INDUSTRY AND
COMPETITIVE
ANALYSIS
© Adapted from Thompson, 1998, McGraw-Hill
“Analysis is the critical starting
point of strategic thinking.”
Kenichi Ohmae
“Quote”
What is Competition Like & How Strong
Are the Competitive Forces?
Objective
To identify
4
Main sources of competitive
forces
4
Strength of these forces
Key analytical tool
Five Forces Model of
Competition
© Adapted from Thompson, 1998, McGraw-Hill
Five Forces Model of Competition
Substitute
Products
(of firms in
other industries)
Suppliers of
Key Inputs
Rivalry
Among
Competing
Sellers
Buyers
Potential
New
Entrants
© Adapted from Thompson, 1998, McGraw-Hill
Analysing the Five Competitive
Forces: How to Do It
Assess strength of each competitive force (Strong? Moderate? Weak? )
4
Rivalry among competitors
4
Substitute products
4
Potential entry
4
Bargaining power of suppliers
4
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
Price
Quality
Performance features offered
Customer service
Warranties/guarantees
Advertising/promotions
Dealer networks
Product innovation
© Adapted from Thompson, 1998, McGraw-Hill
Competitive Force of Potential Entry
Seriousness of threat depends on
4
Barriers to entry
4
Reaction of existing firms to entry
Barriers exist when
4
Newcomers confront obstacles
4
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
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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:
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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 of
Substitute Products
Concept
Substitutes matter when customers are
attracted to the products of firms in other
industries
Examples
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic vs. Glass vs. Metal
Newspapers vs. TV vs. Internet
© Adapted from Thompson, 1998, McGraw-Hill
How to Tell Whether Substitute
Products Are a Strong Force
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Sales of substitutes are growing rapidly
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Producers of substitutes are planning
to add new capacity
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Their profits are up
© Adapted from Thompson, 1998, McGraw-Hill
Principle of Competitive Markets
The competitive threat of substitutes
is stronger when they are:
4
Readily available
4
Attractively priced
4
Believed to have comparable or better
performance features
4
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:
4
Prices charged
4
Quality/performance of items supplied
4
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
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Buyers are a stronger competitive
force the more they have
leverage to bargain over:
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Price
Quality
Service
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Other terms and conditions of sale
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© Adapted from Thompson, 1998, McGraw-Hill
Strategic Implications of the
Five Competitive Forces
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Competitive environment is
unattractive when:
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Rivalry is strong
4
Entry barriers are low
4
Competition from
substitutes is strong
4
Suppliers and customers have
considerable bargaining power
© Adapted from Thompson, 1998, McGraw-Hill
Strategic Implications of the
Five Competitive Forces
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Competitive environment is ideal
when:
4
Rivalry is moderate
4
Entry barriers are high
4
Good substitutes do
not exist
4
Suppliers and customers are
in a weak bargaining position
© Adapted from Thompson, 1998, McGraw-Hill
Coping With the
Five Competitive Forces
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Objective is to craft a strategy
that will:
4
Insulate you from competitive
forces
4
Influence competitive pressures
in ways that favour you
4
Build a sustainable competitive
advantage
© Adapted from Thompson, 1998, McGraw-Hill
Competitor Analysis
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Successful strategists take great pains in
scouting competitors
4
Understanding their strategies
4
Watching their actions
4
Evaluating their vulnerability to driving
forces and competitive pressures
4
Sizing up their resource strengths and
weaknesses and their capabilities
4
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
• Aggressive
expansion via
acquisition &
internal
growth
•Getting
stronger; on
the move
•Mostly
offensive
•Striving for
low-cost
leadership
•Wellentrenched
•Mostly
defensive
•Mostly
focusing on a
market niche
• Local
• Be dominant
leader
• Regional
• Overtake
industry
leader
• 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
•Give up
present share
to achieve
short-term
profits
•Retrenching
to a position
that can be
defended
• Maintain
current
position
• Just survive
Competitive
Strategy
•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
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Predicting rivals’ next moves involves
4 Analyzing their current competitive positions
4 Examining public pronouncements about what
it will take to be successful in industry
4 Gathering information from grapevine about
current activities and potential changes
4 Studying past actions and leadership
4 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
4 Specific strategy elements
4 Product attributes
4 Resources
4 Competencies
4 Competitive capabilities
l KSFs spell difference between
4 Profit and loss
4 Competitive success or failure
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© Adapted from Thompson, 1998, McGraw-Hill
Identifying Industry
Key Success Factors
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Answers to three questions pinpoint KSFs
4 On what basis do customers choose between
competing brands of sellers?
4 What must a seller do to be competitively
successful -- what resources and competitive
capabilities does it need?
4 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
Scientific research expertise; Product innovation capability; Expertise
in a given technology; Capability to use Internet to conduct various
business activities
Manufacturing- Low-cost production efficiency; Quality of manufacture; High use of
fixed assets; Low-cost plant locations; High labor productivity; Lowrelated
cost product design; Flexibility to make a range of products
Strong network of wholesale distributors/dealers; Gaining ample
Distributionspace on retailer shelves; Having company-owned retail outlets; Low
related
distribution costs; Fast delivery
Fast, accurate technical assistance; Courteous customer service;
MarketingAccurate filling of orders; Breadth of product line; Merchandising
related
skills; Attractive styling; Customer guarantees; Clever advertising
Superior workforce talent; Quality control know-how; Design
expertise; Expertise in a particular technology; Ability to develop
Skills-related
innovative products; Ability to get new products to market quickly
Organizational Superior information systems; Ability to respond quickly to shifting
market conditions; Superior ability to employ Internet to conduct
capability
business; More experience & managerial know-how
Favorable image/reputation with buyers; Overall low-cost; Convenient
locations; Pleasant, courteous employees; Access to financial capital;
Other types
Patent protection
Technologyrelated
© Adapted from Thompson, 1998, McGraw-Hill
Example: KSFs for Beer Industry
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Utilization of brewing capacity -- to keep
manufacturing costs low
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Strong network of wholesale distributors -to gain access to retail outlets
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Clever advertising -- to induce beer drinkers
to buy a particular brand
© Adapted from Thompson, 1998, McGraw-Hill
Example: KSFs for Apparel
Manufacturing Industry
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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
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Locating plants close to end-use
customers -- to keep costs of shipping
empty cans low
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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 Industry
Attractive or Unattractive and Why?
Objective
Develop conclusions about whether the industry
and competitive environment is attractive or
unattractive, both near- and long-term, for
earning good profits
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 in
Assessing Industry Attractiveness
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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 and
Competitive Situation Analysis
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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
© Adapted from Thompson, 1998, McGraw-Hill