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EXTERNAL ANALYSIS ANALYSIS (INDUSTRY AND COMPETITION)INDUSTRY AND COMPETITION)
Payne
(4)
“Analysis is the critical starting point of
strategic thinking.” Kenichi Ohmae
Key Text Readings: Chapter 2, Chapter 3, Appendix A
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Environmental
Scanning
Environmental
Monitoring
Competitive
Intelligence
Forecasts
ForecastingForecasting: : Involves the development of plausible projections about the direction, scope, speed and intensity of environmental change.
AssessingAssessing
Formulation& Planning
Formulation& Planningprojections
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Environmental Analysis Levels
ConnectConnectFirm
Industry Level
Macro Level
CompetitorsSuppliers
Substitutes Customers
Demographic
TechnologicalPolitical/Legal
Social
Economic
Global
EXTERNAL or MACRO-
ENVIRONMENT
Industry and competitive conditions
(opportunities and threats)
INTERNAL or MICRO-ENVIRONMENT
Its competencies, capabilities, resources, and competitiveness
(strengths and weaknesses)
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Environmental Analysis Levels(of a Health Care Organization)
General Environment
• Government Institutions • Educational Institutions • Religious Institutions• Research Organizations• Consumers
Health Care Environment
• Planning / Regulatory• Primary Providers• Secondary Providers• Provider Representative• Consumers/Patients
Service Area
• Competitors• Government Services• Businesses• Non-profits• Other Locals• Educational Institutions • Individuals/Consumers
OrganizationOrganization
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Macro Environment (1) Socio-cultural segmentSocio-cultural segment
Women in the workplaceWomen in the workplace Workforce diversityWorkforce diversity Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment Shifts in work and career preferencesShifts in work and career preferences Shifts in product and service preferencesShifts in product and service preferences
Political/Legal SegmentPolitical/Legal Segment
Antitrust lawsAntitrust laws Taxation lawsTaxation laws Deregulation philosophiesDeregulation philosophies Labor training lawsLabor training laws Educational philosophies and policiesEducational philosophies and policies
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Economic segmentEconomic segment Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product
Macro Environment (2)
Technological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported R&D Focus of private and government-supported R&D
expendituresexpenditures New communication technologiesNew communication technologies
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Global SegmentGlobal Segment Important political eventsImportant political events Critical global marketsCritical global markets Newly industrialize countriesNewly industrialize countries Different cultural and institutional attributesDifferent cultural and institutional attributes
Macro Environment (3)
DemographicDemographic Population sizePopulation size Age structureAge structure Geographic distributionGeographic distribution Ethnic mixEthnic mix Income distributionIncome distribution
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Segment/Trends/Events Industry Positive Neutral Negative
Demographic Aging population
Rising affluence
Health CareBaby products
Brokerage services Fast foodsUpscale pets and supplies
Sociocultural More women in the workforce Greater concern for health & fitness
ClothingBaking Products (staples)
Home exercise equipmentMeat products
Political/legal Tort reform
ADA (Americans with Disabilities Act)
Legal ServicesAuto Manufacturing
RetailManufacturers of elevators, escalators & ramps
Technological Genetic engineering
Pollution/global warming
PharmaceuticalPublishing
Engineering ServicesPetroleum
Economic Interest Rate Increases Residential construction
Most common grocery products
Global Increasing Global Trade
Emergence of China as an economic power
ShippingPersonal service
Soft drinksDefense
Impact of General Environmental Trends on Various Industries
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Five Forces Model of CompetitionSubstituteProducts(of firms in
other industries)
Rivalry IntensityAmong
CompetingSellers
PotentialNew
Entrants
Suppliers of Key Inputs
Buyers
Threat of New Entrants
Bar
gain
ing
Pow
er o
f B
uyer
sBargain
ing P
ower of S
uppliers
Threat of Substitutes
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Analyzing 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
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Rivalry Among Competing Sellers
Usually the most powerful of the five forces Check which weapons of competitive rivalry
are most actively used by rivals in jockeying for position Price Quality Performance features offered Customer service Warranties/guarantees Advertising/promotions Dealer networks Product innovation
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What Causes Rivalry to Be Stronger?
Lots of firms, more 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 brands One or more firms initiates moves to bolster their
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, and countries of origin
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Competitive Force of Threat of New Entry
Seriousness of threat depends primarily on:
Barriers to entry
Reaction of existing firms to entry
Barriers exist when:
Newcomers confront obstacles
Economic factors put potential entrant at a disadvantage relative to incumbent firms
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Common Barriers to Entry
Economies of scale Inability to gain access to specialized
technology Existence of learning/experience curve effects Strong brand preferences and customer loyalty Capital requirements and/or other specialized
resource requirements Cost disadvantages independent of size Access to distribution channels Regulatory policies, tariffs, trade restrictions
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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
Substitutes’ profits are up
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
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Competitive Force of Substitute Products
Substitutes matter when customers are attracted to the products or services of firms in other industries
Concept
Eyeglasses vs. Contact Lens MD vs. DPM vs. DC Plastic vs. Glass vs. Metal
Examples
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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
Suppliers are a stronger force the more they can exercise power over:
Prices charged Quality/performance of items supplied Amounts and delivery times
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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 standardized Their costs in switching to substitutes or other brands are
low They can purchase from several sellers Product purchased does not save buyer money
Buyers are a stronger competitive force the more they have leverage to bargain over:
Price or Quality or Service Other terms and conditions of sale
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Strategic Implications of the Five 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
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
Objective is to craft a strategy that will: Insulate firm from competitive forces Influence competitive pressures in ways that favor firm Build a sustainable competitive advantage
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Stakeholder Analysis
Stakeholder BStakeholder B Stakeholder CStakeholder C
Stakeholder AStakeholder A
Focal FirmFocal Firm
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Who are Stakeholders?
Identifying stakeholders is one way of sizing up the internal and external constituents that influence the firm. Stakeholders are individuals and groups who can affect and are
affected by a firm’s strategic outcomes and who have enforceable claims on its performance
Stakeholders include individuals, groups, and other organizations who have an interest in the actions of an organization and who have the ability to influence it
Stakeholders may be categorized as internal, interface and external.
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Building Stakeholder Relationships
Managing down Relationships with subordinates
Managing up Relationships with bosses and corporate staff
Managing out Relationships with customers and suppliers
Managing across Relationships with peers
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Stakeholder Analysis
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Internal stakeholders– Management– Professionals– Support Personnel
Interface stakeholders– Shareholders – Board of Directors– Medical Staff
External stakeholders– Suppliers– Competitors– Government Agencies–Patients
Examples of Stakeholder Groups
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Relationships with Stakeholders
Organizations have dependency relationships with stakeholders
Firms are not equally dependent on all stakeholders and not every stakeholder has the same level of influence
An effective organization strategy requires consensus from a plurality of key stakeholders about what it should be doing and how these things should be done
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Key Success Factors Key Success Factors
KSFs or CSFs are competitive elements that most affect every strategic group member’s ability to prosper in the marketplace: Specific strategy elements Product attributes Resources or Competencies Competitive capabilities
KSFs spell difference between: Profit and loss Competitive success or failure
Ask: Ask: For our organization to be successful, we For our organization to be successful, we MUST be especially good at ___________?MUST be especially good at ___________?
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Key Success Factors
A sound strategy incorporates efforts to be competent on all industry key success
factors and to excel on at least one factor!
KSF 1KSF 1
KSF 2KSF 2KSF 3KSF 3
Optimize Optimize PerformancePerformance
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Identifying Key Success Factors
Answers to three questions pinpoint KSFs On what basis do customers choose between
competing brands or offerings of sellers? What must a seller/provider do to be competitively
successful -- what resources and competitive capabilities does it need?
What does it take for sellers/providers to achieve a sustainable competitive advantage?
KSFs consist of the 3 - 5 really major determinants of financial and competitive success in a strategic group.
(Recall our discussion on developing objectives?)
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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 activitiesLow-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 productsStrong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast deliveryFast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertisingSuperior 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 quicklySuperior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-howFavorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection
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Example: KSFs for the Refractive Eye Surgery Industry
High numbers of procedures, which is a component of price, experience, and service.
Low rate of complications and high rate of success (20/20)
Positive word-of-mouth and reputation
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Strategic Group Mapping
One technique for revealing the different competitive positions of industry rivals is strategic group mapping
A strategic group consists of those rivals with similar competitive approaches in an industry
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Strategic Group Mapping
Firms in same strategic group have two 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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Procedure: 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 group’s respective share of total industry sales
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Example: Strategic Group Map of Retail Jewelry Industry
Pri
ce /
Qu
alit
y / I
mag
e
High
Low
Medium
Product Line / Merchandise Mix
Specialty Jewelers Full-line JewelersLimited-category
RetailersBroad-category
Retailers
Outlet Mall Retailers
National, Regional, & Local Guild - “Fine
Jewelry” Stores
National Jewelry Chains
Local Jewelers Credit Jewelers Catalog
Showrooms
Off-Price Retailers
Small Independent
Guild Jewelers
Prestige Departmentalized Retailers
Upscale Department Stores
Chains
Discounters
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Guidelines: Strategic Group Maps
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
Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group
If more than two good competitive variables can be used, several maps can be drawn
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Interpreting Strategic Group Maps(i.e., Implications of the Strategic Groups Concept)
Driving forces and competitive pressures often favor some strategic groups and hurt others – such recognition may be the key to developing a competitive advantage.
Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position. Important niches may be identified that are not currently being filled by competitors.
The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be (“Organizations most like yours are the most dangerous.”)
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Pri
ce /
Qu
alit
y / I
mag
e
High
Low
Medium
Product Line / Merchandise Mix
SpecialtyFull-line
ProvidersLimited-category
RetailersBroad-category
Retailers
Within or Between Strategic Groups
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FerrariLamborghini
Porsche ToyotaFord
GeneralMotors
Chrysler*HondaNissan
Mercedes*BMW
High
HyundaiKia
High
Breadth of Product LineLowLow
Price
The World Automobile Industry
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Geographical Scope
0 10 20 30 40 50 60 70 80
Ver
tica
l Bal
ance
00.
51.
01.
52.
0
NATIONALPRODUCTION COMPANIES
INTEGRATED INTERNATIONAL
MAJORS
NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES
INTEGRATED DOMESTICOIL COMPANIES
Royal Dutch-Shell Gp.
Exxon-Mobil
Statoil
PDVSA
Kuwait Petroleum
Petronas
Petrobras
RepsolNippon
Sunoco
BP-Amoco
ChevronTexaco
Phillips
Pemex
Indian Oil
ENI
INTEGRATED OIL MAJORSINTERNATIONALUPSTREAM,REGIONALLYFOCUSEDDOWNSTREAM
IranNOC
Neste
Ashland
Conoco PhillipsENI
Elf-Fina-TotalRepsol YPF INTERNATIONAL
DOWNSTREAM OIL COMPANIES
INTERNATIONALUPSTREAM
COMPANIES
Dana Petroleum
PremierOil
PetroChinaLukoil
Apache
Valero
Strategic Groups Within the World Petroleum Industry Strategic Groups Within the World Petroleum Industry
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Competitor Analysis and Strength Assessment
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
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Predicting Strategic Moves of RivalsPredicting Strategic Moves of Rivals
A firm’s own best strategic moves are affected by: Current strategies of competitors Actions competitors are likely to take next
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
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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
• Multi-country • Move to 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
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Assessing a Company’s Competitive Strength versus Key Rivals
1. List industry key success factors and other relevant measures of competitive strength
2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted rating system
4. Sum individual ratings to get overall measure of competitive strength for each rival
5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage
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Unweighted Competitive Strength Assessment
KSF/Strength MeasureKSF/Strength Measure
Quality/product performanceQuality/product performance
Reputation/imageReputation/image
Manufacturing capabilityManufacturing capability
Technological skillsTechnological skills
Dealer network/distributionDealer network/distribution
New product innovationNew product innovation
Financial resourcesFinancial resources
Relative cost positionRelative cost position
Customer service capabilityCustomer service capability
Overall strength ratingOverall strength rating
ABC Co.ABC Co. Rival 1Rival 1 Rival 2Rival 2
88 55 1010
88 77 1010
22 1010 44
1010 11 77
99 44 1010
99 44 1010
55 1010 77
55 1010 33
55 77 1010
6161 5858 7171
Rival 3Rival 3
11
11
55
33
55
55
33
11
11
2525
Rival 4Rival 4
66
66
11
88
11
11
11
44
44
3232
Rating Scale: 1 = Very weak; 10 = Very strongRating Scale: 1 = Very weak; 10 = Very strong
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A Weighted Competitive Strength Assessment
KSF/Strength MeasureKSF/Strength Measure
Quality/product performanceQuality/product performance
Reputation/imageReputation/image
Manufacturing capabilityManufacturing capability
Technological skillsTechnological skills
Dealer network/distributionDealer network/distribution
New product innovationNew product innovation
Financial resourcesFinancial resources
Relative cost positionRelative cost position
Customer service capabilityCustomer service capability
Rival 1Rival 1 Rival 2Rival 2
5/0.505/0.50 10/1.0010/1.00
7/0.707/0.70 10/1.0010/1.00
10/1.0010/1.00 4/0.404/0.40
1/0.051/0.05 7/0.357/0.35
4/0.204/0.20 10/0.5010/0.50
4/0.204/0.20 10/0.5010/0.50
10/1.0010/1.00 7/0.707/0.70
10/3.5010/3.50 3/1.053/1.05
7/1.057/1.05 10/1.5010/1.50
ABC Co.ABC Co.
88//0.800.80
8/0.808/0.80
2/0.202/0.20
10/0.5010/0.50
9/0.459/0.45
9/0.459/0.45
5/0.505/0.50
5/1.755/1.75
5/0.755/0.75
Rival 3Rival 3
1/0.101/0.10
1/0.101/0.10
5/0.505/0.50
3/0.153/0.15
5/0.255/0.25
5/0.255/0.25
3/0.303/0.30
1/0.351/0.35
1/0.151/0.15
Rival 4Rival 4
6/0.606/0.60
6/0.606/0.60
1/0.101/0.10
8/0.408/0.40
1/0.051/0.05
1/0.051/0.05
1/0.101/0.10
4/1.404/1.40
4/1.604/1.60
WeightWeight
0.100.10
0.100.10
0.100.10
0.050.05
0.050.05
0.050.05
0.100.10
0.350.35
0.150.15
Sum of weightsSum of weights 1.001.00
Overall strength ratingOverall strength rating 6.206.20 8.208.20 7.007.00 2.102.10 2.902.90
Rating Scale: 1 = Very weak; 10 = Very strongRating Scale: 1 = Very weak; 10 = Very strong