SITATION ANALYSIS OUTLINE


Role of Situation Analysis in Strategy-Making
Methods of Industry & Competitive Analysis
 Profiling Industry’s Dominant Economic Traits
 Analyzing Industry’s Competitive Forces
 Analyzing Drivers of Industry Change
 Assessing Competitive Positions of Rivals
 Predicting Competitive Moves of Rivals
 Pinpointing Key Success Factors
 Drawing Conclusions About Overall Industry
Attractiveness
 Conducting an Industry & Competitive Analysis
1
WHY DO A SITUATION ANALYSIS?
Identify features in a firm’s external & internal
environment whichObjective
frame its window of
 STRATEGIC OPTIONS
 OPPORTUNITIES
 Focuses on two considerations:
 EXTERNAL factors: MACRO environment
(industry & competitive conditions)
 INTERNAL factors: MICRO environment
(firm’s internal situation & competitive position)
Figure 3-1: How Strategic Thinking and
Analysis Lead to Good Choices
Thinking Strategically
About Industry
and Competitive
Conditions
Identifying
Strategic Options
Open to the
Company
Thinking Strategically
About a Company’s
Own Situation
Choice of
The Best
Strategy
KEY QUESTIONS REGARDING
EXTERNAL ENVIRONMENT
1. Industry’s dominant economic traits
2. Competitive forces at work in industry &
strength
3. Drivers of change in industry
4. Firms in strongest/weakest competitive
positions
5. Competitive moves of rivals
6. Key factors determining competitive
success or failure in industry
7. Attractiveness of industry
IDENTIFYING AN INDUSTRY’S
DOMINANT ECONOMIC TRAITS

Market size & growth rate/stage in life cycle

Scope of competitive rivalry

Number of competitors & relative sizes

Prevalence of backward/forward integration

Entry/exit barriers

Nature & pace of technological change

Product & customer characteristics

Scale economies & experience curve effects

Capacity utilization & capital requirements

Industry profitability
EXPERIENCE CURVE EFFECTS

An experience curve exists when unit costs
decline as cumulative production volume
increases due to
 Increased KNOWLEDGE about or
 FAMILIARITY with the process

The bigger the experience curve effect, the
bigger the cost advantage of the firm with
 Largest CUMULATIVE production volume
Figure 3-2: Comparison of Experience
Curve Effects
$1
Cost per Unit
$1
90
80
81
70
64
72.9
51.2
49
34.3
10% Cost
Reduction
20% Cost
Reduction
30% Cost
Reduction
1
2
Million Million
Units Units
4
Million
Units
8
Million
Units
EXPERIENCE CURVE EFFECTS
Basic Concept
When a strong learning/experience curve
effect causes unit costs to decline
substantially as cumulative production
volume builds, a strategy to become the
largest volume manufacturer can offer the
COMPETITIVE ADVANTAGE of being the
industry’s LOWEST-COST producer!
ANALYSIS OF COMPETITIVE FORCES
Objective

To identify

Main SOURCES of competitive forces and

STRENGTH of these pressures
COMPETITIVE FORCES MATTER BECAUSE:
To be successful, strategy must be designed
to cope effectively with competitive pressures objective must be to build a strong, market
position based on competitive advantage!
Figure 3-3: The Five Forces Model of
Competition: A Key Analytical Tool
Substitute
Products
Suppliers
Rivalry
Among
Competing
Sellers
Potential
New
Entrants
Buyers
THE FIVE COMPETITIVE FORCES
1. RIVALRY among competing sellers in
an industry
2. SUBSTITUTE PRODUCTS offered by
firms in OTHER industries
3. Potential ENTRY of new competitors
4. Bargaining power of SUPPLIERS
5. Bargaining power of BUYERS
PROCEDURE: ANALYZING THE FIVE
COMPETITIVE FORCES



Identify main sources of competitive pressures
 Rivalry among competitors
 Substitute products
 Potential entry
 Bargaining power of suppliers
 Bargaining power of buyers
Assess strength of each competitive force
 Strong? Moderate? Weak?
 Scale of 1 - 5: 1 = weak; 5 = strong
Explain how each competitive force works & its
role in overall competitive picture
RIVALRY AMONG
COMPETING SELLERS


Usually the MOST POWERFUL of the five
competitive forces
Weapons of COMPETITIVE RIVALRY
 Price
 Quality
 Performance features offered
 Customer service
 Warranties and guarantees
 Advertising & special promotions
 Dealer networks
 Product innovation
PRINCIPLES OF
COMPETITIVE RIVALRY
A powerful competitive strategy
launched by one firm INTENSIFIES
competitive pressures on rivals!
Use of various competitive weapons by
rivals to out maneuver one another shapes
 Rules of competition &
 Requirements for competitive success
PRINCIPLE OF
COMPETITIVE MARKETS
Competitive jockeying among rival
firms is a dynamic process as

Firms initiate new offensive &
defensive moves

Emphasis swings from one mix of
competitive weapons to another
WHAT CAUSES RIVALRY
TO BE STRONGER?








Lots of firms, equal in size and capability, exit
Demand for product growing slowly
Industry conditions tempt firms to use competitive
weapons to boost volume
Switching costs incurred by customers are low
A firm initiates moves to bolster its standing at
expense of rivals
A successful strategic move carries a big payoff
Costs more to get out of business than to stay in
Firms have diverse strategies, corporate priorities,
resources, & countries of origin
COMPETITIVE FORCE
OF POTENTIAL ENTRY



New entrants boost competitive pressures

By bringing new production capacity into play

Through actions to build market share
Seriousness of threat of entry depends on

BARRIERS to entry

Expected REACTION of existing firms to entry
Barriers to entry exist WHEN

It is difficult for newcomers to enter market

A new entrant’s small sales volume puts it a
price/cost disadvantage
COMMON BARRIERS TO ENTRY









Economies of scale
Inability to gain access to specialized
technology
Existence of learning/experience curve effects
Brand preferences and customer loyalty
Capital requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies
Tariffs & international trade restrictions
REACTION OF EXISTING FIRMS
CAN BE AN ENTRY BARRIER



WHEN existing firms
 Indicate they’ll aggressively defend their
position
 Have substantial resources to wage defense
 Can use leverage with customers to keep their
business
THEN potential entrants likely to be discouraged
by
 Prospects of a costly struggle
 Strong threat of competitive retaliation
WHICH makes entry barriers HIGHER
WHEN IS POTENTIAL ENTRY A
STRONG COMPETITIVE FORCE?
Competitive threat of outsiders entering
a market is stronger when



Entry barriers are low
Incumbent firms do not vigorously
fight newcomer
Newcomer can expect to earn
attractive profits
COMPETITIVE FORCE OF
SUBSTITUTE PRODUCTS
Concept
SUBSTITUTES matter when products of firms in
another industry enter the market picture
Examples




Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic Containers vs. Glass vs. Tin vs. Aluminum
Aspirin vs. Other Types of Pain Relievers
WHY SUBSTITUTE
PRODUCTS MATTER


Competitively priced substitutes can place
CEILING on PRICES industry can charge for
its product
Price ceiling can place LID on PROFITS
industry members can earn

Availability of substitutes invites customers to
make QUALITY & PERFORMANCE
comparisons as well as PRICE comparisons

The lower the SWITCHING COSTS, easier it is
for customers to shift to substitute products
INDICATORS OF STRENGTH
OF SUBSTITUTE PRODUCTS

Growth rate of sales of substitutes

Market inroads of substitutes

Plan of manufacturers of substitutes to
expand capacity

Profits of firms producing substitutes
PRINCIPLE OF
COMPETITIVE MARKETS
Competitive threat of substitute
products is strong when



Prices of substitutes are viewed
attractive by buyers
Buyers’ costs of switching to
substitutes are low
Buyers view substitutes as having
equal or better performance features
COMPETITIVE FORCE OF SUPPLIERS

Suppliers are a strong competitive force when
 Item makes up large portion of costs of product,
is crucial to production process, and/or
significantly affects product quality
 It is costly for buyers to switch suppliers
 They have good reputations & growing demand
for their product
 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
PRINCIPLE OF
COMPETITIVE MARKETS
Whether suppliers are a strong or weak
competitive force depends on if they have
bargaining power to put rivals at a
competitive disadvantage based on:

Prices they can command


Quality & performance of items supplied
Reliability of deliveries

Other terms & conditions of supply
COMPETITIVE FORCE OF BUYERS

Buyers are a strong competitive force when
 They are large & purchase a sizable percentage
of industry’s product
 They buy in volume quantities
 They incur low costs in switching to substitutes
 They have flexibility to purchase from several
sellers
 Selling industry’s product is standardized
 They can integrate backward
 Product being purchased does NOT save buyer
money or has low value to buyer
PRINCIPLE OF
COMPETITIVE MARKETS
Buyers become a stronger competitive
force the more they can exercise
bargaining leverage over




Price
Quality
Service
Other terms & conditions of sale
STRATEGIC IMPLICATIONS OF THE
FIVE COMPETITIVE FORCES
Competitive environment is unattractive
when:
 Rivalry
is very strong
 Entry barriers are low
 Competition from substitutes is
strong
 Suppliers & customers have
considerable bargaining power
STRATEGIC IMPLICATIONS OF THE
FIVE COMPETITIVE FORCES
Competitive environment is ideal when:
 Rivalry is only moderate
 Entry barriers are relatively high
 There are no good substitutes
 Suppliers & customers are in a weak
bargaining position
Principle
The weaker the competitive forces, the
GREATER an industry’s PROFITS!
COPING WITH THE
FIVE COMPETITIVE FORCES
Concept
A company whose strategy and market
position provide a GOOD DEFENSE
against the five forces can earn aboveaverage profits even when some or all
of the five forces are strong!
COPING WITH THE
FIVE COMPETITIVE FORCES

Objective is to craft a strategy that will
 Insulate company from competitive
forces
 Influence industry’s competitive rules in
company’s favor
 Provide a strong position from which
“to play the game” of competition
 Help create sustainable competitive
advantage
IDENTIFYING & ASSESSING
DRIVING FORCES
Concept

Industry conditions change because
EXTERNAL FORCES are DRIVING
industry participants to alter their actions

DRIVING FORCES are the MAJOR
UNDERLYING CAUSES of changing
industry & competitive conditions
IDENTIFYING & ASSESSING
DRIVING FORCES

Role of driving forces analysis in
strategy-making

Indicates EXTERNAL FACTORS
likely to have greatest impact on a firm
over next 1 - 3 years

Must assess difference driving forces
will make to be able to craft a strategy
responsive to emerging conditions
DRIVING FORCES ANALYSIS

Analysis of driving forces has two steps
1. Identifying RELEVANT driving forces
2. ASSESSING IMPACT they will have

Task of driving forces analysis is:
SEPARATE MAJOR causes of industry
change from MINOR ones
 IDENTIFY the THREE or FOUR driving
forces likely to have greatest impact on a
firm over next 1 - 3 years

TYPES OF DRIVING FORCES

Changes in long-term industry growth rate

Changes in who buys the product & how
they use it

Product innovation

Technological change/process innovation

Marketing innovation

Entry or exit of major firms

Diffusion of technical knowledge
TYPES OF DRIVING FORCES

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Increasing globalization of industry
Changes in cost and efficiency
Shifting from standardized to differentiated
products (or vice versa)
Regulatory influences & government policy
changes
Changing societal concerns, attitudes, &
lifestyles
Changes in degree of uncertainty & risk
ENVIRONMENTAL SCANNING
Definition
A broad-ranging effort to monitor & interpret social,
political, economic, ecological, & technological
events in an effort to spot budding trends &
conditions that could eventually impact industry
Purpose

Raise consciousness of managers about potential
developments that could
 Have important impact on industry conditions
 Pose new opportunities & threats
ASSESSING COMPETITIVE
POSITIONS: STRATEGIC GROUPS

A STRATEGIC GROUP consists of
those rival firms with similar
competitive approaches & positions in
an industry

A STRATEGIC GROUP MAP displays
different competitive positions that
rival firms occupy
STRATEGIC GROUP MAPS

Firms in same strategic group have one or more
competitive characteristics in common . . .
 Sell in same price/quality range


Cover same geographic areas
Be vertically integrated to same degree

Have comparable product line breadth
Emphasize same types of distribution
channels
Offer buyers similar services

Use identical technological approaches


COMPETITOR ANALYSIS


A firm’s strategic moves are affected by

Current strategies of competitors

Actions competitors are likely to take next
Profile of key competitors involves studying:

Current position in industry

Strategic objectives & recent actions

Basic competitive approaches
COMPETITOR ANALYSIS

Successful strategists take great pains in
scouting competitors by





Understanding their strategies
Watching their actions
Evaluating their vulnerability to driving
forces & competitive pressures
Sizing up their strengths & weaknesses
Trying to anticipate rivals’ next moves
PREDICTING MOVES
OF RIVAL COMPETITORS

Predicting rivals’ next moves involves
 Analyzing current competitive positions
 Examining public pronouncements about
what it will take to be successful in industry
 Gathering information from grapevine about
current activities & potential changes
 Studying past actions & leadership
 Determining who has flexibility to make major
strategic changes & who is locked into
pursuing same basic strategy
PRINCIPLE
Managers who fail to study
competitors closely risk being
blindsided by “surprise” actions
on the part of competitors!
PINPOINTING INDUSTRY
KEY SUCCESS FACTORS
Basic Concept


KEY SUCCESS FACTORS (KSFs) spell
difference between
 Profit & loss
 Competitive success or failure
A KEY SUCCESS FACTOR can be
 Specific skill or talent
 Competitive capability
 Something a firm must do to satisfy
customers
PINPOINTING INDUSTRY KEY
SUCCESS FACTORS

Identifying KSFs is top priority as they
are good cornerstones of a firm’s strategy
 Winning COMPETITIVE ADVANTAGE
often hinges on being distinctively
better than rivals at one or more of the
KSFs

KSFs consist of the 3 - 5 really major
determinants of financial & competitive
success in industry
EXAMPLE: INDUSTRY
KEY SUCCESS FACTORS
Beer/Brewing Industry

Utilization of brewing capacity - to keep
manufacturing costs low

Developing a strong network of wholesale
distributors - to gain access to retail outlets

Clever advertising - to induce beer drinkers
to buy a particular brand
EXAMPLE: INDUSTRY
KEY SUCCESS FACTORS
Apparel Manufacturing Industry

Fashion design - to create buyer appeal

Low-cost manufacturing efficiency - to
keep selling prices competitive
EXAMPLE: INDUSTRY
KEY SUCCESS FACTORS
Tin & Aluminum Can Industry

Locating plants close to end-use
customers - to keep costs of shipping
empty cans low

Ability to market plant output within
economical shipping distances
STRATEGIC MANAGEMENT PRINCIPLE
A sound strategy
incorporates industry
key success factors!
CONCLUSION: OVERALL
INDUSTRY ATTRACTIVENESS
Objective
To review overall situation & develop conclusions
about relative attractiveness or unattractiveness
of the industry, both near- and long-term
Principle
A firm uniquely well-suited in an otherwise
unattractive industry can, under certain
circumstances, still earn unusually good profits
ASSESSING OVERALL
INDUSTRY ATTRACTIVENESS








Industry’s market size & growth potential
Whether industry will be favorably or unfavorably
impacted by driving forces
Potential for entry/exit of major firms
Stability/dependability of demand
Will competitive forces become stronger or weaker
Severity of problems facing industry
Degree of risk & uncertainty in industry’s future
Whether competitive conditions are conducive to
rising/falling industry profitability
CONDUCTING AN INDUSTRY &
COMPETITIVE SITUATION ANALYSIS

Two things to consider:
1. Task of analyzing a firm’s
EXTERNAL situation cannot be
reduced to a formula-like exercise
2. Sweeping industry & competitive
analyses need to done every 1 to 3
years