Professional Documents
Culture Documents
Chap03 - Industry and Competitive Analysis
Chap03 - Industry and Competitive Analysis
INDUSTRY AND
COMPETITIVE
ANALYSIS
Screen graphics created by:
Jana F. Kuzmicki, PhD, Mississippi University for Women
1
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
“Analysis is the critical starting
point of strategic thinking.”
Kenichi Ohmae
Laszlo Birinyi
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
Role of Situation Analysis in Strategy-Making
Methods of Industry and Competitive Analysis
Industry’s Dominant Economic Traits
Industry’s Competitive Forces
Drivers of Industry Change
Competitive Positions of Rivals
Competitive Moves of Rivals
Key Success Factors
Conclusions: Overall Industry Attractiveness
Conducting an Industry and Competitive Analysis
3
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
What Is Situation Analysis?
Two considerations
Company’s external or
macro-environment
Industry and competitive
conditions
Company’s internal or
micro-environment
Competencies,
capabilities, resource
strengths and weaknesses,
and competitiveness
4
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Figure 3.1: The Components of a
Company’s Macro-Environment
MACROENVIRONMENT
The Economy
at Large
Le
gi
gy Re sla
o lo gu tio
hn la n a
c Suppliers Substitutes tio n
Te n d
COMPANY
Rival Buyer
Firms s
So New
c Entrants
an ietal tion s
dL V
ife alue p ula phic
sty s IMMEDIATE INDUSTRY Po ogra
les m
AND COMPETITIVE
ENVIRONMENT
De
5
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Figure 3.2: Strategic Thinking and Analysis
Leads to Good Strategic Choices
Assess Industry & Competitive Conditions
Industry’s
dominant
economic
traits
Competitive
Drivers of
forces and
change in the
strength of
industry
each force
Conclusions:
Competitor Key success Industry
analysis factors attractiveness
7
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Question 1: What are the
Industry’s Dominant Economic Traits?
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
8
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Table 3.1: Sample Profile
of the Dominant Economic
Characteristics of the
Sulfuric Acid Industry
The Experience Curve Effect
$1
$1 .90
.81
Cost per Unit
.80
.729 10% Cost
.70 .64 Reduction
.512
.49 20% Cost
Reduction
.343
30% Cost
Reduction
1 2 4 8
Million Million Million Million
Units Units Units Units
11
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Table 3.2: Relevance of
Key Economic Features
Economic Strategic Importance
Feature
Market Size Small markets don’t tend to attract new firms; large markets attract firms
looking to acquire rivals with established positions in attractive industries
Market growth rate Fast growth breeds new entry; slow growth spawns increased rivalry & shake-
out of weak rivals
Capacity Surpluses push prices & profit margins down; shortages pull them up
surpluses/shortages
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 More buyers will shop for lowest price
item for buyers
Standard products Buyers have more power because it’s easier to switch from seller to seller
Rapid technological Raises risk; investments in technology facilities/equipment may become
change obsolete before they wear out
Capital requirements Big requirements make investment decisions critical; timing becomes
important; creates a barrier to entry and exit
Vertical integration 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 Shortens product life cycle; increases risk because of opportunities for
innovation leapfrogging
12
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Question 2: What is Competition Like and
How Strong Are the Competitive Forces?
Objective
To identify
Main sources of
competitive forces
Strength of these forces
Rivalry
Suppliers
Among
of Key Buyers
Competing
Inputs
Sellers
Potential
New
Entrants
14
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Analyzing the Five Competitive Forces:
How to Do It
Assess strength of each of the five competitive forces
(Strong? Moderate? Weak? )
Rivalry among competitors
Competition from substitute products
Competitive threat from potential entrants
Bargaining power of suppliers and
supplier-seller collaboration
Bargaining power of buyers and
buyer-seller collaboration
Explain how each force acts to create competitive pressure
—What are the factors that cause each force to be
strong or weak?
Decide whether overall competition (the combined effect
of all five competitive forces) is brutal, fierce, strong,
normal/moderate, or weak
15
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Rivalry Among Competing Sellers
Usually the most powerful of the five forces
The big factor determining the strength of rivalry is
how actively and aggressively are rivals employing
the various weapons of competition in jockeying for a
stronger market position and seeking bigger sales
Is price competition vigorous?
Active efforts to improve quality?
Are rivals racing to offer better
performance features?
Are rivals racing to offer better
customer service?
Lots of advertising/sales promotions?
Active efforts to build a stronger
dealer network?
Active product innovation?
Active use of other weapons of rivalry?
16
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
What Causes Rivalry to be Stronger?
Active jockeying for position among rivals and frequent
launches of new offensives to gain sales and market share
One or more firms initiates moves to bolster their
standing at expense of rivals
Lots of firms that are relatively equal in size and capability
Slow market growth
Industry conditions tempt some firms to go on the offensive
to boost volume and market share
Customers have low costs in switching to rival brands
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, and countries of origin
17
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Principle of Competitive Markets
Barriers to entry
Examples
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Newspapers vs. TV vs. Internet
E-mail vs. Overnight Delivery
22
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
How to Tell Whether Substitute
Products are a Strong Force
Sales of substitutes are
growing rapidly
Producers of substitutes
plan to add new capacity
Profits of producers of
substitutes are up
23
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Principle of Competitive Markets
Attractively priced
24
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Competitive Pressures From Suppliers
and Supplier-Seller Collaboration
Whether supplier-seller relationships
represent a weak or strong
competitive force depends on
Whether suppliers can exercise
sufficient bargaining leverage to
influence terms of supply in their
favor
Extent and competitive
importance of collaborative
partnerships between one or
more sellers and their suppliers
25
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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
26
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Competitive Pressures: Collaboration
Between Sellers and Suppliers
Rival sellers are forming long-term strategic
partnerships with select suppliers to
Promote just-in-time deliveries and
reduced inventory and logistic costs
Speed availability of next-generation
components
Enhance quality of parts being supplied
Reduce suppliers’ costs which paves way for
lower prices on items supplied
Competitive advantage potential may accrue to
industry rivals doing the best job of managing
supply-chain relationships
27
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Principle of Competitive Markets
Quality and
performance
of items supplied
Reliability of deliveries
28
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Competitive Pressures From Buyers
and Seller-Buyer Collaboration
Whether seller-buyer relationships
represent a weak or strong
competitive force depends on
31
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Principle of Competitive Markets
36
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Analyzing Driving Forces
37
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Common Types of Driving Forces
Marketing innovation
38
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Common Types of Driving Forces
Entry or exit of major firms
Diffusion of technical knowledge
Changes in cost and efficiency
Market shift from standardized to differentiated
products (or vice versa)
Regulatory policies / government legislation
Changing societal concerns, attitudes, and
lifestyles
Changes in degree of uncertainty and risk
39
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Environmental Scanning
Definition
Monitoring and interpreting sweep of social,
political, economic, ecological, and technological
events to spot budding trends that could
eventually impact industry
Purpose
Raise consciousness of managers about potential
developments that could
Have important impact on industry conditions
Pose new opportunities and threats
40
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Question 4: Which Companies are in
Strongest / Weakest Positions?
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 in
an industry
41
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Strategic Group Mapping
Firms in same strategic group have two 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
42
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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
43
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Example: Strategic Group Map of the
Video Game Industry
Low
(Coin-operated
Suppliers/Distribution Channels
equipment) Arcade
operators
Types of Video Game
Publishers
Low of games on
(Coin-operated CD-ROMs
Sony, Sega,
equipment)
Nintendo, several
others
Low
(Coin-operated
equipment) MSN Gaming Zone,
Pogo.com,
America Online,
Low HEAT, Engage,
(Coin-operated Oceanline, TEN
equipment)
Low Medium High
(Coin-operated (Video players (Use PC)
equipment) cost $100-$300)
Overall Cost to Players of Video Games
44
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Guidelines: Strategic Group Maps
Variables selected as axes should not be highly
correlated
Variables chosen as axes should expose big
differences in how rivals compete
Variables do not have to be either quantitative or
continuous
Drawing sizes of circles proportional to combined
sales of firms in each strategic group allows map
to reflect relative sizes of each strategic group
If more than two good competitive variables can
be used, several maps can be drawn
45
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Interpreting Strategic Group Maps
Announced plans
47
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Competitor Analysis
Successful strategists take great pains
in scouting competitors to
Understand their strategies
Watch their actions
Evaluate their vulnerability to driving
forces and competitive pressures
Size up their resource strengths and
weaknesses and their capabilities
Try to anticipate rivals’ next moves
48
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Table 3.3: Categorizing Objectives
and Strategies of Competitors
Competitive Strategic Market Share Competitive Strategic Competitive
Scope Intent Objective Position Posture Strategy
• Aggressive • Getting • Striving for
• Be dominant • Mostly
• Local expansion stronger; on low-cost
leader offensive
via the move leadership
• Overtake acquisition &
internal • Well- • Mostly • Focusing on
• Regional industry
growth entrenched defensive market niche
leader
• Be among • Expansion • Stuck in the • Combination • Pursuing
• National industry via internal middle of the of offensive differentiation
leaders growth pack & defensive based on
Quality
• Expansion • Going after a
• Move into • Aggressive Service
• Multicountry via different
top 10 risk-taker Technology
acquisition position
superiority
• Move up a • Hold on to • Struggling; Breadth of
• Conservative
• Global notch in present losing product line
follower
rankings share ground Image &
49
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Predicting Moves of Rivals
Predicting rivals’ next moves involves
Analyzing their current competitive positions
Examining public pronouncements about
what it will take to be successful in industry
Gathering information from grapevine about
current activities and potential changes
Studying past actions and leadership
Determining who has flexibility to make major
strategic changes and who is locked into
pursuing same basic strategy
50
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Question 6: What are the Key Factors
for Competitive Success?
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
51
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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 does it take for sellers to achieve a
sustainable competitive advantage?
KSFs consist of the 3 - 5 really major
determinants of financial and
competitive success in an industry
52
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Table 3.3: Common Types of
Key Success Factors
Scientific research expertise; Product innovation capability; Expertise
Technology-
in a given technology; Capability to use Internet to conduct various
related business activities
Low-cost production efficiency; Quality of manufacture; High use of
Manufacturing- fixed assets; Low-cost plant locations; High labor productivity; Low-
related cost product design; Flexibility to make a range of products
Strong network of wholesale distributors/dealers; Gaining ample
Distribution-
space on retailer shelves; Having company-owned retail outlets; Low
related distribution costs; Fast delivery
Fast, accurate technical assistance; Courteous customer service;
Marketing-
Accurate filling of orders; Breadth of product line; Merchandising
related skills; Attractive styling; Customer guarantees; Clever advertising
Superior workforce talent; Quality control know-how; Design
Skills-related expertise; Expertise in a particular technology; Ability to develop
innovative products; Ability to get new products to market quickly
Superior information systems; Ability to respond quickly to shifting
Organizational market conditions; Superior ability to employ Internet to conduct
capability business; More experience & managerial know-how
Favorable image/reputation with buyers; Overall low-cost; Convenient
Other types locations; Pleasant, courteous employees; Access to financial capital;
Patent protection
53
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Example: KSFs for Beer Industry
54
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Example: KSFs for Apparel
Manufacturing Industry
Fashion design -- to
create buyer appeal
Low-cost manufacturing
efficiency -- to keep selling
prices competitive
55
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Example: KSFs for Tin and
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
56
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Strategic Management Principle
57
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
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
58
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Things to Consider in
Assessing Industry Attractiveness
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
59
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Conducting an Industry and
Competitive Situation Analysis
Two things to keep in mind