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SITATION ANALYSIS OUTLINE. Role of Situation Analysis in Strategy-Making Methods of Industry & Competitive Analysis Profiling Industry’s Dominant Economic Traits Analyzing Industry’s Competitive Forces Analyzing Drivers of Industry Change Assessing Competitive Positions of Rivals

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sitation analysis outline
SITATION ANALYSIS OUTLINE
  • Role of Situation Analysis in Strategy-Making
  • Methods of Industry & Competitive Analysis
    • Profiling Industry’s Dominant Economic Traits
    • Analyzing Industry’s Competitive Forces
    • Analyzing Drivers of Industry Change
    • Assessing Competitive Positions of Rivals
    • Predicting Competitive Moves of Rivals
    • Pinpointing Key Success Factors
    • Drawing Conclusions About Overall Industry Attractiveness
    • Conducting an Industry & Competitive Analysis 1
why do a situation analysis
WHY DO A SITUATION ANALYSIS?

Identify features in a firm’s external & internal environment which frame its window of

    • STRATEGIC OPTIONS
    • OPPORTUNITIES
  • Focuses on two considerations:
    • EXTERNAL factors: MACRO environment (industry & competitive conditions)
    • INTERNAL factors: MICRO environment (firm’s internal situation & competitive position)

Objective

figure 3 1 how strategic thinking and analysis lead to good choices
Figure 3-1: How Strategic Thinking and Analysis Lead to Good Choices

Thinking Strategically

About Industry

and Competitive

Conditions

Identifying

Strategic Options

Open to the

Company

Choice of

The Best

Strategy

Thinking Strategically

About a Company’s

Own Situation

key questions regarding external environment
KEY QUESTIONS REGARDING EXTERNAL ENVIRONMENT

1. Industry’s dominant economic traits

2. Competitive forces at work in industry & strength

3. Drivers of change in industry

4. Firms in strongest/weakest competitive positions

5. Competitive moves of rivals

6. Key factors determining competitive success or failure in industry

7. Attractiveness of industry

identifying an industry s dominant economic traits
IDENTIFYING AN INDUSTRY’S DOMINANT ECONOMIC TRAITS
  • Market size & growth rate/stage in life cycle
  • Scope of competitive rivalry
  • Number of competitors & relative sizes
  • Prevalence of backward/forward integration
  • Entry/exit barriers
  • Nature & pace of technological change
  • Product & customer characteristics
  • Scale economies & experience curve effects
  • Capacity utilization & capital requirements
  • Industry profitability
experience curve effects
EXPERIENCE CURVE EFFECTS
  • An experience curve exists when unit costs decline as cumulative production volume increases due to
    • Increased KNOWLEDGE about or
    • FAMILIARITY with the process
  • The bigger the experience curve effect, the bigger the cost advantage of the firm with
    • Largest CUMULATIVE production volume
figure 3 2 comparison of experience curve effects
Figure 3-2: Comparison of Experience Curve Effects

$1

90

$1

81

80

10% Cost

Reduction

72.9

70

64

51.2

20% Cost

Reduction

Cost per Unit

49

34.3

30% Cost

Reduction

1

Million

Units

2

Million

Units

4

Million

Units

8

Million

Units

experience curve effects8
EXPERIENCE CURVE EFFECTS

When a strong learning/experience curve effect causes unit costs to decline substantially as cumulative production volume builds, a strategy to become the largest volume manufacturer can offer the COMPETITIVE ADVANTAGE of being the industry’s LOWEST-COST producer!

Basic Concept

analysis of competitive forces
ANALYSIS OF COMPETITIVE FORCES
  • To identify
    • Main SOURCES of competitive forces and
    • STRENGTH of these pressures

Objective

COMPETITIVE FORCES MATTER BECAUSE:

To be successful, strategy must be designed

to cope effectively with competitive pressures -

objective must be to build a strong, market

position based on competitive advantage!

figure 3 3 the five forces model of competition a key analytical tool
Figure 3-3: The Five Forces Model of Competition: A Key Analytical Tool

Substitute

Products

Rivalry

Among

Competing

Sellers

Suppliers

Buyers

Potential

New

Entrants

the five competitive forces
THE FIVE COMPETITIVE FORCES

1. RIVALRY among competing sellers in an industry

2. SUBSTITUTE PRODUCTS offered by firms in OTHER industries

3. Potential ENTRY of new competitors

4. Bargaining power of SUPPLIERS

5. Bargaining power of BUYERS

procedure analyzing the five competitive forces
PROCEDURE: ANALYZING THE FIVE COMPETITIVE FORCES
  • Identify main sources of competitive pressures
    • Rivalry among competitors
    • Substitute products
    • Potential entry
    • Bargaining power of suppliers
    • Bargaining power of buyers
  • Assess strength of each competitive force
    • Strong? Moderate? Weak?
    • Scale of 1 - 5: 1 = weak; 5 = strong
  • Explain how each competitive force works & its role in overall competitive picture
rivalry among competing sellers
RIVALRY AMONGCOMPETING SELLERS
  • Usually the MOST POWERFUL of the five competitive forces
  • Weapons of COMPETITIVE RIVALRY
    • Price
    • Quality
    • Performance features offered
    • Customer service
    • Warranties and guarantees
    • Advertising & special promotions
    • Dealer networks
    • Product innovation
principles of competitive rivalry
PRINCIPLES OFCOMPETITIVE RIVALRY

A powerful competitive strategy

launched by one firm INTENSIFIES

competitive pressures on rivals!

  • Use of various competitive weapons by
  • rivals to out maneuver one another shapes
  • Rules of competition &
  • Requirements for competitive success
principle of competitive markets
PRINCIPLE OFCOMPETITIVE MARKETS

Competitive jockeying among rival firms is a dynamic process as

  • Firms initiate new offensive & defensive moves
  • Emphasis swings from one mix of competitive weapons to another
what causes rivalry to be stronger
WHAT CAUSES RIVALRYTO BE STRONGER?
  • Lots of firms, equal in size and capability, exit
  • Demand for product growing slowly
  • Industry conditions tempt firms to use competitive weapons to boost volume
  • Switching costs incurred by customers are low
  • A firm initiates moves to bolster its standing at expense of rivals
  • 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, & countries of origin
competitive force of potential entry
COMPETITIVE FORCEOF POTENTIAL ENTRY
  • New entrants boost competitive pressures
    • By bringing new production capacity into play
    • Through actions to build market share
  • Seriousness of threat of entry depends on
    • BARRIERS to entry
    • Expected REACTION of existing firms to entry
  • Barriers to entry exist WHEN
    • It is difficult for newcomers to enter market
    • A new entrant’s small sales volume puts it a price/cost disadvantage
common barriers to entry
COMMON BARRIERS TO ENTRY
  • Economies of scale
  • Inability to gain access to specialized technology
  • Existence of learning/experience curve effects
  • Brand preferences and customer loyalty
  • Capital requirements
  • Cost disadvantages independent of size
  • Access to distribution channels
  • Regulatory policies
  • Tariffs & international trade restrictions
reaction of existing firms can be an entry barrier
REACTION OF EXISTING FIRMSCAN BE AN ENTRY BARRIER
  • WHEN existing firms
    • Indicate they’ll aggressively defend their position
    • Have substantial resources to wage defense
    • Can use leverage with customers to keep their business
  • THEN potential entrants likely to be discouraged by
    • Prospects of a costly struggle
    • Strong threat of competitive retaliation
  • WHICH makes entry barriers HIGHER
when is potential entry a strong competitive force
WHEN IS POTENTIAL ENTRY A STRONG COMPETITIVE FORCE?

Competitive threat of outsiders entering a market is stronger when

  • Entry barriers are low
  • Incumbent firms do not vigorously fight newcomer
  • Newcomer can expect to earn attractive profits
competitive force of substitute products
COMPETITIVE FORCE OFSUBSTITUTE PRODUCTS

SUBSTITUTESmatter when products of firms in another industry enter the market picture

  • Eyeglasses vs. Contact Lens
  • Sugar vs. Artificial Sweeteners
  • Plastic Containers vs. Glass vs. Tin vs. Aluminum
  • Aspirin vs. Other Types of Pain Relievers

Concept

Examples

why substitute products matter
WHY SUBSTITUTEPRODUCTS MATTER
  • Competitively priced substitutes can place CEILING on PRICES industry can charge for its product
  • Price ceiling can place LID on PROFITS industry members can earn
  • Availability of substitutes invites customers to make QUALITY & PERFORMANCE comparisonsas well as PRICE comparisons
  • The lower the SWITCHING COSTS, easier it is for customers to shift to substitute products
indicators of strength of substitute products
INDICATORS OF STRENGTHOF SUBSTITUTE PRODUCTS
  • Growth rate of sales of substitutes
  • Market inroads of substitutes
  • Plan of manufacturers of substitutes to expand capacity
  • Profits of firms producing substitutes
principle of competitive markets24
PRINCIPLE OFCOMPETITIVE MARKETS

Competitive threat of substitute

products is strong when

  • Prices of substitutes are viewed attractive by buyers
  • Buyers’ costs of switching to substitutes are low
  • Buyers view substitutes as having equal or better performance features
competitive force of suppliers
COMPETITIVE FORCE OF SUPPLIERS
  • Suppliers are a strong competitive force when
    • Item makes up large portion of costs of product, is crucial to production process, and/or significantly affects product quality
    • It is costly for buyers to switch suppliers
    • They have good reputations & growing demand for their product
    • 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
principle of competitive markets26
PRINCIPLE OF COMPETITIVE MARKETS

Whether suppliers are a strong or weak competitive force depends on if they have bargaining power to put rivals at a competitive disadvantage based on:

  • Prices they can command
  • Quality & performance of items supplied
  • Reliability of deliveries
  • Other terms & conditions of supply
competitive force of buyers
COMPETITIVE FORCE OF BUYERS
  • Buyers are a strong competitive force when
    • They are large & purchase a sizable percentage of industry’s product
    • They buy in volume quantities
    • They incur low costs in switching to substitutes
    • They have flexibility to purchase from several sellers
    • Selling industry’s product is standardized
    • They can integrate backward
    • Product being purchased does NOT save buyer money or has low value to buyer
principle of competitive markets28
PRINCIPLE OFCOMPETITIVE MARKETS

Buyers become a stronger competitive force the more they can exercise bargaining leverage over

  • Price
  • Quality
  • Service
  • Other terms & conditions of sale
strategic implications of the five competitive forces
STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES

Competitive environment is unattractivewhen:

  • Rivalry is very strong
  • Entry barriers are low
  • Competition from substitutes is strong
  • Suppliers & customers have considerable bargaining power
strategic implications of the five competitive forces30
STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES

Competitive environment is idealwhen:

  • Rivalry is only moderate
  • Entry barriers are relatively high
  • There are no good substitutes
  • Suppliers & customers are in a weak bargaining position

The weaker the competitive forces, the GREATER an industry’s PROFITS!

Principle

coping with the five competitive forces
COPING WITH THEFIVE COMPETITIVE FORCES

A company whose strategy and market position provide a GOOD DEFENSE against the five forces can earn above-average profits even when some or all of the five forces are strong!

Concept

coping with the five competitive forces32
COPING WITH THEFIVE COMPETITIVE FORCES
  • Objective is to craft a strategy that will
    • Insulate company from competitive forces
    • Influence industry’s competitive rules in company’s favor
    • Provide a strong position from which “to play the game” of competition
    • Help create sustainable competitive advantage
identifying assessing driving forces
IDENTIFYING & ASSESSINGDRIVING FORCES
  • Industry conditions change because EXTERNAL FORCES are DRIVING industry participants to alter their actions
  • DRIVING FORCES are the MAJOR UNDERLYING CAUSES of changing industry & competitive conditions

Concept

identifying assessing driving forces34
IDENTIFYING & ASSESSINGDRIVING FORCES
  • Role of driving forces analysis in strategy-making
    • Indicates EXTERNAL FACTORS likely to have greatest impact on a firm over next 1 - 3 years
    • Must assess difference driving forces will make to be able to craft a strategy responsive to emerging conditions
driving forces analysis
DRIVING FORCES ANALYSIS
  • Analysis of driving forces has two steps

1. Identifying RELEVANT driving forces

2. ASSESSING IMPACT they will have

  • Task of driving forces analysis is:
    • SEPARATEMAJOR causes of industry change from MINOR ones
    • IDENTIFY the THREE or FOURdriving forces likely to have greatest impact on a firm over next 1 - 3 years
types of driving forces
TYPES OF DRIVING FORCES
  • Changes in long-term industry growth rate
  • Changes in who buys the product & how they use it
  • Product innovation
  • Technological change/process innovation
  • Marketing innovation
  • Entry or exit of major firms
  • Diffusion of technical knowledge
types of driving forces37
TYPES OF DRIVING FORCES
  • Increasing globalization of industry
  • Changes in cost and efficiency
  • Shifting from standardized to differentiated products (or vice versa)
  • Regulatory influences & government policy changes
  • Changing societal concerns, attitudes, & lifestyles
  • Changes in degree of uncertainty & risk
environmental scanning
ENVIRONMENTAL SCANNING

A broad-ranging effort to monitor & interpret social, political, economic, ecological, & technological events in an effort to spot budding trends & conditions that could eventually impact industry

  • Raise consciousness of managers about potential developments that could
    • Have important impact on industry conditions
    • Pose new opportunities & threats

Definition

Purpose

assessing competitive positions strategic groups
ASSESSING COMPETITIVE POSITIONS: STRATEGIC GROUPS
  • A STRATEGIC GROUP consists of those rival firms with similar competitive approaches & positions in an industry
  • A STRATEGIC GROUP MAP displays different competitive positions that rival firms occupy
strategic group maps
STRATEGIC GROUP MAPS
  • Firms in same strategic group have one 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
competitor analysis
COMPETITOR ANALYSIS
  • A firm’s strategic moves are affected by
    • Current strategies of competitors
    • Actions competitors are likely to take next
  • Profile of key competitors involves studying:
    • Current position in industry
    • Strategic objectives & recent actions
    • Basic competitive approaches
competitor analysis42
COMPETITOR ANALYSIS
  • Successful strategists take great pains in scouting competitors by
    • Understanding their strategies
    • Watching their actions
    • Evaluating their vulnerability to driving forces & competitive pressures
    • Sizing up their strengths & weaknesses
    • Trying to anticipate rivals’ next moves
predicting moves of rival competitors
PREDICTING MOVESOF RIVAL COMPETITORS
  • Predicting rivals’ next moves involves
    • Analyzing current competitive positions
    • Examining public pronouncements about what it will take to be successful in industry
    • Gathering information from grapevine about current activities & potential changes
    • Studying past actions & leadership
    • Determining who has flexibility to make major strategic changes & who is locked into pursuing same basic strategy
principle
PRINCIPLE

Managers who fail to study

competitors closely risk being

blindsided by “surprise” actions

on the part of competitors!

pinpointing industry key success factors
PINPOINTING INDUSTRYKEY SUCCESS FACTORS
  • KEY SUCCESS FACTORS (KSFs) spell difference between
    • Profit & loss
    • Competitive success or failure
  • A KEY SUCCESS FACTOR can be
    • Specific skill or talent
    • Competitive capability
    • Something a firm must do to satisfy customers

Basic Concept

pinpointing industry key success factors46
PINPOINTING INDUSTRY KEY SUCCESS FACTORS
  • Identifying KSFs is top priority as they are good cornerstones of a firm’s strategy
    • Winning COMPETITIVE ADVANTAGE often hinges on being distinctively better than rivals at one or more of the KSFs
  • KSFs consist of the3 - 5 really major determinants of financial & competitive success in industry
example industry key success factors
EXAMPLE: INDUSTRYKEY SUCCESS FACTORS
  • Utilization of brewing capacity - to keep manufacturing costs low
  • Developing a strong network of wholesale distributors - to gain access to retail outlets
  • Clever advertising - to induce beer drinkers to buy a particular brand

Beer/Brewing Industry

example industry key success factors48
EXAMPLE: INDUSTRYKEY SUCCESS FACTORS
  • Fashion design - to create buyer appeal
  • Low-cost manufacturing efficiency - to keep selling prices competitive

Apparel Manufacturing Industry

example industry key success factors49
EXAMPLE: INDUSTRYKEY SUCCESS FACTORS
  • Locating plants close to end-use customers - to keep costs of shipping empty cans low
  • Ability to market plant output within economical shipping distances

Tin & Aluminum Can Industry

strategic management principle
STRATEGIC MANAGEMENT PRINCIPLE

A sound strategy incorporates industry key success factors!

conclusion overall industry attractiveness
CONCLUSION: OVERALLINDUSTRY ATTRACTIVENESS

To review overall situation & develop conclusions about relative attractiveness or unattractiveness of the industry, both near- and long-term

A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

Objective

Principle

assessing overall industry attractiveness
ASSESSING OVERALLINDUSTRY ATTRACTIVENESS
  • Industry’s market size & growth potential
  • Whether industry will be favorably or unfavorably impacted by driving forces
  • Potential for entry/exit of major firms
  • Stability/dependability of demand
  • Will competitive forces become stronger or weaker
  • Severity of problems facing industry
  • Degree of risk & uncertainty in industry’s future
  • Whether competitive conditions are conducive to rising/falling industry profitability
conducting an industry competitive situation analysis
CONDUCTING AN INDUSTRY & COMPETITIVE SITUATION ANALYSIS
  • Two things to consider:

1. Task of analyzing a firm’s EXTERNAL situation cannot be reduced to a formula-like exercise

2. Sweeping industry & competitive analyses need to done every 1 to 3 years

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