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THINKING STRATEGICALLY ABOUT INDUSTRY AND COMPETITIVE CONDITIONS.

The key questions

1. What are the industry’s dominant economic features.

2. What is the competition like and how strong are each of the competitive forces?

3. What is causing the industry’s competitive structure and business environment to change?

4. Which companies are in the strongest/weakest positions?

5. what strategic moves are rivals likely to make next?

6. What are the key factors for competitive success?

7. Is the industry attractive and what are the prospects of above average profitability?

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What is competition like and What is competition like and how strong are each of the how strong are each of the

competitive forces?competitive forces?

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FIVE FORCES OF FIVE FORCES OF COMPETETIONCOMPETETION

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Suppliers of raw

materials, parts

components, or other resource inputs.

Buyers

RIVALRAY AMONG

COMPETING SELLERS created by

jockeying for better market position and competitive advantage

Firms in other industries offering substitute products.

Potential new entrants

Competitive pressure stemming from supplier-seller collaboration and bargaining.

Competitive pressure stemming from seller-buyer collaboration and bargaining.

Competitive pressure coming from the threat of entry of new rivals.

Competitive pressures coming from the market attempts of outsiders to win buyers over to their products.

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RIVALRAY AMONG

COMPETING SELLERS created by

jockeying for better market position and competitive advantage

THIS IS AN ECONOMIC

BATTLE FIELD

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The intensity of the among the competing sellers is a function of how vigorously they employ such tactics as :

Low pricesExpanded

customer servicesSpecial promotions

New product inductions

Snazzier features

Longer warranties

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THE SUCCESS OF ANY FIRM’S STRATEGY HINGES ON WHAT STRATEGIES ITS RIVALS EMPLOY AND THE RESOURCES RIVALS ARE WILLING AND ABLE TO PUT BEHIND THEIR STRATEGIC EFFORTS.

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Factors that influence the tempo of Factors that influence the tempo of cross company rivalry.cross company rivalry.

1. Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capability.

2. Rivalry is usually stronger when demand for the product is growing slowly.

3. Rivalry is more intense when industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volume.

4. Rivalry is stronger when customers costs to switch brands are low.

Cont’d…..

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Factors that influence the tempo of Factors that influence the tempo of cross company rivalry.cross company rivalry.

5. Rivalry is stronger when one or more competitors are dissatisfied with their market position and launch moves to bolster their standing at the expense of rivals.

6. Rivalry increases in proportion to the size of the payoff from a successful strategic move.

7. Rivalry tends to be more vigorous when it costs more to get out of a business than to stay in and compete.

8. Rivalry becomes more volatile and unpredictable the more diverse competitors are in terms of their visions, strategic intents, objectives, strategies, resources, and countries of origin.

Cont’d…..

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Factors that influence the tempo of Factors that influence the tempo of cross company rivalry.cross company rivalry.

9. Rivalry increases when strong companies outside the industry acquire weak firms in the industry and launch aggressive, well funded moves to transform their newly acquired competitors into major market contenders.

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Potential entry of new

competitors

Barriers to entryBarriers to entry

The expected reaction of incumbent firms to new

entry.

The expected reaction of incumbent firms to new

entry.

Competitive threat of entry depends upon:

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Types of entry barriersTypes of entry barriers

1.1. Economies of scaleEconomies of scale2.2. Cost and resource disadvantages independent of size.Cost and resource disadvantages independent of size.3.3. Learning and experience curves.Learning and experience curves.4.4. Inability to match the technology and specialized know Inability to match the technology and specialized know

how of firms already in the industry.how of firms already in the industry.5.5. Brand preferences and customer loyalty.Brand preferences and customer loyalty.6.6. Capital requirements.Capital requirements.7.7. Access to distribution channels.Access to distribution channels.8.8. Regulatory policies.Regulatory policies.9.9. Tariffs and international trade restrictions.Tariffs and international trade restrictions.

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1.1. Economies of scaleEconomies of scale2.2. Cost and resource disadvantages Cost and resource disadvantages

independent of size.independent of size.3.3. Learning and experience curves.Learning and experience curves.4.4. Inability to match the technology and Inability to match the technology and

specialized know how of firms already specialized know how of firms already in the industry.in the industry.

5.5. Brand preferences and customer Brand preferences and customer loyalty.loyalty.

6.6. Capital requirements.Capital requirements.7.7. Access to distribution channels.Access to distribution channels.8.8. Regulatory policies.Regulatory policies.9.9. Tariffs and international trade Tariffs and international trade

restrictions.restrictions.

How formidable the entry barriers are for each type of potential entrant – startup enterprises, candidate companies in other industries, and current industry participants.

How attractive the profit prospects are for new entrants.

CONSIDERATIONS IN EVALUATING

THREAT OF ENTRY

Types of entry barriers

The best test of whether potential entry is strong or weak competitive force in the marketplace is to ask if the industry’s growth and profit prospects are attractive enough to induce additional entry.

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Competitive pressures from substitute products.

Producers of eyeglasses Makers of contact lenses

Laser surgery

Sugar industry Artificial sweeteners

Cotton & wool producers Polyester fabrics

Aspirin manufacturers Ibuprofen, acetaminophen

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Competitive pressures from substitute products.

1. Whether attractively priced substitutes are available.

2. Whether buyers view the substitutes as being satisfactory in terms of quality, performance, and other relevant attributes.

3. Whether buyers can easily switch to substitutes easily.

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Competitive pressure

stemming from supplier-seller collaboration

and bargaining.

Can supplier exercise sufficient bargaining power to influence the terms and conditions of supply in their favor.

Can supplier exercise sufficient bargaining power to influence the terms and conditions of supply in their favor.

The extent of supplier-seller collaboration in the industry.

The extent of supplier-seller collaboration in the industry.

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How supplier bargaining power can How supplier bargaining power can create competitive pressures.create competitive pressures.

1. Whenever the items they provide are commodities available on the open market from numerous suppliers with ample capability to fill orders.

2. When there are good substitutes for the item they provide and buyers find it neither costly nor difficult to switch their purchases to the suppliers of alternative items.

3. When the company they are supplying is a major customer.

Conditions under which the supplier have a little or no bargaining power.

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How supplier bargaining power can How supplier bargaining power can create competitive pressures.create competitive pressures.

Conditions under which the supplier have strong bargaining power.

1. When he is the major supplier of the product.

2. When supplier provides an item that accounts for a sizeable fraction of the costs of an industry's product, is crucial to the industry’s production process, or significantly affects the quality of the industry’s product.

3. When it is difficult for the users to switchover to alternate suppliers.

4. When they can supply a component more cheaply than industry members can make it themselves.

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How collaborative partnerships How collaborative partnerships between sellers and suppliers can between sellers and suppliers can

create competitive pressures.create competitive pressures.

REASONS FOR COLLABORATION

1. Promote just in time deliveries and reduced inventory and logistics costs.

2. Speed the availability of next generation components.

3. Enhance the quality of the parts and components being supplied and reduce defect rates.

4. Reduce the supplier’s costs and pave the way for lower prices on the items supplied.

2020

Competitive pressure

stemming from seller-buyer collaboration

and bargaining.

Whether buyers have sufficient bargaining power to influence the terms and conditions of sale in their favor.

Whether buyers have sufficient bargaining power to influence the terms and conditions of sale in their favor.

The extent and competitive importance of seller-buyer strategic partnerships in the industry.

The extent and competitive importance of seller-buyer strategic partnerships in the industry.

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How buyer bargaining power can How buyer bargaining power can create competitive pressures.create competitive pressures.

CONDITIONS UNDER WHICH THE BUYER HAS A STRONG BARGAINING POWER

1. The buyers are large and purchase a sizable percentage of the industry’s output.

2. Because of manufacturer’s need for broad retail exposure and favorable shelf space for their products.

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CONDITIONS UNDER WHICH THE BUYER HAS A STRONG BARGAINING POWER

3. If buyer’s costs of switching to competing brands or substitutes are relatively low.

4. If the number of buyers is small or if a customer is particularly important to a seller.

5. If buyers are well informed about sellers ‘ products, prices, and costs.

6. If buyers pose a credible threat of integrating backward into the business of sellers.

7. If buyers have discretion in whether and when they purchase the product.

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How buyer bargaining power can How buyer bargaining power can create competitive pressures.create competitive pressures.

CONDITIONS UNDER WHICH THE BUYER HAS A WEAK BARGAINING POWER

1. When they buy infrequently or in small quantities.

2. When they face high costs to switch brands.

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STRATEGIC IMPLICATIONS OF STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES.THE FIVE COMPETITIVE FORCES.

The stronger the collective impact of competitive forces,

the lower the combined profitability of participant firms.