Analysis of the Competitive Environment
Transcript of Analysis of the Competitive Environment
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Analysis of the Competitive
EnvironmentChapter 7
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Quick Review
Analysis of the external environmentincludes:
Analysis of the macroenvironment (farenvironment)
Analysis of the microenvironment (nearenvironment, or competitive environment)
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External Environment
Internal
Environment
External micro
or near environment
External macro or far environment
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Quick Review: Analysis of theMacroenvironment
Tool for analysis: SPENT Analysis
Socio-demographic
Political Economic
Natural Environmental
Technological
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Quick Review: ConductingMacroenvironmental Analysis
Scanning
Monitoring
Forecasting
Assessing
NOTE: The ability to predict trends and changesin the macroenvironment that impact a business,and the ability to make changes based on theprediction, can be a source of competitiveadvantage
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Analysis of the CompetitiveEnvironment: Key Definitions
Macroenvironment
Microenvironment
Industry Market
Switching costs
Substitute products
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Purpose of Analysis ofMicroenvironment (Industry and
Markets) Identify opportunities for competenceleveraging
Understand customers and their needs
Identify current and potential threats
Understand resource markets
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Industry Analysis: Classification
Porter: Industry is a group of businesseswhose products are close substitutes
Other definitions: by production process
Examples: SIC (Standard IndustrialClassification) and NACE (NomenclatureGenerale des Activites Economiques dans les
Communautes Europeenes)
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SIC Examples
Link: UK SIC(92)
Examples: D Manufacturing DA Manufacture of food products, beverages and
tobacco DB Manufacture of textiles
DC Manufacture of leather and leather products
http://www.statistics.gov.uk/methods_quality/sic/contents.asphttp://www.statistics.gov.uk/methods_quality/sic/contents.asp -
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Example: Industry Classification
Philip Morris Headquarters: New York City.
Chairman, chief executive: Geoffrey Bible.
Major tobacco brands: Marlboro, Merit, Basic, Virginia Slims,Cambridge.U.S. cigarette market share: 47.5 percent in 1997, up from 46.3percent in 1996.Cigarette division: Philip Morris USA.Financial highlights: Net income of $6.3 billion, or $7.68 a share, onsales of $68.9 billion.
Other businesses: Kraft Foods, Inc., the largest U.S. food company(Oscar Mayer, Jell-O, Post cereals, Maxwell House); Miller BrewingCo., the No. 2 U.S. brewer (Miller, Red Dog, and Lowenbrau);financial services and real estate.Number of employees: 154,000.
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Industry Analysis Checklist
Location
Location of support and resource markets
Extent of concentration or fragmentation
Product types produced
Levels of output, growth and lifecycleposition
Ownership issues
Other activities of industry members
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Porters 5 Forces Model of IndustryAnalysis
Developed in 1980 to analyze the natureand extent of competition within anindustry
Porter identified 5 competitive forces thatdetermine the nature of competitionwithin an industry
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Bio on Michael Porter
Born 1947
Degree in aeronautical engineering(Princeton); doctorate in economics
(Harvard) Member of the faculty at Harvard
Seminal work: Competitive Strategy
(1980) Other works: The Competitive Advantage
of Nations (1990)
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Porters 5 Forces Model
Threat of new entrants
Threat of substitute products
Power of buyers or customers Power of suppliers
Rivalry among businesses
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Advantage of the Model
According to Porter, businesses can usethe model to identify how to position itselfto take advantage ofopportunities and
overcome threats
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Force 1: Threat of New Entrants
Force 1 depends on the heightofbarriersto entry
Barriers to entry include:
Costs of capital investment needed to enter Regulatory and legal barriers
Brand loyalty and customer switching costs
Economies of scale utilized by existing competitors
Access to suppliers and distributors
Resistance from existing competitors
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Force 2: Threat of SubstituteProducts
Substitute products: products that meetthe same needs
The threat existing from substituteproducts depends upon:
Extent to which price and performance of asubstitute can match the industrys product
Willingness of buyers to switch to thesubstitute
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Example: Threat of substituteproducts
The threat of substitutes makes it difficultto increase prices and improve margins
Example: The price of aluminum cans isrestricted by the threat of substitutes likeglass bottles, steel cans and plasticcontainers
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Force 3: Bargaining Power ofBuyers or Customers
The threat is related to how much power buyersor customers have over the industry (the higherthe power, the lower the price)
Bargaining power of buyers or customersdepends upon:
Number of customers and volume of their purchases
Number and size of businesses supplying the product
Switching costs
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Bargaining Power of Buyers
Monopsony a market where there aremany suppliers and one buyer
Thus, buyer has a great deal of powerover price
In order to decrease the power of buyers,sellers need to find buyers with lowerpower to negotiate, switch suppliers ordevelop offers strong buyers cant refuse
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Force 4: Bargaining Power ofSuppliers
The threat is related to how much powersuppliers have over the industry
Bargaining power of suppliers depends
upon: Uniqueness and scarcity of the supplied
resource
Switching costs
How many industries require the resource
Number and size of resource suppliers
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Example: Bargaining Power ofSuppliers
DeBeers worldwide diamond supplier
DeBeers controls most of the productivediamond mines in the world
Thus, they have extremely high power inthe industry
In this situation, its better to build win-win relationships with the supplier
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Force 5: Intensity of Rivalry
Intensity of rivalry of competitors in the industryis related to competition on both price andnon-price bases
Force 5 is directly related to the other 4 forces,and depends upon:
Height of entry barriers and number and size ofcompetitors
Maturity of the industry
Degree of brand loyalty
Power of buyers and availability of substitutes
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Intensity of Rivalry
Concentrated vs. Fragmented industries SIC classification is useful to assess this portion High concentration ratio means the majority of
market share is held by a few firms Low concentration ratio means the industry has
many rivals, none with significant market share Competitive strategies include:
Changing prices
Improving product differentiation Creatively using channels of distribution Exploiting relationships with suppliers
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Porters 5 Forces and Profit
Force Profitability willbe higher if:
Profitability willbe lower if:
Bargaining power
of suppliers
Weak suppliers Strong suppliers
Bargaining powerof buyers
Weak buyers Strong buyers
Threat of new
entrants
High entry barriers Low entry barriers
Threat ofsubstitutes
Few possiblesubstitutes
Many possiblesubstitutes
Competitive rivalry Little rivalry Intense rivalry
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Criticisms of Porters 5 ForcesModel
Porters 5 Forces is designed to assess industryprofitability. Other argue that company-specific factors(for example, competences) are more important
Implies the five forces apply equally to all competitors in
the industry No consideration of product and resource markets
It cannot be applied without consideration of themacroenvironment
Assumes relationships with competitors, buyers andsuppliers is not cooperative, but competitive
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Co-operative Environment
One of the criticisms of Porters 5 ForcesModel is that it views all relationships ascompetitive, not cooperative
BUT: Most organizations have formal andinformal co-operative relationships withsuppliers and distributors
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Co-operative Environment (Cont.)
Co-operative environment is importantbecause it may:
Help achieve sustainable competitive
advantage
Produce lower costs
Provide sustainable relationships with those
outside the organization
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Analysis of the Co-operativeEnvironment
GovernmentLinks
InformalCo-operative
Links
Organization
ComplementorsFormal
Co-operativeLinks
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Co-operative Links
Informal co-operative links organizations linktogether for mutual or common purposewithout legally binding contracts
Formal co-operative links links bound by somesort of contract
Complementors companies whose productsadd valueto the organizations basic product
Government links relationships withgovernments
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Informal Co-operative Links
Examples: Chambers of Commerce,Industry Associations, Keiretsu (Japan),Chaebol (Korea)
These networks provide strong support forthe organizations which belong to them
Strong support links may provide
competitive advantage
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Formal Co-operative Links
Examples: Joint Ventures, StrategicAlliances
Links can be with suppliers, distributorsand even competitors
Real world examples: Benetton, Toyota,Marks & Spencer
Strong links may deliver lower prices andhigher quality service to the organization
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Complementors
Examples: Software is a complementor ofhardware
Usually, complementors work with theorganization to provide ajoint offering
Real world example: Microsoft
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Government Links
Examples: negotiations with governmenton tax, investment and legal issues;organization lobbies
Real world examples: For companies inthe defense and pharmaceutical industries(Boeing, Smith Kline Beecham), strong
government links are essential
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Co-operative Links: Summary
Co-operative links can be opportunities, and co-operative links of competitors may be threats
Porters 5 Forces analysis focuses on the
competitiveness of relationships, BUT,competitive advantage may be gained throughcooperation
Establishing cooperative links is an emergentapproach to strategy development
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Alternative to 5 Forces Analysis:Resource-based Framework
Resource-based framework is designed tocompensate for disadvantages intraditional models (like Porters 5 Forces)
Emphasizes the importance of corecompetence in achieving competitiveadvantage
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Resource-based Framework
Complicated and comprehensiveanalysis
Analysis of 5 inter-related areas:
Organization
Industry
Product markets
Resource markets
Other industries
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Resource-based Framework
ResourceMarkets
ProductMarkets
Organization
CompanyIndustry
CompetenceRelatedIndustry
OrganizationsProducts
New Markets
Substitutes
SupplierPower
Competitive Rivalry
Threat of new entrants
BuyerPower
Threat ofSubstitutes
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Resource-based Framework:Organization
Focuses on competences, corecompetences, resources and value chain(as we discussed in detail in Chapter 2)
This part of the analysis includes ananalysis of: Resources
Organizational competences, corecompetences and activities
Value chain
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Resource-based Framework:Industry
Focuses on analysis of competitors:
Skills and competences
Configuration of value-adding activities
Technology
Number and size
Performance (focus on financial performance)
Ease of entry and exit (barriers)
Strategic groupings
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A Note on Strategic Groupings
Strategic groups the group of competitorsrepresenting an organizations closestcompetitors
Example: a group of branded clothes including
Polo (Ralph Lauren), Tommy Hilfiger, and Izod(Lacoste), among others, may be a strategicgroup, even though there are other lower qualitybrands that are technically competitors
Example 2: Rolex, Tag Heuer, Tissot may bepart of a strategic group that does not includeSwatch, Timex, Seiko, even though they are allwatchmakers
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Resource-based Framework:Product Markets
Analysis is focused on: Customer needs and satisfaction
Unmet customer needs
Market segments and profitability
Number of competitors to the market and relativemarket share
Number of customers and their purchasing power
Access to distribution channels
Ease of entry
Potential for competence leveraging
Need for new competence building
d b d k
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Product-based Framework:Resource Markets
Resource markets: where organizations obtainfinance, human resources, human resources,physical resources, technological resources
Analysis focuses on: Resource requirements
Number of actual and potential suppliers
Size of suppliers
Potential collaboration with suppliers (cooperation)
Access by competitors to suppliers
Nature of the resource and availability of substitutes
b d k
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Resource-based Framework:Competence-related Industries
Focuses on analysis ofotherindustrieswith similar competences and which mayproduce products that can be substitutes
of the organizations productsAnalysis is useful to identify:
Potential threats
Other industries in which the organizationmay be able to leverage their competences
New markets
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Next Class: Tutorial
UK Outbound tour operations industry, pp.370390
Consider analysis of the industry by Porters 5
Forces Analysis, Resource-based Framework Identify any parts of the value chain
Identify an strategic groups
Discuss the intensity of rivalry in the industry Identify SPENT influences
Identify any cooperative links