Session 3 Objectives
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Consider how business environments and external forces
affect business strategy
Explore how industry structure and position create
opportunities for competitive advantage
Analyze industries, competitors, and sustainability of
different strategic options
Learn how to use strategic group mapping
The Strategy Design Process
Strategic Analysis
Strategy Implementation
and Evaluation
Strategic Choice
Identify
Sustainable
Competitive
Advantage
Understand
Industry Context
and Competition
Create
Sustainable
Competitive
Advantage
Select
Sustainable
Competitive
Advantage
Craft and
Communicate
Vision and Mission
Develop Action
Plans, Programs,
and Processes
Develop Strategic Goals
and Specific Long
Term Objectives
Analyze Industry and
External Environment
Evaluate
The Current
Situation
Analyze Resources and
Internal Capabilities
Evaluate and
Select Strategy
Craft Changes
in Structure
and Processes
Implement the
Strategy
Establish the Basis
for Sustainable
Competitive Advantage
Develop a Strategic
Control System
Understand and Critique
Current Strategy
Generate Feasible
Alternative
Strategies
Feedback and Rethinking
Evaluate the
Strategies
Results
Environmental Analysis to Industry Analysis
MACROENVIRONMENT
The Economy
at Large
Suppliers
Rival
Firms
Substitutes
COMPANY
Buyers
New
Entrants

IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT
Situation Analysis
Assess Industry & Competitive Conditions
1. Industry’s dominant economic traits
2. Nature of competition & strength of
competitive forces
3. Drivers of industry change
4. Competitive position of rivals
5. Strategic moves of rivals
6. Key success factors
7. Conclusions about industry attractiveness
Assess Company Situation
1. Assessment of company’s present strategy
2. Resource strengths and weaknesses,
market opportunities, and external threats
3. Company’s costs compared to rivals
4. Strength of company’s competitive position
5. Strategic issues that need to be addressed
Identify
Strategic
Options
for the
Company
Select
the Best
Strategy
for the
Company
Question 1: What are the Industry’s
Dominant Economic Traits?
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Market size and growth rate
Scope of competitive rivalry
Number of competitors and their relative sizes
Prevalence of backward/forward integration
Entry/exit barriers
Nature and pace of technological change
Product and customer characteristics
Scale economies and experience curve effects
Capacity utilization and resource requirements
Industry profitability
Relevance of Key Economic Features
Economic
Feature
Strategic Importance
Market growth rate
Small markets don’t tend to attract new firms; large markets attract firms
looking to acquire rivals with established positions in attractive industries
Fast growth breeds new entry; slow growth spawns increased rivalry & shakeout of weak rivals
Capacity
surpluses/shortages
Surpluses push prices & profit margins down; shortages pull them up
Industry profitability
High-profit industries attract new entrants; depressed conditions lead to exit
Entry/exit barriers
High barriers protect positions and profits of existing firms; low barriers make
existing firms vulnerable to entry
Product is big-ticket
item for buyers
More buyers will shop for lowest price
Standard products
Buyers have more power because it’s easier to switch from seller to seller
Rapid technological
change
Vertical integration
Raises risk; investments in technology facilities/equipment may become
obsolete before they wear out
Big requirements make investment decisions critical; timing becomes
important; creates a barrier to entry and exit
Raises capital requirements; often creates competitive & cost differences
among fully vs. partially vs. non-integrated firms
Economies of scale
Increases volume & market share needed to be cost competitive
Rapid product
innovation
Shortens product life cycle; increases risk because of opportunities for
leapfrogging
Market Size
Capital requirements
Question 2: What is Competition Like and
How Strong Are the Competitive Forces?
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Objective is to identify
◦ Main sources of competitive forces
◦ Strength of these forces
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Key analytical tool
◦ Five (Six) Forces Model of Competition
Porter’s Five Forces of Competition
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL
ENTRANTS
Threat of
Threat of
SUBSTITUTES
new entrants
Rivalry among
existing firms
Bargaining power of buyers
BUYERS
substitutes
Rivalry Between Established Competitors
The extent to which industry profitability is depressed by aggressive
price competition depends upon:
◦ Concentration (number and size distribution of firms)
◦ Diversity of competitors (differences in goals, cost
structure, etc.)
◦ Product differentiation
◦ Excess capacity and exit barriers
◦ Cost conditions
 Extent of scale economies
 Ratio of fixed to variable costs
The Threat of Entry
The extent to which entrants threaten industry
profitability depends upon the height of barriers to
entry. The principal sources of barriers to entry are:
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Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to channels of distribution
Legal and regulatory barriers
Retaliation
Threat of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
◦ Buyers’ propensity to substitute
◦ The price-performance characteristics of
substitutes.
◦ Profitability of the substitute industry
Five Forces or Six?
Introducing Complements
SUPPLIERS
Bargaining power
of suppliers
The suppliers of
complements create
value for the industry
and can exercise
bargaining power
INDUSTRY
COMPETITORS
POTENTIAL
ENTRANTS
COMPLEMENTS
Threat of
new entrants
Threat of
Rivalry among
existing firms
Bargaining power of buyers
BUYERS
SUBSTITUTES
substitutes
Competitive Force of Buyers
Buyers are a strong competitive force when:
◦ They are large and purchase a sizable percentage of
industry’s product
◦ They buy in large quantities
◦ They can integrate backward
◦ Industry’s product is standardized
◦ Their costs in switching to substitutes or other
brands are low
◦ They can purchase from several sellers
◦ Product purchased does not save buyer money
Competitive Force of Suppliers
Suppliers are a strong competitive force when:
◦ Item makes up large portion of product costs,is crucial
to production process, and/or significantly affects
product quality
◦ It is costly for buyers to switch suppliers
◦ They have good reputations and growing demand
◦ 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
Dynamic Competition
Porter framework assumes
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industry structure drives competitive behavior
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Industry structure is largely stable
But---competition also changes industry structure
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Schumpeterian Competition: A “perennial gale of
creative destruction” where innovation overthrows
established market leaders
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Hypercompetition: “intense and rapid competitive
moves….creating disequilibrium through continuously
creating new competitive advantages and destroying,
obsoleting, or neutralizing opponents’ competitive
advantages
Question 3: What Forces Are at
Work to Change Industry Conditions?
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Industries change because forces are driving industry
participants to alter their actions
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Driving forces are the major underlying causes of
changing industry and competitive conditions
1. Identify those forces likely to exert greatest influence over
next 1 - 3 years
– Usually no more than 3 - 4 factors qualify
as real drivers of change
2. Assess impact
– What difference will the forces make - favorable?
unfavorable?
Common Types of Driving Forces
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Entry or exit of major firms
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Diffusion of technical knowledge and innovations
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Changes in cost and efficiency
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Shift from standardized to differentiated products
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Regulatory policies / government legislation
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Changing societal concerns, attitudes, and lifestyles
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Changes in degree of uncertainty and risk
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Internet and e-commerce opportunities
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Increasing globalization of industry
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Changes in long-term industry growth rate
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Changes in nature of product usage
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Product innovation/technological change
Question 5: What Strategic Moves Are
Rivals Likely to Make Next?
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A firm’s own best strategic moves are affected by
◦ Current strategies of competitors
◦ Future actions of competitors
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Profiling key rivals involves gathering
competitive intelligence about their:
◦ Current strategies
◦ Most recent moves
◦ Resource strengths and weaknesses
◦ Announced plans
Competitor Analysis
Competitive
Scope
Strategic Intent
• Local
• Be dominant
leader
• Regional
• Overtake
industry leader
• National
• Be among
industry leaders
• Move into top
• Multicountry
10
• Global
• Move up a
notch in
rankings
• Maintain current
position
• Just survive
Market Share
Objective
Competitive
Position
Strategic
Posture
Competitive
Strategy
• Aggressive
expansion via
acquisition &
internal
growth
• Getting
stronger; on
the move
• Mostly
offensive
• Striving for
low-cost
leadership
• Wellentrenched
• Mostly
defensive
• Focusing on
market niche
• Expansion
via internal
growth
• Stuck in the
middle of the
pack
• Expansion
via
acquisition
• Going after a
different
position
• Hold on to
present share
• Struggling;
losing
ground
• Combination • Pursuing
of offensive
differentiation
& defensive
based on
Quality
• Aggressive
Service
risk-taker
Technology
superiority
• Conservative Breadth of
product line
follower
Image &
reputation
More value for
the money
Other
attributes
• Give up
present share
to achieve
short-term
profits
• Retrenching
to a position
that can be
defended
Predicting Moves of Rivals
Predicting rivals’ next moves involves
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Analyzing their current competitive positions
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Examining public pronouncements about what it will take to be
successful in industry
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Gathering information from grapevine or industry intelligence
about current activities and potential changes
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Studying past actions and leadership
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Determining who has flexibility to make major strategic changes
and who is locked into pursuing the same basic strategy
The Contributions of Game Theory to
Competitive Analysis
Framing strategic decisions as interactions between competitors
Predicting outcomes of competitive situations involving a few players
Some key concepts:
1. Competition and Cooperation—Game theory can show conditions
where cooperation more advantageous than competition
2. Deterrence—changing the payoffs in the game in order to deter
a competitor from certain actions
3. Commitment—irrevocable deployments of resources that
give creditability to threats
4. Signaling—communication to influence a competitor's decision
Problems of game theory:
1. Useful in explaining past competitive behavior—weak in predicting future
competitive behavior.
2. What’s the problem? — Multitude of models, outcomes highly sensitive
to small changes in assumptions
Question 6: What are the Key Factors
for Competitive Success?
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Competitive elements most affecting every industry
member’s ability to prosper
◦ Specific strategy elements
◦ Product attributes
◦ Resources
◦ Competencies
◦ Competitive capabilities
KSFs spell the difference between
◦ Profit and loss
◦ Competitive success or failure
Identifying Key Success Factors
Prerequisites for success
What do
customers want?
How does the firm
survive competition
Analysis of competition
Analysis of demand
• What drives competition?
• Who are our
customers?
• What are the main
dimensions of competition?
• What do they want?
•How intense is competition?
•How can we obtain a superior
competitive position?
KEY SUCCESS FACTORS
Segmentation Analysis: Principal Stages
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Identify key variables
and categories.
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Construct a segmentation matrix
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Analyze segment attractiveness
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Identify KSFs in each segment
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Analyze benefits of
broad vs. narrow scope.
Identify segmentation variables
Reduce to 2 or 3 variables
Identify discrete categories for
each variable
Potential for economies
of scope across segments
Similarity of KSFs
Product differentiation benefits
of segment focus
The Basis for Segmentation: Customer and Product Characteristics
Characteristics
of the Buyers
Industrial buyers
*Size
*Technical
sophistication
*OEM/replacement
Household buyers
*Demographics
*Lifestyle
*Purchase occasion
Distribution channel
Opportunities for
Differentiation
Characteristics
of the Product
Geographical
location
*Size
*Distributor/broker
*Exclusive/
nonexclusive
*General/special
list
*Physical size
*Price level
*Product features *Technology design
*Inputs used (e.g. raw materials)
*Performance characteristics
*Pre-sales & post-sales services
Segmentation and Key Success Factors in the U.S. Bicycle Industry
SEGMENT
Low price bicycles sold primarily
through department and discount
stores, mainly under the retailer’s
own brand (e.g. Sears’ “Free Spirit”);
Medium-priced bicycles sold
primarily under manufacturer’s brand
name and distributed mainly through
specialist bicycles stores;
KEY SUCCESS FACTORS
* Low-costs through global sourcing of components
& low-wage assembly.
* Supply contract with major retailer.
Leading competitors: Taiwanese & Chinese assemblers,
some U.S manufacturers, e.g. Murray Ohio, Huffy
*Cost efficiency through large scale operation and
either low wages or automated manufacturing.
*Reputation for quality (durability, reliability) through
effective marketing to dealers and/or consumers.
* International marketing & distribution.
Leading competitors: Raleigh, Giant, Peugeot, Fuji (Japan).
High-priced bicycles for enthusiasts.
Children’s bicycles (and tricycles) sold
primarily through toy retailers (discount
toy stores, department stores, and
specialist toy stores).
*Quality of components and assembly, Innovation in
design (e.g. minimizing weight and wind resistance).
*Reputation (e.g. through success in racing, through
effective brand management).
*Strong dealer relations.
Leading competitors: K2, Specialized, Trek
Similar to low-price bicycle segment.
Question 7: Is the Industry
Attractive or Unattractive and Why?
Develop conclusions about whether the industry and
competitive environment is attractive or unattractive,
both near- and long-term, for earning good profits
A firm uniquely well-suited in an otherwise unattractive
industry can, under certain circumstances, still earn
unusually good profits
Issues to Consider in
Assessing Industry Attractiveness
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Industry’s market size and growth potential
Whether competitive conditions are conducive to
rising/falling industry profitability
Will competitive forces become stronger or weaker
Whether industry will be favorably or unfavorably
impacted by driving forces
Potential for entry/exit of major firms
Stability/dependability of demand
Severity of problems facing industry
Degree of risk and uncertainty in industry’s future
Nov 1984
July 2000
Feb 1996
Feb 2004
Apple Computer
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Historically, what were Apple’s major competitive advantages? Have
they changed over time? Why?
How has the structure of the PC industry changed over the last 20
years? What new opportunities for competitive advantage have
these changes created?
Evaluate Apple’s strategies since 1990. Have they developed a
sustainable competitive advantage?
Has Steve Jobs finally solved Apple’s long-standing problems with
the Mac business and Apple’s broader strategic position?
What should Apple do today?
Question 4: Which Companies are in
Strongest / Weakest Positions?
A strategic group is a group of firms in an industry
following the same or similar strategy.
Identifying strategic groups:
• Identify principal strategic variables that
distinguish firms.
• Position each firm in relation to these variables.
• Identify clusters.
Steps in the construction of
strategic group maps:
1. Identify two important competitive
characteristics that strategically differentiate
firms in an industry from one another.
2. Plot the firms on the two-variable map.
3. Draw circles around the firms that are clustered
together.
4. Indicate potential movement of firms with
arrows.
Strategic Groups in the
World Automobile Industry
Broad
GLOBAL, BROAD-LINE
PRODUCERS e.g., GM, Ford,
Toyota, Nissan, Honda, VW
REGIONALLY FOCUSED
BROAD-LINE PRODUCERS
e.g. Fiat, PSA, Renault,
Rover, Chrysler
PRODUCT
RANGE
GLOBAL SUPPLIERS OF
NARROW MODEL RANGE
e.g., Volvo, Subaru, Isuzu,
Suzuki, Saab, Hyundai
NATIONALLY FOCUSED,
INTERMEDIATE LINE
PRODUCERS e.g. Tofas, Kia,
VAZ, Maruti
NATIONALLY- FOCUSED,
SMALL, SPECIALIST
PRODUCERS e.g., Bristol
(U.K.), Classic Roadsters (U.S.),
Morgan (U.K.)
Narrow
National
LUXURY CAR
MANUFACTURERS e.g.,
Jaguar, Rolls Royce,
Daimler-Benz, BMW
PERFORMANCE
CAR PRODUCERS
e.g., Porsche,
Maserati, Lotus
GEOGRAPHICAL SCOPE
Global
2.0
Strategic Groups Within the World
Petroleum Industry
INTEGRATED DOMESTIC
OIL COMPANIES
1.5
PRODUCTION
COMPANIES
1.0
PDVSA
INTEGRATED INTERNATIONAL
MAJORS
DIVERSIFIED
MAJORS
Kuwait
Exxon
Amoco
Arco
Phillips
Unocal
Indian Oil
Petrobras
Elf
Elf
Repsol
0.5
Vertical Balance
Statoil
EN
ENI
I
Neste
Nippon
0
Sun
0
10
NATIONALLY-FOCUSED
DOWNSTREAM COMPANIES
20
30
BP
Chevron
Total
Texaco
Shell
Mobil
INTERNATIONAL
DOWNSTREAM Petrofina
OIL COMPANIES
40
50
Geographical Scope
60
70
80
Hamel, “Strategy as Revolution”
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Strategic planning is often not strategic
Strategy making should be subversive
The bottleneck is at the top of the bottle
Revolutionaries exist in every company
Change is not the problem, engagement is
Strategy making must be democratic
Anyone can be a strategy activist
Perspective is worth 50 IQ points
Top-down and bottom up are not the only alternatives
You cannot see the end from the beginning
How to Start a Revolution
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Re-conceive your product or service
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Re-define the market space
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Radically improve the value equation
Separate form and function
Achieve joy of use
Push the bounds of universality
Strive for individuality
Increase accessibility to your products
Re-draw industry boundaries
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Rescale the industry
Compress the supply chain
Drive convergence between industries