group

• Move to a new group and make it better

Strategic Maps of the United States Airline Industry

Braniff

TWA

Eastern

United

American

Delta

WesternRepublicOzark

USAir Piedmont

FrontierAirCal

PSA

South-west

Texas Int’l

United

South-west

AmericaWest

International International

National National

Regional Regional

No Frills No FrillsFull Service Full ServiceQuality of Service Quality of Service

Geo

gra

ph

ic

Sco

pe

The Late 1970s The Early 1990s

RenoAir

Continental

PanAm

Northwest

Laker

WorldAmerican

TWA

Delta

USAir

NorthwestConti-nental

Kiwi

Others

Build a strategic group map based on the data below

Small independent

Żabka Chata Polska

Polo Market

PSS ‘Społem’

Minimal

No of stores Up to 2 More than 10

More than 10

3-10 3-10 Up to 2

Area of average store (m2)

up 100 up 100 up 100 100-400 100-400 More than 400

Intensity of marketing activities

low medium medium medium medium high

Asortment narrow narrow narrow narrow narrow narrow

Price level medium high high low low low

Market share 53,2% 11,2% 4,7% 5,1% 22,0% 3,8%

Competitive Forces AssessmentPorter’s Five Forces

New Entrants: Barriers to Entry

• Economies of Scale – To the extent that there are economies of scale, it will be

difficult for a new firm to come in and compete with established firms.

• Product Differentiation– To the extent that the firm’s products are distinct and non-

copiable, new firms won’t be able to come in and take away customers.

• Brand Identification– To the extent that there is brand identification, customers will

remember the firm’s product and will resist switching.

• Switching Cost– If it is costly for the customer to switch, new entrants won’t

be able to convince them to do so.

New Entrants: Barriers to Entry

• Access to Distribution Channels– If the firm has preferential or monopolistic access to

distribution channels, it is more resistant to competition.

• Capital Requirements– If capital requirements are high, new under-capitalized firms

won’t be able to enter the industry.

• Access to Latest Technology– If technology is important in the industry, new firms are less

likely to have access to them, which is good for established firms.

• Experience and Learning Effects– If experience is necessary for a firm to figure out how to

operate efficiently, established firms have a distinct advantage.

Barriers to Entry: Examples

• Regulatory restrictions (e.g. banking license) • brand names (e.g. Xerox, McDonalds – can

develop customer loyalty; hard to develop and/or imitate)

• patents (illegal to exploit without ownership; e.g. new drugs)

• unique know-how (e.g. WalMart’s “hot docking” technique of logistics management)

Competitive Forces AssessmentPorter’s Five Forces

• Number of Important Suppliers– The fewer the number of important suppliers,

the more power they have over the firm.

• Availability of Substitutes for the Suppliers’ Products– This would reduce supplier power

• Differentiation or Switching Costs of Suppliers’ Products– If it’s difficult for the firm to switch to other

suppliers, the current suppliers can charge more

• Suppliers’ Threat of Forward Integration – To the extent that suppliers might potentially

themselves become competitors, they are less reliable and need to be looked at strategically

• Suppliers’ Contribution to Quality or Service of the Industry Products– How crucial are suppliers in the maintenance

of the quality of industry products? If very crucial, this will increase supplier power.

• Importance of the Industry to Suppliers’ Profits

Competitive Forces AssessmentPorter’s Five Forces

• Number of Important Buyers– The greater the number of important buyers, the less

power does the firm have to manipulate prices

• Availability of Substitutes for the Industry Products– The impact of this on price elasticity of demand for the

industry’s products is obvious.

• Buyer’s Switching Costs– This is relevant both in terms of switching to

competitors’ products and switching to products manufactured by other industries.

• Buyer’s Threat of Backward Integration– The buyer might choose to integrate backward and

manufacture his input goods, himself. This means that buyers have to be looked at strategically.

Competitive Forces AssessmentPorter’s Five Forces

Substitutes matter when customers are attracted to the products of firms in

other industries

Eyeglasses and contact lens v. laser surgery Sugar v. artificial sweeteners Newspapers v. TV v. Internet

Examples

Threat of substitutes depend on:

– Availability of Close Substitutes– User’s Switching Costs– Substitute Producer’s Profitability and

Aggressiveness– Where is the substitute product located on

the Price/Value dimensions?