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Company’s macroenvironment. Q1. what are the industry’s dominant economic features?. Market size growth rate the number & sizes of buyers and sellers the geographic boundaries of the market The degree of product differentiation the speed of product innovation

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slide3

Market size

growth rate

the number & sizes of buyers and sellers

the geographic boundaries of the market

The degree of product differentiation

the speed of product innovation

the extent of vertical integration.

The extent of scale economies& experience/learning curve effects.

learning experience curve effects

Most goods or services show the experience curve effect.

Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant percentage.

The company can gain a cost advantage with largest cumulative production volume.

Learning/experience curve effects
recognizing these features helps

managers to prepare for the analysis

managers to understand the kinds of strategic moves that industry members are likely to employ.

Recognizing these features helps..
question 2 what kinds of competitive forces are industry members facing and how strong are they

QUESTION 2: WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY?

slide7

The Five-Forces Model of Competition

Michael E. Porter

Tool for diagnosing the principal competitive pressure

Build the model of competition in 3 steps

· Step1: For each of the five forces, identify the different parties involve

· Step2: Evaluate how strong the pressures stemming form each forces are

· Step3: Determine whether the strength of the five forces is helpful to earning profits

competitive pressures created by the rivalry among competing sellers

Competitive pressures coming from other firms in the industry

· when one firm deploys a strategy that produces good results, its rivals respond with offensive and defensive countermoves of their own.

· competitive battle among rivals can assume many forms that extend well beyond lively price competition.

The intensity of rivalry varies from industry to industry and depends of many identifiable factors

Competitive Pressures Created by the Rivalry among Competing Sellers

factors affecting the strength of rivalry

Rivalry is strongerwhen:

Buyer demand is growing or falling off slowly

Sellers find themselves with excess capacity

Buyer costs to switch brands are low

Products are commodities

Firms have high fixed and storage costs

Competitors are numerous/similar(size, strength)

Rivals have diverse objectives/strategies/origin

Rivals have high exit barriers

Factors Affecting the Strength of Rivalry

factors affecting the strength of rivalry1

Rivalry is weakerwhen:

Buyer demand is growing rapidly

Buyer costs to switch brands are high

Products are strongly differentiated

Customer loyalty is high

Fixed and storage costs are low

Sales are concentrated among a few sellers

Rivals are homogeneous

Exit barriers are low

Factors Affecting the Strength of Rivalry

competitive threat of new entrants

The ease of a firm entering a new market is dependent on 2 main factors:

Barriers to entry

Expected reaction of existing firms

The size of the barriers and expected reaction is a huge determinant of any potential new firms ability to survive in the market

Competitive Threat of new entrants
barriers to entry
Barriers to entry
  • Economies of Scale
  • Experience
  • Customer loyalty
  • Intellectual barriers
  • Networks
  • Other cost advantages

Threat of entry can easily fluctuate as factors change

factors affecting threat of entry

Growth/Profit potential –

If this is high, firms will be less deterred to enter the market

Usually attracts larger, established firms with sufficient resources in related markets to enter

Potential entrants & capabilities –

Large existing companies with a strong brand image may be able to enter some markets easily

The bigger the pool of potential entrants with the capabilities to enter the market, the stronger the threat of entry

factors affecting threat of entry
competitive pressure of substitutes

Substitute products can adversely affect demand providing:

Good substitutes are available

They are attractively priced

Comparable/better features

Consumers have low costs in switching to substitute

Whether a substitute product is a threat can be determined by; sales growth comparison, addition of capacity and profit increases

Competitive pressure of substitutes
competitive pressures stemming from supplier bargaining power

Bargaining power

: the relative ability of parties in a situation to exert influence over each other.

Suppliers with Bargaining Power

: can erode industry profitability.

Competitive Pressures Stemming from Supplier Bargaining Power.

factors determining the strength of suppliers bargaining p ower

Suppliers’ bargaining power is stronger when

Supplier products are in short supply.

Supplier products are differentiated.

Supplier products are critical to industry.

High costs in purchasing alternatives.

No good substitutes.

Suppliers are not dependant on industry.

Suppliers industry is concentrated.

Factors Determining the Strength of Suppliers’ Bargaining Power.
slide19

Suppliers’ bargaining power is weaker when

A large entity of suppliers.

The item is available from many suppliers.

Low costs for finding alternatives.

Good substitutes.

Industry members account for a big fraction of suppliers’ sales.

No suppliers with large market shares.

Possibility for industry members to integrate into the supply business. (self-manufacturer)

competitive pressures stemming from buyer bargaining power and price sensitivity
Competitive Pressures Stemming from Buyer Bargaining Power and price sensitivity

Price-sensitivity

= price elasticity

: It is a measure of responsiveness of the quantity of a good or service demanded to changes in its price.

slide21

Buyers with strong bargaining power

: can limit industry profitability.

Buyer price sensitivity

: limits the profit potential of industry

members.

factors determining the strength of buyers bargaining p ower

Buyer bargaining power is stronger when

Low costs in switching to other product.

Products are undifferentiated.

Large number of buyers. Few relation with industry.

Buyers demand is weak.

Buyers are well-informed.

Buyers with ability to integrate into the business of sellers.

Buyers with ability to postpone purchase

Buyers are price-sensitive.

Factors Determining the Strength of Buyers’ Bargaining Power.
slide23

Buyer bargaining power is weaker when

High costs in switching to competing products.

Sellers’ products are differentiated.

Buyers are small and numerous relative to sellers.

Sufficient supply for satisfying buyers demand.

Limited information about sellers.

Buyers are not price-sensitivity.

is the collective strength of the five competitive forces conducive to good profitability

The effects that each of the five

competitive forces set the stage for

evaluating whether the strength of the

five competitive forces is conducive to

good profitability.

Is the collective strength of the five competitive forces conducive to good profitability?
slide25

Competitively Unattractive Industry

When all five forces are producing strong competitive pressures, the competitively unattractive industry occurs.

Rivalry among sellers is vigorous.

Low entry barriers.

Competition from substitutes in intense.

Suppliers and buyers can exercise considerable leverage.

slide26

Attractive Industry

When the overall impact of the five

competitive forces is moderate to weak,

the attractive industry occurs.

The members of the industry can expect to earn good profits and a nice return on investment.

analyzing industry dynamics

1 step: Indentifying the drivers of change.

2 step: Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive.

3 step: Determining what strategy changes are needed to prepare for the impacts of the anticipated change.

Analyzing industry dynamics
identifying an industry s drivers of change

Changes in an industry’s long-term growth rate

Increasing globalization

Change in who buys the product and how they use it

Technological change

Emerging new internet capabilities and applications

Product and marketing innovation

Identifying an industry’s drivers of change
identifying an industry s drivers of change1

Entry or exit of major firms

Diffusion of technical know-how across companies and countries

Improvements in efficiency in adjacent markets

Reductions in uncertainty and business risk

Regulatory influences and government policy changes

Changing societal concerns, attitudes, and lifestyles

Identifying an industry’s drivers of change
assessing the impact of the factors driving industry change

Overall, are the factors driving change causing demand for the industry’s product to increase or decrease?

Is the collective impact of the drivers of change making competition more or less intense?

Will the combined impacts of the change drivers lead to higher to lower industry profitability?

Key Question: whether a new strong force is emerging or whether forces that are strong presently are beginning to weaken

Assessing the impact of the factors driving industry change
what strategic moves are rivals likely to make next

Competitive intelligence

- latest action & announcement

- financial performance

- strength & weakness

- thinking & leadership style

What strategic moves are rivals likely to make next?
what are the key factors for competitive success

Particular strategy elements

Product attributes

Operational approaches

Resources

Competitive capabilities

What are the key factors for competitive success?
what are the key factors for competitive success1

Should consider three question

On what basis do buyers of the industry’s product choose between the competing brands of sellers?

What resources and competitive capabilities must a company have to be competitively successful?

What shortcomings are almost certain to put a company at a significant competitive disadvantage?

What are the key factors for competitive success?
slide37
Q7. Does the outlook for the industry offer the company a good opportunity to earn attractive profits?
slide38

if an industry’s overall profit prospects are above average

→industry environment is attractive

If an industry profit prospects are below average

→industry environment is not attractive

BUT! This attractiveness or unattractiveness is not same for all industry participants and all potential entrants.

slide39

If company decided that industry is attractive, it should invest aggressively to capture the opportunities and to improve its long-term competitive position in the business.

If company decided that industry is unattractive, it should protect its present position, invest cautiously, and try to find opportunities in other industries.