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Session 3 ObjectivesSession 3 Objectives
Consider how business environments and external forces affect business strategy
Explore how industry structure and position create opportunities for competitive advantage
Analyze industries, competitors, and sustainability of different strategic options
Learn how to use strategic group mapping
The Strategy Design ProcessThe Strategy Design Process
Strategic Analysis Strategic Choice Strategy Implementationand Evaluation
Evaluate The Current
Situation
Evaluate theStrategies
Results
Implement theStrategy
Craft Changes in Structure
and Processes
Develop Action Plans, Programs,
and Processes
Analyze Resources and Internal Capabilities
IdentifySustainableCompetitiveAdvantage
Craft and Communicate
Vision and Mission
Evaluate andSelect Strategy
Establish the Basis for Sustainable
Competitive Advantage
Generate FeasibleAlternativeStrategies
CreateSustainableCompetitiveAdvantage
Feedback and Rethinking
SelectSustainableCompetitiveAdvantage
Develop a Strategic Control System
Understand and Critique Current Strategy
Analyze Industry and External Environment
Understand Industry Context and Competition
Develop Strategic Goals and Specific Long Term Objectives
Environmental Analysis to Industry AnalysisEnvironmental Analysis to Industry AnalysisEnvironmental Analysis to Industry AnalysisEnvironmental Analysis to Industry Analysis
Situation AnalysisSituation Analysis
IdentifyStrategic Optionsfor the
Company
Select the Best Strategyfor the
Company
Question 1: What are the Industry’s Question 1: What are the Industry’s Dominant Economic Traits?Dominant Economic Traits?
Market size and growth rate Scope of competitive rivalry Number of competitors and their relative sizes Prevalence of backward/forward integration Entry/exit barriers Nature and pace of technological change Product and customer characteristics Scale economies and experience curve effects Capacity utilization and resource requirements Industry profitability
Relevance of Key Economic FeaturesRelevance of Key Economic Features
Question 2: What is Competition Like Question 2: What is Competition Like and and How Strong Are the Competitive Forces?How Strong Are the Competitive Forces?
Objective is to identify
◦ Main sources of competitive forces
◦ Strength of these forces Key analytical tool
◦ Five (Six) Forces Model of Competition
Porter’s Five Forces of Porter’s Five Forces of CompetitionCompetition
SUPPLIERS
POTENTIALENTRANTS SUBSTITUTES
BUYERS
INDUSTRYCOMPETITORS
Rivalry amongexisting firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new entrants
Threat of
substitutes
Rivalry Between Established Rivalry Between Established CompetitorsCompetitors
The extent to which industry profitability is depressed by aggressive price competition depends upon:
◦ Concentration (number and size distribution of firms)
◦ Diversity of competitors (differences in goals, cost structure, etc.)
◦ Product differentiation◦ Excess capacity and exit barriers◦ Cost conditions
Extent of scale economies Ratio of fixed to variable costs
The Threat of EntryThe Threat of Entry
The extent to which entrants threaten industry
profitability depends upon the height of barriers to
entry. The principal sources of barriers to entry are:
Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to channels of distribution Legal and regulatory barriers Retaliation
Threat of SubstitutesThreat of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
◦ Buyers’ propensity to substitute
◦ The price-performance characteristics of substitutes.
◦ Profitability of the substitute industry
SUPPLIERS
POTENTIALENTRANTS
SUBSTITUTES
BUYERS
INDUSTRYCOMPETITORS
Rivalry amongexisting firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new entrantsThreat of
substitutes
COMPLEMENTS
The suppliers of complements create value for the industry
and can exercise bargaining power
Five Forces or Six? Five Forces or Six? Introducing Introducing ComplementsComplements
Competitive Force of BuyersCompetitive 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 large 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
Competitive Force of SuppliersCompetitive 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
Dynamic CompetitionDynamic Competition
Porter framework assumes industry structure drives competitive behavior Industry structure is largely stable
But---competition also changes industry structure Schumpeterian Competition: A “perennial
gale of creative destruction” where innovation overthrows established market leaders
Hypercompetition: “intense and rapid competitive moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsoleting, or neutralizing opponents’ competitive advantages
Question 3: What Forces Are atQuestion 3: What Forces Are atWork to Change Industry Work to Change Industry Conditions?Conditions? Industries change because forces are driving
industry participants to alter their actions
Driving forces are the major underlying causes of changing industry and competitive conditions
1. Identify those forces likely to exert greatest influence over next 1 - 3 years
– Usually no more than 3 - 4 factors qualify
as real drivers of change
2. Assess impact– What difference will the forces make -
favorable? unfavorable?
Common Types of Driving ForcesCommon Types of Driving Forces
Entry or exit of major firms Diffusion of technical knowledge and innovations Changes in cost and efficiency Shift from standardized to differentiated products Regulatory policies / government legislation Changing societal concerns, attitudes, and lifestyles Changes in degree of uncertainty and risk Internet and e-commerce opportunities Increasing globalization of industry
Changes in long-term industry growth rate
Changes in nature of product usage
Product innovation/technological change
Question 5: What Strategic Moves Question 5: What Strategic Moves Are Rivals Likely to Make Next?Are Rivals Likely to Make Next?
A firm’s own best strategic moves are affected by
◦ Current strategies of competitors
◦ Future actions of competitors
Profiling key rivals involves gathering competitive intelligence about their:
◦ Current strategies
◦ Most recent moves
◦ Resource strengths and weaknesses
◦ Announced plans
Competitor AnalysisCompetitor Analysis
Predicting Moves of Predicting Moves of RivalsRivals
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 or industry intelligence 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 the same basic strategy
Framing strategic decisions as interactions between competitorsPredicting outcomes of competitive situations involving a few players
Some key concepts:1. Competition and Cooperation—Game theory can show conditions
where cooperation more advantageous than competition2. Deterrence—changing the payoffs in the game in order to deter
a competitor from certain actions3. Commitment—irrevocable deployments of resources that
give creditability to threats4. Signaling—communication to influence a competitor's decision
Problems of game theory:1. Useful in explaining past competitive behavior—weak in predicting future
competitive behavior.2. What’s the problem? — Multitude of models, outcomes highly sensitive
to small changes in assumptions
The Contributions of Game Theory to Competitive Analysis
Question 6: What are the Key Question 6: What are the Key Factors Factors for Competitive Success?for Competitive Success? Competitive elements most affecting every
industry member’s ability to prosper
◦ Specific strategy elements
◦ Product attributes
◦ Resources
◦ Competencies
◦ Competitive capabilities KSFs spell the difference between
◦ Profit and loss
◦ Competitive success or failure
Identifying Key Success Identifying Key Success FactorsFactors
Prerequisites for success
Analysis of demand
• Who are our customers?
• What do they want?
KEY SUCCESS FACTORS
Analysis of competitionAnalysis of competition
• What drives competition?What drives competition?
• What are the main What are the main dimensions of competition?dimensions of competition?
•How intense is competition?How intense is competition?
•How can we obtain a superior How can we obtain a superior competitive position?competitive position?
What do What do customers want?customers want?
How does the firm How does the firm survive competitionsurvive competition
Segmentation Analysis: Principal Segmentation Analysis: Principal Stages Stages
Identify key variables
and categories.
Construct a segmentation matrix
Analyze segment attractiveness
Identify KSFs in each segment
Analyze benefits of
broad vs. narrow scope.
Identify segmentation variablesReduce to 2 or 3 variablesIdentify discrete categories for each variable
Potential for economiesof scope across segmentsSimilarity of KSFsProduct differentiation benefitsof segment focus
The Basis for Segmentation: Customer and Product The Basis for Segmentation: Customer and Product CharacteristicsCharacteristics
Opportunities forDifferentiation
Characteristics of the Buyers
Characteristics of the Product
Industrial buyers
Household buyers
Distribution channel
Geographicallocation
*Size*Technical sophistication*OEM/replacement
*Demographics*Lifestyle*Purchase occasion
*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list
*Physical size *Price level*Product features *Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services
Segmentation and Key Success Factors in the U.S. Segmentation and Key Success Factors in the U.S. Bicycle IndustryBicycle Industry
SEGMENT
Low price bicycles sold primarily through department and discount stores, mainly under the retailer’sown brand (e.g. Sears’ “Free Spirit”);
KEY SUCCESS FACTORS
* Low-costs through global sourcing of components & low-wage assembly.* Supply contract with major retailer.
Leading competitors: Taiwanese & Chinese assemblers,some U.S manufacturers, e.g. Murray Ohio, Huffy
Medium-priced bicycles sold primarily under manufacturer’s brandname and distributed mainly throughspecialist bicycles stores;
*Cost efficiency through large scale operation and either low wages or automated manufacturing.*Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers.* International marketing & distribution.
Leading competitors: Raleigh, Giant, Peugeot, Fuji (Japan).
*Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance).*Reputation (e.g. through success in racing, through effective brand management).*Strong dealer relations.Leading competitors: K2, Specialized, Trek
Similar to low-price bicycle segment.
High-priced bicycles for enthusiasts.
Children’s bicycles (and tricycles) soldprimarily through toy retailers (discount toy stores, department stores, and specialist toy stores).
Question 7: Is the IndustryQuestion 7: Is the IndustryAttractive or Unattractive and Attractive or Unattractive and Why?Why?
Develop conclusions about whether the industry and competitive environment is attractive or unattractive, both near- and long-term, for earning good profits
A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits
Issues to Consider inIssues to Consider inAssessing Industry Assessing Industry AttractivenessAttractiveness 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
Nov 1984 Feb 1996
July 2000 Feb 2004
Historically, what were Apple’s major competitive advantages? Have they changed over time? Why?
How has the structure of the PC industry changed over the last 20 years? What new opportunities for competitive advantage have these changes created?
Evaluate Apple’s strategies since 1990. Have they developed a sustainable competitive advantage?
Has Steve Jobs finally solved Apple’s long-standing problems with the Mac business and Apple’s broader strategic position?
What should Apple do today?
Apple Computer
A strategic group is a group of firms in an industry following the same or similar strategy.
Identifying strategic groups:• Identify principal strategic variables that distinguish firms.• Position each firm in relation to these variables.• Identify clusters.
Question 4: Which Companies are in Strongest / Weakest Positions?
Steps in the construction of Steps in the construction of strategic group maps:strategic group maps:
1. Identify two important competitive characteristics that strategically differentiate firms in an industry from one another.
2. Plot the firms on the two-variable map.3. Draw circles around the firms that are
clustered together.4. Indicate potential movement of firms
with arrows.
Strategic Groups in the Strategic Groups in the World Automobile IndustryWorld Automobile Industry
Broad
PRODUCT RANGERANGE
Narrow
National GEOGRAPHICAL SCOPE Global
NATIONALLY- FOCUSED, SMALL, SPECIALIST
PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.),
Morgan (U.K.)
NATIONALLY FOCUSED, INTERMEDIATE LINE
PRODUCERS e.g. Tofas, Kia, VAZ, Maruti
REGIONALLY FOCUSED BROAD-LINE PRODUCERS
e.g. Fiat, PSA, Renault, Rover, Chrysler
PERFORMANCE CAR PRODUCERS
e.g., Porsche, Maserati, Lotus
LUXURY CAR MANUFACTURERS e.g.,
Jaguar, Rolls Royce, Daimler-Benz, BMW
GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu,
Suzuki, Saab, Hyundai
GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW
Strategic Groups Within the World Strategic Groups Within the World Petroleum IndustryPetroleum Industry
Geographical Scope
0 10 20 30 40 50 60 70 80
Ver
tica
l Bal
ance
00.
51.
01.
52.
0
INTERNATIONALDOWNSTREAM OIL COMPANIES
PRODUCTION COMPANIES
INTEGRATED INTERNATIONAL MAJORS
NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES
INTEGRATED DOMESTICOIL COMPANIES
Neste Petrofina
ChevronShell
TotalMobil
Exxon
Statoil
PDVSA Kuwait
Unocal Arco
Petrobras ENI
Repsol
NipponSun
BP
Texaco
Elf
Phillips
Amoco
Indian Oil
Elf
ENI
DIVERSIFIED MAJORS
Hamel, “Strategy as Revolution”Hamel, “Strategy as Revolution”
Strategic planning is often not strategic Strategy making should be subversive The bottleneck is at the top of the bottle Revolutionaries exist in every company Change is not the problem, engagement is Strategy making must be democratic Anyone can be a strategy activist Perspective is worth 50 IQ points Top-down and bottom up are not the only
alternatives You cannot see the end from the beginning
How to Start a How to Start a RevolutionRevolution
Re-conceive your product or service◦ Radically improve the value equation◦ Separate form and function◦ Achieve joy of use
Re-define the market space◦ Push the bounds of universality◦ Strive for individuality◦ Increase accessibility to your products
Re-draw industry boundaries◦ Rescale the industry◦ Compress the supply chain◦ Drive convergence between industries
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