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Competing For Advantage. Part II – Strategic Analysis Chapter 3 – The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis.

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Competing for advantage l.jpg

Competing For Advantage

Part II – Strategic Analysis

Chapter 3 – The External Environment:

Opportunities, Threats, Industry Competition,

and Competitor Analysis


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  • Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness.

    Michael Porter

  • When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact.

    Warren Buffett

  • Skate to where the puck is going, not to where the puck has been.

    Wayne Gretsky


External environments l.jpg
External Environments understanding of the rules of competition that determine industry attractiveness.

  • Key Terms

    • General Environment –composed of dimensions in the broader society that influence an industry and the firms within it

    • Industry Environment –set of factors that directly influence a firm and its competitive actions and competitive responses

    • Competitor Environment –details about a firm’s direct and indirect competitors and the competitive dynamics expected to impact a firm's efforts to generate above-average returns


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Components of External Analysis understanding of the rules of competition that determine industry attractiveness.

  • Scanning – Identifying early signals

  • Monitoring – Following signals or change identifies in scanning to identify patterns

  • Forecasting – Projections of what might happen

  • Assessing – Determining the timing and significance of forecasted change


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Assessing the General Environment understanding of the rules of competition that determine industry attractiveness.


General environment l.jpg
General Environment understanding of the rules of competition that determine industry attractiveness.

  • Demographic

  • Economic

  • Political

  • Socioculture

  • Technical

  • Global


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1) understanding of the rules of competition that determine industry attractiveness.Demographic Segment

  • Characteristics of the population

    • e.g., age, race, gender, sexual orientation and social classes

  • Ethnic structure

  • Income distribution

  • Geographic distribution


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2) understanding of the rules of competition that determine industry attractiveness.Economic Segment

  • General health/wellbeing of the local, regional, national or global economy.

    • e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs


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3) understanding of the rules of competition that determine industry attractiveness.Political/Legal Segments

  • Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.


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4 understanding of the rules of competition that determine industry attractiveness.) SocioculturalSegment

  • Attitudes of society towards work, careers, products, services and consumer activism.

    • e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.


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5 understanding of the rules of competition that determine industry attractiveness.) Technological Segment

  • Changes in technology that affect the workplace, and the products and services consumers expect

    • e.g., Information technologies, entertainment technologies, product technologies.


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6) Global understanding of the rules of competition that determine industry attractiveness.Segment

  • New and existing markets around the world, and changes in the political, cultural and institutional terrain.


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General Environment understanding of the rules of competition that determine industry attractiveness.

  • Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance

  • Cast a wide net and to identify the emerging trends

  • Then determine which factors are relevant, and how these changes will have an effect upon the firm.


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ROIC Across Industries understanding of the rules of competition that determine industry attractiveness.1995-2004


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Porter’s Five Forces understanding of the rules of competition that determine industry attractiveness.

  • Competitive Rivalry

  • Power of Buyers

  • Power of Suppliers

  • Potential Entrants

  • Substitute Products

    Each of these forces affect costs/prices,

    therefore, profitability


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Substitute understanding of the rules of competition that determine industry attractiveness.

Products

(of firms in

other industries)

Rivalry

Among

Competing

Sellers

Suppliers of

Key Inputs

Buyers

Potential

New

Entrants


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Porter’s 5-forces is all about margins understanding of the rules of competition that determine industry attractiveness.

{

Price

What factors increase/decrease margins within an industry, thus affecting profitability.

Profits

Costs


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When industry structural variables are weak…... understanding of the rules of competition that determine industry attractiveness.

Prices can be kept high

{

Profits can soar

Costs can be kept low


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When industry structural variables are strong understanding of the rules of competition that determine industry attractiveness.

Prices will be pushed down

{

Profits shrink

Costs will rise


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Potential New Entrants revenues…

  • Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents.

  • Firms can create “barriers to enter”

  • Barriers of entry are desirable for entrenched firms


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Barriers to Entry revenues…

  • Economies of scale

  • Product differentiation & loyalty

  • Capital & resource requirement

  • Switching costs

  • Distribution

  • Cost disadvantage independent of size

  • Regulatory policies

  • Access to technology & know-how

  • Learning, costs, experience curves

  • Threat of retaliation


Suppliers l.jpg
Suppliers revenues…

  • Who are you key suppliers?

  • Suppliers are a strong competitive force when:

    • Only a few suppliers exist and is more concentrated than industry to which it is selling

    • Few substitutes available to the industry firm

    • Industry not important buyers to supplier group

    • Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality

    • It is costly for buyers to switch suppliers

    • Forward integration by suppliers is a credible threat

    • Suppliers can supply at a lower cost


Buyers l.jpg
Buyers revenues…

  • Who are your key buyers? - who provides our revenues?

  • Can they force:

    • lower prices, higher quality and service – affect the terms and conditions of the exchange?

  • When do you, as a consumer, have power?

  • Two issues

    • Price sensitivity

    • Can you actually bargain


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Buyers revenues…

  • What affect buyers’ power?

    • Volume/Frequency of purchase

    • When buyers represent a large portion of sellers revenues

    • When buyers can easily switch to another product

    • When the product the buyers are buying is undifferentiated

    • When buyers can self-source or backwards integration

    • Criticality

    • Buyers’ knowledge

    • Buyers’ profitability


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Substitutes revenues…

  • Product/service which fulfills similar need

  • Price cap

  • 3 Questions

    • Are they available?

    • Can we switch?

    • Price-performance relationship?


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Substitutes and Business Definition revenues…

  • How we define our business defines our substitutes and our rivals

Carbonated Soft Drink

Soft Drinks

Beverages

Many Substitutes

Few Substitutes

Few Rivals

Many Rivals


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Rivalry and Profitability revenues…

  • Industry profitability is a collective good.

  • Collective good is served by coordination

    • Are there industries were pricing is coordinated?

  • Incentive to violate


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Rivalry – What drives it? revenues…

  • Numerous or equally balanced competitors

  • Slow growth, excess capacity

  • High fixed costs

  • High storage costs

  • High obsolescence costs

  • Lack of differentiation

  • Low switching costs

  • Perceptions of high payoff from competitive actions

  • High exit barriers


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Exit Barriers revenues…

  • Specialized assets

  • Fixed costs of exit

  • Strategic interrelationships among business units

  • Emotional barriers


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Industries and Segments revenues…

  • What is a segment?

  • Different segments…..

    • posses different combinations of 5-forces

    • therefore:

      • reward different strategies

      • possess different levels of profitability


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Segments in the Automotive Industry revenues…

Economy Luxury

Which segment is more attractive? Why?


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Porter’s..in conclusion revenues…

  • Attractiveness of industry/segment

    • current industry

    • adjacent segments

    • industries you might consider entering

  • Which forces possess the greatest influence?

    • Can we influence them?


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Static model & Hypercompetition revenues…

  • If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing competition and profit.


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Complementors revenues…

  • Key Terms

    • Complementors– companies that sell complementary goods or services that are compatible with the focal firm's own product or services


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Interpreting Industry Analysis revenues…

The ways in which competitive analysis provides insight into the attractiveness of an industry by determining its potential for above-average returns over the long term


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Analysis of Direct Competitors revenues…

  • Key Terms

    • Strategic Group–set of firms emphasizing similar strategic dimensions to use a similar strategy

    • Strategic Dimensions–areas that firms in a strategic group treat similarly


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Implications from Strategic Group Dynamics revenues…

  • Intra-strategic group rivalry is more intense than inter-strategic group rivalry

  • Membership in a strategic group partially defines the essential characteristics of firms' strategies

  • The more similar strategies are seen across strategic groups, the greater the level of expected rivalry

  • The strengths of industries' five forces differ across strategic groups



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Identification of Key Success Factors? revenues…

  • KSFs areproduct attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability

  • opportunities for competitive advantage


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Example: KSFs for Beer Industry revenues…

  • Utilization of brewing capacity -- to keep manufacturing costs low

  • Strong network of wholesale distributors -- to gain access to retail outlets

  • Clever advertising -- to induce beer drinkers to buy a particular brand


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Identifying Key Success Factors (KSFs) - revenues…vary by segment

Automotive Industry


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