Microenvironment analysis

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Microenvironment analysis
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Awareness of competitive forces can help a
company stake out a position in its industry
that is less vulnerable to attack.
Michael E. Porter Competitive
Strategy
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The Objectives of Competitive Analysis

• To understand how industry structure drives
  competition, which determines the level of
  industry profitability
• To assess industry attractiveness
• To use evidence on changes in industry structure
  to forecast future profitability
• To formulate strategies to change industry
  structure to improve industry profitability
• To identify Key Success Factors

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Competitive Forces AssessmentPorters Five Forces
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Competitive Forces AssessmentPorters Five Forces
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Who is my competitor?
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Industry CompetitionRivalry Among Competitors
(2)

• Industry Growth
• If the industry is growing, theres more room for
  everybody less pressure on the firm
• Product Differentiation
• If products are differentiated, markets are in a
  sense, segmented

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Strategic Group Analysis

• Strategic groups is a cluster of companies in an
  industry
• Groups of companies clustered around prezent a
  similar competitive approach or strategic
  position
• Companies in a group are similar to each other
  but different from companies in other groups

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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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Variables to be used

• Variables selected as axes should NOT be highly
  correlated
• Variables chosen as axes should expose BIG
  differences in how rivals compete
• Variables do NOT have to be either quantitative
  or continuous

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Video Game Industry
Video arcades, coin-operated machines
Arcade operators
Publishers of games on CD-ROMs
Home PCs
Sony, Sega, Nintendo, several others
Types of Video Game Suppliers/Distribution
Channels
Video game consoles
MSN Gaming Zone, Pogo.com, America Online, HEAT,
Engage, Oceanline, TEN
Online game sites
Low (Coin-operated equipment)
Medium (Video players cost 100-300)
High (Use PC)
Overall Cost to Players of Video Games
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Interpretation

• Identify factors that prevent firms in one groups
  from competing with companies in other groups
• Evaluate the degree of rivalry between groups
• Recognize groups strengths and weaknesses
• Identify the strategic group that represents the
  greatest opportunity

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Identify next step

• Create a new group
• Move to a better group
• Strengthen the existing group
• Strengthen companys position within existing
  group
• Move to a new group and make it better

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Strategic Maps of the United States Airline
Industry
The Late 1970s
The Early 1990s
International
Pan Am
International
Laker
World
North west
Braniff
Eastern
Geographic Scope
National
National
Continental
South- west
Western
Republic
Ozark
USAir
Piedmont
America West
AirCal
Kiwi
Frontier
South- west
Others
PSA
RenoAir
Texas Intl
Regional
Regional
No Frills
No Frills
Full Service
Full Service
Quality of Service
Quality of Service
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Build a strategic group map based on the data
below
Small independent Zabka Chata Polska Polo Market PSS Spolem Minimal
No of stores Up to 2 More than 10 More than 10 3-10 3-10 Up to 2
Area of average store (m2) up 100 up 100 up 100 100-400 100-400 More than 400
Intensity of marketing activities low medium medium medium medium high
Asortment narrow narrow narrow narrow narrow narrow
Price level medium high high low low low
Market share 53,2 11,2 4,7 5,1 22,0 3,8
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Competitive Forces AssessmentPorters Five Forces
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New Entrants Barriers to Entry

• Economies of Scale
• To the extent that there are economies of scale,
  it will be difficult for a new firm to come in
  and compete with established firms.
• Product Differentiation
• To the extent that the firms products are
  distinct and non-copiable, new firms wont be
  able to come in and take away customers.
• Brand Identification
• To the extent that there is brand identification,
  customers will remember the firms product and
  will resist switching.
• Switching Cost
• If it is costly for the customer to switch, new
  entrants wont be able to convince them to do so.

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New Entrants Barriers to Entry

• Access to Distribution Channels
• If the firm has preferential or monopolistic
  access to distribution channels, it is more
  resistant to competition.
• Capital Requirements
• If capital requirements are high, new
  under-capitalized firms wont be able to enter
  the industry.
• Access to Latest Technology
• If technology is important in the industry, new
  firms are less likely to have access to them,
  which is good for established firms.
• Experience and Learning Effects
• If experience is necessary for a firm to figure
  out how to operate efficiently, established firms
  have a distinct advantage.

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Barriers to Entry Examples

• Regulatory restrictions (e.g. banking license)
• brand names (e.g. Xerox, McDonalds can develop
  customer loyalty hard to develop and/or imitate)
• patents (illegal to exploit without ownership
  e.g. new drugs)
• unique know-how (e.g. WalMarts hot docking
  technique of logistics management)

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Competitive Forces AssessmentPorters Five Forces
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• Number of Important Suppliers
• The fewer the number of important suppliers, the
  more power they have over the firm.
• Availability of Substitutes for the Suppliers
  Products
• This would reduce supplier power
• Differentiation or Switching Costs of Suppliers
  Products
• If its difficult for the firm to switch to other
  suppliers, the current suppliers can charge more

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• Suppliers Threat of Forward Integration
• To the extent that suppliers might potentially
  themselves become competitors, they are less
  reliable and need to be looked at strategically
• Suppliers Contribution to Quality or Service of
  the Industry Products
• How crucial are suppliers in the maintenance of
  the quality of industry products? If very
  crucial, this will increase supplier power.
• Importance of the Industry to Suppliers Profits

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Competitive Forces AssessmentPorters Five Forces
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• Number of Important Buyers
• The greater the number of important buyers, the
  less power does the firm have to manipulate
  prices
• Availability of Substitutes for the Industry
  Products
• The impact of this on price elasticity of demand
  for the industrys products is obvious.
• Buyers Switching Costs
• This is relevant both in terms of switching to
  competitors products and switching to products
  manufactured by other industries.
• Buyers Threat of Backward Integration
• The buyer might choose to integrate backward and
  manufacture his input goods, himself. This means
  that buyers have to be looked at strategically.

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Competitive Forces AssessmentPorters Five Forces
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• Substitutes matter when customers are attracted
  to the products of firms in other industries

Examples

• Eyeglasses and contact lens v. laser surgery
• Sugar v. artificial sweeteners
• Newspapers v. TV v. Internet

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Threat of substitutes depend on

• Availability of Close Substitutes
• Users Switching Costs
• Substitute Producers Profitability and
  Aggressiveness
• Where is the substitute product located on the
  Price/Value dimensions?