Module 3

Industry and Competitive Analysis

Module Outline
Role of Situation Analysis in Strategy-Making Methods of Industry and Competitive Analysis
Profiling Industrys Dominant Economic Traits Analyzing Industrys Competitive Force 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 and Competitive Analysis

Why Do a Situation Analysis?

Objective Identify features in a firms external and internal environment which frame its window of
Strategic Options Opportunities

Focuses on two considerations:

External Factors
Macro environment (industry and competitive conditions)

Internal Factors
Micro environment (firms internal situation and competitive position)

How Strategic Thinking and Analysis Lead to Good Choices?

Thinking Strategically About Industry and Competitive Conditions Identifying Strategic Options Open to the Company Thinking Strategically About a Companys Own Situation Choices of the Best Strategy

Key Questions Regarding External Environment

1. Industrys dominant economic traits 2. Competitive forces at work in industry and 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

Industry Economic Traits

Concept An industrys economic characteristics impose boundaries on the kinds of strategic approaches a company can pursue!

Identifying an Industrys Dominant Economic Traits

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

Comparison of Experience Curve Effects

$1 $1 Cost per Unit 90 80 70 81 64 49

10% Cost 72.9 Reduction

51.2 20% Cost 34.3 30% Cost

Reduction Reduction

1 Million Units

2 Million Units

4 Million Units

8 Million Units

Experience Curve Effects

Basic Concept 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 industrys lowest-cost producer!

Analysis of Competitive Forces

Objective To identify
Main sources of competitive forces, and Strength of these pressures

Competitive forces matter because: To be successful, strategy must be designed to cope effectively with competitive pressure objective must be to build a strong, market position based on competitive advantage!

The 5 Forces Model of Competition: A Key Analytical Tool

Substitute Product

Suppliers

Buyers

Rivalry Among Competing Sellers

Potential New Entrance

The 5 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 5 Competitive Factors

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 forces

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

Explain how each competitive forces works and its role in overall competitive picture

Rivalry Among Competing Sellers

Usually the most powerful of the 5 competitive forces Weapons of competitive rivalry
Price Quality Performance features offered Customer service Warranties and guarantees Advertising and special promotions Dealer networks Product innovation

Principle of Competitive Rivalry

A powerful competitive strategy launched by one firm intensifies competitive pressures on rivals! Use of various competitive weapons by rivals to out maneuver one another shapes
Rules of competition, and Requirements for competitive success

Principle of Competitive Markets

Competitive jockeying among rival firms is a dynamic process as
Firms initiate new offensive and defensive moves Emphasis swings from one mix of competitive weapons to another

What Causes Rivalry to be Stronger?

Lots of firm, 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 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, and countries of origin

Competitive Forces of 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 entrants small sales volume puts it a price / cost disadvantage

Common Barriers to Entry

Economic of scale Inability to gain excess 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 and international trade restirctions

Reaction of Existing Firms Can Be an Entry Barrier

When existing firms
Indicate theyll 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 of Substitute Products

Concept Substitutes matter when products of firms in another industry enter the market picture Examples
Eyeglasses vs. Contact Lens Sugar vs. Artificial Sweeteners Plastic Containers vs. Glass vs. Tin vs. Aluminum Aspirin vs. Other Types of Pain Relievers

Why Substitute Products Matter?

Competitively priced substitutes can place ceiling on prices industry can charge for its product Price ceiling can place lid on profits industry member can earn Availability of substitutes invites customers to make quality and performance comparisons as well as price comparisons The lower the switching costs, easier it is for customer to shift to substitute products

Indicators of Strength of 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 of Competitive Markets

Competitive threat of substitute products 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 when
Item makes up large portion of costs of products, is crucial to production process, an / or significantly affects product quality It is costly for buyers to switch suppliers They have good reputations and 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 and performance of items supplied Reliability of deliveries Other terms and conditions of supply

Competitive Force of Buyers

Buyers are a strong competitive force when
They are large and purchase a sizable percentage of industrys product They buy in volume quantities They incur low costs in switching to substitutes They have flexibility to purchase from several sellers Selling industrys product is standardized They can integrate backward Product being purchased does not save buyer money or has low value to buyer

Principle of Competitive Markets

Buyers become a stronger competitive force the more they can exercise bargaining leverage over
Price Quality Service Other terms and conditions of sale

Strategic implications of the 5 Competitive Forces

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

Strategic Implications of the 5 Competitive Forces

Competitive environments is ideal when:
Rivalry is only moderate Entry barriers are relatively high There are no good substitutes Suppliers and customers are in a weak bargaining position

Principle
The weaker the competitive forces, the greater an industrys profits!

Coping With the 5 Competitive Forces

Concept A company whose strategy and market position provide a good defense against the 5 forces can earn above-average profits even when some or all of the 5 forces are strong!

Coping With the 5 Competitive Forces

Objective is to craft a strategy that will
Insulate company from competitive forces Influence industrys competitive rules in companys favor Provide a strong position from which to play the game of competition Help create sustainable competitive advantage

Identifying and Assessing Driving Forces

Concept Industry condition change because external forces are driving industry participants to alter their actions Driving forces are the major underlying causes of changing industry and competitive conditions

Identifying and Assessing Driving Forces

Role of driving forces analysis in strategymaking
Indicate external factors likely to have greatest impact on a firm over next 1 3 years Must assess difference driving forces will make to be bale to craft a strategy responsive to emerging conditions

Driving Forces Analysis

Analysis of driving forces has 2 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 3 or 4 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 products and 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 and government policy changes Changing societal concerns, attitudes, and lifestyles Changes in degree of uncertainty and risk

Environmental Scanning
Definition
A broad-ranging effort to monitor and interpret social, political, economic, ecological, and technological events in an effort to spot budding trends and conditions that could eventually impact industry

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

Assessing Competitive Positions: Strategic Groups

A strategic group consists of those rival firms with similar competitive approaches and 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 Emphasis same type of distribution channels Offer buyers similar services Use identical technological approaches

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 strategy group Step 4: Draw circles around each strategic group, making circles proportional to size of groups respective share of total industry sale

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

Interpreting Strategic Group Maps

Driving forces and competitive pressures often favor some strategic groups and hurt others Profit potential of different strategic groups varies due to strengths and weaknesses in each groups market position The closer strategic groups are on map, the stronger the competitive rivalry among the member firms tends to be

Competitor Analysis
A firms 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 and recent actions Basic competitive approaches

Competitors Analysis
Successful strategies take great pains in scouting competitors by
Understanding their strategies Watching their actions Evaluating their vulnerability to driving forces and competitive pressures Sizing up their strengths and weaknesses Trying to anticipate rivals next moves

Predicting Moves of Rival Competitors

Predicting rivals next moves involves
Analyzing current competitive position 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

Strategic Management Principle

Managers who fail to study competitors closely risk being blindsided by surprise actions on the part of competitors!

Pinpointing Industry Key Success Factors

Basic Concept Key Success Factors (KSFs) spell difference between
Profit and 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

Pinpointing Industry Key Success Factors

Identifying KSFs is top priority as they are good cornerstones of a firms 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 and competitive success in industry

Example: Industry Key Success Factors

Beer / Brewing Industry
Utilization of brewing capacity to keep manufacturing costs low Developing a strong networks of wholesale distributors to gain access to retail outlets Clever advertising to induce beer drinkers to buy particular brands

Example: Industry Key Success Factors

Apparel Manufacturing Industry
Fashion design to create buyer appeal Low-cost manufacturing efficiency to keep selling prices competitive

Tin and Aluminum Can Industry

Locating plant close to end-use customer to keep costs of shipping empty cans low Ability to market plant output within economical shipping distances

Strategic Management Principle

A sound strategy incorporates industry key success factors!

Conclusion: Overall Industry Attractiveness

Objective
To review overall situation and develop conclusions about relative attractiveness or unattractiveness of the industry, both near- and long-term

Principle
A firm uniquely well-situated in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

Assessing Overall Industry Attractiveness

Industrys market size and 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 and uncertainty in industrys future Whether competitive conditions are conducive to rising / falling industry profitability

Conducting an Industry and Competitive Situation Analysis

Two things to consider:
Task of analyzing a firms external situation cannot be reduced to a formula-like exercise Sweeping industry and competitive analyses need to be done every 1 to 3 years

End of Module 3