Module 3 - Industry and Competitive Analysis

7/28/2019 Module 3 - Industry and Competitive Analysis

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Module 3

Industry and Competitive

Analysis



Module Outline

• Role of Situation Analysis in Strategy-Making

• Methods of Industry and Competitive Analysis – Profiling Industry’s Dominant Economic Traits

– Analyzing Industry’s Competitive Force

– Analyzing Drivers of Industry Change

– Assessing Competitive Positions of Rivals

– Predicting Competitive Moves of Rivals

– Pinpointing Key Success Factors

– Drawing Conclusions About Overall Industry Attractiveness

• Conducting an Industry and Competitive Analysis



Why Do a Situation Analysis?

Objective

• Identify features in a firm’s external and internalenvironment which frame its window of

– Strategic Options

– Opportunities• Focuses on two considerations:

– External Factors

• Macro environment (industry and competitive conditions)

– Internal Factors

• Micro environment (firm’s internal situation and competitiveposition)



How Strategic Thinking and Analysis

Lead to Good Choices?

Thinking Strategically

About Industry and

Competitive

Conditions

Thinking StrategicallyAbout a Company’s

Own Situation

IdentifyingStrategic

Options Open

to the Company

Choices of theBest Strategy



Key Questions Regarding External

Environment

1. Industry’s dominant economic traits

2. Competitive forces at work in industry andstrength

3. Drivers of change in industry

4. Firms in strongest / weakest competitivepositions

5. Competitive moves of rivals6. Key factors determining competitive

success or failure in industry

7. Attractiveness of industry



Industry Economic Traits

Concept

• An industry’s economic characteristicsimpose boundaries on the kinds of strategic

approaches a company can pursue!



Identifying an Industry’s Dominant

Economic Traits

• Market size and growth rate / stage in life cycle

• Scope of competitive rivalry

• Number of competitors and relative sizes

• Prevalence of backwards / forward integration

• Entry / exit barriers

• Nature and pace of technological change

• Product and customer characteristics• Scale economies and experience curve effects

• Capacity and utilization and capital requirements

• Industry profitability



Experience Curve Effects

• An experience curve exists when unit costs

decline as cumulative production volumeincreases due to

– Increased knowledge about, or

– Familiarity with the process

• The bigger the experience curve effect, the

bigger the cost advantage of the firm with – Largest cumulative production volume



Comparison of Experience Curve

Effects

9080

70

81

64

49

72.9

51.2

34.3

$1

$1

10% CostReduction

20% CostReduction

30% CostReduction

1MillionUnits

2MillionUnits

4MillionUnits

8MillionUnits

C o s t p e r U n i t



Experience Curve Effects

Basic Concept

• When a strong learning / experience curveeffect causes unit costs to decline

substantially as cumulative productionvolume builds, a strategy to become thelargest volume manufacturer can offer the

competitive advantage of being theindustry’s lowest-cost producer!



Analysis of Competitive Forces

Objective

• To identify – Main sources of competitive forces, and

– Strength of these pressures

Competitive forces matter because:

To be successful, strategy must be designedto cope effectively with competitive pressure – objective must be to build a strong, market

position based on competitive advantage!



The 5 Forces Model of Competition:

A Key Analytical Tool

Rivalry Among

Competing

Sellers

Substitute

Product

Potential New

Entrance

S u p p l i e r s

B u y er s



The 5 Competitive Forces

1. Rivalry among competing sellers in an

industry2. Substitute products offered by firms in

other industries3. Potential entry of new competitors

4. Bargaining power of suppliers

5. Bargaining power of buyers



Procedure: Analyzing the 5 Competitive

Factors• Identify main sources of competitive pressures

– Rivalry among competitors

– Substitute products

– Potential entry

– Bargaining power of suppliers

– Bargaining power of buyers

• Assess strength of each competitive forces

– Strong? Moderate? Weak?

– Scale of 1 – 5: 1 = weak; 5 = strong

• Explain how each competitive forces works and itsrole in overall competitive picture



Rivalry Among Competing Sellers

• Usually the most powerful of the 5 competitive

forces• Weapons of competitive rivalry

– Price

– Quality – Performance features offered

– Customer service

– Warranties and guarantees – Advertising and special promotions

– Dealer networks

– Product innovation



Principle of Competitive Rivalry

A powerful competitive strategy launched by

one firm intensifies competitive pressureson rivals!

Use of various competitive weapons by rivalsto out maneuver one another shapes

– Rules of competition, and – Requirements for competitive success





What Causes Rivalry to be Stronger?

• Lots of firm, equal in size and capability, exit

• Demand for product growing slowly• Industry conditions tempt firms to use competitive

weapons to boost volume

• Switching costs incurred by customers are low• A firm initiates to bolster its 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



Competitive Forces of Potential Entry

• New entrants boost competitive pressures

– By bringing new production capacity into play

– Through actions to build market share

• Seriousness of threat of entry depends on – Barriers to entry

– Expected reaction of existing firms to entry

• Barriers to entry exist when – It is difficult for newcomers to enter market

– A new entrant’s small sales volume puts it aprice / cost disadvantage



Common Barriers to Entry

• Economic of scale

• Inability to gain excess to specialized technology• Existence of learning / experience curve effects

• Brand preferences and customer loyalty

• Capital requirements

• Cost disadvantages independent of size

• Access to distribution channels• Regulatory policies

• Tariffs and international trade restirctions



Reaction of Existing Firms Can Be an

Entry Barrier

• When existing firms

– Indicate they’ll aggressively defend their position

– Have substantial resources to wage defense

– Can use leverage with customers to keep their business

• Then potential entrants likely to be

discouraged by – Prospects of a costly struggle

– Strong threat of competitive retaliation

• Which makes entry barriers higher



When Is Potential Entry a Strong

Competitive Force?

Competitive threat of outsiders entering a

market is stronger when – Entry barriers are low

– Incumbent firms do not vigorously fightnewcomer

– Newcomer can expect to earn attractive profits



Competitive Force of Substitute

Products

Concept

• Substitutes matter when products of firms inanother industry enter the market picture

Examples• Eyeglasses vs. Contact Lens

• Sugar vs. Artificial Sweeteners

• Plastic Containers vs. Glass vs. Tin vs. Aluminum• Aspirin vs. Other Types of Pain Relievers



Why Substitute Products Matter?

• Competitively priced substitutes can place

ceiling on prices industry can charge for itsproduct

• Price ceiling can place lid on profits industry

member can earn• Availability of substitutes invites customers to

make quality and performance

comparisons as well as price comparisons

• The lower the switching costs, easier it is

for customer to shift to substitute products





Principle of Competitive Markets

Competitive threat of substitute products is

strong when – Prices of substitutes are viewed attractive by

buyers

– Buyers’ costs of switching to substitutes are low

– Buyers’ view substitutes as having equal or better performance features



Competitive Force of Suppliers

• Suppliers are a strong competitive force when

– Item makes up large portion of costs of products, iscrucial to production process, an / or significantly affectsproduct quality

– It is costly for buyers to switch suppliers

– They have good reputations and growing demand for their product

– 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




Whether suppliers are a strong or weak

competitive force depends on if they havebargaining power to put rivals at acompetitive disadvantage based on:

– Prices they can command

– Quality and performance of items supplied

– Reliability of deliveries – Other terms and conditions of supply



Competitive Force of Buyers

• Buyers are a strong competitive force when

– They are large and purchase a sizablepercentage of industry’s product

– They buy in volume quantities

– They incur low costs in switching to substitutes – They have flexibility to purchase from several

sellers

– Selling industry’s product is standardized – They can integrate backward

– Product being purchased does not save buyer

money or has low value to buyer




Buyers become a stronger competitive force

the more they can exercise bargainingleverage over

– Price

– Quality

– Service

– Other terms and conditions of sale

St t i i li ti f th 5



Strategic implications of the 5

Competitive Forces

Competitive environment is unattractive

when: – Rivalry is very strong

– Entry barriers are low

– Competitions from substitutes is strong

– Suppliers and customers have considerablebargaining power

St t i I li ti f th 5



Strategic Implications of the 5

Competitive Forces

Competitive environments is ideal when:

– Rivalry is only moderate – Entry barriers are relatively high

– There are no good substitutes

– Suppliers and customers are in a weakbargaining position

PrincipleThe weaker the competitive forces, the greater an industry’s profits!



Coping With the 5 Competitive Forces

Concept

• A company whose strategy and marketposition provide a good defense against the5 forces can earn above-average profitseven when some or all of the 5 forces arestrong!



Coping With the 5 Competitive Forces

• Objective is to craft a strategy that will

– Insulate company from competitive forces – Influence industry’s competitive rules in

company’s favor

– Provide a strong position from which “to play thegame” of competition

– Help create sustainable competitive advantage

Id tif i d A i D i i



Identifying and Assessing Driving

ForcesConcept

• Industry condition change because externalforces are driving industry participants toalter their actions

• Driving forces are the major underlying

causes of changing industry and competitive

conditions





Forces• Role of driving forces analysis in strategy-

making – Indicate external factors likely to have greatest

impact on a firm over next 1 – 3 years

– Must assess difference driving forces will maketo be bale to craft a strategy responsive toemerging conditions



Driving Forces Analysis

• Analysis of driving forces has 2 steps

1. Identifying relevant driving forces2. Assessing impact they will have

• Task of driving forces analysis is:

– Separate major causes of industry changefrom minor ones

– Identify the 3 or 4 driving forces likely to havegreatest impact on a firm over next 1 – 3 years



Types of Driving Forces

• Changes in long-term industry growth rate

• Changes in who buys the products and howthey use it

• Product innovation• Technological change / process innovation

• Marketing innovation

• Entry or exit of major firms

• Diffusion of technical knowledge



Types of Driving Forces

• Increasing globalization of industry

• Changes in cost and efficiency• Shifting from standardized to differentiated

products (or vice versa)• Regulatory influences and government policy

changes

• Changing societal concerns, attitudes, andlifestyles

• Changes in degree of uncertainty and risk



Environmental Scanning

Definition

– A broad-ranging effort to monitor and interpretsocial, political, economic, ecological, andtechnological events in an effort to spot buddingtrends and conditions that could eventually

impact industry

Purpose

– Raise consciousness of managers aboutpotential developments that could

• Have important impact on industry conditions

• Pose new opportunities and threats

ssessing Competitive Positions:



ssessing Competitive Positions:

Strategic Groups• A strategic group consists of those rival

firms with similar competitive approachesand positions in an industry

• A strategic group map displays differentcompetitive positions that rival firms occupy



Strategic Group Maps

• Firms in same strategic group have one or

more competitive characteristics incommon…

– Sell in same price / quality range

– Cover same geographic areas – Be vertically integrated to same degree

– Have comparable product line breadth

– Emphasis same type of distribution channels

– Offer buyers similar services

– Use identical technological approaches



Constructing a Strategic Group Map

Draw circles around each strategic group,making circles proportional to size of group’s respective share of total industry

sale

Step 4:

Assign firms that fall in about the samestrategy space to same strategy group

Step 3:

Plot firms on a two-variable map using

pairs of these differentiating characteristics

Step 2:

Identify competitive characteristics that

differentiate firms in an industry from oneanother

Step 1:



Guidelines: Strategic Group Maps

• 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

• Drawing sizes of circles proportional to combined

sales of firms in each strategic group allows map toreflect relative sizes of each strategic group

• If more than two good competitive variables can be

used, several maps can be drawn

I i S i G M



Interpreting Strategic Group Maps

• Driving forces and competitive pressures

often favor some strategic groups and hurtothers

• Profit potential of different strategic groupsvaries due to strengths and weaknesses ineach group’s market position

• The closer strategic groups are on map, thestronger the competitive rivalry among themember firms tends to be

C tit A l i



Competitor Analysis

• A firm’s strategic moves are affected by

– Current strategies of competitors – Actions competitors are likely to take next

• Profile of key competitors involves studying:

– Current position in industry

– Strategic objectives and recent actions

– Basic competitive approaches

C tit A l i



Competitors Analysis

• Successful strategies take great pains in

scouting competitors by – Understanding their strategies

– Watching their actions

– Evaluating their vulnerability to driving forces andcompetitive pressures

– Sizing up their strengths and weaknesses

– Trying to anticipate rivals’ next moves

P di ti M f Ri l C tit



Predicting Moves of Rival Competitors

• Predicting rivals’ next moves involves

– Analyzing current competitive position – Examining public pronouncements about what it

will take to be successful in industry

– Gathering information from grapevine aboutcurrent activities and potential changes

– Studying past actions and leadership

– Determining who has flexibility to make major strategic changes and who is locked intopursuing same basic strategy

St t i M t P i i l



Strategic Management Principle

Managers who fail to study competitors

closely risk being blindsided by “surprise”actions on the part of competitors!

Pinpointing Industry Key Success



p g y y

FactorsBasic Concept

• Key Success Factors (KSFs) spelldifference between

– Profit and loss

– Competitive success or failure

• A Key Success Factor can be

– Specific skill or talent – Competitive capability

– Something a firm must do to satisfy customers

Pinpointing Industry Key Success



p g y y

Factors• Identifying KSFs is top priority as they are

good cornerstones of a firm’s strategy – Winning competitive advantage often hinges

on being distinctively better than rivals at one or

more of the KSFs

• KSFs consist of the 3 – 5 really major determinants of financial and competitive

success in industry

Example: Industry Key Success



p y y

FactorsBeer / Brewing Industry

– Utilization of brewing capacity – to keepmanufacturing costs low

– Developing a strong networks of wholesale

distributors – to gain access to retail outlets – Clever advertising – to induce beer drinkers to

buy particular brands

Example: Industry Key Success



p y y

Factors Apparel Manufacturing Industry

– Fashion design – to create buyer appeal – Low-cost manufacturing efficiency – to keep

selling prices competitive

Tin and Aluminum Can Industry

– Locating plant close to end-use customer – tokeep costs of shipping empty cans low

– Ability to market plant output within economicalshipping distances



Conclusion: Overall Industry



AttractivenessObjective

– To review overall situation and developconclusions about relative attractiveness or unattractiveness of the industry, both near- and

long-termPrinciple

– A firm uniquely well-situated in an otherwise

unattractive industry can, under certaincircumstances, still earn unusually good profits

ssessing Overall Industry



Attractiveness• Industry’s market size and growth potential

• Whether industry will be favorably or unfavorablyimpacted by driving forces

• Potential for entry / exit of major firms

• Stability / dependability of demand• Will competitive forces become stronger or weaker

• Severity of problems facing industry

• Degree of risk and uncertainty in industry’s future

• Whether competitive conditions are conducive torising / falling industry profitability

Conducting an Industry and



Competitive Situation Analysis• Two things to consider:

– Task of analyzing a firm’s external situationcannot be reduced to a formula-like exercise

– Sweeping industry and competitive analyses

need to be done every 1 to 3 years



End of Module 3

Documents

Module 3 - Industry and Competitive Analysis