EXTERNAL ANALYSIS (INDUSTRY AND COMPETITION)

Payne (3)
Analysis is the critical starting point of strategic thinking.
Kenichi Ohmae
1

Environmental Analysis Levels

EXTERNAL

or

Macro Level
Economic

MACROENVIRONMENT
Demographic

Industry Level Firm

Connect Connect

Suppliers Global Customers Technological

Competitors Social

and competitive conditions (opportunities and threats)

INTERNAL Its

Industry

Substitutes Political/Legal

or MICROENVIRONMENT competencies, capabilities, resources, and competitiveness (strengths and weaknesses) 2

Macro Environment (1)

q

Socio-cultural segment

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

Political/Legal Segment

Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies
3

Macro Environment (2)

q

Economic segment

Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

Technological Segment

Macro Environment (3)

q

Global Segment

Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes

Demographic

Population size Age structure Geographic distribution Ethnic mix Income distribution
5

Impact of General Environmental Trends on Various Industries

Segment/Trends/Events
Demographic Aging population Rising affluence Brokerage services Fast foods Upscale pets and supplies Sociocultural More women in the workforce Greater concern for health & fitness Political/legal Tort reform ADA (Americans with Disabilities Act) Technological Genetic engineering Pollution/global warming Economic Interest Rate Increases Clothing Baking Products (staples) Home exercise equipment Meat products Legal Services Auto Manufacturing Retail Manufacturers of elevators, escalators & ramps Pharmaceutical Publishing Engineering Services Petroleum Residential construction Most common grocery products

Industry
Health Care Baby products

Positive

Neutral

Negative

Global Increasing Global Trade Emergence of China as an economic power

Shipping Personal service Soft drinks Defense

Five Forces Model of Competition

Substitute Products
(of firms in other industries)

Threat of Substitutes
Bargaining Power of Suppliers

Suppliers of Key Inputs

Rivalry Intensity Among Competing Sellers

Bargaining Power of Buyers

Buyers

Threat of New Entrants

Potential New Entrants

Analyzing the Five Competitive Forces: How to Do It

q

Assess strength of each competitive force (Strong? Moderate? Weak? )

Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers

q q

Explain how each force acts to create competitive pressure Decide whether overall competition is brutal, fierce, strong, normal/moderate, or weak
8

Rivalry Among Competing Sellers

q q

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
9

What Causes Rivalry to Be Stronger?

q q q q q q q q

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
10

Competitive Force of Threat of New Entry

q

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
11

Common Barriers to Entry

q q q q q q q q

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
12

How to Tell Whether Substitute Products Are a Strong Force

q q

Sales of substitutes are growing rapidly Producers of substitutes are planning to add new capacity Substitutes profits are up
Readily available Attractively priced Believed to have comparable or better performance features Customer switching costs are low
13

The competitive threat of substitutes is stronger when they are:

Competitive Force of Substitute Products

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

vs. Contact Lens MD vs. DPM vs. DC Plastic vs. Glass vs. Metal
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Competitive Force of Suppliers

q

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
15

Competitive Force of Buyers

q

Buyers are a strong competitive force when:

They are large and purchase a sizable percentage of industrys product They buy in volume quantities They can integrate backward Industrys 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

16

Strategic Implications of the Five Forces

q

Competitive environment is unattractive when:

Rivalry is strong Entry barriers are low Competition from substitutes is strong Suppliers and customers have considerable bargaining power Rivalry is moderate Entry barriers are high Good substitutes do not exist Suppliers and customers are in a weak bargaining position

Competitive environment is ideal when:

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 17

Stakeholder Analysis
Stakeholder A

Focal Firm

Stakeholder B

Stakeholder C

18

Who are Stakeholders?

q

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 firms 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.

19

Building Stakeholder Relationships

q

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

20

Stakeholder Analysis

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Examples of Stakeholder Groups

xInternal

stakeholders

Management Professionals Support Personnel

xInterface

stakeholders

Shareholders Board of Directors Medical Staff

xExternal

stakeholders

Suppliers Competitors Government Agencies Patients

22

Relationships with Stakeholders

q q

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

q

KSFs or CSFs are competitive elements that most affect every strategic group members ability to prosper in the marketplace:

Specific strategy elements Product attributes Resources or Competencies Competitive capabilities Profit and loss Competitive success or failure

KSFs spell difference between:

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

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Key Success Factors

KSF 1

Optimize Performance

KSF 3

KSF 2

A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!
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Identifying Key Success Factors

q

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

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

Technologyrelated

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Example: KSFs for the Refractive Eye Surgery Industry

q

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

28

Example: KSFs for Beer Industry

q

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

q q

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

30

Strategic Group Mapping

q

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

High Market Commonality Low KEY

The shaded area represents degree of market commonality between two firms Resource endowment A Resource endowment B
32

II I III IV

Low

Resource Similarity

High

Market Commonality
q

Market Commonality is concerned with

the number of markets with which a firm and a competitor are jointly involved the degree of importance of the individual markets to each competitor

Most industries markets are somewhat related in terms of

technologies core competencies Firms competing in several markets

33

Multi-market competition

Resource Similarity
q

Resource similarity

the extent to which the firms tangible and intangible resources are comparable to a competitors in terms of both type and amount

Firms with similar types and amounts of resources are likely to

have similar strengths and weaknesses use similar broad strategies

Assessing resource similarity can be difficult if critical resources are intangible rather than tangible
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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 groups respective share of total industry sales
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Example: Strategic Group Map of Retail Jewelry Industry

High

Price / Quality / Image

Small Independent Guild Jewelers

National, Regional, & Local Guild - Fine Jewelry Stores

Prestige Departmentalized Retailers

Upscale Department Stores

Medium

National Jewelry Chains Chains Local Jewelers Credit Jewelers Catalog Showrooms Off-Price Retailers Discounters

Low

Outlet Mall Retailers

Specialty Jewelers

Full-line Jewelers

Limited-category Retailers

Broad-category Retailers
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Product Line / Merchandise Mix

Guidelines: Strategic Group Maps

q q q q

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
37

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

q

Interpreting Strategic Group Maps

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 groups 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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Within or Between Strategic Groups

High

Price / Quality / Image

Medium

Low Specialty Full-line Providers Limited-category Retailers Broad-category Retailers

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Product Line / Merchandise Mix

The World Automobile Industry

High Ferrari Lamborghini Porsche
Mercedes* BMW

Price

Hyundai Kia Low Low

Toyota Ford General Motors Chrysler* Honda Nissan

High

Breadth of Product Line

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Strategic Groups Within the World Petroleum Industry Strategic Groups Within the World Petroleum Industry
INTERNATIONAL UPSTREAM Premier Apache COMPANIES Oil Kuwait Petroleum PDVSA NATIONAL Iran PRODUCTION COMPANIES NOC Statoil Dana Petroleum INTEGRATED DOMESTIC OIL COMPANIES INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM

Vertical Balance

1.5

2.0

Exxon -Mobil Chevron Pemex Petronas INTEGRATED Royal Dutch Texaco Lukoil PetroChina INTERNATIONAL -Shell Gp. Conoco Phillips Indian Oil Phillips MAJORS Petrobras ENI Elf-Fina-Total ENI Nippon Repsol YPF INTERNATIONAL Repsol DOWNSTREAM Valero Neste OIL COMPANIES Ashland Sunoco BP-Amoco

0
0

0.5

1.0

10

20

30

40

50

60

70

80

NATIONALLY-FOCUSED DOWNSTREAM COMPANIES

Geographical Scope
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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 Rivals

q

A firms 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 Local Strategic Intent Be dominant leader Overtake industry leader Be among industry leaders Move to top 10 Move up a notch in rankings Maintain current position Just survive Market Share Objective Aggressive expansion via acquisition & internal growth Competitive Position Getting stronger; on the move Wellentrenched Stuck in the middle of the pack Going after a different position Struggling; losing ground Strategic Posture Mostly offensive Mostly defensive Combination of offensive & defensive Aggressive risk-taker Conservative follower Competitive Strategy 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 44

Regional

National

Expansion via internal growth Expansion via acquisition Hold on to present share Give up present share to achieve shortterm profits

Multi-country

Global

Retrenching to a position that can be defended

Assessing a Companys 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 Measure Quality/product performance Reputation/image Manufacturing capability Technological skills Dealer network/distribution New product innovation Financial resources Relative cost position Customer service capability Overall strength rating ABC Co. 8 8 2 10 9 9 5 5 5 61 Rival 1 5 7 10 1 4 4 10 10 7 58 Rival 2 10 10 4 7 10 10 7 3 10 71 Rival 3 1 1 5 3 5 5 3 1 1 25 Rival 4 6 6 1 8 1 1 1 4 4 32
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Rating Scale: 1 = Very weak; 10 = Very strong

A Weighted Competitive Strength Assessment

KSF/Strength Measure Quality/product performance Reputation/image Manufacturing capability Technological skills Dealer network/distribution New product innovation Financial resources Relative cost position Customer service capability Sum of weights Overall strength rating Weight 0.10 0.10 0.10 0.05 0.05 0.05 0.10 0.35 0.15 1.00 6.20 8.20 7.00 2.10 2.90
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ABC Co. 8/0.80 8/0.80 2/0.20 10/0.50 9/0.45 9/0.45 5/0.50 5/1.75 5/0.75

Rival 1 5/0.50 7/0.70 10/1.00 1/0.05 4/0.20 4/0.20 10/1.00 10/3.50 7/1.05

Rival 2 10/1.00 10/1.00 4/0.40 7/0.35 10/0.50 10/0.50 7/0.70 3/1.05 10/1.50

Rival 3 1/0.10 1/0.10 5/0.50 3/0.15 5/0.25 5/0.25 3/0.30 1/0.35 1/0.15

Rival 4 6/0.60 6/0.60 1/0.10 8/0.40 1/0.05 1/0.05 1/0.10 4/1.40 4/1.60

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