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Competing For Advantage
Part II – Strategic AnalysisChapter 3 – The External Environment:
Opportunities, Threats, Industry Competition, and Competitor Analysis
Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness.
Michael Porter
When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact.
Warren Buffett
Skate to where the puck is going, not to where the puck has been.
Wayne Gretsky
External Environments
Key Terms General Environment – composed of dimensions
in the broader society that influence an industry and the firms within it
Industry Environment – set of factors that directly influence a firm and its competitive actions and competitive responses
Competitor Environment – details about a firm’s direct and indirect competitors and the competitive dynamics expected to impact a firm's efforts to generate above-average returns
Components of External Analysis
Scanning – Identifying early signals Monitoring – Following signals or change
identifies in scanning to identify patterns Forecasting – Projections of what might
happen Assessing – Determining the timing and
significance of forecasted change
Assessing the General Environment
General Environment
1) Demographic
2) Economic
3) Political
4) Socioculture
5) Technical
6) Global
1) Demographic Segment
Characteristics of the population e.g., age, race, gender, sexual orientation and
social classes Ethnic structure Income distribution Geographic distribution
2) Economic Segment
General health/wellbeing of the local, regional, national or global economy. e.g., Interest rates, unemployment rates,
consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs
3) Political/Legal Segments
Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.
4) Sociocultural Segment
Attitudes of society towards work, careers, products, services and consumer activism. e.g., concern for quality of life, birth rates,
woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.
5) Technological Segment
Changes in technology that affect the workplace, and the products and services consumers expect e.g., Information technologies, entertainment
technologies, product technologies.
6) Global Segment
New and existing markets around the world, and changes in the political, cultural and institutional terrain.
General Environment
Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance
Cast a wide net and to identify the emerging trends
Then determine which factors are relevant, and how these changes will have an effect upon the firm.
ROIC Across Industries 1995-2004
-5
0
5
10
15
20
25
Bevrgs Cigs Pharm Steel Computers Airlines
Porter’s Five Forces
Competitive Rivalry Power of Buyers Power of Suppliers Potential Entrants Substitute Products
Each of these forces affect costs/prices,
therefore, profitability
SubstituteProducts(of firms in
other industries)
RivalryAmong
CompetingSellers
PotentialNew
Entrants
Suppliers of Key Inputs
Buyers
Price
Costs
Profits{What factors increase/decrease margins within an industry, thus affecting profitability.
Porter’s 5-forces is all about margins
Prices can be kept high
Costs can be kept low
Profits can soar {
When industry structural variables are weak…...
Prices will be pushed down
Costs will rise
Profits shrink{
When industry structural variables are strong
Suppose you had to start a new business and start generating revenues…
… today
… in a week
… in 2 months
… in 1 year
What kind of businesses might you start?
Potential New Entrants
Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents.
Firms can create “barriers to enter” Barriers of entry are desirable for entrenched
firms
Barriers to Entry
Economies of scale Product differentiation & loyalty Capital & resource requirement Switching costs Distribution Cost disadvantage independent of size Regulatory policies Access to technology & know-how Learning, costs, experience curves Threat of retaliation
Suppliers• Who are you key suppliers?• Suppliers are a strong competitive force when:
Only a few suppliers exist and is more concentrated than industry to which it is selling
Few substitutes available to the industry firm Industry not important buyers to supplier group Supplier group provides a product crucial to
production process, and/or significantly affects buyers’ product quality
It is costly for buyers to switch suppliers Forward integration by suppliers is a credible
threat Suppliers can supply at a lower cost
Buyers
Who are your key buyers? - who provides our revenues?
Can they force:• lower prices, higher quality and service –
affect the terms and conditions of the exchange?
• When do you, as a consumer, have power? • Two issues
• Price sensitivity• Can you actually bargain
Buyers What affect buyers’ power?
Volume/Frequency of purchase When buyers represent a large portion of sellers
revenues When buyers can easily switch to another
product When the product the buyers are buying is
undifferentiated When buyers can self-source or backwards
integration Criticality Buyers’ knowledge Buyers’ profitability
Substitutes
Product/service which fulfills similar need Price cap 3 Questions
Are they available? Can we switch? Price-performance relationship?
Substitutes and Business Definition
How we define our business defines our substitutes and our rivals
Carbonated Soft Drink Soft Drinks Beverages
Many Substitutes
Few Rivals Many Rivals
Few Substitutes
Rivalry and Profitability
Industry profitability is a collective good. Collective good is served by coordination
• Are there industries were pricing is coordinated?
Incentive to violate
Rivalry – What drives it? Numerous or equally balanced competitors Slow growth, excess capacity High fixed costs High storage costs High obsolescence costs Lack of differentiation Low switching costs Perceptions of high payoff from competitive actions High exit barriers
Exit Barriers
Specialized assets Fixed costs of exit Strategic interrelationships among business
units Emotional barriers
Industries and Segments What is a segment? Different segments…..
• posses different combinations of 5-forces• therefore:
reward different strategies possess different levels of profitability
Segments in the Automotive IndustryEconomy Luxury
Which segment is more attractive? Why?
Porter’s..in conclusion
Attractiveness of industry/segment current industry adjacent segments industries you might consider entering
Which forces possess the greatest influence? Can we influence them?
Static model & Hypercompetition
• If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing
competition and profit.
Complementors
Key TermsComplementors – companies that
sell complementary goods or services that are compatible with the focal firm's own product or services
Interpreting Industry Analysis
The ways in which competitive analysis provides insight into the attractiveness of an industry by determining its potential for above-average returns over the long term
Analysis of Direct Competitors
Key Terms Strategic Group – set of firms
emphasizing similar strategic dimensions to use a similar strategy
Strategic Dimensions – areas that firms in a strategic group treat similarly
Implications from Strategic Group Dynamics
Intra-strategic group rivalry is more intense than inter-strategic group rivalry
Membership in a strategic group partially defines the essential characteristics of firms' strategies
The more similar strategies are seen across strategic groups, the greater the level of expected rivalry
The strengths of industries' five forces differ across strategic groups
Competitor Analysis Components
Identification of Key Success Factors?
KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability
opportunities for competitive advantage
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
Identifying Key Success Factors (KSFs) - vary by segment
Automotive Industry