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