THEME 4:
EXTERNAL ANALYSIS (II).
PARTICULAR ENVIRONMENT:
COMPETITIVE STRUCTURE OF THE INDUSTRY
© Alfonso VARGAS SÁNCHEZ
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Strengths
&
Weaknesses
INTERNAL FACTORS
Company’s
own
values
COMPETITIVE
STRATEGY
Opportunities
&
Threats
EXTERNAL FACTORS
Society’s
expectations
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ANALYSIS of the PARTICULAR ENVIRONMENT
DIMENSIONS:
•Political & legal.
•Economic.
•Social & cultural.
•Technological.
COMPETITIVE FORCES:
•Current competitors.
•Potential entrants.
•Agents at the boundaries.
•Consumers (users).
SECTOR / INDUSTRY
OPPORTUNITIES
&
THREATS
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COMPETITIVE FORCES: COMPETITIVE
STRUCTURE of the INDUSTRY
POTENTIAL COMPETITORS
(threat of new entrants)
SUPPLIERS
(bargaining power)
EXISTING COMPETITORS
(rivalry)
BUYERS
(bargaining power)
SUBSTITUTE PRODUCTS
(threat)
GOVERMENT ACTION
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POTENTIAL RIVALRY
(competitive threats)
NEW COMPETITORS
NEW PRODUCTS
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3
4
5
NEW
COMPANIES
RIVALS IN OTHER
COUNTRIES
RIVALS IN OTHER
SECTORS
SUBSTITUTE
PRODUCTS
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1
7
BARGAINING POWER
OF SUPPLIERS
CURRENT RIVALRY
(existing competitors)
BARGAINING POWER
OF BUYERS
9
8
10
GOVERNMENTS
ECONOMIC POWER
OF OWNERS
SOCIAL POWER
(social agents)
BARGAINING POWER OF
“BOUNDARY AGENTS”
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INDUSTRY STAKEHOLDERS AS DETERMINANTS OF
BUSINESS ATTRACTIVENESS
Stakeholders whose actions
influence the company in a
direct and permanent manner
Stakeholders whose actions
influence the company in an
indirect and periodic manner
Existing and potential competitors.
Suppliers.
Distribution channels.
Consumers.
Governments.
Unions.
Political parties.
Universities.
Consumers Associations.
Commercial and Industrial Associations.
Ecological Movements.
Mass Media.
Etc.
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THE THREAT OF NEW ENTRANTS DEPENDS ON:
ENTRY BARRIERS
EXPECTED RETALIATION FROM EXISTING COMPETITORS
ECONOMIES OF SCALE
OTHER DISADVANTAGES IN COSTS
DIFFERENTIATION
CAPITAL/INVESTMENT REQUIREMENTS
SWITCHING COSTS
ACCESS TO DISTRIBUTION CHANNELS
GOVERMENT REGULATIONS
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•History of tendency to retaliate fiercely?
•Resources available to companies for
defending themselves?
•Degree of commitment (big investments)?
•Slow industry growth?
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•Many small or several equal-sized competitors.
•Slow industry growth.
•High fixed or storage costs.
•Lack of differentiation.
•Overcapacity situation.
•Strong strategic interests.
•High exit barriers.
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1. Highly specialized assets.
2. Fixed costs for exiting.
3. Strategic inter-dependencies with other important
businesses of the company.
4. Emotional barriers.
5. Social and governmental restrictions.
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BARRIERS
EXIT
LOW
LOW
ENTRY
HIGH
Low & stable
returns
Low returns
& high-risk
activity
HIGH High & stable High returns
returns
& high-risk
activity
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Those that can perform the same function or meet the
same need as the product of the sector under study
Defense against possible substitutes can be fortified
by means of collective actions
Watch out for:
-Trends improving the position and price of substitutes.
-Substitutes coming from highly profitable sectors.
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→ Degree to which sales are concentrated in few buyers.
→ Importance of product for the buyer (cost, quality).
→ Product differentiation.
→ Switching costs.
→ Buyers’ profitability.
→ Threat of buyers’ backward integration.
→ Availability of substitutes.
→ Information held by buyers.
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Concentration of supply among few suppliers
Availability of substitute inputs
Bargaining power of
suppliers depends on:
Is the industry a key market sector for supplier?
Relative importance of inputs supplied
Differentiation & switching costs
Threat of forward integration
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KEYS TO POSSIBLE ACTIONS
ON COMPETITIVE FORCES
→Product-market segmentation:
→ Collaborating with suppliers:
•
Current and potential growth.
§
•
Margins.
Working together to get cheaper,
better quality supplies; and better
service.
•
Fewer competitors.
§
Concentrating the operations in those
suppliers for which your company is
important.
§
Not dealing with suppliers unwilling
to collaborate.
→ Establishing entry barriers:
•
Distribution channels.
•
Patents.
•
Economies of scale.
→ Concentrating on solvent buyers:
§
Reward their loyalty.
§
Make cost of switching unacceptable.
→ Remain alert to emergence of substitutes; try to offer them before the competitors.
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CASE STUDY:
COMPETITIVE PROFILE OF THE AUTOMOBILE
COMPONENTS SECTOR IN SPAIN
RIVALRY
FACTORS
DESCRIPTION
ATTRACTIVENESS
Market growth
Slow market growth, less than GDP growth rate
Low
Number of competitors
Many competitors
Very low
Product differentiation
Product designed to specifications provided by
client
Very low
Exit barriers
Relatively lows, particularly for medium-sized
companies able to reorientate their operations
Intermediate
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CASE STUDY:
COMPETITIVE PROFILE OF THE AUTOMOBILE
COMPONENTS SECTOR IN SPAIN
ENTRY BARRIERS
FACTORS
DESCRIPTION
ATTRACTIVENESS
Capital requirements
Moderately high
Intermediate
Access to technology
Moderately high
Intermediate
Government limitations
Do not exist
The likelihood of retaliation from Quite small
existing industry players
Very low
Low
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CASE STUDY:
COMPETITIVE PROFILE OF THE AUTOMOBILE
COMPONENTS SECTOR IN SPAIN
BARGAINING POWER OF SUPPLIERS
FACTORS
DESCRIPTION
ATTRACTIVENESS
Number of suppliers
Enough suppliers
Intermediate
Supplier switching costs
Low
High
Possibility of forward integration
Low
High
Importance of the sector for suppliers
Medium
Intermediate
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CASE STUDY:
COMPETITIVE PROFILE OF THE AUTOMOBILE
COMPONENTS SECTOR IN SPAIN
BARGAINING POWER OF BUYERS
FACTORS
DESCRIPTION
ATTRACTIVENESS
Number of buyers
Few
Low
Possibility of backward
integration
Quite high
Low
Buyers profitability
Normally good, but cyclical
Intermediate
Supplier switching costs for
buyers
Quite high
Intermediate
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CASE STUDY:
COMPETITIVE PROFILE OF THE AUTOMOBILE
COMPONENTS SECTOR IN SPAIN
SUBSTITUTES
FACTORS
DESCRIPTION
Availability of substitutes Quite small until the client radically changes the
design and the materials used
ATTRACTIVENESS
Intermediate
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CASE STUDY:
COMPETITIVE PROFILE OF THE AUTOMOBILE AUXILIARY
SECTOR IN SPAIN
COMPETITIVE
ATRACTIVENESS
LEVEL
Rivalry
Entry barriers
Suppliers bargaining power
Buyers bargaining power
Substitutes
7/4 = 1'75
9/4 = 2'25
14/4 = 3'50
10/4 = 2'50
3/1 = 3'00
Quite low
Between low and intermediate
Intermediate-High
Between low and intermediate
Intermediate
Score
43/17 = 2'53
Between low and intermediate
Watch out for: Very low = 1. Low = 2. Intermediate = 3 . High = 4.
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Because the companies operating in the same
sector pursue out different strategies and
obtain different market shares and different
returns on their investments.
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ZARA VS BENETTON
Advertising Only in-store and with
Advertising.
conventional display: almost pure
information. The group has always
preferred discretion.
Design: The Zara motto is to copy
Design
trend setters. They visit the fashion
shows and they offer their
customers the sort of clothes worn
by top-models at a reasonable
price.
Franchising. Only when this
Franchising
formula is strictly necessary to enter
a selected country market. In this
case they choose partners who can
justify their leadership in the market.
Only first brands.
Advertising Aggressive, creative,
Advertising.
bold, controversial. The image of
Benetton has always been linked to
provocative advertising campaigns.
Design. Original, like a good Italian
Design
company. The Benetton approach
has always been casual and sporty
clothes made well, to its own
designs.
Franchising This is the formula
Franchising.
preferred by the group for growth in
any new country market. There are
more than 2,000 partners around
the world and strict norms, even for
the design of the stores.
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ZARA VS BENETTON
Diversification None at all. The
Diversification.
Inditex group manufactures and
sells fashion, and that is all. As an
exception, it runs its own logistics.
Diversification Very high. The
Diversification.
group is not just in fashion: sport,
cinema, telecommunications,
catering or transport are other
activities.
Culture Inbred, following the purest
Culture.
“El Corte Inglés” style. From
management to product design, the
policy on hiring is strictly closed, as
its shareholding was until its entry
on the Stock market.
Culture Open and imaginative. It
Culture.
has taken risks more than once by
hiring innovators and has created
around its leader a public image of
versatility and commitment to social
and human values that it transfers
to the company as a whole.
Source: Dinero, September 2002, nº 910.
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Specialization
Relations with Government
Brand identification
Distribution channel
Relationship with parent company
Quality
Leverage
Technological leadership
Price
Vertical integration
Service
Costs
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Characterization of the strategy of all the competitors of importance on the
basis of a series of explanatory dimensions of their competitive behavior.
Set of companies in a particular industry
pursuing the same or similar strategies.
A unique group
Several groups
Each company is a group
-Different strengths and weaknesses.
-Different moments of market entry.
-Historical accidents.
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-Entry barriers do not affect all strategic groups
with the same intensity.
-Factors which impede the movement from one
strategic group to another within an industry.
Mobility barriers:
•
Protect against a key change in the strategy of other competitors.
•
Explain why certain companies are persistently more profitable
than others and why different strategies coexist.
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Changes in the environment
Strategic choices made by companies
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METHODOLOGY
1.-Why some industries are persistently more
profitable than others?
2.-Within a particular industry, why do some
companies are persistently more profitable
than others?
3.-And why do different strategies coexist?
4.-Methodology for strategic groups
identification.
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METHODOLOGY
Identification of all competitors of
importance.
Characterization of their strategies:
strategic dimensions.
Graphic representations: strategic maps
(symbols, arrows,…).
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DIMENSIONS
SPECIALIZATION
VERTICAL
INTEGRATION
COSTS
SERVICE
QUALITY
PRICE
DISTRIBUTION
CHANNEL
FIRM A
Low
High
Low
Low
Low
Low
Own (partially)
FIRM B
High
Low
High (1)
High
High
High
Specialized
FIRM C
High
High
Low
Intermediate
Low (2)
Low (1)
Generic
FIRM D
Intermediate
Low
Intermediate (1)
High
Intermediate
Intermediate
Generic
(mainly)
(1)
These data are not contained explicitly in the text, but it is possible to deduce them.
(2)
A direct correlation between cost-price and quality is observed.
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Full line (Low)
SPECIALIZATION
A
D
Reduced line (High)
B
C
Low
High
VERTICAL INTEGRATION
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Full line (Low)
SPECIALIZATION
A
D
Reduced line (High)
C
B
Low
High
COSTS-PRICE-QUALITY POSITION
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Full line (Low)
SPECIALIZATION
A
D
C
Reduced line (High)
Low
B
High
LEVEL OF SERVICE
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Full line (Low)
SPECIALIZATION
A
D
Reduced line (High)
C
Generic
B
Specialized
DISTRIBUTION CHANNEL
Own
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“Coming together is a
beginning. Keeping together
is progress. Working together
is success.”
(Henry Ford, 1863-1947, American
founder of the Ford Motor Company and
father of modern assembly lines used in
mass production)
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