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“Analysis is the critical starting point of strategic thinking.”. Payne (3). EXTERNAL ANALYSIS ( INDUSTRY AND COMPETITION). Kenichi Ohmae. Macro Level. Economic. Industry Level. Demographic. Suppliers. Firm. Competitors. Connect. Connect. Social. Global. Substitutes.

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analysis is the critical starting point of strategic thinking

“Analysis is the critical starting point of strategic thinking.”

Payne

(3)

EXTERNAL ANALYSIS

(INDUSTRY AND COMPETITION)

Kenichi Ohmae

slide2
Macro Level

Economic

Industry Level

Demographic

Suppliers

Firm

Competitors

Connect

Connect

Social

Global

Substitutes

Customers

Political/Legal

Technological

Environmental Analysis Levels

  • EXTERNAL or MACRO-ENVIRONMENT
    • Industry and competitive conditions (opportunities and threats)
  • INTERNAL or MICRO-ENVIRONMENT
    • Its competencies, capabilities, resources, and competitiveness (strengths and weaknesses)
macro environment 1
Socio-cultural segmentMacro Environment (1)
  • Women in the workplace
  • Workforce diversity
  • Attitudes about quality of worklife
  • Concerns about environment
  • Shifts in work and career preferences
  • Shifts in product and service preferences
  • Political/Legal Segment
  • Antitrust laws
  • Taxation laws
  • Deregulation philosophies
  • Labor training laws
  • Educational philosophies and policies
macro environment 2
Macro Environment (2)
  • Economic segment
  • Inflation rates
  • Interest rates
  • Trade deficits or surpluses
  • Budget deficits or surpluses
  • Personal savings rate
  • Business savings rates
  • Gross domestic product
  • Technological Segment
  • Product innovations
  • Applications of knowledge
  • Focus of private and government-supported R&D expenditures
  • New communication technologies
macro environment 3
Global SegmentMacro Environment (3)
  • Important political events
  • Critical global markets
  • Newly industrialize countries
  • Different cultural and institutional attributes
  • Demographic
  • Population size
  • Age structure
  • Geographic distribution
  • Ethnic mix
  • Income distribution
five forces model of competition
Five Forces Model of Competition

Substitute

Products

(of firms in

other industries)

Threat of Substitutes

Rivalry Intensity

Among

Competing

Sellers

Suppliers of

Key Inputs

Buyers

Bargaining Power of Buyers

Bargaining Power of Suppliers

Threat of New Entrants

Potential

New

Entrants

analyzing the five competitive forces how to do it
Assess strength of each competitive force (Strong? Moderate? Weak? )

Rivalry among competitors

Substitute products

Potential entry

Bargaining power of suppliers

Bargaining power of buyers

Explain how each force acts to create competitive pressure

Decide whether overall competitionis brutal, fierce, strong, normal/moderate, or weak

Analyzing the Five Competitive Forces: How to Do It
rivalry among competing sellers
Usually the most powerfulof the five forces

Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position

Price

Quality

Performance features offered

Customer service

Warranties/guarantees

Advertising/promotions

Dealer networks

Product innovation

Rivalry Among Competing Sellers
what causes rivalry to be stronger
Lots of firms, more equal in size and capability

Slow market growth

Industry conditions tempt some firms to go on the offensive to boost volume and market share

Customers have low costs in switching brands

One or more firms initiates moves to bolster their 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, and countries of origin

What Causes Rivalry to Be Stronger?
competitive force of threat of new entry
Seriousness of threat depends primarily on:

Barriers to entry

Reaction of existing firms to entry

Barriers exist when:

Newcomers confront obstacles

Economic factors put potential entrant at a disadvantage relative to incumbent firms

Competitive Force of Threat of New Entry
common barriers to entry
Economies of scale

Inability to gain access to specialized technology

Existence of learning/experience curve effects

Strong brand preferences and customer loyalty

Capital requirements and/or other specialized resource requirements

Cost disadvantages independent of size

Access to distribution channels

Regulatory policies, tariffs, trade restrictions

Common Barriers to Entry
how to tell whether substitute products are a strong force
Sales of substitutes are growing rapidly

Producers of substitutes are planning to add new capacity

Substitutes’ profits are up

How to Tell Whether Substitute Products Are a Strong Force

The competitive threat of substitutes is stronger when they are:

  • Readily available
  • Attractively priced
  • Believed to have comparable or better performance features
  • Customer switching costs are low
competitive force of substitute products
Substitutesmatter when customers are attracted to the products or services of firms in other industries Competitive Force of Substitute Products

Concept

Examples

  • Eyeglasses vs. Contact Lens
  • MD vs. DPM vs. DC
  • Plastic vs. Glass vs. Metal
competitive force of suppliers
Suppliers are a strongcompetitive force when:

Item makes up large portion of product costs, is crucial to production process, and/or significantly affects product quality

It is costly for buyers to switch suppliers

They have good reputations and growing demand

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

Competitive Force of Suppliers

Suppliers are a stronger force the more they can exercise power over:

  • Prices charged
  • Quality/performance of items supplied
  • Amounts and delivery times
competitive force of buyers
Buyers are a strong competitive force when:

They are large and purchase a sizable percentage of industry’s product

They buy in volume quantities

They can integrate backward

Industry’s product is standardized

Their costs in switching to substitutes or other brands are low

They can purchase from several sellers

Product purchased does not save buyer money

Competitive Force of Buyers

Buyers are a stronger competitive force the more they have leverage to bargain over:

  • Price or Quality or Service
  • Other terms and conditions of sale
strategic implications of the five forces
Competitive environment is unattractive when:

Rivalry is strong

Entry barriers are low

Competition from substitutes is strong

Suppliers and customers have considerable bargaining power

Strategic Implications of the Five Forces
  • Competitive environment is idealwhen:
    • Rivalry is moderate
    • Entry barriers are high
    • Good substitutes do not exist
    • Suppliers and customers are in a weak bargaining position
  • Objective is to craft a strategy that will:
    • Insulate firm from competitive forces
    • Influence competitive pressures in ways that favor firm
    • Build a sustainable competitive advantage
slide19
Who are Stakeholders?
  • Identifying stakeholders is one way of sizing up the internal and external constituents that influence the firm.
    • Stakeholders are individuals and groups who can affect and are affected by a firm’s strategic outcomes and who have enforceable claims on its performance
    • Stakeholders include individuals, groups, and other organizations who have an interest in the actions of an organization and who have the ability to influence it
  • Stakeholders may be categorized as internal, interface and external.
building stakeholder relationships
Managing down

Relationships with subordinates

Managing up

Relationships with bosses and corporate staff

Managing out

Relationships with customers and suppliers

Managing across

Relationships with peers

Building Stakeholder Relationships
slide22
Examples of Stakeholder Groups
  • Internal stakeholders
    • Management
    • Professionals
    • Support Personnel
  • Interface stakeholders
    • Shareholders
    • Board of Directors
    • Medical Staff
  • External stakeholders
    • Suppliers
    • Competitors
    • Government Agencies
    • Patients
relationships with stakeholders
Organizations have dependency relationships with stakeholders

Firms are not equally dependent on all stakeholders and not every stakeholder has the same level of influence

An effective organization strategy requires consensus from a plurality of key stakeholders about what it should be doing and how these things should be done

Relationships with Stakeholders
key success factors
KSFs or CSFs are competitive elements that most affect every strategic group member’sability to prosper in the marketplace:

Specific strategy elements

Product attributes

Resources or Competencies

Competitive capabilities

KSFsspell difference between:

Profit and loss

Competitive success or failure

Key Success Factors

Ask: For our organization to be successful, we MUST be especially good at ___________?

key success factors1
Key Success Factors

Optimize Performance

A sound strategy incorporates efforts to be competent on allindustry key success factors and to excel on at least one factor!

identifying key success factors
Answers to three questions pinpoint KSFs

On what basis do customers choose between competing brands or offerings of sellers?

What must a seller/provider do to be competitively successful -- what resources and competitive capabilities does it need?

What does it take for sellers/providers to achieve a sustainable competitive advantage?

KSFs consist of the3 - 5 really major determinants of financial and competitive success in a strategic group.

(Recall our discussion on developing objectives?)

Identifying Key Success Factors
common types of key success factors
Technology-related

Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities

Manufacturing-related

Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products

Distribution-related

Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery

Marketing-related

Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising

Skills-related

Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly

Organizational capability

Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how

Other types

Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection

Common Types of Key Success Factors
example ksfs for the refractive eye surgery industry
High numbers of procedures, which is a component of price, experience, and service.

Low rate of complications and high rate of success (20/20)

Positive word-of-mouth and reputation

Example: KSFs for the Refractive Eye Surgery Industry
slide29
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
strategic group mapping
One technique for revealing the different competitive positions of industry rivals is strategic group mapping

A strategic group consists of those rivals with similar competitive approaches in an industry

Strategic Group Mapping
strategic group mapping1
Firms in same strategic group have two 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

Strategic Group Mapping
a framework of competitor analysis
A Framework of Competitor Analysis

High

II

I

Market

Commonality

III

IV

Low

KEY

Low

High

The shaded area represents degree of market commonality between two firms

Resource

Similarity

Resource endowment A

Resource endowment B

market commonality
Market Commonality is concerned with

the number of markets with which a firm and a competitor are jointly involved

the degree of importance of the individual markets to each competitor

Most industries’ markets are somewhat related in terms of

technologies

core competencies

Multi-market competition

Firms competing in several markets

Market Commonality
resource similarity
Resource similarity

the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount

Firms with similar types and amounts of resources are likely to

have similar strengths and weaknesses

use similar broad strategies

Assessing resource similarity can be difficult if critical resources are intangible rather than tangible

Resource Similarity
procedure constructing a strategic group map
STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another

STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics

STEP 3: Assign firms that fall in about the same strategy space to same strategic group

STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

Procedure: Constructing a Strategic Group Map
example strategic group map of retail jewelry industry
Example: Strategic Group Map of Retail Jewelry Industry

High

Small Independent Guild Jewelers

National, Regional, & Local Guild - “Fine Jewelry” Stores

Prestige Departmentalized Retailers

Upscale Department Stores

Price / Quality / Image

National Jewelry Chains

Local Jewelers

Medium

Chains

Credit Jewelers

Catalog Showrooms

Off-Price Retailers

Discounters

Outlet Mall Retailers

Low

Broad-category Retailers

Specialty Jewelers

Full-line Jewelers

Limited-category Retailers

Product Line / Merchandise Mix

guidelines strategic group maps
Variables selected as axes should not be highly correlated

Variables chosen as axes should expose bigdifferences in how rivals compete

Variables do not have to be either quantitative or continuous

Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group

If more than two good competitive variables can be used, several maps can be drawn

Guidelines: Strategic Group Maps
interpreting strategic group maps i e implications of the strategic groups concept
Driving forces and competitive pressures often favor some strategic groups and hurt others – such recognition may be the key to developing a competitive advantage.

Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position. Important niches may be identified that are not currently being filled by competitors.

The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be (“Organizations most like yours are the most dangerous.”)

Interpreting Strategic Group Maps(i.e., Implications of the Strategic Groups Concept)
slide39
Within or Between Strategic Groups

High

Price / Quality / Image

Medium

Low

Broad-category Retailers

Specialty

Full-line Providers

Limited-category Retailers

Product Line / Merchandise Mix

slide40
The World Automobile Industry

High

Ferrari

Lamborghini

Porsche

Mercedes*

BMW

Toyota

Ford

General

Motors

Chrysler*

Honda

Nissan

Price

Hyundai

Kia

High

Low

Low

Breadth of Product Line

slide41
Strategic Groups Within the World Petroleum Industry

INTERNATIONAL

UPSTREAM

COMPANIES

INTEGRATED OIL MAJORS

INTERNATIONAL

UPSTREAM,

REGIONALLY

FOCUSED

DOWNSTREAM

Premier

Oil

Apache

Dana Petroleum

Kuwait Petroleum

PDVSA

INTEGRATED

DOMESTIC

OIL COMPANIES

  • NATIONAL
  • PRODUCTION
  • COMPANIES

Iran

NOC

0 0.5 1.0 1.5 2.0

Statoil

BP-Amoco

Exxon

-Mobil

Vertical Balance

Chevron

Texaco

Pemex

Petronas

INTEGRATED

INTERNATIONAL

MAJORS

Royal Dutch

-Shell Gp.

Lukoil

Conoco Phillips

ENI

Elf-Fina-Total

Repsol YPF

PetroChina

Indian Oil

Phillips

Petrobras

ENI

Nippon

INTERNATIONAL

DOWNSTREAM

OIL COMPANIES

Repsol

Valero

Neste

Ashland

Sunoco

0 10 20 30 40 50 60 70 80

NATIONALLY-FOCUSED

DOWNSTREAM COMPANIES

Geographical Scope

competitor analysis and strength assessment
Competitor Analysis and Strength Assessment
  • Successful strategists take great pains in scouting competitors
    • Understanding their strategies
    • Watching their actions
    • Evaluating their vulnerability to driving forces and competitive pressures
    • Sizing up their resource strengths and weaknesses and their capabilities
    • Trying to anticipate rivals’ next moves
predicting strategic moves of rivals
A firm’s own best strategic moves are affected by:

Current strategies of competitors

Actions competitors are likely to take next

Predicting rivals’ next moves involves:

Analyzing their current competitive positions

Examining public pronouncements about what it will take to be successful in industry

Gathering information from grapevine about current activities and potential changes

Studying past actions and leadership

Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy

Predicting Strategic Moves of Rivals
categorizing the objectives and strategies of competitors
Competitive Scope

Strategic Intent

Market Share Objective

Competitive Position

Strategic Posture

Competitive Strategy

Categorizing the Objectives and Strategies of Competitors
  • Local
  • Be dominant leader
  • Aggressive expansion via acquisition & internal growth
  • Getting stronger; on the move
  • Mostly offensive
  • Striving for low-cost leadership
  • Regional
  • Overtake industry leader
  • Well-entrenched
  • Mostly defensive
  • Mostly focusing on a market niche
  • National
  • Be among industry leaders
  • Expansion via internal growth
  • Stuck in the middle of the pack
  • Combination of offensive & defensive
  • Pursuing differentiation based on
  • Quality
  • Service
  • Technology superiority
  • Breadth of product line
  • Image & reputation
  • More value for the money
  • Other attributes
  • Multi-country
  • Move to top 10
  • Expansion via acquisition
  • Going after a different position
  • Aggressive risk-taker
  • Global
  • Move up a notch in rankings
  • Hold on to present share
  • Struggling; losing ground
  • Conservative follower
  • Maintain current position
  • Give up present share to achieve short-term profits
  • Retrenching to a position that can be defended
  • Just survive
assessing a company s competitive strength versus key rivals
1. List industry key success factors and other relevant measures of competitive strength

2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)

3. Decide whether to use a weighted or unweightedrating system

4. Sum individual ratings to get overall measure of competitive strength for each rival

5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

Assessing a Company’s Competitive Strength versus Key Rivals
unweighted competitive strength assessment
Unweighted Competitive Strength Assessment

KSF/Strength Measure

ABC Co.

Rival 1

Rival 2

Rival 3

Rival 4

Quality/product performance

8

5

10

1

6

Reputation/image

8

7

10

1

6

Manufacturing capability

2

10

4

5

1

Technological skills

10

1

7

3

8

Dealer network/distribution

9

4

10

5

1

New product innovation

9

4

10

5

1

Financial resources

5

10

7

3

1

Relative cost position

5

10

3

1

4

Customer service capability

5

7

10

1

4

Overall strength rating

61

58

71

25

32

Rating Scale: 1 = Very weak; 10 = Very strong

a weighted competitive strength assessment
A Weighted Competitive Strength Assessment

KSF/Strength Measure

Weight

ABC Co.

Rival 1

Rival 2

Rival 3

Rival 4

Quality/product performance

0.10

8/0.80

5/0.50

10/1.00

1/0.10

6/0.60

Reputation/image

0.10

8/0.80

7/0.70

10/1.00

1/0.10

6/0.60

Manufacturing capability

0.10

2/0.20

10/1.00

4/0.40

5/0.50

1/0.10

Technological skills

0.05

10/0.50

1/0.05

7/0.35

3/0.15

8/0.40

Dealer network/distribution

0.05

9/0.45

4/0.20

10/0.50

5/0.25

1/0.05

New product innovation

0.05

9/0.45

4/0.20

10/0.50

5/0.25

1/0.05

Financial resources

0.10

5/0.50

10/1.00

7/0.70

3/0.30

1/0.10

Relative cost position

0.35

5/1.75

10/3.50

3/1.05

1/0.35

4/1.40

Customer service capability

0.15

5/0.75

7/1.05

10/1.50

1/0.15

4/1.60

Sum of weights

1.00

Overall strength rating

6.20

8.20

7.00

2.10

2.90

Rating Scale: 1 = Very weak; 10 = Very strong

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