Understanding the Factors that Determine a Company

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Understanding the Factors that Determine a Company

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1. Diagnosing a company’s situation has two facets Assessing the company’s external or macro-environment Industry and competitive conditions Forces acting to reshape this environment Assessing the company’s internal or micro-environment Market position and competitiveness Competencies, capabilities, resource strengths and weaknesses, and competitiveness Understanding the Factors that Determine a Company’s Situation

3. Porter’s 5 Competitive Forces Competition in an industry, and thus potential profit & attractiveness, is a composite of, 1. Current sellers competing in the market Typically, the strongest force 2. Threat of new competitors’ market entry Consider barriers to entry and expected response of current competitors 3. Substitute products stealing market share Consider price attractiveness, quality comparison by buyers, and relative ease of substituting

4. 5 Forces, (con’t) 4. Competitive pressures resulting from supplier---seller relationships Consider supplier power and potential collaborative relationships 5. Competitive pressures resulting from seller--- buyer relationships Remember the unit of analysis is firm-level buying Consider volume buying, switching costs, and potential backward integration threat General rule: greater collective forces means less collective profitability of industry firms & lower industry attractiveness

5. The Five Forces Model of Competition

6. 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

7. Competitive environment is unattractive from the standpoint of earning good profits when Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power Strategic Implications of the Five Competitive Forces

8. Competitive environment is worth considering from a profit-making standpoint when Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist Suppliers and customers are in a weak bargaining position Strategic Implications of the Five Competitive Forces

9. STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years Usually no more than 3 - 4 factors qualify as real drivers of change STEP 2: Assess impact Are the driving forces acting to cause market demand for product to increase or decrease? Are the driving forces acting to make competition more or less intense? Will the driving forces lead to higher or lower industry profitability? STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces Analyzing Driving Forces: Three Key Steps

10. Emerging new Internet capabilities and applications Increasing globalization of industry [trade barriers, labor] Changes in long-term industry growth rate [SUVs, CDs] Changes in who buys the product and how they use it [iPods, cell phones] Product innovation [video games, Rx] Technological change/process innovation [VOIP, steel] Marketing innovation [pop-ups, cell phone ads] Common Types of Driving Forces

11. Entry or exit of major firms [Google in China] Diffusion of technical knowledge [tech transfer] Changes in cost and efficiency [hybrids] Consumer preferences shift from standardized to differentiated products (or vice versa) [alcohol & texts; netbooks] Changes in degree of uncertainty and risk [online auction] Regulatory policies / government legislation [unions, Do Not Call registry] Changing societal concerns, attitudes, and lifestyles [going green, Baby Boomer products] Common Types of Driving Forces (con’t)

12. What Market Positions Do Rivals Occupy? One technique to reveal different competitive positions of industry rivals is strategic group mapping A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions

13. Example: Strategic Group Map of Selected Retail Chains

14. KSFs are those competitive factors most affecting every industry member’s ability to prosper KSFs concern Specific strategy elements Product attributes Resources Competencies Competitive capabilities that a company needs to be competitively successful KSFs are attributes that spell the difference between Profit and loss Competitive success or failure What Are the Key Factors for Competitive Success?

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