Analyzing a Companys External Environment

1
Chapter
Analyzing a Companys External Environment
2
Chapter Outline

• Conducting an Industry and Competitive
• Analysis (ICA)
• Industrys Dominant Economic Traits
• Industrys Competitive Forces
• Driving Forces of Industry Change
• Competitive Positions of Rivals
• Competitive Moves of Rivals
• Key Success Factors
• Conclusions Overall Industry Attractiveness

3
What Is Situation Analysis?

• Two considerations
• Companys external ormacro-environment (Chapter
  3)
• Industry and competitive conditions
• Companys internal ormicro-environment (Chapter
  4)
• Competencies, capabilities,resource strengths
  and weaknesses,and competitiveness

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Q 1 What are the Industrys Dominant
Economic Traits?

• Market size and growth rate
• Scope of competitive rivalry
• Number of competitors and their relative sizes
• Prevalence of backward/forward integration
• Nature and pace of technological change
• Product and customer characteristics
• Scale economies and experience/learning curve
  effects
• Industry profitability

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Table 3.1 Relevance ofKey Economic Features
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Q 2 What Kinds of Competitive Forces Are
Industry Members Facing?

• Objectives are to identify
• Main sources of competitive forces
• Strength of these forces
• Key analytical tool
• Five Forces Modelof Competition

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Fig. 3.3 The Five ForcesModel of
Competition
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Analyzing the Five Competitive Forces How
to Do It

• Step 1 Identify the specific competitivepressur
  es associated with each ofthe five forces
• Step 2 Evaluate the strength of
  eachcompetitive force -- fierce,
  strong,moderate, or weak?
• Step 3 Determine whether the collective
  strengthof the five competitive forces is
  conduciveto earning attractive profits

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Rivalry Among Competing Sellers

• Usually the most critical of the five forces in
  determining the overall strength of competition
  in an industry
• The threat of rivalry is typically higher if
• Active jockeying for position among rivals and
  frequent launches of new offensives to gain
  sales and market share
• 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

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Competitive Forceof Potential Entry

• The threat of entry is stronger when
• Theres a sizable pool of entry candidates
• Entry barriers are low
• Industry growth is rapid and profit potential is
  high
• Incumbents are unwilling or unable to contest a
  newcomers entry efforts

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Common Barriers to Entry

• Sizable economies of scale
• Existence of strong learning/experience curve
  effects
• Strong brand preferences and customer loyalty
• Large capital requirements and/or other
  specialized resource requirements
• Difficulties in gaining access to distribution
  channels
• Regulatory policies, tariffs, trade restrictions

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Competitive Force ofSubstitute Products
Concept

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

Examples

• Eyeglasses and contact lensvs. laser surgery
• Sugar vs. artificial sweeteners
• Newspapers vs. TV vs. Internet

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How to Tell Whether SubstituteProducts Are
a Strong Force

• 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

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Competitive Pressures From Suppliersand
Supplier-Seller Collaboration

• Suppliers are a strong competitive force
  suppliers when they can exercise sufficient
  bargaining leverage toinfluence terms of supply
  in their favor
• Item makes up large portion of product costs, is
  crucial to production process, or significantly
  affects product quality
• It is costly for buyers to switch suppliers
• 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 From Buyersand
Seller-Buyer Collaboration

• Buyers are a strong competitive force when they
  have sufficient bargaining leverage to influence
  terms of sale in their favor
• They buy in large quantities
• They can integrate backward
• Industrys product is standardized
• Their costs in switching to substitutes are low
• They can purchase from several sellers

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Strategic Implications of theFive
Competitive Forces

• Competitive environment is unattractive fromthe
  standpoint of earning good profits when
• Rivalry is vigorous
• Entry barriers are lowand entry is likely
• Competition from substitutes is
  strong
• Suppliers and buyers haveconsiderable bargaining
  power

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Q 3 What Factors Are Driving Industry
Change and What Impacts Will They Have?

• Driving Forces are the major underlying causes of
  changing industry and competitive conditions
• Usually no more than 3 - 5 factors qualify as
  real drivers of change

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Common Types ofDriving Forces

• Increasing globalization of industry
• Changes in long-term industry growth rate
• Changing societal concerns, attitudes, and
  lifestyles
• Product innovation
• Entry or exit of major firms
• Regulatory policies / government legislation

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Question 4 What Market Positions Do Rivals
Occupy?

• One technique to revealdifferent competitive
  positionsof industry rivals isstrategic group
  mapping
• A strategic group is acluster of firms in an
  industrywith similar competitiveapproaches and
  market positions

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Procedure for Constructing a Strategic Group
Map

• STEP 1 Identify competitive characteristics
  that differentiate firms in an industry from one
  another
• STEP 2 Plot firms on a two-variable map using
  pairs of these differentiating characteristics
• STEP 3 Assign firms that fall in about the same
  strategy space to same strategic group
• STEP 4 Draw circles around each group, making
  circles proportional to size of groups
  respective share of total industry sales

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Example Strategic Group Mapof Selected
Retail Chains
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Interpreting StrategicGroup Maps

• Variables selected as axes should not be highly
  correlated
• Variables chosen as axes should expose big
  differences in how rivals compete
• Drawing sizes of circles proportional to combined
  sales of firms in each strategic group allows map
  to reflect relative sizes of each strategic group
• Driving forces and competitive pressures often
  favor some strategic groups and hurt others
  Profit potential of different strategic groups
  varies
• The closer strategic groups are on map, the
  stronger the competitive rivalry among member
  firms tends to be

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Q 5 What Strategic MovesAre Rivals Likely
to Make?

• A firms best strategic moves are affected by
• Current strategies of competitors
• Future actions of competitors
• Profiling key rivals involves gatheringcompetitiv
  e intelligence about
• Current strategies
• Most recent actions and public announcements
• Resource strengths and weaknesses
• Thinking and leadership styles of top executives

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Competitor Analysis

• Sizing up strategies and competitive strengths
  and weaknesses of rivals involves assessing
• Which rival has the best strategy? Which
  rivalsappear to have weak strategies?
• Which firms are poised to gain market share, and
  which ones seen destined to lose ground?
• Which rivals are likely to rank among the
  industry leaders five years from now? Do any
  up-and-coming rivals have strategies and the
  resources to overtake the current industry leader?

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Q 6 What Are the Key Factors for
Competitive Success?

• KSFs are those competitive factors most affecting
  every industry members ability to develop a
  competitive advantage
• KSFs consist of the 3 - 5 major determinants of
  financial and competitive success in an industry
• KSFs are attributes that spell the difference
  between
• Profit and loss
• Competitive success or failure
• See table 3.3 for examples

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Q 7 Does the Outlook for the Industry
Present an Attractive Opportunity?

• Involves assessing whether the industryand
  competitive environment is attractiveor
  unattractive for earning good profits
• Under certain circumstances, a firm
  uniquelywell-situated in an otherwise
  unattractive industrycan still earn unusually
  good profits
• Attractiveness is relative, not absolute
• Conclusions have to be drawn from theperspective
  of a particular company