industry and competitive analysis
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© Adapted from Thompson, 1998, McGraw-Hill
INDUSTRY AND INDUSTRY AND COMPETITIVE COMPETITIVE
ANALYSISANALYSIS
“Analysis is the critical starting
point of strategic thinking.”
Kenichi Ohmae“Quote”
© Adapted from Thompson, 1998, McGraw-Hill
What is Competition Like & How Strong Are the Competitive Forces?
To identify
Main sources of competitive forces
Strength of these forces
Key analytical tool
Five Forces Model of Competition
Objective
© Adapted from Thompson, 1998, McGraw-Hill
Five Forces Model of Competition
SubstituteProducts(of firms in
other industries)
RivalryAmong
CompetingSellers
PotentialNew
Entrants
Suppliers of Key Inputs
Buyers
SubstituteProducts(of firms in
other industries)
RivalryAmong
CompetingSellers
PotentialNew
Entrants
Suppliers of Key Inputs
Buyers
© Adapted from Thompson, 1998, McGraw-Hill
Analysing the Five Competitive Forces: How to Do It
Assess strength of each competitive force (Strong? Moderate? Weak? ) Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers
Explain how each force acts to create competitive pressure
Decide whether overall competition is brutal, fierce, strong, normal/moderate, or weak
© Adapted from Thompson, 1998, McGraw-Hill
Rivalry Among Competing Sellers
Usually the most powerful of the five forces
Check which factors of competitive rivalry are most actively used by rivals for position ie
PriceQualityPerformance features offeredCustomer serviceWarranties/guaranteesAdvertising/promotionsDealer networksProduct innovation
© Adapted from Thompson, 1998, McGraw-Hill
Competitive Force of Potential Entry
Seriousness of threat depends on Barriers to entry
Reaction of existing firms to entry
Barriers exist when Newcomers confront obstacles
Environmental factors put potential entrant at a disadvantage relative to incumbent firms (ie economic & technology)
© Adapted from Thompson, 1998, McGraw-Hill
Common Barriers to Entry
Economies of scale Inability to gain access to specialised technology Existence of learning/experience curve effects Strong brand preferences and customer loyalty Capital requirements and/or other specialised resource
requirements Cost disadvantages independent of size Access to distribution channels Regulatory policies, tariffs, trade restrictions
© Adapted from Thompson, 1998, McGraw-Hill
Principle of Competitive Markets
Threat of entry is stronger when:
Entry barriers are low Sizable pool of entry candidates exists Incumbents are unwilling or unable to contest a
newcomer’s entry efforts Newcomer can expect to earn attractive profits
© Adapted from Thompson, 1998, McGraw-Hill
Competitive Force ofSubstitute Products
Substitutes matter when customers are attracted to the products of firms in other industries
Concept
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic vs. Glass vs. Metal
Newspapers vs. TV vs. Internet
Examples
© Adapted from Thompson, 1998, McGraw-Hill
How to Tell Whether Substitute Products Are a Strong Force
Sales of substitutes are growing rapidly
Producers of substitutes are planning to add new capacity
Their profits are up
© Adapted from Thompson, 1998, McGraw-Hill
Principle of Competitive Markets
The 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
© Adapted from Thompson, 1998, McGraw-Hill
Competitive 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
© Adapted from Thompson, 1998, McGraw-Hill
Principle of Competitive Markets
Suppliers are a stronger force the more they can exercise power over:
Prices charged
Quality/performance of items supplied
Amounts and delivery times
© Adapted from Thompson, 1998, McGraw-Hill
Competitive 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 volume quantities
They can integrate backward
Industry’s product is standardised
Their costs in switching to substitutes or other brands are low
They can purchase from several sellers
Product purchased does not save buyer money
© Adapted from Thompson, 1998, McGraw-Hill
Principle of Competitive Markets
Buyers are a stronger competitive force the more they have leverage to bargain over:
Price Quality Service Other terms and conditions of sale
© Adapted from Thompson, 1998, McGraw-Hill
Strategic Implications of theFive Competitive Forces
Competitive environment is unattractive when:
Rivalry is strong
Entry barriers are low
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power
© Adapted from Thompson, 1998, McGraw-Hill
Strategic Implications of theFive Competitive Forces
Competitive environment is ideal when:
Rivalry is moderate
Entry barriers are high
Good substitutes do not exist
Suppliers and customers are in a weak bargaining position
© Adapted from Thompson, 1998, McGraw-Hill
Coping With theFive Competitive Forces
Objective is to craft a strategy that will:
Insulate you from competitive forces
Influence competitive pressures in ways that favour you
Build a sustainable competitive advantage
© Adapted from Thompson, 1998, McGraw-Hill
Competitor Analysis
Successful strategists take great pains in scouting competitors Understanding their strategies Watching their actions Evaluating their vulnerability to driving
forces and competitive pressures Sizing up their resource strengths and
weaknesses and their capabilities Trying to anticipate rivals’ next moves
© Adapted from Thompson, 1998, McGraw-Hill
Categorizing the Objectives and Strategies of Competitors
Competitive Scope
Strategic Intent
Market Share Objective
Competitive Position
Strategic Posture
Competitive Strategy
• Local• Be dominant leader
• Aggressive expansion via acquisition & internal growth
•Getting stronger; on the move
•Mostly offensive
• Regional• Overtake industry leader
•Well-entrenched
•Mostly defensive
• National• Be among industry leaders
• Expansion via internal growth
•Stuck in the middle of the pack
•Combination of offensive & defensive
• Multicountry• Move into top 10
• Expansion via acquisition
•Going after a different position
•Aggressive risk-taker
• Global• Move up a notch in rankings
• Hold on to present share
•Struggling; losing ground
•Conservative follower
• Maintain current position
•Give up present share to achieve short-term profits
•Retrenching to a position that can be defended• Just survive
•Striving for low-cost leadership
•Mostly focusing on a market niche
•Pursuing differentiation based on– Quality– Service– Technology superiority– Breadth of product line– Image & reputation– More value for the money– Other attributes
© Adapted from Thompson, 1998, McGraw-Hill
Predicting Moves of Rivals
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 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 same basic strategy
© Adapted from Thompson, 1998, McGraw-Hill
Question 6: What Are the Key Factors for Competitive Success?
KSFs are competitive elements that most affect every industry member’s ability to prosper in the marketplace Specific strategy elements Product attributes Resources Competencies Competitive capabilities
KSFs spell difference between Profit and loss Competitive success or failure
© Adapted from Thompson, 1998, McGraw-Hill
Identifying IndustryKey Success Factors
Answers to three questions pinpoint KSFs On what basis do customers choose between
competing brands of sellers? What must a seller do to be competitively
successful -- what resources and competitive capabilities does it need?
What does it take for sellers to achieve a sustainable competitive advantage?
KSFs consist of the 3 - 5 really major determinants of financial and competitive success in an industry
© Adapted from Thompson, 1998, McGraw-Hill
Common Types of Key Success Factors
Technology-related
Manufacturing-related
Distribution-related
Marketing-related
Skills-related
Organizational capability
Other types
Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities
Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products
Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery
Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising
Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly
Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how
Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection
© Adapted from Thompson, 1998, McGraw-Hill
Example: KSFs for Beer Industry
Utilization of brewing capacity -- to keep manufacturing costs low
Strong network of wholesale distributors -- to gain access to retail outlets
Clever advertising -- to induce beer drinkers to buy a particular brand
© Adapted from Thompson, 1998, McGraw-Hill
Example: KSFs for Apparel Manufacturing Industry
Fashion design -- to create buyer appeal
Low-cost manufacturing efficiency -- to keep selling
prices competitive
© Adapted from Thompson, 1998, McGraw-Hill
Example: KSFs for Tin and Aluminum Can Industry
Locating plants close to end-use customers -- to keep costs of shipping empty cans low
Ability to market plant output within economical shipping distances
© Adapted from Thompson, 1998, McGraw-Hill
Strategic Management Principle
A sound strategy incorporates
efforts to be competent on all
industry key success factors and
to excel on at least one factor!
© Adapted from Thompson, 1998, McGraw-Hill
Question 7: Is the IndustryAttractive or Unattractive and Why?
Develop conclusions about whether the industry and competitive environment is attractive or
unattractive, both near- and long-term, for earning good profits
Objective
Principle
A firm uniquely well-suited in an otherwise unattractive industry can, under certain
circumstances, still earn unusually good profits
© Adapted from Thompson, 1998, McGraw-Hill
Things to Consider inAssessing Industry Attractiveness
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
© Adapted from Thompson, 1998, McGraw-Hill
Conducting an Industry andCompetitive Situation Analysis
Two things to keep in mind:
1. Evaluating industry and competitive conditions cannot be reduced to a formula-like exercise--thoughtful analysis is essential
2. Sweeping industry and competitive analyses need to done every 1 to 3 years
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