Competing For Advantage

Part II – Strategic AnalysisChapter 3 – The External Environment:

Opportunities, Threats, Industry Competition, and Competitor Analysis

Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness.

Michael Porter

When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact.

Warren Buffett

Skate to where the puck is going, not to where the puck has been.

Wayne Gretsky

External Environments

Key Terms General Environment – composed of dimensions

in the broader society that influence an industry and the firms within it

Industry Environment – set of factors that directly influence a firm and its competitive actions and competitive responses

Competitor Environment – details about a firm’s direct and indirect competitors and the competitive dynamics expected to impact a firm's efforts to generate above-average returns

Components of External Analysis

Scanning – Identifying early signals Monitoring – Following signals or change

identifies in scanning to identify patterns Forecasting – Projections of what might

happen Assessing – Determining the timing and

significance of forecasted change

Assessing the General Environment

General Environment

1) Demographic

2) Economic

3) Political

4) Socioculture

5) Technical

6) Global

1) Demographic Segment

Characteristics of the population e.g., age, race, gender, sexual orientation and

social classes Ethnic structure Income distribution Geographic distribution

2) Economic Segment

General health/wellbeing of the local, regional, national or global economy. e.g., Interest rates, unemployment rates,

consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

3) Political/Legal Segments

Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

4) Sociocultural Segment

Attitudes of society towards work, careers, products, services and consumer activism. e.g., concern for quality of life, birth rates,

woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.

5) Technological Segment

Changes in technology that affect the workplace, and the products and services consumers expect e.g., Information technologies, entertainment

technologies, product technologies.

6) Global Segment

New and existing markets around the world, and changes in the political, cultural and institutional terrain.

General Environment

Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance

Cast a wide net and to identify the emerging trends

Then determine which factors are relevant, and how these changes will have an effect upon the firm.

ROIC Across Industries 1995-2004

-5

0

5

10

15

20

25

Bevrgs Cigs Pharm Steel Computers Airlines

Porter’s Five Forces

Competitive Rivalry Power of Buyers Power of Suppliers Potential Entrants Substitute Products

Each of these forces affect costs/prices,

therefore, profitability

SubstituteProducts(of firms in

other industries)

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers of Key Inputs

Buyers

Price

Costs

Profits{What factors increase/decrease margins within an industry, thus affecting profitability.

Porter’s 5-forces is all about margins

Prices can be kept high

Costs can be kept low

Profits can soar {

When industry structural variables are weak…...

Prices will be pushed down

Costs will rise

Profits shrink{

When industry structural variables are strong

Suppose you had to start a new business and start generating revenues…

… today

… in a week

… in 2 months

… in 1 year

What kind of businesses might you start?

Potential New Entrants

Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents.

Firms can create “barriers to enter” Barriers of entry are desirable for entrenched

firms

Barriers to Entry

Economies of scale Product differentiation & loyalty Capital & resource requirement Switching costs Distribution Cost disadvantage independent of size Regulatory policies Access to technology & know-how Learning, costs, experience curves Threat of retaliation

Suppliers• Who are you key suppliers?• Suppliers are a strong competitive force when:

Only a few suppliers exist and is more concentrated than industry to which it is selling

Few substitutes available to the industry firm Industry not important buyers to supplier group Supplier group provides a product crucial to

production process, and/or significantly affects buyers’ product quality

It is costly for buyers to switch suppliers Forward integration by suppliers is a credible

threat Suppliers can supply at a lower cost

Buyers

Who are your key buyers? - who provides our revenues?

Can they force:• lower prices, higher quality and service –

affect the terms and conditions of the exchange?

• When do you, as a consumer, have power? • Two issues

• Price sensitivity• Can you actually bargain

Buyers What affect buyers’ power?

Volume/Frequency of purchase When buyers represent a large portion of sellers

revenues When buyers can easily switch to another

product When the product the buyers are buying is

undifferentiated When buyers can self-source or backwards

integration Criticality Buyers’ knowledge Buyers’ profitability

Substitutes

Product/service which fulfills similar need Price cap 3 Questions

Are they available? Can we switch? Price-performance relationship?

Substitutes and Business Definition

How we define our business defines our substitutes and our rivals

Carbonated Soft Drink Soft Drinks Beverages

Many Substitutes

Few Rivals Many Rivals

Few Substitutes

Rivalry and Profitability

Industry profitability is a collective good. Collective good is served by coordination

• Are there industries were pricing is coordinated?

Incentive to violate

Rivalry – What drives it? Numerous or equally balanced competitors Slow growth, excess capacity High fixed costs High storage costs High obsolescence costs Lack of differentiation Low switching costs Perceptions of high payoff from competitive actions High exit barriers

Exit Barriers

Specialized assets Fixed costs of exit Strategic interrelationships among business

units Emotional barriers

Industries and Segments What is a segment? Different segments…..

• posses different combinations of 5-forces• therefore:

reward different strategies possess different levels of profitability

Segments in the Automotive IndustryEconomy Luxury

Which segment is more attractive? Why?

Porter’s..in conclusion

Attractiveness of industry/segment current industry adjacent segments industries you might consider entering

Which forces possess the greatest influence? Can we influence them?

Static model & Hypercompetition

• If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing

competition and profit.

Complementors

Key TermsComplementors – companies that

sell complementary goods or services that are compatible with the focal firm's own product or services

Interpreting Industry Analysis

The ways in which competitive analysis provides insight into the attractiveness of an industry by determining its potential for above-average returns over the long term

Analysis of Direct Competitors

Key Terms Strategic Group – set of firms

emphasizing similar strategic dimensions to use a similar strategy

Strategic Dimensions – areas that firms in a strategic group treat similarly

Implications from Strategic Group Dynamics

Intra-strategic group rivalry is more intense than inter-strategic group rivalry

Membership in a strategic group partially defines the essential characteristics of firms' strategies

The more similar strategies are seen across strategic groups, the greater the level of expected rivalry

The strengths of industries' five forces differ across strategic groups

Competitor Analysis Components

Identification of Key Success Factors?

KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability

opportunities for competitive advantage

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

Identifying Key Success Factors (KSFs) - vary by segment

Automotive Industry