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Analysis is the critical starting

point of strategic thinking.

Kenichi Ohmae

The McGraw-Hill Companies, Inc., 1998Irwin/McGraw-Hill

Quote


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Chapter Ou t l ine

Role of Situation Analysis in Strategy-Making Methods of Industry and Competitive Analysis

Industrys Dominant Economic Traits

Industrys Competitive Forces Drivers of Industry Change

Competitive Positions of Rivals

Competitive Moves of Rivals Key Success Factors

Conclusions: Overall Industry Attractiveness

Conducting an Industry and Competitive Analysis


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What Is Si tuat ion Analys is?

Focuses on two considerationsA companys EXTERNAL orMACRO-ENVIRONMENT

Industry and competitiveconditions

A companys INTERNAL orMICRO-ENVIRONMENT

Its competencies,capabilities, resourcestrengths and weaknesses,and competitiveness


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Key Considerat ions Regardingthe External Env ironm ent

Industrysdominant

economic

traits

Competitive

forces and

strength of

each force

Drivers of

change in the

industry

Predicting the

moves of

competitors

Key success

factors

Conclusions:

Industry

attractiveness


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Quest ion 1: What Are theIndustrys Dominant Economic Traits?

Market size andgrowth rate

Scope of competitive rivalry

Number of competitorsand their relative sizes

Prevalence of backward/forward integration

Entry/exit barriers

Nature and pace of technological change

Product and customer characteristics

Scale economies and experience curve effects

Capacity utilization and resource requirements

Industry profitability


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The Experience Curve Effect

An experience cu rve exists when unit costsdecline as cumulat ive production volumeincreases because of

Accumulating product ion know -how

Grow ing mastery of the techno logy

The bigger the experience cu rve effect, thebigger the cost advantage of the firm with thelargest cumulat iveproduction volume


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Cost Advantages ofDif ferent Experience Curve Effects

$1

$1 .90

.80

.70

.81

.64

.49

.729

.512

.343

10% Cost

Reduction

20% Cost

Reduction

30% Cost

Reduction

1

Million

Units

2

Million

Units

4

Million

Units

8

Million

Units

Costper

Unit


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Relevance o fKey Econom ic Features

Economic

FeatureMarket Size

Market growth rate

Capacitysurpluses/shortages

Industry profitability

Entry/exit barriers

Product is big-ticketitem for buyers

Standard products

Rapid technologicalchange

Capital requirements

Vertical integration

Economies of scale

Rapid productinnovation

Strategic Importance

Small markets dont tend to attract new firms; large markets attract firmslooking to acquire rivals with established positions in attractive industries

Fast growth breeds new entry; slow growth spawns increased rivalry & shake-out of weak rivals

Surpluses push prices & profit margins down; shortages pull them up

High-profit industries attract new entrants; depressed conditions lead to exit

High barriers protect positions and profits of existing firms; low barriers makeexisting firms vulnerable to entry

More buyers will shop for lowest price

Buyers have more power because its easier to switch from seller to seller

Raises risk; investments in technology facilities/equipment may becomeobsolete before they wear out

Big requirements make investment decisions critical; timing becomesimportant; creates a barrier to entry and exit

Raises capital requirements; often creates competitive & cost differencesamong fully vs. partially vs. non-integrated firms

Increases volume & market share needed to be cost competitive

Shortens product life cycle; increases risk because of opportunities forleapfrogging


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Quest ion 2: What is Compet it ion L ike &How Strong Are the Competi tive Forces?

To identify

Main sourcesof

competitive forcesStrengthof these forces

Key analytical tool

Five Forces Model

of Competi t ion

Objective


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Five Forces Model of Compet it ion

Substitute

Products(of firms in

other industries)

Rivalry

Among

Competing

Sellers

Potential

New

Entrants

Suppliers of

Key InputsBuyers

Substitute

Products(of firms in

other industries)

Rivalry

Among

Competing

Sellers

Potential

New

Entrants

Suppliers of

Key InputsBuyers


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Analyzing the Five Compet i t iveForces: How to Do It

Assess strengthof each competitive force(Strong? Moderate? Weak?)

Rivalry among competitors

Substitute products

Potential entry

Bargaining power of suppliers

Bargaining power of buyers

Explain how eachforce acts to create competitivepressure

Decide whether overall compet it ion is brutal,fierce, strong, normal/moderate, or weak


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Rivalry Among Compet ing Sel lers

Usually the most power fu l of the five forces Check which weapons of competitive rivalry

are most actively used by rivals in jockeyingfor position

Price Quality Performance features offered Customer service Warranties/guaranteesAdvertising/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 theoffensive to boost volume and market share

Customers have low costs in switching brands

One or more firms initiates moves to bolster theirstanding 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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Princip le of Compet i t ive Markets

Competitive jockeying among rival firms

is dynam ic and ever-chang ing

As industry members initiate new

offensive and defensive moves

As emphasis swings from one mix ofcompetitive weapons to another


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Competi t ive Force of Potent ial En try

Seriousness of threat depends on Barr iersto entry

React ionof existing firms to entry

Barriers exist when

Newcomers confront obstacles

Economic factors put potentialentrant at a disadvantage relativeto incumbent firms


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Threat of entry is st rongerwhen:

Entry barriers are low

Sizable pool of entry candidatesexists

Incumbents are unwilling or unable to

contest a newcomers entry efforts Newcomer can expect to earn

attractive profits


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Competi t ive Force o fSubst i tute Produc ts

Subst i tutesmatter when customers areattracted to the products of firms in other

industries

Concept

Eyeglasses vs. Contact Lens

Sugar vs. Artificial Sweeteners

Plastic vs. Glass vs. Metal

Newspapers vs. TV vs. Internet

Examples


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How to Tel l Whether Subst i tu teProduc ts A re a Strong Force

Sales of substitutes aregrowing rapidly

Producers of substitutes

are planning to add newcapacity

Their profits are up


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The competitive threat of subst i tu tesis st rongerwhen they are:

Readily availableAttractively priced

Believed to have comparable or betterperformance features

Customer switching costs are low


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Compet it ive Force of Suppl iers

Suppliers are a s t rongcompetitive force when:

Item makes up large portion of product costs,is crucial to production process, and/orsignificantly affects product quality

It is costly for buyers to switch suppliers They have good reputations and

growing demand

They can supply a component cheaper thanindustry members can make it themselves

They do not have to contend with substitutes

Buying firms are not important customers


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Suppl iersare a st rongerforce the

more they can exercise power over:

Prices charged

Quality/performance

of items supplied

Amounts and delivery times


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Compet it ive Force of Buyers

Buyers are a s t rongcompetitive force when:

They are large and purchase a sizablepercentage 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


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Buyersare a st rongercompetitiveforce the more they haveleverage to bargain over:

Price

Quality

Service Other terms and conditions

of sale

St t i I l i t i f th


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Strateg ic Imp l icat ions o f theFive Compet i t ive Forces

Competitive environment isunattract ivewhen:

Rivalry is strong

Entry barriers are low

Competition from

substitutes is strong Suppliers and customers have

considerable bargaining power

St t i I l i t i f th


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Strateg ic Imp l icat ions o f theFive Compet i t ive Forces

Competitive environment is idealwhen:

Rivalry is moderate

Entry barriers are high

Good substitutes do

not exist Suppliers and customers are

in a weak bargaining position

C i With th


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Coping With theFive Compet i t ive Forces

Objective is to craft a strategythat will:

Insulate firm from competitive

forces

Influence competitive pressures

in ways that favor company Build a sustainable competitive

advantage

Q ti 3 Wh t F A t


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Quest ion 3: What Forces A re atWork to Change Indus try Condi t ions?

Industries change because forcesare dr iv ingindustry participants

to alter their actions

Driv ing forces are themajor

underly ing causes of

changing industry andcompetitive conditions


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Analyzing Driv ing Forces

1. Identify those forceslikely to exertgreatest inf lu ence over next 1 - 3years

Usual lyno more than 3 - 4factors qualify

2. Assessimpact

What dif ferencewill theforces make (favorable?unfavorable?)


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Common Types of Dr iv ing Forces

Changes in long-term industry growth rate Changes in who buys the product and how

they use it

Product innovation

Technological change/process innovation

Marketing innovation Entry or exit of major firms

Diffusion of technical knowledge


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Common Types of Dr iv ing Forces

Increasing globalization of industry Changes in cost and efficiency

Market shift from standardized to

differentiated products (or vice versa) New regulatory policies and/or government

legislation

Changing societal concerns, attitudes, andlifestyles

Changes in degree of uncertainty and risk


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Env ironmental Scann ing

Monitoring and interpreting sweep of social,political, economic, ecological, and technological

events to spot budding trends that couldeventually impact industry

Definition

Purpose

Raise consciousness of managers about potentialdevelopments that could

Have important impact on industry conditions

Pose new opportunities and threats

Quest ion 4: Which Companies are in


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Quest ion 4: Which Companies are inStrongest / Weakest Posi t ions?

One technique for revealing the differentcompetitive positions of industry rivals isstrategic group mapp ing

A strategic g roup consists of those rivalswith similar competitive approaches in anindustry


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Procedu re: Construct ing a


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Procedu re: Construct ing aStrateg ic Group Map

STEP 1: Identify competitive characteristics thatdifferentiate firms in an industry from oneanother

STEP 2: Plot firms on a two-variable map using

pairs of these differentiatingcharacteristics

STEP 3: Assign firms that fall in about the same

strategy space to same strategic groupSTEP 4: Draw circles around each group, making

circles proportional to size of groups

respective share of total industry sales

Example: Strategic Group Map of


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Example: Strategic Group Map ofRetai l Jewelry Industry

Price/Quality/Image

High

Low

Medium

Product Line / Merchandise Mix

Specialty

Jewelers

Full-line

Jewelers

Limited-category

RetailersBroad-category

Retailers

Outlet Mall Retailers

National, Regional,

& Local Guild -

Fine Jewelry

Stores

National

Jewelry

Chains

Local

JewelersCredit

Jewelers Catalog

Showrooms

Off-Price

Retailers

SmallIndependent

Guild Jewelers

Prestige

Departmentalized

RetailersUpscale

Department

Stores

Chains

Discounters


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Guidel ines: Strateg ic Group Maps

Variables selected as axes should no tbe highlycorrelated

Variables chosen as axes should expose b igdifferences in how rivals compete

Variables do no thave to be either quantitative orcontinuous

Drawing sizes of circles proportional to combined

sales of firms in each strategic group allows mapto reflect relative sizes of each strategic group

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


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In terp ret ing Strateg ic Group Maps

Driving forces and competitive pressuresoften favor some strategic groups and hurtothers

Profit potential of different strategic groupsvaries due to strengths and weaknesses ineach groups market position

The closer strategic groups are on map, thestronger the competitive rivalry amongmember firms tends to be

Quest ion 5: What Strateg ic Moves


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Quest ion 5: What Strateg ic MovesAre Rivals L ikely to Make Next?

A firms own best strategic moves areaffected by

Current strategies of competitors

Actions competitors are likely totake next

Profiling key rivals involves studying

Current position in industryStrategic objectives

Basic competitive approaches


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Competi tor Analys is

Successful strategists take great pains inscouting competitors

Understanding their strategies

Watching their actionsEvaluating their vulnerability to driving

forces and competitive pressures

Sizing up their resource strengths andweaknesses and their capabilities

Trying to anticipate rivals next moves

Catego rizing the Object ives and


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Catego rizing the Object ives andStrateg ies o f Compet i tors

CompetitiveScope

StrategicIntent

Market ShareObjective

CompetitivePosition

StrategicPosture

CompetitiveStrategy

LocalBe dominantleader

Aggressiveexpansion viaacquisition &internalgrowth

Gettingstronger; onthe move

Mostlyoffensive

RegionalOvertakeindustryleader

Well-entrenched

Mostlydefensive

NationalBe amongindustryleaders

Expansionvia internalgrowth

Stuck in themiddle of thepack

Combinationof offensive &defensive

MulticountryMove intotop 10

Expansionvia acquisition

Going after adifferentposition

Aggressiverisk-taker

GlobalMove up anotch inrankings

Hold on to

present share

Struggling;

losing ground

Conservative

follower

Maintaincurrentposition

Give uppresent shareto achieveshort-termprofits

Retrenchingto a positionthat can bedefendedJust survive

Striving forlow-costleadership

Mostlyfocusing on amarket niche

Pursuingdifferentiationbased on

QualityServiceTechnologysuperiority

Breadth of

product lineImage &reputation

More valuefor the money

Otherattributes


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Predic t ing Moves of Rivals

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

Quest ion 6: What Are the Key


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Quest ion 6: What Are the KeyFacto rs fo r Compet it ive Success?

KSFs are competitive elements that most

affect every industry membersability to

prosper in the marketplace

Specific strategy elements

Product attributes Resources

Competencies

Competitive capabilities KSFsspell difference between

Profit and loss

Competitive success or failure

Ident i fy ing Indus try


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Ident i fy ing Indus tryKey Success Facto rs

Answers to three questions pinpointKSFs

On what basis do customers choose betweencompeting brands of sellers?

What must a seller do to be competitively

successful -- what resources and competitivecapabilities does it need?

What does it take for sellers to achieve a

sustainable competitive advantage? KSFsconsist of the3 - 5 really major

determinants of financial and competitivesuccess in an industry


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Example: KSFs for Beer Indus try

Utilization of brewing capacity -- to keepmanufacturing costs low

Strong network of wholesale distributors --

to gain access to retail outlets Clever advertising -- to induce beer drinkers

to buy a particular brand

Example: KSFs for Apparel


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Example: KSFs for ApparelManu factur ing Indus try

Fashion design -- tocreate buyer appeal

Low-cost manufacturing

efficiency -- to keep selling

prices competitive

Example: KSFs fo r Tin and


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Example: KSFs fo r Tin andAlum inum Can Indust ry

Locating plants close to end-usecustomers -- to keep costs of shipping

empty cans low

Ability to market plant output withineconomical shipping distances


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Strategic Management Princ iple

A sound strategy incorporates

efforts to be competent on al l

industry key success factors and

to excel on at leas t one factor!

Quest ion 7: Is the Industry


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Quest ion 7: Is the IndustryA t t ract ive or Unatt ract ive and Why?

Develop conclusions about whether the industryand competitive environment is attract iveor

unattract ive, both near- and long-term, forearning good profits

Objective

Principle

A firm uniquely well-suited in an otherwise

unattractive industry can, under certain

circumstances, still earn unusually good profits

Things to Consider in


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Things to Consider inAssessing Industry A t t ract iveness

Industrys market size and growth potential

Whether competitive conditions are conducive torising/falling industry profitability

Will competitive forces become stronger or

weaker Whether industry will be favorably or unfavorably

impacted by driving forces

Potential for entry/exit of major firms Stability/dependability of demand

Severity of problems facing industry

Degree of risk and uncertainty in industrys future

Conduc t ing an Indus try and


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Conduc t ing an Indus try andCompet it ive Si tuat ion Analys is

Two things to keep in mind:1. Evaluating industry and competitive

conditions cannot be reduced to a

formula-like exercise--thought fu lanalysisis essent ial

2. Sweeping industry and competitiveanalyses need to done every 1 to 3

years


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