Session 3 ObjectivesSession 3 Objectives

Consider how business environments and external forces affect business strategy

Explore how industry structure and position create opportunities for competitive advantage

Analyze industries, competitors, and sustainability of different strategic options

Learn how to use strategic group mapping

The Strategy Design ProcessThe Strategy Design Process

Strategic Analysis Strategic Choice Strategy Implementationand Evaluation

Evaluate The Current

Situation

Evaluate theStrategies

Results

Implement theStrategy

Craft Changes in Structure

and Processes

Develop Action Plans, Programs,

and Processes

Analyze Resources and Internal Capabilities

IdentifySustainableCompetitiveAdvantage

Craft and Communicate

Vision and Mission

Evaluate andSelect Strategy

Establish the Basis for Sustainable

Competitive Advantage

Generate FeasibleAlternativeStrategies

CreateSustainableCompetitiveAdvantage

Feedback and Rethinking

SelectSustainableCompetitiveAdvantage

Develop a Strategic Control System

Understand and Critique Current Strategy

Analyze Industry and External Environment

Understand Industry Context and Competition

Develop Strategic Goals and Specific Long Term Objectives

Environmental Analysis to Industry AnalysisEnvironmental Analysis to Industry AnalysisEnvironmental Analysis to Industry AnalysisEnvironmental Analysis to Industry Analysis

Situation AnalysisSituation Analysis

IdentifyStrategic Optionsfor the

Company

Select the Best Strategyfor the

Company

Question 1: What are the Industry’s Question 1: What are the Industry’s Dominant Economic Traits?Dominant Economic Traits?

Market size and growth rate Scope of competitive rivalry Number of competitors and 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

Relevance of Key Economic FeaturesRelevance of Key Economic Features

Question 2: What is Competition Like Question 2: What is Competition Like and and How Strong Are the Competitive Forces?How Strong Are the Competitive Forces?

Objective is to identify

◦ Main sources of competitive forces

◦ Strength of these forces Key analytical tool

◦ Five (Six) Forces Model of Competition

Porter’s Five Forces of Porter’s Five Forces of CompetitionCompetition

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

Rivalry Between Established Rivalry Between Established CompetitorsCompetitors

The extent to which industry profitability is depressed by aggressive price competition depends upon:

◦ Concentration (number and size distribution of firms)

◦ Diversity of competitors (differences in goals, cost structure, etc.)

◦ Product differentiation◦ Excess capacity and exit barriers◦ Cost conditions

Extent of scale economies Ratio of fixed to variable costs

The Threat of EntryThe Threat of Entry

The extent to which entrants threaten industry

profitability depends upon the height of barriers to

entry. The principal sources of barriers to entry are:

Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to channels of distribution Legal and regulatory barriers Retaliation

Threat of SubstitutesThreat of Substitutes

Extent of competitive pressure from producers of

substitutes depends upon:

◦ Buyers’ propensity to substitute

◦ The price-performance characteristics of substitutes.

◦ Profitability of the substitute industry

SUPPLIERS

POTENTIALENTRANTS

SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrantsThreat of

substitutes

COMPLEMENTS

The suppliers of complements create value for the industry

and can exercise bargaining power

Five Forces or Six? Five Forces or Six? Introducing Introducing ComplementsComplements

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

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

Dynamic CompetitionDynamic Competition

Porter framework assumes industry structure drives competitive behavior Industry structure is largely stable

But---competition also changes industry structure Schumpeterian Competition: A “perennial

gale of creative destruction” where innovation overthrows established market leaders

Hypercompetition: “intense and rapid competitive moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsoleting, or neutralizing opponents’ competitive advantages

Question 3: What Forces Are atQuestion 3: What Forces Are atWork to Change Industry Work to Change Industry Conditions?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

1. 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

2. Assess impact– What difference will the forces make -

favorable? unfavorable?

Common Types of Driving ForcesCommon Types of Driving Forces

Entry or exit of major firms Diffusion of technical knowledge and innovations Changes in cost and efficiency Shift from standardized to differentiated products Regulatory policies / government legislation Changing societal concerns, attitudes, and lifestyles Changes in degree of uncertainty and risk Internet and e-commerce opportunities Increasing globalization of industry

Changes in long-term industry growth rate

Changes in nature of product usage

Product innovation/technological change

Question 5: What Strategic Moves Question 5: What Strategic Moves Are Rivals Likely to Make Next?Are Rivals Likely to Make Next?

A firm’s own best strategic moves are affected by

◦ Current strategies of competitors

◦ Future actions of competitors

Profiling key rivals involves gathering competitive intelligence about their:

◦ Current strategies

◦ Most recent moves

◦ Resource strengths and weaknesses

◦ Announced plans

Competitor AnalysisCompetitor Analysis

Predicting Moves of Predicting Moves of RivalsRivals

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 or industry intelligence 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 the same basic strategy

Framing strategic decisions as interactions between competitorsPredicting outcomes of competitive situations involving a few players

Some key concepts:1. Competition and Cooperation—Game theory can show conditions

where cooperation more advantageous than competition2. Deterrence—changing the payoffs in the game in order to deter

a competitor from certain actions3. Commitment—irrevocable deployments of resources that

give creditability to threats4. Signaling—communication to influence a competitor's decision

Problems of game theory:1. Useful in explaining past competitive behavior—weak in predicting future

competitive behavior.2. What’s the problem? — Multitude of models, outcomes highly sensitive

to small changes in assumptions

The Contributions of Game Theory to Competitive Analysis

Question 6: What are the Key Question 6: What are the Key Factors Factors for Competitive Success?for Competitive Success? Competitive elements most affecting every

industry member’s ability to prosper

◦ Specific strategy elements

◦ Product attributes

◦ Resources

◦ Competencies

◦ Competitive capabilities KSFs spell the difference between

◦ Profit and loss

◦ Competitive success or failure

Identifying Key Success Identifying Key Success FactorsFactors

Prerequisites for success

Analysis of demand

• Who are our customers?

• What do they want?

KEY SUCCESS FACTORS

Analysis of competitionAnalysis of competition

• What drives competition?What drives competition?

• What are the main What are the main dimensions of competition?dimensions of competition?

•How intense is competition?How intense is competition?

•How can we obtain a superior How can we obtain a superior competitive position?competitive position?

What do What do customers want?customers want?

How does the firm How does the firm survive competitionsurvive competition

Segmentation Analysis: Principal Segmentation Analysis: Principal Stages Stages

Identify key variables

and categories.

Construct a segmentation matrix

Analyze segment attractiveness

Identify KSFs in each segment

Analyze benefits of

broad vs. narrow scope.

Identify segmentation variablesReduce to 2 or 3 variablesIdentify discrete categories for each variable

Potential for economiesof scope across segmentsSimilarity of KSFsProduct differentiation benefitsof segment focus

The Basis for Segmentation: Customer and Product The Basis for Segmentation: Customer and Product CharacteristicsCharacteristics

Opportunities forDifferentiation

Characteristics of the Buyers

Characteristics of the Product

Industrial buyers

Household buyers

Distribution channel

Geographicallocation

*Size*Technical sophistication*OEM/replacement

*Demographics*Lifestyle*Purchase occasion

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Physical size *Price level*Product features *Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

Segmentation and Key Success Factors in the U.S. Segmentation and Key Success Factors in the U.S. Bicycle IndustryBicycle Industry

SEGMENT

Low price bicycles sold primarily through department and discount stores, mainly under the retailer’sown brand (e.g. Sears’ “Free Spirit”);

KEY SUCCESS FACTORS

* Low-costs through global sourcing of components & low-wage assembly.* Supply contract with major retailer.

Leading competitors: Taiwanese & Chinese assemblers,some U.S manufacturers, e.g. Murray Ohio, Huffy

Medium-priced bicycles sold primarily under manufacturer’s brandname and distributed mainly throughspecialist bicycles stores;

*Cost efficiency through large scale operation and either low wages or automated manufacturing.*Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers.* International marketing & distribution.

Leading competitors: Raleigh, Giant, Peugeot, Fuji (Japan).

*Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance).*Reputation (e.g. through success in racing, through effective brand management).*Strong dealer relations.Leading competitors: K2, Specialized, Trek

Similar to low-price bicycle segment.

High-priced bicycles for enthusiasts.

Children’s bicycles (and tricycles) soldprimarily through toy retailers (discount toy stores, department stores, and specialist toy stores).

Question 7: Is the IndustryQuestion 7: Is the IndustryAttractive or Unattractive and Attractive or Unattractive and Why?Why?

Develop conclusions about whether the industry and competitive environment is attractive or unattractive, both near- and long-term, for earning good profits

A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

Issues to Consider inIssues to Consider inAssessing Industry Assessing Industry AttractivenessAttractiveness Industry’s market size and growth potential Whether competitive conditions are conducive to

rising/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 industry’s

future

Nov 1984 Feb 1996

July 2000 Feb 2004

Historically, what were Apple’s major competitive advantages? Have they changed over time? Why?

How has the structure of the PC industry changed over the last 20 years? What new opportunities for competitive advantage have these changes created?

Evaluate Apple’s strategies since 1990. Have they developed a sustainable competitive advantage?

Has Steve Jobs finally solved Apple’s long-standing problems with the Mac business and Apple’s broader strategic position?

What should Apple do today?

Apple Computer

A strategic group is a group of firms in an industry following the same or similar strategy.

Identifying strategic groups:• Identify principal strategic variables that distinguish firms.• Position each firm in relation to these variables.• Identify clusters.

Question 4: Which Companies are in Strongest / Weakest Positions?

Steps in the construction of Steps in the construction of strategic group maps:strategic group maps:

1. Identify two important competitive characteristics that strategically differentiate firms in an industry from one another.

2. Plot the firms on the two-variable map.3. Draw circles around the firms that are

clustered together.4. Indicate potential movement of firms

with arrows.

Strategic Groups in the Strategic Groups in the World Automobile IndustryWorld Automobile Industry

Broad

PRODUCT RANGERANGE

Narrow

National GEOGRAPHICAL SCOPE Global

NATIONALLY- FOCUSED, SMALL, SPECIALIST

PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.),

Morgan (U.K.)

NATIONALLY FOCUSED, INTERMEDIATE LINE

PRODUCERS e.g. Tofas, Kia, VAZ, Maruti

REGIONALLY FOCUSED BROAD-LINE PRODUCERS

e.g. Fiat, PSA, Renault, Rover, Chrysler

PERFORMANCE CAR PRODUCERS

e.g., Porsche, Maserati, Lotus

LUXURY CAR MANUFACTURERS e.g.,

Jaguar, Rolls Royce, Daimler-Benz, BMW

GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu,

Suzuki, Saab, Hyundai

GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW

Strategic Groups Within the World Strategic Groups Within the World Petroleum IndustryPetroleum Industry

Geographical Scope

0 10 20 30 40 50 60 70 80

Ver

tica

l Bal

ance

00.

51.

01.

52.

0

INTERNATIONALDOWNSTREAM OIL COMPANIES

PRODUCTION COMPANIES

INTEGRATED INTERNATIONAL MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Neste Petrofina

ChevronShell

TotalMobil

Exxon

Statoil

PDVSA Kuwait

Unocal Arco

Petrobras ENI

Repsol

NipponSun

BP

Texaco

Elf

Phillips

Amoco

Indian Oil

Elf

ENI

DIVERSIFIED MAJORS

Hamel, “Strategy as Revolution”Hamel, “Strategy as Revolution”

Strategic planning is often not strategic Strategy making should be subversive The bottleneck is at the top of the bottle Revolutionaries exist in every company Change is not the problem, engagement is Strategy making must be democratic Anyone can be a strategy activist Perspective is worth 50 IQ points Top-down and bottom up are not the only

alternatives You cannot see the end from the beginning

How to Start a How to Start a RevolutionRevolution

Re-conceive your product or service◦ Radically improve the value equation◦ Separate form and function◦ Achieve joy of use

Re-define the market space◦ Push the bounds of universality◦ Strive for individuality◦ Increase accessibility to your products

Re-draw industry boundaries◦ Rescale the industry◦ Compress the supply chain◦ Drive convergence between industries