Figure 3.

1: From Thinking Strategically to

Choosing a Strategy

Thinking
Strategically
about External
Environment

Form a Identify Select

Strategic Strategic the Best
Vision Options Strategy

Thinking
Strategically
about Internal
Environment
 Question 1: What are the Industry’s
Dominant Economic Features?
 Market size and growth rate
 Number of rivals
 Scope of competitive rivalry
 Number of buyers
 Degree of product differentiation
 Product innovation
 Supply/demand conditions
 Pace of technological change
 Vertical integration
 Economies of scale
 Learning/experience curve effects
Question 2: What Kinds of Competitive Forces
are Industry Members Facing?
Fig. 3.4: Existing Rivalry
Fig. 3.5: Threat of New Entry
Fig. 3.6: Threat of Substitute Products
Fig. 3.7: Bargaining Power of Suppliers
Fig. 3.8: Bargaining Power of Buyers
 Question 3: What Forces Are Driving
Industry Change?
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?
 Question 4: What Market Positions Do
Industry Rivals Occupy?

 One technique for revealing the different

competitive positions of industry rivals is
strategic group mapping
 A strategic group consists of those rivals
with similar competitive approaches and
positions in the market
 Procedure for Constructing a
Strategic Group Map
STEP 1: Identify competitive characteristics that
differentiate firms in an industry from one
another
STEP 2: Plot firms on a two-variable map using
pairs of these differentiating
characteristics
STEP 3: Assign firms that fall in about the same
strategy space to same strategic group
STEP 4: Draw circles around each group, making
circles proportional to size of group’s
respective share of total industry sales
 Example: Strategic Group Map of the
Video Game Industry
Video
Arcades/Coin-
Suppliers/Distribution Channels

Op. Machines Arcade

operators
Types of Video Game

Publishers
Home PCs of games on
CD-ROMs
Sony, Sega,
Nintendo, several
others
Video Game
Consoles
MSN Gaming Zone,
Pogo.com,
America Online,
Online Video HEAT, Engage,
Game Sites Oceanline, TEN

Low Medium High

(Coin-operated (Video players (Use PC)
equipment) cost $100-$300)
Overall Cost to Players of Video Games
 Question 5: What Strategic Moves Are
Rivals Likely to Make Next?
 A firm’s own best strategic moves are affected by

 Current strategies of competitors

 Future actions of competitors

 Profiling key rivals involves gathering

competitive intelligence about their
 Current strategies

 Most recent moves

 Resource strengths and weaknesses

 Announced plans
 Question 6: What are the Key Factors for
Future Competitive Success?
 Competitive elements most affecting every
industry member’s ability to prosper
 Specific strategy elements
 Product attributes
 Resources
 Competencies
 Competitive capabilities
 Market achievements
 KSFs spell the difference between
 Profit and loss
 Competitive success or failure
 Identifying Industry
Key Success Factors
 Answers to three questions pinpoint KSFs
 On what basis do customers choose between
competing brands of sellers?
 What resources and competitive capabilities
does a seller need to have to be
competitively successful?
 What shortcomings put a company at a
significant competitive disadvantage?
 KSFs consist of the 3 - 6 really major
determinants of financial and
competitive success in an industry
 Question 7: Is the Industry
Attractive or Unattractive and Why?

Objective
Develop conclusions about whether the industry
and competitive environment is attractive or
unattractive, both near- and long-term, for
earning good profits

Principle
A firm uniquely well-suited in an otherwise
unattractive industry can, under certain
circumstances, still earn unusually good profits
Figure 3.1: From Thinking Strategically to
Choosing a Strategy

Thinking
Strategically
about External
Environment

Form a Identify Select

Strategic Strategic the Best
Vision Options Strategy

Thinking
Strategically
about Internal
Environment
 Question 1: How Well is the
Company’s Present Strategy Working?
 Two steps involved

 Determine current strategy of

company
 Examine key indicators of
strategic and financial
performance
Question 2: What Are the Firm’s Strengths,
Weaknesses, Opportunities and Threats ?
 S W O T represents the first letter in
 S trengths
 W eaknesses
 O pportunities
 T hreats
 For a company’s strategy to be well-
conceived, it must be matched to both
 Resource strengths and
weaknesses
 Best market opportunities and
external threats to its well-being
 Competencies vs. Core Competencies
vs. Distinctive Competencies
 A company competence is an activity that a
company has learned to perform well

 A core competence is a competitively

important activity that a company performs
better than other internal activities

 A distinctive competence is a competitively

important activity that a company performs
better than its rivals
 Table 4.2: SWOT Analysis -
What to Look For
Potential Resource Potential Resource Potential Company Potential External
Strengths Weaknesses Opportunities Threats

• Powerful strategy • No clear strategic • Serving additional • Entry of potent new

• Strong financial direction customer groups competitors
condition • Obsolete facilities • Expanding to new • Loss of sales to
• Strong brand name • Weak balance geographic areas substitutes
image/reputation sheet; excess debt • Expanding product • Slowing market
• Widely recognized • Higher overall line growth
market leader costs than rivals • Transferring skills • Adverse shifts in
to new products exchange rates &
• Proprietary • Missing some key
trade policies
technology skills/competencies • Vertical integration
• Costly new
• Cost advantages • Subpar profits • Take market share
regulations
• Strong advertising • Internal operating from rivals
• Vulnerability to
• Product innovation problems . . . • Acquisition of
business cycle
skills • Falling behind in rivals
• Growing leverage
• Good customer R&D • Alliances or JVs to of customers or
service • Too narrow expand coverage suppliers
• Better product product line • Openings to exploit • Reduced buyer
quality • Weak marketing new technologies needs for product
• Alliances or JVs skills • Openings to extend • Demographic
brand name/image changes
 Role of SWOT Analysis in
Crafting a Better Strategy
 Developing a clear understanding of a company’s
 Resource strengths
 Resource weaknesses
 Best opportunities
 External threats
 Drawing conclusions about how
 Company’s strategy can be matched to both its
resource capabilities and market opportunities
 Urgent it is for company to correct resource
weaknesses and guard against external threats
 Developing actions for improving strategy
 Question 3: Are the Company’s
Prices and Costs Competitive?
 Assessing whether a firm’s costs are
competitive with those of rivals is a crucial
part of company analysis
 Key analytical tools

 Value chain analysis

 Activity-based costing

 Benchmarking
 The Concept of a Company
Value Chain
 A company consists of all the activities and functions
it performs in trying to deliver value to its customers.
 A company’s value chain shows the linked set
of activities, functions, and business processes
that it performs
 A company’s value chain consists of two types of
activities
 Primary activities (where most of the value
for customers is created)
 Support activities that are undertaken to
aid the individuals ands groups engaged in
doing the primary activities
Figure 4.3: Representative Company Value Chain
Figure 4.4: Representative Value Chain for
an Entire Industry
 Benchmarking Costs of
Key Value Chain Activities
 Focuses on cross-company comparisons of how certain
activities are performed and the costs associated with these
activities
 Determine whether a company is performing particular
value chain activities efficiently by studying the practices
and procedures used by other companies
 Learn what is the “best” way to do a particular activity from
those who have demonstrated they are “best-in-industry” or
“best-in-world”
 Assess if company’s costs of performing particular value
chain activities are in line with competitors
 Learn how other firms achieve lower costs
 Take action to improve company’s cost competitiveness
Strategic Options for Remedying a Cost
Disadvantage

 Adopting best practices

 Reengineering/Revamping value chain
 Relocate high-cost activities
 Outsourcing
 Invest in technological improvements
 Innovate around troublesome cost components
 Find ways to detour around the activities or
item where costs are high
 Redesign the product to speed manufacturing
 Work with suppliers and buyers to reduce their
costs
Question 4: Is the Company Competitively
Stronger or Weaker Than Key Rivals?
Competitive Strength Assessment
1. List KSFs/competitive strength measures

2. Rate firms on each factor using rating scale of 1 to 10

(1 = very weak; 5 = average; 10 = very strong)
3. Decide whether to use a weighted or unweighted
rating system
4. Sum individual ratings to get an overall measure of
competitive strength for each rival
5. Determine whether firm enjoys a competitive
advantage or suffers from a competitive disadvantage
based on the overall strength ratings
 Table 4.5 (A): An Unweighted
Competitive Strength Assessment
KSF/Strength Measure ABC Co. Rival 1 Rival 2 Rival 3 Rival 4

Quality/product performance 8 5 10 1 6

Reputation/image 8 7 10 1 6

Manufacturing capability 2 10 4 5 1

Technological skills 10 1 7 3 8

Dealer network/distribution 9 4 10 5 1

New product innovation 9 4 10 5 1

Financial resources 5 10 7 3 1

Relative cost position 5 10 3 1 4

Customer service capability 5 7 10 1 4

Overall strength rating 61 58 71 25 32

Rating Scale: 1 = very weak; 5 = average; 10 = very strong

 Table 4.5 (B): A Weighted
Competitive Strength Assessment
ABC
KSF/Strength Measure Weight Rival 1 Rival 2 Rival 3 Rival 4
Co.
Quality/product performance 0.10 8/0.80 5/0.50 10/1.00 1/0.10 6/0.60
Reputation/image 0.10 8/0.80 7/0.70 10/1.00 1/0.10 6/0.60
Manufacturing capability 0.10 2/0.20 10/1.00 4/0.40 5/0.50 1/0.10
Technological skills 0.05 10/0.50 1/0.05 7/0.35 3/0.15 8/0.40
Dealer network/distribution 0.05 9/0.45 4/0.20 10/0.50 5/0.25 1/0.05
New product innovation 0.05 9/0.45 4/0.20 10/0.50 5/0.25 1/0.05
Financial resources 0.10 5/0.50 10/1.00 7/0.70 3/0.30 1/0.10
Relative cost position 0.30 5/1.50 10/3.00 3/0.95 1/0.30 4/1.20
Customer service capability 0.15 5/0.75 7/1.05 10/1.50 1/0.15 4/0.60
Sum of weights 1.00
Overall strength rating 5.95 7.70 6.85 2.10 3.70

Rating Scale: 1 = very weak; 5 = average; 10 = very strong

 Why Do a Competitive
Strength Assessment ?
 Reveals strength of firm’s competitive position
vis-à-vis key rivals
 Shows how firm stacks up against rivals, measure-
by-measure—pinpoints firm’s competitive
strengths and competitive weaknesses
 Indicates whether firm is at a competitive
advantage / disadvantage against each rival
 Identifies possible offensive attacks (pit company
strengths against rivals’ weaknesses)
 Identifies possible defensive actions (a need to
correct competitive weaknesses)
 Question 5: What Strategic Issues
Does the Company Need to Address?
 Based on the answers to the preceding 4 questions
and the 7 questions posed in conducting industry and
competitive analysis, what items should be on the
company’s “worry list” ?
 Requires thinking strategically about
 Pluses and minuses in the
industry and competitive situation
 Company’s resource strengths
and weaknesses and attractiveness
of its competitive position
A “good” strategy must address “what to do” about
each and every strategic issue!