SITATION ANALYSIS OUTLINE

Role of Situation Analysis in Strategy-Making Methods of Industry & Competitive Analysis

Profiling Industry’s Dominant Economic Traits Analyzing Industry’s Competitive Forces 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 & Competitive Analysis

1

WHY DO A SITUATION ANALYSIS?Identify features in a firm’s external & internal

environment which frame its window ofSTRATEGIC OPTIONSOPPORTUNITIES

Focuses on two considerations:EXTERNAL factors: MACRO environment

(industry & competitive conditions) INTERNAL factors: MICRO environment

(firm’s internal situation & competitive position)

Objective

Figure 3-1: How Strategic Thinking and Analysis Lead to Good Choices

Thinking StrategicallyAbout Industry

and CompetitiveConditions

Thinking StrategicallyAbout a Company’s

Own Situation

IdentifyingStrategic Options

Open to the Company

Choice ofThe Best Strategy

KEY QUESTIONS REGARDING EXTERNAL ENVIRONMENT

1. Industry’s dominant economic traits

2. Competitive forces at work in industry & strength

3. Drivers of change in industry

4. Firms in strongest/weakest competitive positions

5. Competitive moves of rivals

6. Key factors determining competitive success or failure in industry

7. Attractiveness of industry

IDENTIFYING AN INDUSTRY’S DOMINANT ECONOMIC TRAITS

Market size & growth rate/stage in life cycle Scope of competitive rivalry Number of competitors & relative sizes Prevalence of backward/forward integration Entry/exit barriers Nature & pace of technological change Product & customer characteristics Scale economies & experience curve effects Capacity utilization & capital requirements Industry profitability

EXPERIENCE CURVE EFFECTS

An experience curve exists when unit costs decline as cumulative production volume increases 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

Figure 3-2: Comparison of Experience Curve Effects

$1

$1 90

80

70

81

64

49

72.9

51.2

34.3

10% CostReduction

20% CostReduction

30% CostReduction

1MillionUnits

2MillionUnits

4MillionUnits

8MillionUnits

Co

st p

er U

nit

EXPERIENCE CURVE EFFECTS

When a strong learning/experience curve effect causes unit costs to decline

substantially as cumulative production volume builds, a strategy to become the

largest volume manufacturer can offer the COMPETITIVE ADVANTAGE of being the

industry’s LOWEST-COST producer!

Basic Concept

ANALYSIS OF COMPETITIVE FORCES

To identify Main SOURCES of competitive forces and STRENGTH of these pressures

Objective

COMPETITIVE FORCES MATTER BECAUSE:To be successful, strategy must be designed

to cope effectively with competitive pressures -objective must be to build a strong, marketposition based on competitive advantage!

Figure 3-3: The Five Forces Model of Competition: A Key Analytical Tool

SubstituteProducts

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers Buyers

THE FIVE COMPETITIVE FORCES

1. RIVALRY among competing sellers in an industry

2. SUBSTITUTE PRODUCTS offered by firms in OTHER industries

3. Potential ENTRY of new competitors

4. Bargaining power of SUPPLIERS

5. Bargaining power of BUYERS

PROCEDURE: ANALYZING THE FIVE COMPETITIVE FORCES

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 force Strong? Moderate? Weak? Scale of 1 - 5: 1 = weak; 5 = strong

Explain how each competitive force works & its role in overall competitive picture

RIVALRY AMONGCOMPETING SELLERS

Usually the MOST POWERFUL of the five competitive forces

Weapons of COMPETITIVE RIVALRY Price Quality Performance features offered Customer service Warranties and guarantees Advertising & special promotions Dealer networks Product innovation

PRINCIPLES OFCOMPETITIVE RIVALRY

Use of various competitive weapons byrivals to out maneuver one another shapes

Rules of competition & Requirements for competitive success

A powerful competitive strategylaunched by one firm INTENSIFIES

competitive pressures on rivals!

PRINCIPLE OFCOMPETITIVE MARKETS

Competitive jockeying among rival firms is a dynamic process as

Firms initiate new offensive & defensive moves

Emphasis swings from one mix of competitive weapons to another

WHAT CAUSES RIVALRYTO BE STRONGER?

Lots of firms, 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 moves 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, & countries of origin

COMPETITIVE FORCEOF 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 a

price/cost disadvantage

COMMON BARRIERS TO ENTRY

Economies of scale Inability to gain access 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 & international trade restrictions

REACTION OF EXISTING FIRMSCAN 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

fight newcomer Newcomer can expect to earn

attractive profits

COMPETITIVE FORCE OFSUBSTITUTE PRODUCTS

SUBSTITUTES matter when products of firms in another industry enter the market picture

Eyeglasses vs. Contact Lens Sugar vs. Artificial Sweeteners Plastic Containers vs. Glass vs. Tin vs. Aluminum Aspirin vs. Other Types of Pain Relievers

Concept

Examples

WHY SUBSTITUTEPRODUCTS MATTER

Competitively priced substitutes can place CEILING on PRICES industry can charge for its product

Price ceiling can place LID on PROFITS industry members can earn

Availability of substitutes invites customers to make QUALITY & PERFORMANCE comparisons as well as PRICE comparisons

The lower the SWITCHING COSTS, easier it is for customers to shift to substitute products

INDICATORS OF STRENGTHOF SUBSTITUTE PRODUCTS

Growth rate of sales of substitutes

Market inroads of substitutes

Plan of manufacturers of substitutes to

expand capacity

Profits of firms producing substitutes

PRINCIPLE OFCOMPETITIVE MARKETS

Competitive threat of substituteproducts 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 whenwhen Item makes up large portion of costs of product,

is crucial to production process, and/or significantly affects product quality

It is costly for buyers to switch suppliers They have good reputations & 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

PRINCIPLE OF COMPETITIVE MARKETS

Whether suppliers are a strong or weak competitive force depends on if they have

bargaining power to put rivals at a competitive disadvantage based on:

Prices they can command Quality & performance of items supplied Reliability of deliveries Other terms & conditions of supply

COMPETITIVE FORCE OF BUYERS

Buyers are a strong competitive force when They are large & purchase a sizable percentage

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

PRINCIPLE OFCOMPETITIVE MARKETS

Buyers become a stronger competitive force the more they can exercise

bargaining leverage over

Price Quality Service Other terms & conditions of sale

STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES

Competitive environment is unattractive when:

Rivalry is very strong Entry barriers are low Competition from substitutes is

strong Suppliers & customers have

considerable bargaining power

STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES

Competitive environment is ideal when: Rivalry is only moderate Entry barriers are relatively high There are no good substitutes Suppliers & customers are in a weak

bargaining position

The weaker the competitive forces, the GREATER an industry’s PROFITS!

Principle

COPING WITH THEFIVE COMPETITIVE FORCES

A company whose strategy and market

position provide a GOOD DEFENSE

against the five forces can earn above-

average profits even when some or all

of the five forces are strong!

Concept

COPING WITH THEFIVE 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 the game” of competition Help create sustainable competitive

advantage

IDENTIFYING & ASSESSINGDRIVING FORCES

Industry conditions change because EXTERNAL FORCES are DRIVING industry participants to alter their actions

DRIVING FORCES are the MAJOR UNDERLYING CAUSES of changing industry & competitive conditions

Concept

IDENTIFYING & ASSESSINGDRIVING FORCES

Role of driving forces analysis in strategy-making

Indicates EXTERNAL FACTORS likely to have greatest impact on a firm over next 1 - 3 years

Must assess difference driving forces will make to be able to craft a strategy responsive to emerging conditions

DRIVING FORCES ANALYSIS

Analysis of driving forces has two steps

1. Identifying RELEVANT driving forces

2. ASSESSING IMPACT they will have

Task of driving forces analysis is: SEPARATE MAJOR causes of industry

change from MINOR ones IDENTIFY the THREE or FOUR driving

forces likely to have greatest 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 product & how

they 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 & government policy

changes Changing societal concerns, attitudes, &

lifestyles Changes in degree of uncertainty & risk

ENVIRONMENTAL SCANNING

A broad-ranging effort to monitor & interpret social, political, economic, ecological, & technological

events in an effort to spot budding trends & conditions that could eventually impact industry

Raise consciousness of managers about potential developments that could Have important impact on industry conditions Pose new opportunities & threats

Definition

Purpose

ASSESSING COMPETITIVE POSITIONS: STRATEGIC GROUPS

A STRATEGIC GROUP consists of those rival firms with similar competitive approaches & positions in an industry

A STRATEGIC GROUP MAP displays different competitive positions that rival firms occupy

STRATEGIC GROUP MAPS

Firms in same strategic group have one 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

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 & recent actions

Basic competitive approaches

COMPETITOR ANALYSIS

Successful strategists take great pains in scouting competitors by

Understanding their strategies Watching their actions Evaluating their vulnerability to driving

forces & competitive pressures Sizing up their strengths & weaknesses Trying to anticipate rivals’ next moves

PREDICTING MOVESOF RIVAL COMPETITORS

Predicting rivals’ next moves involves Analyzing current competitive positions Examining public pronouncements about

what it will take to be successful in industry Gathering information from grapevine about

current activities & potential changes Studying past actions & leadership Determining who has flexibility to make

major strategic changes & who is locked into pursuing same basic strategy

PRINCIPLE

Managers who fail to study

competitors closely risk being

blindsided by “surprise” actions

on the part of competitors!

PINPOINTING INDUSTRYKEY SUCCESS FACTORS

KEY SUCCESS FACTORS (KSFs) spell difference between Profit & 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

Basic Concept

PINPOINTING INDUSTRY KEY SUCCESS 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 & competitive success in industry

EXAMPLE: INDUSTRYKEY SUCCESS FACTORS

Utilization of brewing capacity - to keep manufacturing costs low

Developing a strong network of wholesale distributors - to gain access to retail outlets

Clever advertising - to induce beer drinkers to buy a particular brand

Beer/Brewing Industry

EXAMPLE: INDUSTRYKEY SUCCESS FACTORS

Fashion design - to create buyer appeal

Low-cost manufacturing efficiency - to keep selling prices competitive

Apparel Manufacturing Industry

EXAMPLE: INDUSTRYKEY SUCCESS FACTORS

Locating plants close to end-use customers - to keep costs of shipping empty cans low

Ability to market plant output within economical shipping distances

Tin & Aluminum Can Industry

STRATEGIC MANAGEMENT PRINCIPLE

A sound strategy

incorporates industry

key success factors!

CONCLUSION: OVERALLINDUSTRY ATTRACTIVENESS

To review overall situation & develop conclusions about relative attractiveness or unattractiveness

of the industry, both near- and long-term

A firm uniquely well-suited in an otherwise unattractive industry can, under certain

circumstances, still earn unusually good profits

Objective

Principle

ASSESSING OVERALLINDUSTRY ATTRACTIVENESS

Industry’s market size & growth potential Whether industry will be favorably or unfavorably

impacted 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 & uncertainty in industry’s future Whether competitive conditions are conducive to

rising/falling industry profitability

CONDUCTING AN INDUSTRY & COMPETITIVE SITUATION ANALYSIS

Two things to consider:

1. Task of analyzing a firm’s EXTERNAL situation cannot be reduced to a formula-like exercise

2. Sweeping industry & competitive analyses need to done every 1 to 3 years