McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Understanding the Factors that
Determine a Company’s Situation
 Diagnosing a company’s situation has two facets
 Assessing the company’s external or macroenvironment
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Industry and competitive conditions
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Forces acting to reshape this environment
 Assessing the company’s internal or micro-environment

Market position and competitiveness

Competencies, capabilities, resource strengths and weaknesses, and competitiveness
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Thinking Strategically About a
Company’s Macro-environment
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 Identifying external environmental variables that influence long-term decisions
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Understanding Industry’s
Dominant Economic Features
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Market size and growth rate
Number of rivals
Scope of competitive rivalry
Buyer needs and requirements
Degree of product differentiation
Product innovation
Supply/demand conditions
Pace of technological change
Economies of scale
Learning and experience curve effects
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Industry Analysis
 Objectives are to identify
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Main sources of competitive forces
 Strength of these forces
 Key analytical tool

Five Forces Model of Competition
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The Five Forces Model of Competition
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Porter’s Five Forces: How to Do It
Step 1: Identify the specific competitive pressures associated with each of the five forces
Step 2: Evaluate the strength of each competitive force – fierce, strong, moderate to normal, or weak?
Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits
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Threat of New Entrants decreases if barriers to entry are high
 economies of scale are high
Threat of New
Entrants
 capital requirements are high
 incumbency advantages independent of size are high
 customer loyalty is high
 access to distribution channels
Bargaining
Power of
Suppliers is limited
 government policy is restrictive
Rivalry Among
Competitors
Threat of
Substitution
Bargaining
Power of
Customers
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Suppliers are likely to be powerful if:
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Supplier industry dominated by a few firms
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Suppliers’ products have few substitutes
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Suppliers’ product is an
Bargaining
Power of
Suppliers important input
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Suppliers’ products have high
Threat of New
Entrants
Rivalry Among
Competitors
Threat of
Substitution switching costs
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Suppliers present a creible threat to integrate forward
Bargaining
Power of
Customers
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Buyers are likely to be powerfu l if:
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They are concentrated or purchases are large relative to seller’s sales
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Purchase accounts for a significant fraction of supplier’s
Threat of New
Entrants sales
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Products are undifferentiated
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Buyers face few switching
Bargaining
Power of
Suppliers costs
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Buyer presents a credible threat to backward integration
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Buyer is price sensitive
Rivalry Among
Competitors
Threat of
Substitution
Bargaining
Power of
Customers
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Threat of Subsitutes is stronger when …
 There are many good substitutes readily available
 Substitutes are attractively priced
 The higher the quality and
Bargaining
Power of
Suppliers performance of substitutes
 The lower the end user’s switching costs
 End users grow more comfortable with using substitutes
Threat of New
Entrants
Rivalry Among
Competitors
Threat of
Substitution
Bargaining
Power of
Customers
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Rivalry in an industry is stronger when …
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Competitors are active in making fresh moves to improve market standing and
Threat of New
Entrants business performance
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Slow market growth
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Number of rivals increases and rivals are
Bargaining
Power of
Suppliers
Rivalry Among
Competitors
Bargaining
Power of
Customers of equal size and competitive capability
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Buyer costs to switch brands are
Threat of
Substitution low
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Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume
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Strategic Implications of the Five Competitive Forces
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Competitive environment is unattractive from the standpoint of earning good profits when
Rivalry is vigorous
Entry barriers are low and entry is likely
 substitutes is strong
 Suppliers and customers have considerable bargaining power
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Competitive environment is ideal from a profit-making standpoint when
Rivalry is moderate
Entry barriers are high and no firm is likely to enter
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Good substitutes do not exist
Suppliers and customers are in a weak bargaining position
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Competitor Analysis
 A firm’s best strategic moves are affected by
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Current strategies of competitors
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Future actions of competitors
 Profiling key rivals involves gathering competitive intelligence about
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Current strategies
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Most recent actions and public announcements
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Resource strengths and weaknesses
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Efforts being made to improve their situation
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Thinking and leadership styles of top executives
3-15

Competitor Analysis
 Understanding what market positions do rivals occupy
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One technique to reveal different competitive positions of industry rivals is strategic group mapping
 A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions
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Example: Strategic Group Map of Selected Automobile Manufacturers
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Key Factors for Competitive Success
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Key Success Factors (KSFs) are competitive factors and attributes that affect every industry member’s ability to be competitively and financially successful
KSFs are those particular attributes that are so important that they spell the difference between
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Profit and loss
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Competitive success or failure
KSFs can relate to
 Specific strategy elements
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Product attributes
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Resources
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Competencies
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Competitive capabilities
 Market achievements
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Common Types of Industry Key Success Factors
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Example: KSFs for Bottled Water Industry
 Access to distribution – to get a company’s brand stocked and favorably displayed in retail outlets
 Image – to induce consumers to buy a particular company’s product
(brand name and attractiveness of packaging are key deciding factors)
 Low-cost production capabilities – to keep selling prices competitive
 Sufficient sales volume – to achieve scale economies in marketing expenditures
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Example: KSFs for
Ready-to-Wear Apparel Industry
 Appealing designs and color combinations – to create buyer appeal
 Low-cost manufacturing efficiency – to keep selling prices competitive
 Strong network of retailers/companyowned stores – to allow stores to keep best-selling items in stock
 Clever advertising – to effectively convey a specific image to induce consumers to purchase a particular label
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The degree to which an industry is attractive or unattractive is not the same for all industry participants or potential entrants.
The opportunities an industry presents depend partly on a company’s ability to capture them.
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