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Strategic ManagementStrategic ManagementIndustry and Competitive Industry and Competitive

AnalysisAnalysis

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Prof. Chitra ParthasarathyProf. Chitra Parthasarathy

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Starting pointStarting point Decisions on what strategy to pursue

should flow directly from solid analysis of a company’s external environment and internal situation.

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The two most important The two most important situational considerations situational considerations

1. Industry and competitive conditions2. A Company’s own competitive

capabilities, resources, internal strengths and weaknesses and market position.

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The environmentThe environment All organizations operate in a macro

environment consisting broadly of the economy at large, population demographics, social values and lifestyles, governmental legislation, technological factors and the company’s immediate industry and competitive environment.

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Immediate external Immediate external environmentenvironment

The biggest influence / impact on a

company’s strategy is the company’s immediate industry and competitive environment.

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A RequirementA Requirement Accurate diagnosis of the company’s

situation is a necessary managerial preparation for deciding on a sound Long Term direction, setting appropriate objectives, and designing a winning strategy.

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THINKING STRATEGICALLY ABOUTINDUSTRY AND COMPETITIVECONDITIONSThe Key questions:1. What are the industry’s dominant economic features?2. What is the competition like and how strong are each of the competitive forces?3. What is causing the industry’s competitive structure and business environment to change?4. Which companies are in the strongest/weakest positions?5. What strategic moves are rivals likely to make next?6. What are the key factors for competitive success?7. Is the industry attractive and what are the prospects for above-average profitability?

THINKING STRATEGICALLY ABOUT ACOMPANY’S OWN SITUATIONThe key questions:

1. How well is the company’s present strategy working?2. What are the company’s strengths, weaknesses, opportunities, 3. and threats?4. Are the company’s prices and costs competitive?5. How strong is the company’s competitive position?6. What strategic issues does the company face?

WHAT STRATEGICOPTIONS DOESTHE COMPANYREALISTICALLYHAVE?•Is it locked in toimproving the presentstrategy or is there roomto make major strategychanges?

WHAT IS THE BESTSTRATEGY?The key criteria•Does it have good fitwith the company’ssituation?•Will it help build acompetitive advantage?•Will it help improve thecompany performance?

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Analyzing the industry and Analyzing the industry and competitioncompetition

Industries differ widely in their

economic characteristics, competitive situations and future profit prospects.

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Analyzing the industry and Analyzing the industry and competitioncompetition

The economic character of industries varies

according to such factors as overall size and market growth rate, the pace of technological change, the geographical boundaries of the market (local to world wide) the number and size of buyers and sellers, whether sellers products are virtually identical or highly differentiated, the extent to which costs are affected by economies of scale and the types of distribution channels.

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Methods of AnalysisMethods of Analysis A tool kit of concepts and techniques

to get a clear fix on key industry traits, the intensity of competition, the drivers of industry change, the market position and strategies of rival companies, the keys to competitive success, and the industry’s profit outlook.

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Insightful answers to 7 questionsInsightful answers to 7 questions1. What are the industry’s dominant economic

features?2. What is the competition like and how strong

are each of the competitive forces?3. What is causing the industry’s competitive

structure and business environment to change?4. Which companies are the strongest / weakest

positions?5. What strategic moves are rivals likely to make

note?6. What are the key factors for competitive

success?7. Is the industry attractive and what are the

prospects for above-average profitability?

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Q1: What are the Industry’s Q1: What are the Industry’s dominant economic features?dominant economic features?

An Industry’s economic features help frame the window of strategic approaches a company can pursue.

Industries differ significantly in their basic character and structure. Industries and companies analysis begins with an overview of the industry’s dominant eco featured.

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The factors to considerThe factors to consider• Market size• Scope of competitive rivalry (local,

regional, national and global)• Market growth rate and position in the

business life (early development, rapid growth & take-off, early maturity, maturity, saturation, stagnation and decline)

• The number of rivals and their relative sizes

• Whether and to what extent industry rivals have integrated (backward and/or forward)

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The factors to considerThe factors to consider• The types of distribution channels used to

access consumers.• The pace of technological change in both

production process innovation and new product introductions.

• Whether the products and services of rival firms are highly, weakly or essentially differentiated

• Whether companies can realize economies of scale in purchasing, manufacturing, transportation, marketing or advertising.

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Contd….Contd….

• Whether key individual participants are clustered in a particular location

• Whether high rates of capacity utilization are crucial to achieving low-cost production efficiency

• Capital requirement and the ease of entry and exit.

• Whether individual profitability is above/below par.

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Q2:What is competition like and how strong Q2:What is competition like and how strong are each of the competitive forces?are each of the competitive forces?

Industrial and complete analysis involves delving into the industry’s competitive process to discover what the main sources of competitive pressure are how strong each force is. This analytical step is necessary because managers cannot devise a successful strategy without in-depth understanding of the industry’s competitive character

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A well-proven ModelA well-proven Model

Professor Michael Porter declares that

- the state of the competition in an industry is a composite of Five forces

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Suppliers ofRaw

materials,Parts,

Componentsor other

Resourceinputs

Buyers

Potential New Entrants

Firms in other industries offering substitute products

RivalryAmong

Competing sellersCompetitive

Pressures createdBy jockeying

For betterMarket positionAnd competitive

advantage

Competitive pressures stemming from supplier-seller collaboration and bargaining

Competitive pressures coming from the markets attempts of outsiders to win buyers over to their products

Competitive pressures stemming from supplier-seller collaboration and bargaining

Competitive pressures coming from the markets attempts of outsiders to win buyers over to their products

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Rivalry among competing Rivalry among competing sellers sellers

. In some industry, rivalry is based on attractive combination of performance features, being first to market with attract features out competing with higher quality, offering longer warrantees, superior after sales service, creating a stronger brand image.

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A principle of competitive A principle of competitive MarketsMarkets

Competitive jockeying among rival firms is a dynamic ever-changing process as new offensive and defensive moves are initiated and emphasis swings from one blend of competitive weapons and tactics to another

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The fierce nature of The fierce nature of competitioncompetition

Competitive markets are economic

battlefields. It is dynamic and rivals try to out-compete one another and build customer loyalty.

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Some common factors that Some common factors that influence the tempo of rivalryinfluence the tempo of rivalry

• Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capability.

• Rivalry is usually stronger when demand for the product is growing slowly.

• Rivalry is intense when customers find it easily to switch brands.

• Rivalry is more when it costs more to get out of business than to stay in and compete.

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The potential entry of new The potential entry of new competitioncompetition

The competitive threat of depends on

two factors.1. Barriers to entry2. The expected reaction of incumbent

firms to new entry barriers.

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Types of entry barriersTypes of entry barriers

• Economies of scale• Cost & resource disadvantages

irrespective of size• Learning & experience curve effects.• Inability to match the technical &

specific know-how of existing players.

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More barriersMore barriers• Brand preferences and customer loyalty• Capital requirements• Access to distribution channels• Regulatory policies• Tariffs and internal trade restrictionsWhether an industry’s entry barriers ought

to be considered high or low depends on the resources and competencies possessed by the pool of potential entrants

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Competitive pressures from Competitive pressures from substitute productssubstitute products

Firms in one industry are quite often in

close competition with firms in another industry because their respective products are good substitutes.

.

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Principles of competitive Principles of competitive marketsmarkets

The competitive threat based by

substitute products is strong when substitutes are readily available and attractively priced, buyers believe substitutes have comparable or better features, and buyers’ switching costs are low..

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Principles of competitive Principles of competitive marketsmarkets

The suppliers to a group of rival firms are strong competitive force whenever they have sufficient bargaining buyer to put certain rivals at a competitive disadvantage based on the prices they can command, the quality and performance of the items they supply or the role of their deliveries

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Competitive pressure from Supplier Competitive pressure from Supplier bargaining powerbargaining power

• Suppliers have no bargaining power or leverage over rivals whenever items they provide are freely available from numerous suppliers

• Similarly when good substitutes for the item are available and buyers find it neither costly nor difficult to switch

• Also when it is a major customer

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Competitive pressure from Supplier Competitive pressure from Supplier bargaining powerbargaining power

Major suppliers have strong bargaining power • if an item that accounts for a sizable portion

of the costs of an industry’s product• Is crucial to the industry’s production process• Or significantly aff3ects the quality of the

industry’s product• they have considerable influence on the

competitive processE.g. true when a few suppliers control most of

the available supplies and have pricing leverage

Suppliers with good reputations and growing demand for their output

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Principle of competitive Principle of competitive MarketsMarkets

Buyers are strong competitive force

when they are able to exercise bargaining leverage over price, quality, service, or other terms of sale. High switching costs create buyer lock-in and weaken a buyer’s bargaining power.

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Competitive pressure from Buyer Competitive pressure from Buyer Bargaining and Seller-Buyer Bargaining and Seller-Buyer

collaborationcollaboration

When buyers cost of switching is lowIf buyers well informed about sellers

product, price & costsIf buyers pose credible threat of

backward integrationHave discretion in whether and when

they buy.

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Strategic implications of the 5 Strategic implications of the 5 competitive forcescompetitive forces

A company’s competitive strategy is increasingly effective the more it provides good defenses against the five competitive forces, shifts competitive pressures in ways that favor the company, and helps create sustainable competitive advantage.

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Q3: What is causing industry’s Q3: What is causing industry’s competitive structure and business competitive structure and business

environment to change?environment to change?

Industry conditions change because important forces are driving industry participants (competitors, customers, or suppliers) to alter their actions;

the driving forces in an industry are the major underlying causes of changing industry and competitive conditions.

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The most common driving The most common driving forcesforces

a. The internet and e-commerceb. Increasing globalization of the

industryc. Changes in the LT industry growth

rated. Changes in who buys the product

and how they use ite. Product innovation

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The most common driving The most common driving forcesforces

f. Technological changeg. Market innovationh. Entry/exit of major firmsi. Diffusion of technical know-how

across companies and countriesj. Changes in cost and efficiency

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More of themMore of themk. Regulatory influence and

government policy changesl. Changes societal concerns,

attitudes and lifestylesm. Reduction in uncertainty and

business risk.

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Environment scanningEnvironment scanning Environment scanning techniques

involves studying and interpreting the sweep of social, political, economic, ecological and technological events in an effort to spot budding trends and conditions that could become driving forces.

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Why environmental Why environmental scanning?scanning?

The purpose of environmental

scanning is to raise the awareness of managers about potential developments that could have an important impact on industry conditions and pose new opposition and threats.

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Q4:Which companies are in the Q4:Which companies are in the strongest/weakest positions?strongest/weakest positions?

A technique for revealing the competitive

positions of industry participants is Strategic Group Mapping

A strategic group consists of those rival firms with similar competitive approaches and positions in the market.

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Use of Strategic Group MapsUse of Strategic Group Maps Dividing industry members into

strategic groups allows industry analysts to better understand the pattern of competition in complex industries and to pinpoint a firm’s closest competitors

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Constructing a strategic group Constructing a strategic group mapmap

Identify the competitive characteristics that differentiate firms in the industry – price/quality range, geographic coverage, degree of vertical integration, product-line width, distribution channels, degree of service offered.

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Constructing a strategic group Constructing a strategic group mapmap

• Plot the firm on a two variable map using pairs of these differentiating characteristics.

• Assign firms that fall into the same strategic space to the same strategic group.

• Draw proportional circles around each strategic group to show the group’s share of global industry sales revenue.

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Q5:What strategic moves are Q5:What strategic moves are rivals likely to make next?rivals likely to make next?

A company cannot expect to out maneuver its rivals without monitoring their actions, understanding their strategies and anticipating what moves they are likely to make next.

Competitive intelligence about competitors strategies, monitoring their actions, sizing up their strengths and weaknesses and using what they have learned to anticipate what moves rivals are likely to make next

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Competitive IntelligenceCompetitive Intelligence

Successful strategists take great pains in gathering competitive intelligence about competitors’ strategies, monitoring their actions, sizing up their strengths and weaknesses, and using what they have learned to anticipate what moves rivals are likely to make next.

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Monitoring group’s Monitoring group’s strategiesstrategies

The best source of information comes from examining what it is doing in the market place and from what its management is saying about the company’s plans.

Managers who fail to study competitors closely risk being overtaken by surprise actions

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Q6: What are the key factors for Q6: What are the key factors for company’s success?company’s success?

• Key factors concern the product attributes, competencies, competitive capabilities and market achievements with the greatest direct hearing on company’s profitability.

• An industry’s key success factors are those things that most affect industry members’ ability to prosper in the market place – the particular strategy elements, product attributes, resources, competencies, competitive capabilities and business outcomes that spell the difference between profit and loss and, ultimately, between competitive success or failure.

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Identifying the Key Success Identifying the Key Success FactorsFactors

Three questions help identify an industry’s KSF

• On what basis do customers choose between the competing hands of sellers?

• What product attributes are crucial?• What resources and competitive capabilities

does a seller need to have to competitively successful?

• What does it take for sellers to achieve a sustainable competitive advantage?

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Strategic Management Strategic Management PrinciplePrinciple

A sound strategy incorporates efforts

to be competent on all industry key success factors and to excel on at least one factor

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Q7: Is the industry attractive and what Q7: Is the industry attractive and what are its prospects for greater average are its prospects for greater average

profitability?profitability?

The final step of industry and competency analysis is to use the answers to the previous six questions to draw conclusions about the relative attractiveness/ unattractiveness of the industry, both Short term and Long term.

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Factors on which to base Factors on which to base conclusionsconclusions

• The industry’s growth• Whether company currently permits

adequate profitability and whether company forces will get stronger or weaker.

• Whether industry profitability will be favorably / unfavorably affected by the prevailing driving forces.

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More factorsMore factors• The company’s competitive position in

the industry and whether its position is likely to grow stronger / weaker.

• The company’s potential to capitalize on the vulnerabilities of weaker rivals.

• Whether the company is able to deferred against or counteract the factors that make the industry unattractive.

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Contd…Contd…

• The degree of risk and uncertainty in the industry’s future

• The severity of problems confronting the industry as a whole.

• Whether continued participation in this industry adds importance to the firm’s ability to be successful in other industries in which it may have business interests.