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EXTERNAL ANALYSIS ANALYSIS (INDUSTRY AND COMPETITION)INDUSTRY AND COMPETITION)

Payne

(3)“Analysis is the

critical starting

point of strategic

thinking.”Kenichi Ohmae

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Environmental Analysis Levels

ConnectConnectFirm

Industry Level

Macro Level

CompetitorsSuppliers

Substitutes Customers

Demographic

TechnologicalPolitical/Legal

Social

Economic

Global

EXTERNAL or MACRO-

ENVIRONMENT

Industry and competitive conditions

(opportunities and threats)

INTERNAL or MICRO-ENVIRONMENT

Its competencies, capabilities, resources, and competitiveness

(strengths and weaknesses)

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Macro Environment (1) Socio-cultural segmentSocio-cultural segment

Women in the workplaceWomen in the workplace Workforce diversityWorkforce diversity Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment Shifts in work and career preferencesShifts in work and career preferences Shifts in product and service preferencesShifts in product and service preferences

Political/Legal SegmentPolitical/Legal Segment

Antitrust lawsAntitrust laws Taxation lawsTaxation laws Deregulation philosophiesDeregulation philosophies Labor training lawsLabor training laws Educational philosophies and policiesEducational philosophies and policies

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Economic segmentEconomic segment Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product

Macro Environment (2)

Technological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported R&D Focus of private and government-supported R&D

expendituresexpenditures New communication technologiesNew communication technologies

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Global SegmentGlobal Segment Important political eventsImportant political events Critical global marketsCritical global markets Newly industrialize countriesNewly industrialize countries Different cultural and institutional attributesDifferent cultural and institutional attributes

Macro Environment (3)

DemographicDemographic Population sizePopulation size Age structureAge structure Geographic distributionGeographic distribution Ethnic mixEthnic mix Income distributionIncome distribution

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Segment/Trends/Events Industry Positive Neutral Negative

Demographic Aging population

Rising affluence

Health CareBaby products

Brokerage services Fast foodsUpscale pets and supplies

Sociocultural More women in the workforce Greater concern for health & fitness

ClothingBaking Products (staples)

Home exercise equipmentMeat products

Political/legal Tort reform

ADA (Americans with Disabilities Act)

Legal ServicesAuto Manufacturing

RetailManufacturers of elevators, escalators & ramps

Technological Genetic engineering

Pollution/global warming

PharmaceuticalPublishing

Engineering ServicesPetroleum

Economic Interest Rate Increases Residential construction

Most common grocery products

Global Increasing Global Trade

Emergence of China as an economic power

ShippingPersonal service

Soft drinksDefense

Impact of General Environmental Trends on Various Industries

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Five Forces Model of CompetitionSubstituteProducts(of firms in

other industries)

Rivalry IntensityAmong

CompetingSellers

PotentialNew

Entrants

Suppliers of Key Inputs

Buyers

Threat of New Entrants

Bar

gain

ing

Pow

er o

f B

uyer

sBargain

ing P

ower of S

uppliers

Threat of Substitutes

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Analyzing the Five Competitive Forces: How to Do It

Assess strength of each competitive force (Strong? Moderate? Weak? ) Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers

Explain how each force acts to create competitive pressure

Decide whether overall competition is brutal, fierce, strong, normal/moderate, or weak

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Rivalry Among Competing Sellers

Usually the most powerful of the five forces Check which weapons of competitive rivalry

are most actively used by rivals in jockeying for position Price Quality Performance features offered Customer service Warranties/guarantees Advertising/promotions Dealer networks Product innovation

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What Causes Rivalry to Be Stronger?

Lots of firms, more 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 brands One or more firms initiates moves to bolster their

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

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Competitive Force of Threat of New Entry

Seriousness of threat depends primarily on:

Barriers to entry

Reaction of existing firms to entry

Barriers exist when:

Newcomers confront obstacles

Economic factors put potential entrant at a disadvantage relative to incumbent firms

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Common Barriers to Entry

Economies of scale Inability to gain access to specialized

technology Existence of learning/experience curve effects Strong brand preferences and customer loyalty Capital requirements and/or other specialized

resource requirements Cost disadvantages independent of size Access to distribution channels Regulatory policies, tariffs, trade restrictions

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How to Tell Whether Substitute Products Are a Strong Force

Sales of substitutes are growing rapidly

Producers of substitutes are planning to add new capacity

Substitutes’ profits are up

The 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

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Competitive Force of Substitute Products

Substitutes matter when customers are attracted to the products or services of firms in other industries

Concept

Eyeglasses vs. Contact Lens MD vs. DPM vs. DC Plastic vs. Glass vs. Metal

Examples

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Competitive 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

Suppliers are a stronger force the more they can exercise power over:

Prices charged Quality/performance of items supplied Amounts and delivery times

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Competitive 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 volume 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

Buyers are a stronger competitive force the more they have leverage to bargain over:

Price or Quality or Service Other terms and conditions of sale

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Strategic Implications of the Five Forces

Competitive environment is unattractive when: Rivalry is strong Entry barriers are low Competition from substitutes is strong Suppliers and customers have considerable bargaining power

Competitive environment is ideal when: Rivalry is moderate Entry barriers are high Good substitutes do not exist Suppliers and customers are in a weak bargaining position

Objective is to craft a strategy that will: Insulate firm from competitive forces Influence competitive pressures in ways that favor firm Build a sustainable competitive advantage

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Stakeholder Analysis

Stakeholder BStakeholder B Stakeholder CStakeholder C

Stakeholder AStakeholder A

Focal FirmFocal Firm

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Who are Stakeholders?

Identifying stakeholders is one way of sizing up the internal and external constituents that influence the firm. Stakeholders are individuals and groups who can affect and are

affected by a firm’s strategic outcomes and who have enforceable claims on its performance

Stakeholders include individuals, groups, and other organizations who have an interest in the actions of an organization and who have the ability to influence it

Stakeholders may be categorized as internal, interface and external.

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Building Stakeholder Relationships

Managing down Relationships with subordinates

Managing up Relationships with bosses and corporate staff

Managing out Relationships with customers and suppliers

Managing across Relationships with peers

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Stakeholder Analysis

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Internal stakeholders– Management– Professionals– Support Personnel

Interface stakeholders– Shareholders – Board of Directors– Medical Staff

External stakeholders– Suppliers– Competitors– Government Agencies–Patients

Examples of Stakeholder Groups

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Relationships with Stakeholders

Organizations have dependency relationships with stakeholders

Firms are not equally dependent on all stakeholders and not every stakeholder has the same level of influence

An effective organization strategy requires consensus from a plurality of key stakeholders about what it should be doing and how these things should be done

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Key Success Factors Key Success Factors

KSFs or CSFs are competitive elements that most affect every strategic group member’s ability to prosper in the marketplace: Specific strategy elements Product attributes Resources or Competencies Competitive capabilities

KSFs spell difference between: Profit and loss Competitive success or failure

Ask: Ask: For our organization to be successful, we For our organization to be successful, we MUST be especially good at ___________?MUST be especially good at ___________?

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Key Success Factors

A sound strategy incorporates efforts to be competent on all industry key success

factors and to excel on at least one factor!

KSF 1KSF 1

KSF 2KSF 2KSF 3KSF 3

Optimize Optimize PerformancePerformance

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Identifying Key Success Factors

Answers to three questions pinpoint KSFs On what basis do customers choose between

competing brands or offerings of sellers? What must a seller/provider do to be competitively

successful -- what resources and competitive capabilities does it need?

What does it take for sellers/providers to achieve a sustainable competitive advantage?

KSFs consist of the 3 - 5 really major determinants of financial and competitive success in a strategic group.

(Recall our discussion on developing objectives?)

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Common Types of Key Success Factors

Technology-related

Manufacturing-related

Distribution-related

Marketing-related

Skills-related

Organizational capability

Other types

Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activitiesLow-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of productsStrong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast deliveryFast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertisingSuperior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quicklySuperior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-howFavorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection

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Example: KSFs for the Refractive Eye Surgery Industry

High numbers of procedures, which is a component of price, experience, and service.

Low rate of complications and high rate of success (20/20)

Positive word-of-mouth and reputation

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Example: KSFs for Beer Industry

Utilization of brewing capacity -- to keep manufacturing costs low

Strong network of wholesale distributors -- to gain access to retail outlets

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

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Strategic Group Mapping

One technique for revealing the different competitive positions of industry rivals is strategic group mapping

A strategic group consists of those rivals with similar competitive approaches in an industry

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Strategic 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

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A Framework of Competitor Analysis

MarketMarketCommonalityCommonality

HighHigh

LowLow

LowLow HighHighResourceResourceSimilaritySimilarity

The shaded area represents The shaded area represents degree of market commonality degree of market commonality

between two firmsbetween two firms

Resource endowment BResource endowment B

Resource endowment AResource endowment A

KEYKEY

IIIIII

IIIIII IVIV

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Market Commonality

Market Commonality is concerned withMarket Commonality is concerned with the number of markets with which a firm and a the number of markets with which a firm and a

competitor are jointly involvedcompetitor are jointly involved the degree of importance of the individual markets to the degree of importance of the individual markets to

each competitoreach competitor Most industries’ markets are somewhat related in Most industries’ markets are somewhat related in

terms ofterms of technologiestechnologies core competenciescore competencies

Multi-market competitionMulti-market competition Firms competing in several marketsFirms competing in several markets

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Resource Similarity

Resource similarityResource similarity the extent to which the firm’s tangible and intangible the extent to which the firm’s tangible and intangible

resources are comparable to a competitor’s in terms of resources are comparable to a competitor’s in terms of both type and amount both type and amount

Firms with similar types and amounts of resources Firms with similar types and amounts of resources are likely toare likely to have similar strengths and weaknesseshave similar strengths and weaknesses use similar broad strategiesuse similar broad strategies

Assessing resource similarity can be difficult if Assessing resource similarity can be difficult if critical resources are intangible rather than critical resources are intangible rather than tangibletangible

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Procedure: 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

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Example: Strategic Group Map of Retail Jewelry Industry

Pri

ce /

Qu

alit

y / I

mag

e

High

Low

Medium

Product Line / Merchandise Mix

Specialty Jewelers Full-line JewelersLimited-category

RetailersBroad-category

Retailers

Outlet Mall Retailers

National, Regional, & Local Guild - “Fine

Jewelry” Stores

National Jewelry Chains

Local Jewelers Credit Jewelers Catalog

Showrooms

Off-Price Retailers

Small Independent

Guild Jewelers

Prestige Departmentalized Retailers

Upscale Department Stores

Chains

Discounters

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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 to reflect relative sizes of each strategic group

If more than two good competitive variables can be used, several maps can be drawn

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Interpreting Strategic Group Maps(i.e., Implications of the Strategic Groups Concept)

Driving forces and competitive pressures often favor some strategic groups and hurt others – such recognition may be the key to developing a competitive advantage.

Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position. Important niches may be identified that are not currently being filled by competitors.

The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be (“Organizations most like yours are the most dangerous.”)

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Pri

ce /

Qu

alit

y / I

mag

e

High

Low

Medium

Product Line / Merchandise Mix

SpecialtyFull-line

ProvidersLimited-category

RetailersBroad-category

Retailers

Within or Between Strategic Groups

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FerrariLamborghini

Porsche ToyotaFord

GeneralMotors

Chrysler*HondaNissan

Mercedes*BMW

High

HyundaiKia

High

Breadth of Product LineLowLow

Price

The World Automobile Industry

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Geographical Scope

0 10 20 30 40 50 60 70 80

Ver

tica

l Bal

ance

00.

51.

01.

52.

0

NATIONALPRODUCTION COMPANIES

INTEGRATED INTERNATIONAL

MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Royal Dutch-Shell Gp.

Exxon-Mobil

Statoil

PDVSA

Kuwait Petroleum

Petronas

Petrobras

RepsolNippon

Sunoco

BP-Amoco

ChevronTexaco

Phillips

Pemex

Indian Oil

ENI

INTEGRATED OIL MAJORSINTERNATIONALUPSTREAM,REGIONALLYFOCUSEDDOWNSTREAM

IranNOC

Neste

Ashland

Conoco PhillipsENI

Elf-Fina-TotalRepsol YPF INTERNATIONAL

DOWNSTREAM OIL COMPANIES

INTERNATIONALUPSTREAM

COMPANIES

Dana Petroleum

PremierOil

PetroChinaLukoil

Apache

Valero

Strategic Groups Within the World Petroleum Industry Strategic Groups Within the World Petroleum Industry

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Competitor Analysis and Strength Assessment

Successful strategists take great pains in scouting competitors Understanding their strategies Watching their actions Evaluating their vulnerability to driving forces and

competitive pressures Sizing up their resource strengths and weaknesses and

their capabilities Trying to anticipate rivals’ next moves

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Predicting Strategic Moves of RivalsPredicting Strategic Moves of Rivals

A firm’s own best strategic moves are affected by: Current strategies of competitors Actions competitors are likely to take next

Predicting rivals’ next moves involves: Analyzing their current competitive positions Examining public pronouncements about what it will take to

be successful in industry Gathering information from grapevine about current

activities and potential changes Studying past actions and leadership Determining who has flexibility to make major strategic

changes and who is locked into pursuing same basic strategy

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Categorizing the Objectives and Strategies of Competitors

Competitive Scope

Strategic Intent Market Share Objective

Competitive Position

Strategic Posture

Competitive Strategy

• Local• Be dominant leader

• Aggressive expansion via acquisition & internal growth

•Getting stronger; on the move

•Mostly offensive

• Regional• Overtake industry leader

•Well-entrenched

•Mostly defensive

• National• Be among industry leaders

• Expansion via internal growth

•Stuck in the middle of the pack

•Combination of offensive & defensive

• Multi-country • Move to top 10• Expansion via acquisition

•Going after a different position

•Aggressive risk-taker

• Global• Move up a notch in rankings

• Hold on to present share

•Struggling; losing ground

•Conservative follower

• Maintain current position

•Give up present share to achieve short-term profits

•Retrenching to a position that can be defended

• Just survive

•Striving for low-cost leadership

•Mostly focusing on a market niche

•Pursuing differentiation based on– Quality– Service– Technology superiority– Breadth of product line– Image & reputation– More value for the money– Other attributes

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Assessing a Company’s Competitive Strength versus Key Rivals

1. List industry key success factors and other relevant measures of competitive strength

2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)

3. Decide whether to use a weighted or unweighted rating system

4. Sum individual ratings to get overall measure of competitive strength for each rival

5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

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Unweighted Competitive Strength Assessment

KSF/Strength MeasureKSF/Strength Measure

Quality/product performanceQuality/product performance

Reputation/imageReputation/image

Manufacturing capabilityManufacturing capability

Technological skillsTechnological skills

Dealer network/distributionDealer network/distribution

New product innovationNew product innovation

Financial resourcesFinancial resources

Relative cost positionRelative cost position

Customer service capabilityCustomer service capability

Overall strength ratingOverall strength rating

ABC Co.ABC Co. Rival 1Rival 1 Rival 2Rival 2

88 55 1010

88 77 1010

22 1010 44

1010 11 77

99 44 1010

99 44 1010

55 1010 77

55 1010 33

55 77 1010

6161 5858 7171

Rival 3Rival 3

11

11

55

33

55

55

33

11

11

2525

Rival 4Rival 4

66

66

11

88

11

11

11

44

44

3232

Rating Scale: 1 = Very weak; 10 = Very strongRating Scale: 1 = Very weak; 10 = Very strong

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A Weighted Competitive Strength Assessment

KSF/Strength MeasureKSF/Strength Measure

Quality/product performanceQuality/product performance

Reputation/imageReputation/image

Manufacturing capabilityManufacturing capability

Technological skillsTechnological skills

Dealer network/distributionDealer network/distribution

New product innovationNew product innovation

Financial resourcesFinancial resources

Relative cost positionRelative cost position

Customer service capabilityCustomer service capability

Rival 1Rival 1 Rival 2Rival 2

5/0.505/0.50 10/1.0010/1.00

7/0.707/0.70 10/1.0010/1.00

10/1.0010/1.00 4/0.404/0.40

1/0.051/0.05 7/0.357/0.35

4/0.204/0.20 10/0.5010/0.50

4/0.204/0.20 10/0.5010/0.50

10/1.0010/1.00 7/0.707/0.70

10/3.5010/3.50 3/1.053/1.05

7/1.057/1.05 10/1.5010/1.50

ABC Co.ABC Co.

88//0.800.80

8/0.808/0.80

2/0.202/0.20

10/0.5010/0.50

9/0.459/0.45

9/0.459/0.45

5/0.505/0.50

5/1.755/1.75

5/0.755/0.75

Rival 3Rival 3

1/0.101/0.10

1/0.101/0.10

5/0.505/0.50

3/0.153/0.15

5/0.255/0.25

5/0.255/0.25

3/0.303/0.30

1/0.351/0.35

1/0.151/0.15

Rival 4Rival 4

6/0.606/0.60

6/0.606/0.60

1/0.101/0.10

8/0.408/0.40

1/0.051/0.05

1/0.051/0.05

1/0.101/0.10

4/1.404/1.40

4/1.604/1.60

WeightWeight

0.100.10

0.100.10

0.100.10

0.050.05

0.050.05

0.050.05

0.100.10

0.350.35

0.150.15

Sum of weightsSum of weights 1.001.00

Overall strength ratingOverall strength rating 6.206.20 8.208.20 7.007.00 2.102.10 2.902.90

Rating Scale: 1 = Very weak; 10 = Very strongRating Scale: 1 = Very weak; 10 = Very strong