INDUSTRY AND COMPETITIVE ANALYSIS

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Analysis is the critical starting point of strategic thinking.Kenichi Ohmae

Things are always different--the art is figuring out which differences matter.Laszlo Birinyi

What is Situation Analysis?What is Situation Analysis?

Company’s internal or micro-environment:

Competencies, capabilities, resource strengths and weaknesses, and

competitiveness.

Company’s external or macro-environment:

Dominant Industry Traits, Key Drivers, and overall Competitive conditions.

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A firm spend time to do Situational Analysis to better know its available choices.A firm spend time to do Situational Analysis to better know its available choices.

Components of Macro-environmentComponents of Macro-environment

Legislation and

Regulation

Societal Values and

LifestylesPopulation

Demographics

Technology

The Economy at Large

COMPANY

Suppliers Substitutes

Buyers

NewEntrants

Rival Firms

IMMEDIATE INDUSTRY

AND COMPETITIVE ENVIRONMENT

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Question#1: Industry’s Dominant Economic Traits?Question#1: Industry’s Dominant Economic Traits?

Market size and growth rate.

Scope of competitive rivalry.

Number of competitors and their relative sizes & their growth trends.

Prevalence of backward/forward integration.

Entry/exit barriers.

Importance, 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 EffectThe Experience Curve Effect

An experience curve exists when a company’s unit costs decline as its

cumulative production volume increases because of:

Accumulating production know-how.

Growing mastery of the technology.

The bigger the experience curve effect, the bigger the cost advantage of the

firm with the largest cumulative production volume.

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Relevance of Key Economic FeaturesRelevance of Key Economic Features

ECONOMIC FEATURE

Market Size

Market growth rate

Capacity surpluses/shortages

Industry profitability

Entry/exit barriers

Product is big-ticket item for buyers

Standard products

Rapid technological change

Capital requirements

Vertical integration

Economies of scale

Rapid product innovation

STRATEGIC IMPORTANCE

Small markets don’t tend to attract new firms; large markets attract firms looking 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 make existing firms vulnerable to entry

More buyers will shop for lowest price

Buyers have more power because it’s easier to switch from seller to seller

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

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

Raises capital requirements; often creates competitive & cost differences among 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 for leapfrogging

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FIVE FORCES MODEL OF COMPETITION

PotentialNew Entrants

Suppliers of Key Inputs

Buyers

Substitute Products(of firms in

other industries)

RivalryAmong

CompetingSellers

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Question#2: What is Competition Like & How Strong are the Competitive Forces?

Question#2: What is Competition Like & How Strong are the Competitive Forces?

Rivalry Among Competing SellersRivalry Among Competing Sellers

Usually the most powerful of the five forces; The big factor determining the

strength of rivalry is how actively and aggressively are rivals employing the

various weapons of competition in jockeying for a stronger market position and

seeking bigger sales:

Is price competition vigorous?

Active efforts to improve quality?

Are rivals racing to offer better performance features?

Are rivals racing to offer better customer service?

Lots of advertising/sales promotions?

Active efforts to build a stronger dealer network?

Active product innovation?

Active use of other weapons of rivalry?

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What Causes Rivalry to be Stronger?What Causes Rivalry to be Stronger?

Active jockeying for position among rivals and frequent launches of new offensives

to gain sales and market share:

One or more firms initiates moves to bolster their standing at expense of rivals.

Lots of firms that are relatively equal in size and capability.

Slow market growth.

Industry conditions tempt some firms to go on the offensive to boost volume and

market share.

Customers have low costs in switching to rival brands.

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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Competitive Force of Potential EntryCompetitive Force of Potential Entry

Seriousness of threat depends on:

Barriers to entry; barriers exist when:

Newcomers confront obstacles.

Economic factors put potential entrant at a disadvantage relative to

incumbent firms.

Reaction of existing firms to entry.

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Common Barriers to EntryCommon Barriers to Entry

Sizable economies of scale.

Inability to gain access to specialized technology.

Existence of strong learning/experience curve effects.

Strong brand preferences and customer loyalty.

Large capital requirements &/or other specialized resource requirements.

Cost disadvantages independent of size.

Difficulties in gaining access to distribution channels.

Regulatory policies, tariffs, trade restrictions.IND

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Concept:

Substitutes matter when customers are attracted to the products of firms in other

industries.

Examples:

Eyeglasses vs. Contact Lens.

Sugar vs. Artificial Sweeteners.

Newspapers vs. TV vs. Internet.

eMail vs. Overnight Delivery.

Competitive Force of Substitute ProductsCompetitive Force of Substitute Products

How to Tell Whether Substitute Products are a Strong Force?How to Tell Whether Substitute Products are a Strong Force?IN

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Competitive threat of substitutes is stronger when they are:

Readily available.

Attractively priced.

Believed to have comparable or better performance features.

Customer switching costs are low.

Key Indicators:

Rapid growth in sales/profits of substitutes.

Producers of substitutes planning to add capacity.

Competitive Pressures: Suppliers & Supplier-Seller CollaborationCompetitive Pressures: Suppliers & Supplier-Seller Collaboration

Whether supplier-seller relationships represent a weak or strong competitive

force depends on:

Whether suppliers can exercise sufficient bargaining leverage to influence

terms of supply in their favor.

Extent and competitive importance of collaborative partnerships between one

or more sellers and their suppliers.

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Competitive Force of SuppliersCompetitive Force of Suppliers

Suppliers are a strong competitive force when:

Item makes up large portion of product costs, is crucial to production

process, and/or significantly affects product quality.

It is costly for buyers to switch suppliers.

They have good reputations and growing demand.

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.

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Competitive Pressures: Sellers-Suppliers CollaborationCompetitive Pressures: Sellers-Suppliers Collaboration

Rival sellers are forming long-term strategic partnerships with select suppliers

to:

Promote just-in-time deliveries and reduced inventory and logistic costs.

Speed availability of next-generation components.

Enhance quality of parts being supplied.

Reduce suppliers’ costs which paves way for lower prices on items supplied.

Competitive advantage potential may accrue to industry rivals doing the best

job of managing supply-chain relationships.

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Suppliers are a stronger force the more they can exercise power over:

Prices charged.

Quality and performance of items supplied.

Reliability of deliveries.

Competitive Pressures: Buyers-Seller-Buyer CollaborationCompetitive Pressures: Buyers-Seller-Buyer Collaboration

Whether seller-buyer relationships represent a weak or strong competitive

force depends on:

Whether buyers have sufficient bargaining leverage to influence terms of

sale in their favor.

Extent and competitive importance of collaborative partnerships between

one or more sellers and their customers.

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Competitive Force of BuyersCompetitive Force of Buyers

Buyers are a strong competitive force when:

They are large and purchase a sizable percentage of industry’s product.

They buy in large quantities.

They can integrate backward.

Industry’s 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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Competitive Pressures: Sellers-Buyers CollaborationCompetitive Pressures: Sellers-Buyers Collaboration

Partnerships are an increasingly important competitive element in business-to-

business relationships:

Collaboration may result in mutual benefits regarding:

Just-in-time deliveries.

Order processing.

Electronic invoice payments.

On-line sharing of sales at the cash register.

Competitive advantage potential may accrue to industry rivals who do the best

job of managing seller-buyer partnerships.

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Strategic Implications of the 5 Competitive ForcesStrategic Implications of the 5 Competitive Forces

Competitive environment is unattractive from the standpoint of earning

good profits when:

Rivalry is strong.

Entry barriers are low and entry is likely.

Competition from substitutes is strong.

Suppliers and customers have considerable bargaining power.

Competitive environment is ideal from a profit-making standpoint when:

Rivalry is moderate.

Entry barriers are high and no firm is likely to enter.

Good substitutes do not exist.

Suppliers and customers are in a weak bargaining position.

Coping with the 5 Competitive ForcesCoping with the 5 Competitive Forces

Objective is to craft a strategy:

To insulate firm from competitive forces.

To help make the “rules,” placing added pressure on rivals.

Which allows firm to define the business model for the industry.

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Question#3:What Forces are at Work to Change Industry Conditions?

Question#3:What Forces are at Work to Change Industry Conditions?

Industries change because forces are driving industry participants to alter their

actions.

Driving forces are the major underlying causes of changing industry and competitive

conditions.

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ANALYZING DRIVING FORCES

Identify those forces likely to exert greatest influence over next 1-3 years; Usually no

more than 3 - 4 factors qualify as real drivers of change.

• Assess impact: What difference will the forces make - favorable? unfavorable?

Common Types of Driving-ForcesCommon Types of Driving-Forces

e-commerce opportunities.

Globalization.

Long-term industry growth rate.

Who buys the product and how they use it.

Innovation: Product, Technological, Marketing etc.

Entry or exit of major firms.

Diffusion of technical knowledge.

Changes in cost and efficiency.

Market shift from standardized to differentiated products (or vice versa).

Policies / legislation.

Societal concerns, attitudes, and lifestyles.

Degree of uncertainty and risk.

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Question#4: Assessment of Competitive PositionsQuestion#4: Assessment of Competitive PositionsIN

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STRATEGIC GROUP MAPPINGSTRATEGIC GROUP MAPPING

Firms in same strategic group have two 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.

Emphasize same types of distribution channels.

Offer buyers similar services.

Use identical technological approaches.

World Automobile Industry – Strategic Groups MapWorld Automobile Industry – Strategic Groups MapIN

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Video Game Industry – Strategic Groups MapVideo Game Industry – Strategic Groups MapT

ypes

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Supp

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Overall Cost to Players of Video Games

Low(Coin-operated

equipment)

Medium (Console players cost

$100-$300)

High (Use PC)

Arcades

Home PCs

Video game consoles

Online/Internet

Sony, Sega, Nintendo, several

others

Arcade operators Publishers of

games on CD-ROMs

MSN Gaming Zone, Pogo.com, America

Online, HEAT, Engage, Oceanline, TEN

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