Chapter 4
Fall 2005
THE DIAMOND-E
FRAMEWORK
Chapter 4 Objectives
1. Understanding the general relationship between
the firm and the environment
2. Development of the ability to understand and
apply the 5 Forces model
3. Understanding of additional tools (drivers, groups,
competitor analysis) that aid in understanding
an industry
4. Development of the ability to use all of the above
to identify keys to success in an industry and
what it means for the strategy and capabilities
of a firm
Management
Preferences
Organization
STRATEGY
Resources
Figure 3.3
STRATEGIC
CONSISTENCY
Business
Capabilities
Strategy
STRATEGIC
CONSISTENCY
External
Environment
Figure 3.1, p. 38
THE BUSINESS
ENVIRONMENT
Strategy – Environment Fit
Social
Political
Industry
International
Industry
FIRM
Industry
International
International
International
Economic
• A thorough environmental analysis uses the
tools to come to specific conclusions
regarding the nature of the competitive
arena, what it takes to succeed in the
industry, and what strategies are possible
External
Environment
Strategy
Figure 3.1, p. 38
• Assessing strategy – environment fit, requires a
thorough understanding of the environment
• A variety of tools are available for this process
• The tools, however, are a means, not an end
Environment
Technological
International
Variation on Figure 4-1, p. 56
BUSI 4940 - Business Policy
1
Chapter 4
Fall 2005
Environmental Analysis:
Getting Started
Profitability
Profitabilityof
ofUS
USIndustries,
Industries, 1985-95
1985-95
IN D U S T R Y
( 1 9 8 5 - '9 5 )
D ru g s
F o o d a n d k in d r e d p r o d u c t s
- - o f w h ic h T o b a c c o p r o d u c t s
In s t r u m e n t s a n d r e l a t e d p r o d u c t s
P r in t in g a n d p u b lis h i n g
E le c tr ic a l, a n d e l e c t r o n ic e q u ip m e n t
A ir c r a f t , g u id e d m i s s il e s , a n d p a r t s
F a b r ic a t e d m e t a l p r o d u c t s
R u b b e r a n d m is c . p la s t ic s p r o d u c t s
P a p e r a n d a ll ie d p r o d u c t s
R e t a il t r a d e c o r p o r a t io n s
P e t r o le u m a n d c o a l p r o d u c t s
T e x t il e m ill p r o d u c t s
W h o le s a le t r a d e c o r p o r a t io n s
S t o n e , g l a s s a n d c la y p r o d u c t s
M a c h in e r y , e x c . e le c t r ic a l
N o n fe rro u s m e ta ls
M o t o r v e h ic le s a n d e q u i p m e n t
Ir o n a n d S t e e l
M i n in g c o r p o r a ti o n s
A ir lin e s
• Developing a feel for the industry
• What are the Dominant Economic Features?
– Market size and growth
– # of rivals, their size and geographic scope,
degree of differentiation
– Degree of integration and nature of distribution
– Pace of technological change
– Cost factors – economies, learning effects,
capacity, entry/exit barriers
THE FIVE FORCES MODEL
OF COMPETITION
R E T U R N O N E Q U IT Y
1 9 .3 9
1 3 .8 5
1 8 .6 0
1 1 .2 4
1 0 .1 6
1 0 .0 0
8 .3 6
8 .1 5
9 .9 5
8 .4 7
8 .3 7
7 .8 8
7 .2 5
6 .2 3
5 .7 2
4 .2 9
4 .2 1
2 .6 1
1 .3 0
1 .2 4
( 2 .8 4 )
THE FIVE FORCES MODEL
OF COMPETITION
POTENTIAL
ENTRANTS
POTENTIAL
ENTRANTS
Primary Entry Barriers:
SUPPLIER
POWER
INDUSTRY
RIVALRY
SUBSTITUTE
PRODUCTS
BUYER
POWER
Variation on
Figure 4-3, p. 62
THE FIVE FORCES MODEL
OF COMPETITION
Primary determinants of the power of
substitute products include:
1. The relative price and performance of
substitutes
2. Switching costs
3. Buyers propensity to substitute
SUBSTITUTE
AVAILABILITY
BUSI 4940 - Business Policy
1.
2.
3.
4.
5.
6.
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Cost Disadvantages Independent of Scale
Government Policy
THE FIVE FORCES MODEL
OF COMPETITION
Determinants of Buyer Power Include:
1. The relative concentration of buyers and sellers
2. The volume of purchases
3. The relative switching costs of buyers and sellers
4. Ability of buyers to backward integrate
5. The buyers price sensitivity
BUYER
POWER
2
Chapter 4
Fall 2005
THE FIVE FORCES MODEL
OF COMPETITION
THE FIVE FORCES MODEL
OF COMPETITION
Determinants of Supplier Power Include:
SUPPLIER
POWER
Determinants of Rivalry Include:
1. Industry Growth
2. The number and balance of rivals
3. Differentiation
1. Relative concentration
2. Presence of substitutes
3. Relative switching costs
4. Relative threat of integration
5. Importance of the supplies
6. Differentiation of the supplies
INDUSTRY
RIVALRY
4. Percentage of fixed costs
5. Brand identity and product differences
6. Exit barriers and corporate stakes
Example: Strategic Group Map of
Retail Jewelry Industry
What Forces are Driving Change
in the Industry?
– Buyers & what they want -- Globalization
– Entry/exit
--Diffusion of know-how
– Gov’t & Society
-- Technology & Innovation
Price / Quality / Image
• Need to determine how the forces in the
industry might change over time
• Note that Life Cycle is a result, NOT a cause
• Major influences include (see pg.71-74):
High
Small
Independent
Guild Jewelers
National, Regional,
& Local Guild “Fine Jewelry”
Stores
Prestige
Departmentalized
Retailers
Upscale
Department
Stores
National
Jewelry
Chains
Medium
Chains
Local
Jewelers
Low
Credit
Jewelers
Off-Price
Retailers
Outlet Mall Retailers
Specialty
Jewelers
Catalog
Showrooms
Full-line
Jewelers
Discounters
Limited-category
Retailers
Broad-category
Retailers
Product Line / Merchandise Mix
A
A Framework
Framework for
for Competitor
Competitor Analysis
Analysis
Identifying
Identifying Key
Key Success
Success
Factors
Factors
Pre-requisites
forsuccess
success
Pre-requisites for
OBJECTIVES
• What are competitors current
goals?
• Is performance meeting their goals?
• How are their goals likely to change?
What do
customers want?
How does the firm
survive competition
PREDICTIONS
STRATEGY
• How is the firm competing?
ASSUMPTIONS
• What assumptions does the competitor
hold about the industry and itself?
RESOURCES & CAPABILITIES
• What are the competitors’ key
strengths and weaknesses?
BUSI 4940 - Business Policy
Analysis of competition
• What strategy changes
will the competitor
initiate?
• How will the competitor
respond to our strategic
initiatives?
Analysis of demand
• Who are our
customers?
• What do they want?
• What drives competition?
What are
drives
•• What
the competition?
main
• What are the
dimensions
of main
competition?
dimensions of competition?
••How
Howintense
intenseis
iscompetition?
competition?
Howcan
canwe
weobtain
obtainaasuperior
••How
superior competitive
competitive
position? position?
KEY SUCCESS FACTORS
3
Chapter 4
Fall 2005
Identifying
Identifying Key
KeySuccess
SuccessFactors
Factors in
in
Retailing
Retailing Through
Through Analyzing
AnalyzingProfitability
Profitability
Sales mix of products
Return on Sales
Avoiding markdowns through
tight inventory control
Max. buying power to minimize
cost of goods purchased
ROCE
Max. sales/sq. foot through:
*location
*product mix
*customer service *quality control
Sales/Capital
Employed
Max. inventory turnover through
electronic data interchange, close
vendor relationships, fast delivery
Minimize capital deployment
through outsourcing & leasing
Putting it Together: Outcomes
of an Industry Analysis
• Identification of key factors within the industry
(most important of the 5 forces, drivers, etc.)
• Identification of 2-4 keys to success/survival
• Identification of 2-4 strategies that could be
successfully pursued (given the above)
• Identification of the resources and capabilities
necessary to successfully implement each of these
strategies
STRATEGIC
CONSISTENCY
From Environment to Business
Capabilities
• Given the environmental analysis, you can
now move to the firm level and determine:
– Whether the firm’s strategy fits with the
environmental demands
– Whether the firm has the necessary resources
and capabilities to compete in the industry
– What actions the firm could take to improve its
position
Business
Capabilities
Strategy
External
Environment
Figure 3.1, p. 38
BUSI 4940 - Business Policy
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