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SITATION ANALYSIS OUTLINE
Role of Situation Analysis in Strategy-Making Methods of Industry & Competitive Analysis
Profiling Industry’s Dominant Economic Traits Analyzing Industry’s Competitive Forces Analyzing Drivers of Industry Change Assessing Competitive Positions of Rivals Predicting Competitive Moves of Rivals Pinpointing Key Success Factors Drawing Conclusions About Overall Industry
Attractiveness Conducting an Industry & Competitive Analysis
1
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WHY DO A SITUATION ANALYSIS?Identify features in a firm’s external & internal
environment which frame its window ofSTRATEGIC OPTIONSOPPORTUNITIES
Focuses on two considerations:EXTERNAL factors: MACRO environment
(industry & competitive conditions) INTERNAL factors: MICRO environment
(firm’s internal situation & competitive position)
Objective
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Figure 3-1: How Strategic Thinking and Analysis Lead to Good Choices
Thinking StrategicallyAbout Industry
and CompetitiveConditions
Thinking StrategicallyAbout a Company’s
Own Situation
IdentifyingStrategic Options
Open to the Company
Choice ofThe Best Strategy
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KEY QUESTIONS REGARDING EXTERNAL ENVIRONMENT
1. Industry’s dominant economic traits
2. Competitive forces at work in industry & strength
3. Drivers of change in industry
4. Firms in strongest/weakest competitive positions
5. Competitive moves of rivals
6. Key factors determining competitive success or failure in industry
7. Attractiveness of industry
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IDENTIFYING AN INDUSTRY’S DOMINANT ECONOMIC TRAITS
Market size & growth rate/stage in life cycle Scope of competitive rivalry Number of competitors & relative sizes Prevalence of backward/forward integration Entry/exit barriers Nature & pace of technological change Product & customer characteristics Scale economies & experience curve effects Capacity utilization & capital requirements Industry profitability
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EXPERIENCE CURVE EFFECTS
An experience curve exists when unit costs decline as cumulative production volume increases due to Increased KNOWLEDGE about or FAMILIARITY with the process
The bigger the experience curve effect, the bigger the cost advantage of the firm with Largest CUMULATIVE production volume
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Figure 3-2: Comparison of Experience Curve Effects
$1
$1 90
80
70
81
64
49
72.9
51.2
34.3
10% CostReduction
20% CostReduction
30% CostReduction
1MillionUnits
2MillionUnits
4MillionUnits
8MillionUnits
Co
st p
er U
nit
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EXPERIENCE CURVE EFFECTS
When a strong learning/experience curve effect causes unit costs to decline
substantially as cumulative production volume builds, a strategy to become the
largest volume manufacturer can offer the COMPETITIVE ADVANTAGE of being the
industry’s LOWEST-COST producer!
Basic Concept
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ANALYSIS OF COMPETITIVE FORCES
To identify Main SOURCES of competitive forces and STRENGTH of these pressures
Objective
COMPETITIVE FORCES MATTER BECAUSE:To be successful, strategy must be designed
to cope effectively with competitive pressures -objective must be to build a strong, marketposition based on competitive advantage!
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Figure 3-3: The Five Forces Model of Competition: A Key Analytical Tool
SubstituteProducts
RivalryAmong
CompetingSellers
PotentialNew
Entrants
Suppliers Buyers
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THE FIVE COMPETITIVE FORCES
1. RIVALRY among competing sellers in an industry
2. SUBSTITUTE PRODUCTS offered by firms in OTHER industries
3. Potential ENTRY of new competitors
4. Bargaining power of SUPPLIERS
5. Bargaining power of BUYERS
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PROCEDURE: ANALYZING THE FIVE COMPETITIVE FORCES
Identify main sources of competitive pressures Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers
Assess strength of each competitive force Strong? Moderate? Weak? Scale of 1 - 5: 1 = weak; 5 = strong
Explain how each competitive force works & its role in overall competitive picture
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RIVALRY AMONGCOMPETING SELLERS
Usually the MOST POWERFUL of the five competitive forces
Weapons of COMPETITIVE RIVALRY Price Quality Performance features offered Customer service Warranties and guarantees Advertising & special promotions Dealer networks Product innovation
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PRINCIPLES OFCOMPETITIVE RIVALRY
Use of various competitive weapons byrivals to out maneuver one another shapes
Rules of competition & Requirements for competitive success
A powerful competitive strategylaunched by one firm INTENSIFIES
competitive pressures on rivals!
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PRINCIPLE OFCOMPETITIVE MARKETS
Competitive jockeying among rival firms is a dynamic process as
Firms initiate new offensive & defensive moves
Emphasis swings from one mix of competitive weapons to another
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WHAT CAUSES RIVALRYTO BE STRONGER?
Lots of firms, equal in size and capability, exit Demand for product growing slowly Industry conditions tempt firms to use competitive
weapons to boost volume Switching costs incurred by customers are low A firm initiates moves to bolster its standing at
expense of rivals 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, & countries of origin
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COMPETITIVE FORCEOF POTENTIAL ENTRY
New entrants boost competitive pressures By bringing new production capacity into play Through actions to build market share
Seriousness of threat of entry depends on BARRIERS to entry Expected REACTION of existing firms to entry
Barriers to entry exist WHEN It is difficult for newcomers to enter market A new entrant’s small sales volume puts it a
price/cost disadvantage
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COMMON BARRIERS TO ENTRY
Economies of scale Inability to gain access to specialized
technology Existence of learning/experience curve effects Brand preferences and customer loyalty Capital requirements Cost disadvantages independent of size Access to distribution channels Regulatory policies Tariffs & international trade restrictions
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REACTION OF EXISTING FIRMSCAN BE AN ENTRY BARRIER
WHEN existing firms Indicate they’ll aggressively defend their
position Have substantial resources to wage defense Can use leverage with customers to keep their
business THEN potential entrants likely to be discouraged
by Prospects of a costly struggle Strong threat of competitive retaliation
WHICH makes entry barriers HIGHER
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WHEN IS POTENTIAL ENTRY A STRONG COMPETITIVE FORCE?
Competitive threat of outsiders entering a market is stronger when
Entry barriers are low Incumbent firms do not vigorously
fight newcomer Newcomer can expect to earn
attractive profits
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COMPETITIVE FORCE OFSUBSTITUTE PRODUCTS
SUBSTITUTES matter when products of firms in another industry enter the market picture
Eyeglasses vs. Contact Lens Sugar vs. Artificial Sweeteners Plastic Containers vs. Glass vs. Tin vs. Aluminum Aspirin vs. Other Types of Pain Relievers
Concept
Examples
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WHY SUBSTITUTEPRODUCTS MATTER
Competitively priced substitutes can place CEILING on PRICES industry can charge for its product
Price ceiling can place LID on PROFITS industry members can earn
Availability of substitutes invites customers to make QUALITY & PERFORMANCE comparisons as well as PRICE comparisons
The lower the SWITCHING COSTS, easier it is for customers to shift to substitute products
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INDICATORS OF STRENGTHOF SUBSTITUTE PRODUCTS
Growth rate of sales of substitutes
Market inroads of substitutes
Plan of manufacturers of substitutes to
expand capacity
Profits of firms producing substitutes
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PRINCIPLE OFCOMPETITIVE MARKETS
Competitive threat of substituteproducts is strong when
Prices of substitutes are viewed attractive by buyers
Buyers’ costs of switching to substitutes are low
Buyers view substitutes as having equal or better performance features
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COMPETITIVE FORCE OF SUPPLIERS
Suppliers are a strong competitive force whenwhen Item makes up large portion of costs of product,
is crucial to production process, and/or significantly affects product quality
It is costly for buyers to switch suppliers They have good reputations & growing demand
for their product 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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PRINCIPLE OF COMPETITIVE MARKETS
Whether suppliers are a strong or weak competitive force depends on if they have
bargaining power to put rivals at a competitive disadvantage based on:
Prices they can command Quality & performance of items supplied Reliability of deliveries Other terms & conditions of supply
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COMPETITIVE FORCE OF BUYERS
Buyers are a strong competitive force when They are large & purchase a sizable percentage
of industry’s product They buy in volume quantities They incur low costs in switching to substitutes They have flexibility to purchase from several
sellers Selling industry’s product is standardized They can integrate backward Product being purchased does NOT save buyer
money or has low value to buyer
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PRINCIPLE OFCOMPETITIVE MARKETS
Buyers become a stronger competitive force the more they can exercise
bargaining leverage over
Price Quality Service Other terms & conditions of sale
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STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES
Competitive environment is unattractive when:
Rivalry is very strong Entry barriers are low Competition from substitutes is
strong Suppliers & customers have
considerable bargaining power
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STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES
Competitive environment is ideal when: Rivalry is only moderate Entry barriers are relatively high There are no good substitutes Suppliers & customers are in a weak
bargaining position
The weaker the competitive forces, the GREATER an industry’s PROFITS!
Principle
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COPING WITH THEFIVE COMPETITIVE FORCES
A company whose strategy and market
position provide a GOOD DEFENSE
against the five forces can earn above-
average profits even when some or all
of the five forces are strong!
Concept
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COPING WITH THEFIVE COMPETITIVE FORCES
Objective is to craft a strategy that will Insulate company from competitive
forces Influence industry’s competitive rules in
company’s favor Provide a strong position from which
“to play the game” of competition Help create sustainable competitive
advantage
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IDENTIFYING & ASSESSINGDRIVING FORCES
Industry conditions change because EXTERNAL FORCES are DRIVING industry participants to alter their actions
DRIVING FORCES are the MAJOR UNDERLYING CAUSES of changing industry & competitive conditions
Concept
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IDENTIFYING & ASSESSINGDRIVING FORCES
Role of driving forces analysis in strategy-making
Indicates EXTERNAL FACTORS likely to have greatest impact on a firm over next 1 - 3 years
Must assess difference driving forces will make to be able to craft a strategy responsive to emerging conditions
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DRIVING FORCES ANALYSIS
Analysis of driving forces has two steps
1. Identifying RELEVANT driving forces
2. ASSESSING IMPACT they will have
Task of driving forces analysis is: SEPARATE MAJOR causes of industry
change from MINOR ones IDENTIFY the THREE or FOUR driving
forces likely to have greatest impact on a firm over next 1 - 3 years
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TYPES OF DRIVING FORCES
Changes in long-term industry growth rate Changes in who buys the product & how
they use it Product innovation Technological change/process innovation Marketing innovation Entry or exit of major firms Diffusion of technical knowledge
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TYPES OF DRIVING FORCES
Increasing globalization of industry Changes in cost and efficiency Shifting from standardized to differentiated
products (or vice versa) Regulatory influences & government policy
changes Changing societal concerns, attitudes, &
lifestyles Changes in degree of uncertainty & risk
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ENVIRONMENTAL SCANNING
A broad-ranging effort to monitor & interpret social, political, economic, ecological, & technological
events in an effort to spot budding trends & conditions that could eventually impact industry
Raise consciousness of managers about potential developments that could Have important impact on industry conditions Pose new opportunities & threats
Definition
Purpose
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ASSESSING COMPETITIVE POSITIONS: STRATEGIC GROUPS
A STRATEGIC GROUP consists of those rival firms with similar competitive approaches & positions in an industry
A STRATEGIC GROUP MAP displays different competitive positions that rival firms occupy
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STRATEGIC GROUP MAPS
Firms in same strategic group have one 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
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COMPETITOR ANALYSIS
A firm’s strategic moves are affected by
Current strategies of competitors
Actions competitors are likely to take next Profile of key competitors involves studying:
Current position in industry
Strategic objectives & recent actions
Basic competitive approaches
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COMPETITOR ANALYSIS
Successful strategists take great pains in scouting competitors by
Understanding their strategies Watching their actions Evaluating their vulnerability to driving
forces & competitive pressures Sizing up their strengths & weaknesses Trying to anticipate rivals’ next moves
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PREDICTING MOVESOF RIVAL COMPETITORS
Predicting rivals’ next moves involves Analyzing current competitive positions Examining public pronouncements about
what it will take to be successful in industry Gathering information from grapevine about
current activities & potential changes Studying past actions & leadership Determining who has flexibility to make
major strategic changes & who is locked into pursuing same basic strategy
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PRINCIPLE
Managers who fail to study
competitors closely risk being
blindsided by “surprise” actions
on the part of competitors!
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PINPOINTING INDUSTRYKEY SUCCESS FACTORS
KEY SUCCESS FACTORS (KSFs) spell difference between Profit & loss Competitive success or failure
A KEY SUCCESS FACTOR can be Specific skill or talent Competitive capability Something a firm must do to satisfy
customers
Basic Concept
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PINPOINTING INDUSTRY KEY SUCCESS FACTORS
Identifying KSFs is top priority as they are good cornerstones of a firm’s strategy Winning COMPETITIVE ADVANTAGE
often hinges on being distinctively better than rivals at one or more of the KSFs
KSFs consist of the 3 - 5 really major determinants of financial & competitive success in industry
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EXAMPLE: INDUSTRYKEY SUCCESS FACTORS
Utilization of brewing capacity - to keep manufacturing costs low
Developing a strong network of wholesale distributors - to gain access to retail outlets
Clever advertising - to induce beer drinkers to buy a particular brand
Beer/Brewing Industry
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EXAMPLE: INDUSTRYKEY SUCCESS FACTORS
Fashion design - to create buyer appeal
Low-cost manufacturing efficiency - to keep selling prices competitive
Apparel Manufacturing Industry
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EXAMPLE: INDUSTRYKEY SUCCESS FACTORS
Locating plants close to end-use customers - to keep costs of shipping empty cans low
Ability to market plant output within economical shipping distances
Tin & Aluminum Can Industry
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STRATEGIC MANAGEMENT PRINCIPLE
A sound strategy
incorporates industry
key success factors!
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CONCLUSION: OVERALLINDUSTRY ATTRACTIVENESS
To review overall situation & develop conclusions about relative attractiveness or unattractiveness
of the industry, both near- and long-term
A firm uniquely well-suited in an otherwise unattractive industry can, under certain
circumstances, still earn unusually good profits
Objective
Principle
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ASSESSING OVERALLINDUSTRY ATTRACTIVENESS
Industry’s market size & growth potential Whether industry will be favorably or unfavorably
impacted by driving forces Potential for entry/exit of major firms Stability/dependability of demand Will competitive forces become stronger or weaker Severity of problems facing industry Degree of risk & uncertainty in industry’s future Whether competitive conditions are conducive to
rising/falling industry profitability
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CONDUCTING AN INDUSTRY & COMPETITIVE SITUATION ANALYSIS
Two things to consider:
1. Task of analyzing a firm’s EXTERNAL situation cannot be reduced to a formula-like exercise
2. Sweeping industry & competitive analyses need to done every 1 to 3 years