Ii 1 externalanalysistools

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Industry & Competitor Analysis

Industry & Competitor Analysis Tools

9/24/12

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Elements of Strategic Management


Implementation• Business plan• Resource allocation• Organizational

design/∆

Arenas

Vehicles M&A 4C

Differentiators

Staging &

Pacing Economic

Logic

External Analysis (OT)

• PESTEL• 5 Forces• Game theory

Internal Analysis (SW)

• Value chain• VRINE• Corporate value

Strategy

StructurePeople

ProcessesRewards

Symbols

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Industry & Competitor AnalysisAgenda

PESTEL framework for analyzing the macro environment (beyond the industry).

Industry Analysis: What determines the overall profitability of an industry? How will it change over time? How can firms use this information to

formulate strategy? Competitor analysis & game

theory. How do we predict our rivals actions?

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Analysis of Macro Environment (PESTEL)

Technological

Economic Socio-Cultural

Legal

Political

Environmental

Industry

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Econ 101 RecapMonopoly

Numerous firms.No market power: Price-takers on identical products.

Free entry & exit.Long-run: Economic profits driven to zero. (Good for consumers & society, bad for firms)

One firm.Market power: Choose price to maximize profit subject to demand.

No entry or exit.Long-run: Positive economic profits. (Good for firm, bad for consumers & society)

A few firms. Outcome depends on how firms compete: Bertrand:

Competition on price. Quantity adjusts to demand.

Cournot: Competition on quantity. Price adjusts to demand.

Collusion: Firms choose price cooperatively.

Perfect Competition

Oligopoly

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If concentration were the main factor, what would we

see?

Industry Concentration

Ind

ustr

y P

rofi

tab

ilit

y

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0%

1%

2%

3%

4%

5%

6%

0% 20% 40% 60% 80% 100%

Ind

us

try

Me

dia

n R

OS

8-Firm Concentration Ratio

Book publishing

Process-control instruments

Flour

Alkalies & chlorine

Why does this diverge from expectations?

What factors explain performance differences across industries.

Industry Concentration v. Profitability 24 Industries

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Competitive Positioning I: Porter’s

Generic Strategies

Low Cost Uniqueness

Cost Leadership

Differentiation

Focused Low Cost

Focused Differentia

tion

Broad Marke

t

Narrow

Market

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Trends Affect Industries Differently

Technological

Economic Socio-Cultural

Legal

Political

Environmental

Industry Environment

Industry Environment

Buyer Power

Supplier Power

Entry Barriers

Substitute

Products

Rivalry

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Concentration is only one Element of Profitability

Potential

RivalrySupplier Power

Entry Barriers

Substitute

Products

Buyer Power

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Threat of Entryis Highest When:

Low economies of scale/capital requirements

Undifferentiated product Incumbents cannot retaliate easily

Restrict access to distribution channels or suppliers

Limit pricing

No critical proprietary knowledge/technology

No network externalities No government/legal barriers

Buyer Power

Supplier Power

Entry Barriers

Substitute

Products

Rivalry

Entry Barriers

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Note on Entry Barriers Two types of entry barriers:

Structural: Inherent natural advantages that incumbents have simply by their incumbency – no action is required.

Strategic: Active entry-deterring behavior by incumbents (e.g., pre-emptive capacity expansion or “limit pricing”).

Opposite effects on industry profits: Structural barriers tend to increase industry

profits since they keep out entrants at no additional cost.

Strategic barriers may decrease industry profits, since they impose costs on incumbents (e.g., reduced margins from limit pricing, or costs of excess capacity).

Always know which type of barrier you’re talking about!

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Buyer Poweris Highest When:

Buyers are large and concentrated/little rivalry

Undifferentiated products reduce switching costs

Buyer can backward integrate (in-source) Buyers know the cost structure Product represents a large % of buyers’

total costs Product has little impact on the quality of

the buyers’ final outputBuyer Power

Supplier Power

Entry Barriers

Substitute

Products

Rivalry

Buyer Power

Supplier Power

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Supplier Poweris Highest When:

Buyer Power

Supplier Power

Entry Barriers

Substitute

Products

Rivalry

Buyer Power

Supplier Power

Suppliers are large and concentrated/little rivalry

Differentiated products increase switching costs between vendors and/or substitute products

Suppliers can forward integrate Focal industry represents a small % of

suppliers’ business

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Threat of Substitutesis Highest When:

Substitute product/service is comparable or superior (in the price/performance relationship)

Low switching costs for buyers (redesign, retooling, etc.)

Buyers are highly price sensitive

Buyer Power

Supplier Power

Entry Barriers

Substitute

Products

Rivalry

Substitute

Products

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Rivalry Can Be a Blast

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Intra-Industry Rivalryis Fiercest When:

Large number of competitors in industry. Industry is stagnant or declining. Opportunity to spread fixed or sunk

costs: Excess capacity Large fixed cost investment. High storage costs for product.

Competitors’ costs differ. Product is undifferentiated. Buyers have low switching costs. Exit barriers are high.

Buyer Power

Supplier Power

Entry Barriers

Substitute

Products

RivalryRivalry

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Note on Meaning of “Rivalry”

“Rivalry” here mainly means intensity of competition that erodes margins.

The focus is mainly on price competition since it directly erodes margins.

In most cases, differentiation-based competition protects or increases margins resulting in greater industry profitability.

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How can you use the 5-forces model?

Market entry/exit based on forecasts of prices, costs, & profits.

Positioning: Find ways to mitigate the greatest threats among the 5 forces (supply chain, switching costs, entry barriers, etc.)

Industry evolution: Anticipate & prepare for changes in the 5 forces.

Industry transformation: Find ways to change the 5 forces to your advantage (new business models, etc.).

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Industry & Competitor AnalysisAgenda

PESTEL framework for analyzing the macro environment (beyond the industry).

Industry Analysis: What determines the overall profitability of an industry? How will it change over time? How can firms use this information to

formulate strategy? Competitor analysis & game

theory. How do we predict our rivals actions?

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Can you beat the prisoner’s dilemma?

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Is this a Prisoner’s Dilemma?

RedC D

BlueB

A N

$500

$50

$550

$55

$1000

$1100

$100

$110

Prisoner’s Dilemma? • Dominant strategies?• Nash equilibrium?• Pareto inefficient?

TwoOneYes

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Sequential/Extended Form Games

Apple 100Samsung 50

Apple 50Samsung 75

Apple 50Samsung -50

Apple 25Samsung -25

Continue Collaborating

Samsung Competes

Samsung drops out

Samsung stays in

Apple ++Samsung +

Apple +Samsung ++

Apple +Samsung --

Apple -Samsung -

Apple

Samsung

Outsource chip

Add capability Samsung

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Behavioral Approach to Anticipating Rivals’ Responses

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Using Resources to Predict rivals’ actions: timing & magnitude

Motivation/Perceived

Threat

Rival’s Response

(e.g., lag, order,magnitude)

Awarenessof Rival

Ability toRespond

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ResourceSimilarity

Market Commonali

ty

Rival Cognition

Awareness & Motivation: How to stay under the radar…

Is firm in same

league?

Do the mkts overlap?

Is firm viewed as a

threat?

Motivation/Perceived

Threat

Rival’s Response

(e.g., lag, order,magnitude)

Awarenessof Rival

Ability toRespond

Resource Strength

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Implementation• Business plan• Resource allocation• Organizational

design/∆

Arenas

Vehicles M&A 4C

Differentiators

Staging &

Pacing Economic

Logic

External Analysis (OT)

• PESTEL• 5 Forces• Game theory

Internal Analysis (SW)

• Value chain• VRINE• Corporate value

Strategy

StructurePeople

ProcessesRewards

Symbols

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