Strategic Management
Industry and Competitive
Analysis
Session 3
Prof. Chitra Parthasarathy
Session 3
1
Starting point
Decisions on what strategy to pursue
should flow directly from solid
analysis of a company’s external
environment and internal situation.
Session 3
2
The two most important
situational considerations
1. Industry and competitive conditions
2. A Company’s own competitive
capabilities,
resources,
internal
strengths and weaknesses and
market position.
Session 3
3
The environment
All organizations operate in a macro
environment consisting broadly of
the economy at large, population
demographics, social values and
lifestyles, governmental legislation,
technological
factors
and
the
company’s immediate industry and
competitive environment.
Session 3
4
Immediate external
environment
The biggest influence / impact on a
company’s strategy is the company’s
immediate industry and competitive
environment.
Session 3
5
A Requirement
Accurate diagnosis of the company’s
situation is a necessary managerial
preparation for deciding on a sound
Long
Term
direction,
setting
appropriate objectives, and designing
a winning strategy.
Session 3
6
THINKING STRATEGICALLY ABOUT
INDUSTRY AND COMPETITIVE
CONDITIONS
The Key questions:
1. What are the industry’s dominant economic features?
2. What is the competition like and how strong are each of
the competitive forces?
3. What is causing the industry’s competitive structure and
business environment to change?
4. Which companies are in the strongest/weakest positions?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for competitive success?
7. Is the industry attractive and what are the prospects for
above-average profitability?
WHAT STRATEGIC
OPTIONS DOES
THE COMPANY
REALISTICALLY
HAVE?
•Is it locked in to
improving the present
strategy or is there room
to make major strategy
changes?
WHAT IS THE BEST
STRATEGY?
The key criteria
•Does it have good fit
with the company’s
situation?
•Will it help build a
competitive advantage
•Will it help improve th
company performance
THINKING STRATEGICALLY ABOUT A
COMPANY’S OWN SITUATION
The key questions:
1.
2.
3.
4.
5.
6.
How well is the company’s present strategy working?
What are the company’s strengths, weaknesses, opportunities,
and threats?
Are the company’s prices and costs competitive?
How strong is the company’s competitive position?
What strategic issues does the company face?
Session 3
7
Analyzing the industry and
competition
Industries differ widely in their
economic characteristics, competitive
situations
and
future
profit
prospects.
Session 3
8
Analyzing the industry and
competition
The economic character of industries varies
according to such factors as overall size
and market growth rate, the pace of
technological change, the geographical
boundaries of the market (local to world
wide) the number and size of buyers and
sellers, whether sellers products are
virtually identical or highly differentiated,
the extent to which costs are affected by
economies of scale
and the types of9
Session 3
distribution channels.
Methods of Analysis
A tool kit of concepts and techniques
to get a clear fix on key industry
traits, the intensity of competition,
the drivers of industry change, the
market position and strategies of
rival
companies,
the
keys
to
competitive
success,
and
the
industry’s profit outlook.
Session 3
10
Insightful answers to 7 questions
1. What are the industry’s dominant economic
features?
2. What is the competition like and how
strong are each of the competitive forces?
3. What is causing the industry’s competitive
structure and business environment to
change?
4. Which companies are the strongest /
weakest positions?
5. What strategic moves are rivals likely to
make note?
6. What are the key factors for competitive
success?
7. Is the industry attractive and what are the
Session 3
prospects for above-average
profitability? 11
Q1: What are the Industry’s
dominant economic features?
An Industry’s economic features help
frame the window of strategic
approaches a company can pursue.
Industries differ significantly in their
basic
character
and
structure.
Industries and companies analysis
begins with an overview of the
industry’s dominant eco featured.
Session 3
12
The factors to consider
• Market size
• Scope of competitive rivalry (local,
regional, national and global)
• Market growth rate and position in the
business life (early development, rapid
growth & take-off, early maturity,
maturity, saturation, stagnation and
decline)
• The number of rivals and their relative
sizes
• Whether and to what extent industry
rivals have integrated (backward and/or
forward)
Session 3
13
The factors to consider
• The types of distribution channels used to
access consumers.
• The pace of technological change in both
production process innovation and new
product introductions.
• Whether the products and services of rival
firms are highly, weakly or essentially
differentiated
• Whether companies can realize economies
of scale in purchasing, manufacturing,
transportation, marketing or advertising.
Session 3
14
Contd….
• Whether key individual participants
are clustered in a particular location
• Whether high rates of capacity
utilization are crucial to achieving
low-cost production efficiency
• Capital requirement and the ease of
entry and exit.
• Whether individual profitability is
above/below par.
Session 3
15
Q2:What is competition like and how
strong are each of the competitive forces?
Industrial and complete analysis
involves delving into the industry’s
competitive process to discover what
the main sources of competitive
pressure are how strong each force is.
This analytical step is necessary
because managers cannot devise a
successful strategy without in-depth
understanding of the industry’s
competitive character
Session 3
16
A well-proven Model
Professor Michael Porter declares that
- the state of the competition in an
industry is a composite of Five forces
Session 3
17
Firms in other industries offering
substitute products
Competitive pressures coming from the markets attempts of outsiders to win
buyers over to their products
Suppliers of
Raw
materials,
Parts,
Components
or other
Resource
inputs
Competitive
pressures
stemming
from supplierseller
collaboration
and
bargaining
Rivalry
Among
Competing sellers
Competitive
Pressures created
By jockeying
For better
Market position
And competitive
advantage
Competitive
pressures
stemming
from supplierseller
collaboration
and
bargaining
Buyers
Competitive pressures coming from the markets attempts of outsiders to win buyers over to their products
3
PotentialSession
New Entrants
18
Rivalry among competing
sellers
. In some industry, rivalry is based on
attractive combination of
performance features, being first to
market with attract features out
competing with higher quality,
offering longer warrantees, superior
after sales service, creating a
stronger brand image.
Session 3
19
A principle of competitive
Markets
Competitive jockeying among rival
firms is a dynamic ever-changing
process as new offensive and
defensive moves are initiated and
emphasis swings from one blend of
competitive weapons and tactics to
another
Session 3
20
The fierce nature of
competition
Competitive markets are economic
battlefields. It is dynamic and rivals
try to out-compete one another and
build customer loyalty.
Session 3
21
Some common factors that
influence the tempo of rivalry
• Rivalry intensifies as the number of
competitors increases and as competitors
become more equal in size and capability.
• Rivalry is usually stronger when demand
for the product is growing slowly.
• Rivalry is intense when customers find it
easily to switch brands.
• Rivalry is more when it costs more to get
out of business than to stay in and
compete.
Session 3
22
The potential entry of new
competition
The competitive threat of depends on
two factors.
1. Barriers to entry
2. The expected reaction of incumbent
firms to new entry barriers.
Session 3
23
Types of entry barriers
• Economies of scale
• Cost & resource disadvantages
irrespective of size
• Learning & experience curve effects.
• Inability to match the technical &
specific know-how of existing
players.
Session 3
24
More barriers
• Brand preferences and customer loyalty
• Capital requirements
• Access to distribution channels
• Regulatory policies
• Tariffs and internal trade restrictions
Whether an industry’s entry barriers ought
to be considered high or low depends on
the resources and competencies
possessed by the pool of potential
entrants
Session 3
25
Competitive pressures from
substitute products
Firms in one industry are quite often in
close competition with firms in
another
industry
because
their
respective
products
are
good
substitutes.
.
Session 3
26
Principles of competitive
markets
The competitive threat based by
substitute products is strong when
substitutes are readily available
and attractively priced, buyers
believe
substitutes
have
comparable or better features, and
buyers’ switching costs are low..
Session 3
27
Principles of competitive
markets
The suppliers to a group of rival firms
are strong competitive force
whenever they have sufficient
bargaining buyer to put certain rivals
at a competitive disadvantage based
on the prices they can command, the
quality and performance of the items
they supply or the role of their
deliveries
Session 3
28
Competitive pressure from Supplier
bargaining power
• Suppliers have no bargaining power
or leverage over rivals whenever
items they provide are freely
available from numerous suppliers
• Similarly when good substitutes for
the item are available and buyers
find it neither costly nor difficult to
switch
• Also when it is a major customer
Session 3
29
Competitive pressure from Supplier
bargaining power
Major suppliers have strong bargaining power
• if an item that accounts for a sizable
portion of the costs of an industry’s product
• Is crucial to the industry’s production
process
• Or significantly aff3ects the quality of the
industry’s product
• they have considerable influence on the
competitive process
E.g. true when a few suppliers control most of
the available supplies and have pricing
leverage
Suppliers with good reputations and growing
30
Session 3
demand for their output
Principle of competitive
Markets
Buyers are strong competitive force
when they are able to exercise
bargaining leverage over price,
quality, service, or other terms of
sale.
High switching costs create
buyer lock-in and weaken a buyer’s
bargaining power.
Session 3
31
Competitive pressure from Buyer
Bargaining and Seller-Buyer
collaboration
When buyers cost of switching is low
If buyers well informed about sellers
product, price & costs
If buyers pose credible threat of
backward integration
Have discretion in whether and when
they buy.
Session 3
32
Strategic implications of the 5
competitive forces
A company’s competitive strategy is
increasingly effective the more it
provides good defenses against the
five
competitive
forces,
shifts
competitive pressures in ways that
favor the company, and helps create
sustainable competitive advantage.
Session 3
33
Q3: What is causing industry’s
competitive structure and business
environment to change?
Industry conditions change because
important forces are driving industry
participants (competitors, customers,
or suppliers) to alter their actions;
the driving forces in an industry are
the major underlying causes of
changing industry and competitive
conditions.
Session 3
34
The most common driving
forces
a. The internet and e-commerce
b. Increasing globalization of the
industry
c. Changes in the LT industry growth
rate
d. Changes in who buys the product
and how they use it
e. Product innovation
Session 3
35
The most common driving
forces
f.
g.
h.
i.
Technological change
Market innovation
Entry/exit of major firms
Diffusion of technical know-how
across companies and countries
j. Changes in cost and efficiency
Session 3
36
More of them
k. Regulatory influence and
government policy changes
l. Changes societal concerns,
attitudes and lifestyles
m. Reduction in uncertainty and
business risk.
Session 3
37
Environment scanning
Environment scanning techniques
involves studying and interpreting
the sweep of social, political,
economic,
ecological
and
technological events in an effort to
spot budding trends and conditions
that could become driving forces.
Session 3
38
Why environmental
scanning?
The
purpose
of
environmental
scanning is to raise the awareness of
managers
about
potential
developments that could have an
important
impact
on
industry
conditions and pose new opposition
and threats.
Session 3
39
Q4:Which companies are in the
strongest/weakest positions?
A
technique
for
revealing
the
competitive positions of industry
participants
is
Strategic
Group
Mapping
A strategic group consists of those
rival firms with similar competitive
approaches and positions in the
market.
Session 3
40
Use of Strategic Group Maps
Dividing
industry
members
into
strategic groups allows industry
analysts to better understand the
pattern of competition in complex
industries and to pinpoint a firm’s
closest competitors
Session 3
41
Constructing a strategic group
map
Identify
the
competitive
characteristics that differentiate firms
in the industry – price/quality range,
geographic coverage, degree of
vertical
integration,
product-line
width, distribution channels, degree
of service offered.
Session 3
42
Constructing a strategic group
map
• Plot the firm on a two variable map
using pairs of these differentiating
characteristics.
• Assign firms that fall into the same
strategic space to the same strategic
group.
• Draw proportional circles around
each strategic group to show the
group’s share of global industry sales
revenue.
Session 3
43
Q5:What strategic moves are
rivals likely to make next?
A company cannot expect to out maneuver
its rivals without monitoring their actions,
understanding
their
strategies
and
anticipating what moves they are likely to
make next.
Competitive intelligence about competitors
strategies, monitoring their actions, sizing
up their strengths and weaknesses and
using what they have learned to anticipate
what moves rivals are likely to make next
Session 3
44
Competitive Intelligence
Successful strategists take great pains
in gathering competitive intelligence
about
competitors’
strategies,
monitoring their actions, sizing up
their strengths and weaknesses, and
using what they have learned to
anticipate what moves rivals are
likely to make next.
Session 3
45
Monitoring group’s
strategies
The best source of information
comes from examining what it is
doing in the market place and from
what its management is saying about
the company’s plans.
Managers
who
fail
to
study
competitors
closely
risk
being
overtaken by surprise actions
Session 3
46
Q6: What are the key factors for
company’s success?
• Key factors concern the product attributes,
competencies, competitive capabilities and
market achievements with the greatest direct
hearing on company’s profitability.
• An industry’s key success factors are those
things that most affect industry members’
ability to prosper in the market place – the
particular strategy elements, product
attributes, resources, competencies,
competitive capabilities and business outcomes
that spell the difference between profit and loss
and, ultimately, between competitive success or
failure.
47
Session 3
Identifying the Key Success
Factors
Three questions help identify an industry’s
KSF
• On what basis do customers choose
between the competing hands of sellers?
• What product attributes are crucial?
• What resources and competitive
capabilities does a seller need to have to
competitively successful?
• What does it take for sellers to achieve a
sustainable competitive advantage?
Session 3
48
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
Session 3
49
Q7: Is the industry attractive and what
are its prospects for greater average
profitability?
The final step of industry and
competency analysis is to use the
answers
to
the
previous
six
questions to draw conclusions about
the
relative
attractiveness/
unattractiveness of the industry, both
Short term and Long term.
Session 3
50
Factors on which to base
conclusions
• The industry’s growth
• Whether company currently permits
adequate profitability and whether
company forces will get stronger or
weaker.
• Whether industry profitability will be
favorably / unfavorably affected by
the prevailing driving forces.
Session 3
51
More factors
• The company’s competitive position
in the industry and whether its
position is likely to grow stronger /
weaker.
• The company’s potential to capitalize
on the vulnerabilities of weaker
rivals.
• Whether the company is able to
deferred against or counteract the
factors that make the industry
52
Session 3
unattractive.
Contd…
• The degree of risk and uncertainty in
the industry’s future
• The severity of problems confronting
the industry as a whole.
• Whether continued participation in
this industry adds importance to the
firm’s ability to be successful in other
industries in which it may have
business interests.
Session 3
53