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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

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

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External Environments

  • 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

  • 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

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General Environment

  • Demographic

  • Economic

  • Political

  • Socioculture

  • Technical

  • Global

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1) 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) 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) Political/Legal Segments

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

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4) 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) 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 Segment

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

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General Environment

  • 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 1995-2004

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Porter’s Five Forces

  • 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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(of firms in

other industries)





Suppliers of

Key Inputs





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Porter’s 5-forces is all about margins



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



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When industry structural variables are weak…...

Prices can be kept high


Profits can soar

Costs can be kept low

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When industry structural variables are strong

Prices will be pushed down


Profits shrink

Costs will rise

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  • Suppose you had to start a new business and start generating revenues…

    … today

    … in a week

    … in 2 months

    … in 1 year

    What kind of businesses might you start?

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Potential New Entrants

  • 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

  • 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

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  • 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

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  • 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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  • 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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  • 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

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

Carbonated Soft Drink

Soft Drinks


Many Substitutes

Few Substitutes

Few Rivals

Many Rivals

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Rivalry and Profitability

  • 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?

  • 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

  • Specialized assets

  • Fixed costs of exit

  • Strategic interrelationships among business units

  • Emotional barriers

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Industries and Segments

  • 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

Economy Luxury

Which segment is more attractive? Why?

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Porter’ conclusion

  • 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

  • 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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  • 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

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

  • 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

  • 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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Competitor Analysis Components

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Identification of Key Success Factors?

  • 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

  • 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) - vary by segment

Automotive Industry

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