Competing For Advantage
Part II – Strategic Analysis
Chapter 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)
2)
3)
4)
5)
6)
Demographic
Economic
Political
Socioculture
Technical
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
25
20
15
10
5
0
-5
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
Substitute
Products
(of firms in
other industries)
Suppliers of
Key Inputs
Rivalry
Among
Competing
Sellers
Potential
New
Entrants
Buyers
Porter’s 5-forces is all about margins
Price
What factors
increase/decrease margins
within an industry, thus
affecting profitability.
Profits
Costs
{
When industry structural variables are weak…...
Prices can be kept high
Profits can soar
Costs can be kept low
{
When industry structural variables are strong
Prices will be pushed down
Profits shrink
Costs will rise
{
 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
Many Substitutes
Few Rivals
Soft Drinks
Beverages
Few Substitutes
Many Rivals
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
Industry
Economy
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 Terms
 Complementors –
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 aboveaverage 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