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Microenvironment analysis. Awareness of competitive forces can help a company stake out a position in its industry that is less vulnerable to attack. Michael E. Porter Competitive Strategy. The Objectives of Competitive Analysis.
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Awareness of competitive forces can help a company stake out a position in its industry that is less vulnerable to attack. Michael E. Porter Competitive Strategy
The Objectives of Competitive Analysis • To understand how industry structure drives competition, which determines the level of industry profitability • To assess industry attractiveness • To use evidence on changes in industry structure to forecast future profitability • To formulate strategies to change industry structure to improve industry profitability • To identify Key Success Factors
Industry Competition:Rivalry Among Competitors (2) • Industry Growth • If the industry is growing, there’s more room for everybody; less pressure on the firm • Product Differentiation • If products are differentiated, markets are in a sense, segmented
Strategic Group Analysis • Strategic groups is a cluster of companies in an industry • Groups of companies clustered around prezent a similar competitive approach or strategic position • Companies in a group are similar to each other but different from companies in other groups
Procedure for 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
Variables to be used • Variables selected as axes should NOT be highly correlated • Variables chosen as axes should expose BIG differences in how rivals compete • Variables do NOT have to be either quantitative or continuous
Video Game Industry Video arcades, coin-operated machines Arcade operators Publishers of games on CD-ROMs Home PCs Sony, Sega, Nintendo, several others Types of Video Game Suppliers/Distribution Channels Video game consoles MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN Online game sites Low (Coin-operated equipment) Medium (Video players cost $100-$300) High (Use PC) Overall Cost to Players of Video Games
Identify factors that prevent firms in one groups from competing with companies in other groups Evaluate the degree of rivalry between groups Recognize group’s strengths and weaknesses Identify the strategic group that represents the greatest opportunity Interpretation
Identify next step • Create a new group • Move to a better group • Strengthen the existing group • Strengthen company’s position within existing group • Move to a new group and make it better
TWA United American Northwest Conti- nental Delta TWA United USAir Delta American Strategic Maps of the United States Airline Industry The Late 1970s The Early 1990s International Pan Am International Laker World North west Braniff Eastern Geographic Scope National National Continental South- west Western Republic Ozark USAir Piedmont America West AirCal Kiwi South- west Frontier Others PSA RenoAir Texas Int’l Regional Regional No Frills Full Service No Frills Full Service Quality of Service Quality of Service
New Entrants: Barriers to Entry • Economies of Scale • To the extent that there are economies of scale, it will be difficult for a new firm to come in and compete with established firms. • Product Differentiation • To the extent that the firm’s products are distinct and non-copiable, new firms won’t be able to come in and take away customers. • Brand Identification • To the extent that there is brand identification, customers will remember the firm’s product and will resist switching. • Switching Cost • If it is costly for the customer to switch, new entrants won’t be able to convince them to do so.
New Entrants: Barriers to Entry • Access to Distribution Channels • If the firm has preferential or monopolistic access to distribution channels, it is more resistant to competition. • Capital Requirements • If capital requirements are high, new under-capitalized firms won’t be able to enter the industry. • Access to Latest Technology • If technology is important in the industry, new firms are less likely to have access to them, which is good for established firms. • Experience and Learning Effects • If experience is necessary for a firm to figure out how to operate efficiently, established firms have a distinct advantage.
Barriers to Entry: Examples • Regulatory restrictions (e.g. banking license) • brand names (e.g. Xerox, McDonalds – can develop customer loyalty; hard to develop and/or imitate) • patents (illegal to exploit without ownership; e.g. new drugs) • unique know-how (e.g. WalMart’s “hot docking” technique of logistics management)
Number of Important Suppliers • The fewer the number of important suppliers, the more power they have over the firm. • Availability of Substitutes for the Suppliers’ Products • This would reduce supplier power • Differentiation or Switching Costs of Suppliers’ Products • If it’s difficult for the firm to switch to other suppliers, the current suppliers can charge more
Suppliers’ Threat of Forward Integration • To the extent that suppliers might potentially themselves become competitors, they are less reliable and need to be looked at strategically • Suppliers’ Contribution to Quality or Service of the Industry Products • How crucial are suppliers in the maintenance of the quality of industry products? If very crucial, this will increase supplier power. • Importance of the Industry to Suppliers’ Profits
Number of Important Buyers • The greater the number of important buyers, the less power does the firm have to manipulate prices • Availability of Substitutes for the Industry Products • The impact of this on price elasticity of demand for the industry’s products is obvious. • Buyer’s Switching Costs • This is relevant both in terms of switching to competitors’ products and switching to products manufactured by other industries. • Buyer’s Threat of Backward Integration • The buyer might choose to integrate backward and manufacture his input goods, himself. This means that buyers have to be looked at strategically.
Substitutes matter when customers are attracted to the products of firms in other industries Examples • Eyeglasses and contact lensv. laser surgery • Sugar v. artificial sweeteners • Newspapers v. TV v. Internet
Threat of substitutes depend on: • Availability of Close Substitutes • User’s Switching Costs • Substitute Producer’s Profitability and Aggressiveness • Where is the substitute product located on the Price/Value dimensions?
