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LECTURE NOTES ON

INDUSTRY AND COMPETITIVE SITUATION ANALYSIS

Industrial situation analysis


An industry can be defined as a group of companies within a sector offering products or services that are close substitutes for each other Rivalry among competitors is central to forces contributing to industrial competitiveness. It is necessary to understand the environmental factors that contribute to the attractiveness and competitiveness of the firm within the industry The industry structure comprises both public and private organizations

Strategic group mapping


A technique to explore industrys structure It is useful in an industry which has populated groups of competitors, each group occupying an identifiable market share and has known appeals to buyers A strategic group consist rivals firms with competitively similar market approaches. They normally resemble one another in any of several ways: Utilizing similar distribution channels Offering buyers similar services and technical assistance Appealing to buyers needs with the same product features

Strategic group mapping helps to look at the industry as whole and the standing of each firm individually Purpose of strategic group mapping is to: Identify broad characteristics that differentiate firms in the industry from one another Add to the picture of what life is like? in the industry

The concept of driving forces


Driving forces are those with the biggest influence on what kinds of changes will take place in the industrys structure and competitive environment. Industry conditions change because important forces are driving industry participants (competitors, customers, or suppliers) to alter their actions; Companies always pass through phases or lifecycle stages such as early development, rapid growth and take off, competitive shake out and combination, early maturity and decline or decay

Kind of driving forces and how they work


Changes in the long-term industry growth rate: a strong rise in growth frequently attracts new firms to enter the market and a shrinking market often causes some firms to exit the industry Changes in who buys the products and how they use it: this may necessitate alteration of distribution channels Product innovation: this can broaden demand, promote entry into the industry, enhance product differentiation among rival sellers eg. Cameras and photographic equipments Marketing innovation: new ways of marketing products can spark a burst of buyers interest, widen demand, and lower unit cost Entry or exit of new firms: an established firm from another industry can bring new ideas and perceptions on how its skills and resources can be innovatively applied. Likewise the exit of major firm changes industry structure by reducing the number of market leaders and causing a rush to capture the former customers of the exiting firm Regulatory influences and government policy changes

Diagnosing an industrys economic and business characteristics


The economics of a business tend to be governed by such factors as capital requirements, make up of cost structure, price determination, typical operating profit margins, roles of marketing and advertising in generating added volume Here concentration is on size and market share requirements Key success factors are basic economic features referring to things a firm must concentrate on doing well as well as specific kind of skills and competence necessary for its future success Some key success factors relating to procurement strategies include: Smaller supply base Just-in-time delivery Total cycle time reduction Supplier relationship Total cost management Total quality management E-procurement Training and development of procurement staff etc

Factors determining industry attractiveness


Market size, growth potential Degree of influence of prevailing driving forces which dictates an industry being favourable or unfavourable Industry structure Capital requirements (the large the capital requirement the less the attractive industry) Potential for the entry or exit (exit of a major firm or several weak firms opens more rooms for remaining firms Industry wide opportunities and threats Severity of problems or issues confronting the industry Regulatory, political, social and environmental consideration

Competitive situation analysis


Organizations must operate within a competitive industry environment Analyzing organizations competitors helps an organization to discover its weaknesses, to identify opportunities for and threats to the organization from the industrial environment. The organization carries a competitor analysis to assess its standing amongst the competitors Competitor analysis begins with identifying present as well as potential competitors.

Purpose
The purpose of competitor analysis is to assist the company to develop its competitive advantage and enable it to defeat its rival companies Contribution to the understanding of the competitive environment of the firm was done Michael Porter of the Harvard Business School

Porters Five Forces Model of Competition


1. Risk of entry by potential competitors: Potential competitors are firms not currently competing in the industry but have the potential to do so if given a choice. Entry into the industry/market is possible if profit margins are attractive and barriers to entry are low Entry of new competitor increases the industry capacity, begins a competition for market share and lowers the current costs Various barriers to entry are: Brand loyalty: huge satisfaction with a certain brand Government Regulation: policy to protect Companies Customer Switching Costs: difficult where customer is satisfied with existing product/service Access to distribution channels: already controlled by Coys in the market Strong Capital requirement: major investment in plant, technology, distribution outlets

CORE CONCEPT: The threat of entry is stronger when entry barriers are low, when there is a sizable pool of entry candidates, when industry growth is rapid and profit potentials are high, and when present firms are unable or unwilling to strongly contest a newcomers entry.

2. Rivalry among current competitors


Rivalry refers to competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to profitability Higher competitive rivalry may occur due to: Competitors of roughly equal size and one competitor decides to gain share over others Slow market growth and company wishes to gain dominance Difficult or expensive to exit from an industry

The successful company will always try to build defense, defeat and compete successfully CORE CONCEPT: The stronger the forces of competition, the harder it becomes for industry members to earn attractive profits.

3. Bargaining Power of Suppliers


Refers to the extent suppliers may increase prices of inputs/supplies (labour, raw materials, services) Suppliers are more powerful if: They are only few No substitutes for the supplies they offer (esp. supplies for technical reasons) Their products are unique Their product is an important input to buyers product Some buyers are not significant to them

In this way, they are regarded as a threat.

4. Threat of Substitute products


Substitute products refer to products having ability of satisfying customers needs effectively They dont entirely replace existing products but introduces new technology or reduce the costs of producing the same product They may limit the profit in an industry by keeping prices down From a strategy viewpoint, key issues to be analyzed are: Possible threat of obsolescence Ability of customers to switch to the substitutes Likely reduction in profit margin if prices come down

5. Bargaining Power of Buyers


Refers to the ability of buyers to bargain down the prices charged by the firms in an industry or to increase the firms cost in the industry by demanding better quality and service of product. Strong buyers can extract profits out of an industry by lowering the prices and increasing the costs. Buyers have strong bargaining power if: They are concentrated and there are few of them They purchase in large quantities. They have full information about the product and the market. They emphasize upon quality products

In this way, they are regarded as a threat.

Strategic implication of the model


Porters model is based on competitive strategy which is a combination of quality, cost and time The model identifies three strategies that can be used to give strategic business units (SBUs) a competitive advantages: 1. Cost leadership: enabling the company to operate efficiently so that it becomes the low cost producer in its industry which is effective when: The market comprises of many price sensitive buyers There few ways of achieving product differentiation

2. Differentiation: attempt to develop products that are known in the industry as unique 3. Focus: concentration on a specific market segment within which an attempt is to achieve either a cost advantage or differentiation

Strategic implication of the model (2)


The power of Porters five forces varies from industry to industry. Whatever be the industry, these five forces determine industry profitability as they affect the prices a COY can charge, its cost structure, and the capital investment essential for survival and competition in industry. Since no COY can successfully perform above average level by being all things to all people, management should select a strategy that provides the business a competitive advantage. As seen above, Porter suggests that there are three generic strategies that can be used singly or in combination to create a defensive position or outperform competitors (cost leadership, differentiation and focus on particular market segment)

Concluding remarks
A company achieves sustainable competitive advantage when an attractive number of buyers prefer its products or services over the offerings of competitors and when the basis for this preference is durable. The stronger a companys financial performance and market position, the more likely it has a well-conceived, well-executed strategy.

Strategic cost analysis


SCA focuses on a firms relative cost position with its rivals. It is concerned with identification of all costs involved in producing an item from the purchase of raw materials to the end price paid by customers Competitors do not necessarily or even usually incur the same costs in supplying their products to end users. Disparities in costs among rival producers comes from: Differences in the price paid for raw materials, component parts and other items purchased from suppliers Differences in basic technology and age of plant and equipments Differences in internal operating costs due to economies of scales associated with different size plants, wage rates, different productivity level etc Difference in distribution channel costs (wholesalers and retailers in getting the product to end user

Low-Cost Leadership Strategies


A company achieves low-cost leadership when it becomes the industrys lowest-cost provider as compared to several competitors For maximum effectiveness, companies employing a low-cost provider strategy need to achieve their cost advantage in ways difficult for rivals to copy or match. To achieve a cost advantage, a firm must make sure that its cumulative costs across its overall value chain are lower than competitors cumulative costs. CORE CONCEPT: A low-cost leaders basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders are exceptionally good at finding ways to drive costs out of their businesses.