cs02 - external factor analysis

8/3/2019 Cs02 - External Factor Analysis

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INDUSTRY AND COMPETITIVE ANALYSIS

Analysis is the critical starting point of strategic thinking. Kenichi OhmaeThings are always different--the art is figuring out which differences matter. Laszlo Birinyi


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Role of Situation Analysis in Strategy-Making.

Methods of Industry and Competitive Analysis.

Discussion Points


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Situation Analysis

Indirect External

Factors

Political,

Economical,

Social,

Technological,

Ecological, &Legislative

Conditions.

Direct External

Factors

Dominant Industry

Traits,

Industry Drivers,

and

Overall

Competitive

Conditions.

Internal Factors

Competencies,

Capabilities,

Resource Strengths

& Weaknesses,

and Overall

Competitiveness.


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Industry & Competitive EnvironmentKey Considerations

Strategic

position

Assess the nature of theenvironment

Audit environmental

influences

Identify key

competitive forces

Identify key

opportunities

and threats

Identify

competitive position

Strategicposition


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Trend Extrapolation Delphy Analysis

Experience &Learning

Scenario Planning

Simple Complex

Static

Dynamic

Environmental Conditions

EnvironmentalConditio

ns


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IndustrysDominantEconomic

Traits

CompetitiveForces, andthe Strength

of eachCompetitive

Force

ChangeDrivers in

the Industry

CompetitorAnalysis

Strategicmoves of theKey Rivals

Key SuccessFactors

CONCLUSION

OverallIndustry

Attractiveness


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#1: Industrys Dominant Economic Traits?

Economies

of Scale

Number of competitors,

their relative sizes & their

growth trends.

Capacity utilization andresource requirements.


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An experience curve exists when (a Companys) incremental input required to

produce unit incremental output reduces.

example: unit costs decline as cumulative production volume increases, because of:

Accumulating production know-how.

Growing mastery of the technology.

The bigger the experience curve effect, the bigger the cost advantage of the firm

with the largest cumulative production volume.

Scale Economy Achieving Economical Cost while moving up the scale of

Production (or any other operation, like Distribution, Marketing etc.) .

Comes with Experience Curve Effect.

Scope Economy Creating Synergies and getting Economical Cost by

combining different functions or operations, using same resource for multiple

or enriched use, etc.

Comes with Strategic Moves like integration, Diversification etc.

Learning / Experience Curve Effect


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Learning / Experience Curve Effect


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External Factors

Industry

Rivals

BuyersSuppliers

Entry & Exit Barriers

Substitutes

Social Political Demographic(At Large)

Ecological Economic

Infra

Structural

Technological Legal


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#2: What is Competition Like & How Strong are the Competitive Forces?

Five Forces Model of Competition

CompleteBuyingChain?

CompleteSupplyChain?

Exit? Mobility?

ComplementaryProducts?


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SAssess the Strength of each of the 5 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.

Identify the factors that cause each force to be strong or weak?

Explain how each force acts to create Competitive pressure.

Assess the Direction of each Competitive ForceGrowing / Stagnant / Declining.

Look for and Filter the Exceptions.

Decide whether overall competition (the combined effect of all 5 competitive

forces) is Brutal, Fierce, Strong, Moderate, or Weak.

Five Force Model of Competition


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Rivalry among Competing Sellers Efforts of rivals to gain better market

position, higher sales and market share, and competitive advantage

Usually the most powerful of the five forces; The big factor determining the

strength of rivalry is how actively and aggressively are rivals employing the

various weapons of competition in jockeying for a stronger market position and

seeking bigger sales:

Is price competition vigorous?

Active efforts to improve quality?

Are rivals racing to offer better performance features?Are rivals racing to offer better customer service?

Lots of advertising/sales promotions?

Active efforts to build a stronger dealer network?

Active product innovation?

Active use of other weapons of rivalry?

Competitive Force of Industry-Rivalry


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Active jockeying for position among rivals and frequent launches of new offensives

to gain sales and market share:

One or more firms initiate moves to bolster their standing at expense of rivals.

Lots of firms that are relatively 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 to Rival Brands.

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.

Indicators of Intense Industry-Rivalry


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Competitive Force of Potential-Entry

The pool of entry-candidates is large. Entry barriers are low or can

be readily hurdled by the likely entry candidates.

When existing industry members are looking to expand their

market reach by entering product segments or geographic areaswhere they currently do not have a presence.

Industry members are earning attractive profits.

Buyer demand is growing rapidly.

Threat of New Entry is Stronger, when

Competitive pressures coming from the threat of entry of new rivals.

Has direct effect on Competitive Rivalry.

Concept


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Competitive Force of Potential-Entry

Barriers to entry exist when:

Newcomers confront obstacles.

Economic factors put potential entrant at a disadvantage relative to

incumbent firms.

Strong reaction of existing firms expected to the potential new entrant.

Seriousness of Threat depends on:

Sizable Economies of Scale. Cost disadvantages independent of size.

Inability to gain access to specialized technology; distribution channels.

Regulatory policies, tariffs, trade restrictions.

Large Capital (&/or other specialized resource) requirements.

Existence of strong Learning / Experience curve effects.

Strong brand preferences, and customer loyalty.

Some Common Barriers to Entry


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Competitive Force of Substitute-Products

Competitive pressures coming from the attempts ofcompanies outside the industry to win buyers over to their products.

Substitutes matter when customers are attracted to the products of firms

in other industries.

Concept

Eyeglasses vs. Contact Lens.

Sugar vs. Artificial Sweeteners.

Foreign Trip vs. Home Theatre.

Newspapers vs. TV vs. Internet.

eMail vs. Overnight Delivery Courier Service.

Examples


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Factors Affecting the Strength of Substitute Products

Readily available, and/or

Attractively priced , and/or

Believed to have (at least) comparable or (even) better

performance features , and/or

Customer switching costs are low , and/or

Customer loyalty is low , and/or ..

Competitive threat of substitutes is stronger when they are:

Rapid growth in the Sales / Profits of the Substitutes.

Producers of Substitutes planning to expand further.

Key Indicators


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Competitive Force of Suppliers

Competitive pressures stemming from supplier

bargaining power and seller-supplier collaboration

Concept

Suppliers of Raw Materials, Parts, Components, or Other

Resource Inputs.

Suppliers mean


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Competitive Force of Suppliers

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 to other / new suppliers.

they have good reputations and also growing demand.

they can supply a component cheaper than its rivals, and than the

industry members can make it themselves.

they do not have to contend with substitutes.

buying firms are not important customers.

Suppliers are a strong competitive force when:


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Whether Supplier-Seller Relationships represent a weak or strong competitive

force, primarily depends on:

Whether suppliers can exercise sufficient bargaining leverage to influence

terms of supply in their favor.

Extent and competitive importance of collaborative partnerships between one

or more sellers and their suppliers.

Competitive Pressures: Supplier-Seller Collaboration


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Rival sellers form Long-Term strategic partnerships with select suppliers to..

Promote JIT / VMI deliveries and reduced inventory and logistic costs.

Speed availability of next-generation components.

Enhance quality of parts being supplied.

Reduce suppliers costs which paves way for lower prices on items supplied.

Competitive advantage potential may accrue to industry rivals doing the best job

of managing supply-chain relationships.

Suppliers are a stronger force the more they can exercise powerover the..

Prices charged.

Quality and Performance of the items supplied.

Reliability of Deliveries.

Competitive Pressures: Supplier-Seller Collaboration


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Competitive Force of Buyers

Competitive pressures stemming from buyer

bargaining power and seller-buyer collaboration.

Concept

End Consumers.

Supply Chain Partners / Intermediaries.

But, not Internal Customers.

Buyers mean


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Competitive Force of Buyers

they are large and purchase a sizable percentage of industrys /

sellers product.

they can integrate backward.

industrys /sellers product is standardized.

buyers cost of switching to substitutes (or competitive brands) are

low.

buyers can purchase from several sellers.

product purchased does not save buyer money.

buyers are more aware and informed.

Overall demand is declining.

Buyers are a Strong Competitive Force when:


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Partnerships are an increasingly important competitive element in B2B

relationships.

Collaboration may result in mutual benefits regarding:

JIT deliveries / VMI.

Improved Order processing and Stock Levels.

Electronic Invoicing / Payments.

On-line sharing of sales at the cash register.

Implementation of CPFRS.

Competitive advantage potential may accrue to industry rivals who do the best

job of managing Seller-Buyer partnerships.

Competitive Pressures: Sellers-Buyers Collaboration


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From the Standpoint of earning Good-Profits, the Competitive Environment is:

Strategic Implications of the 5 Competitive Forces

Unattractive, when..

Rivalry is strong.

Entry barriers are low and new entry

is likely.

Competition from substitutes is

strong.

Suppliers have considerable

bargaining power.

Customers have considerable

bargaining power.

Attractive, when..

Rivalry is moderate (not low).

Entry barriers are high and no firm is

likely to enter.

Good substitutes do not exist, or not

in a position to challenge.

Suppliers and customers are in a weak

bargaining position.


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Coping with the 5 Competitive Forces

To insulate firm from competitive forces.

To help make the rules, placing added pressure on rivals.

Which allows firm to define the business model for the industry.

Objective is to craft a strategy:


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#2: What is Competition Like & How Strong are the Competitive Forces?

Five Forces Model of Competition (Example: Farming)

Threat of New Entrant (-)

Not too expensive to enter the industry.

Experience needed but training easily available.

Some economies of scale.

Some cost benefits if in business for some time.

No Technology protection.

Low barriers to entry.

Buyer Power (--)

Few large supermarkets.

Very large orders.

Homogeneous product.

Extreme Price sensitivity.

Ability to substitute.

Supplier Power ( )

Moderate number of Suppliers.

Large Suppliers.

Similar Products.

Able to Substitute.

Threat of Substitution (-)

Some cross-product substitutes.

Ability to import food.

Competitive Rivalry (- -)

Very many competitors

Low switching Cost

High cost of leaving industry


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Industries change because forces are driving industry participants to alter theiractions.

Driving forces are the major underlying causes of changing the industry and the

competitive conditions.

Identify those forces likely to exert greatest influence over next 1-3 years;

Usually no more than 3 - 4 factors qualify as real drivers of change.

Assess the impact of the identified Driving-Forces

What difference will the forces make - favorable? unfavorable?


#3: What Forces are at Work to Change Industry Conditions?

Analyzing the Driving Forces


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e-commerce opportunities.

Globalization.

Long-term industry growth rate.

Policies / legislation.

Entry or exit of major firms.

Diffusion of technical knowledge.

Changes in cost and efficiency.

Societal concerns, attitudes, and lifestyles.

Innovation: Product, Technological, Marketing etc.

Market shift from standardized from/to differentiated products.

Who buys, and how they use it?

Degree of uncertainty and risk.

Some Common Driving Forces
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Identifying the Driving ForcesThe Environmental Scanning

Monitoring and interpreting sweep of social, political, economic,

ecological, legislative and technological events to spot budding trends

that could eventually impact industry.

Definition

Raise consciousness of managers about potential developments that

could:

Have important impact on industry conditions.

Pose new opportunities and threats to the organization.

Purpose


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Firms in same Strategic Group have two or more competitive characteristics in

common, for example the firms:

Sell in same price/quality range.

Cover same geographic areas.

Are vertically integrated to same degree.

Have comparable product line breadth.

Emphasize same types of distribution channels.

Offer buyers similar Services.

Use identical technological approaches


#4: Assessment of Competitive Positions

Strategic Group Mapping


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Strategic Groups MapWorld Automobile Industry

Low High

High

Price

Variety


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1. Identify competitive characteristics that differentiate firms in an industry from one

another.

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

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

4. Draw circles around each group, making circles proportional to size of groups

respective share of total industry sales.

How to Construct Strategic Group Maps?

Variables selected as axes should not be highly correlated.

Variables do not have to be either quantitative or continuous.

If more than 2 good competitive variables can be used, several maps can be drawn.


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How to Interpret Strategic Group Maps?

Driving forces and competitive pressures often favor some strategic groups and hurt

others.

Profit potential of different strategic groups varies due to strengths and weaknesses

in each groups market position.

The closer strategic groups are on map, the stronger the competitive rivalry among

member firms tends to be.


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A firms own best strategic moves are affected by Current strategies of competitorsand Future actions of competitors.

Profiling key rivals involves gathering competitive intelligence about their Current

strategies, Most recent moves, Resource strengths and weaknesses, Announced plans.


#5: Expected Moves by Rivals

Successful strategists take great pain in scouting competitors to:

Understand their strategies.

Watch their actions.

Evaluate their vulnerability to driving forces and competitive pressures.

Size up their resource strengths and weaknesses and their capabilities.

Try to anticipate rivals next moves.


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Categorizing Competitors

Competitorsby

Scope

StrategicIntent

ShareObjective

StrategicPosition

StrategicPosture

Strategy

..


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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.

Closely Predicting Rivals Moves


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Competitive elements most affecting every industry members ability to prosper:Specific strategy elements.

Resources.

Product attributes.

Competencies.

Competitive capabilities.

KSFs spell the difference between Profit or loss; Competitive success or failure.

Answers to three questions pinpoint KSFs:

On what basis do customers choose between competing brands?

What resources and competitive capabilities does a seller need to have to be competitively

successful?

How sellers to achieve a sustainable competitive advantage?

KSFs consist of the 3-5 really major determinants of financial and competitive

success in an industry.


#6: Industrys Key Success Factors


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Some Common KSFs

KSFs

Technology

Manufactng

Distribution

MarketingSkills

Organizatalcapability

..


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Conclusion: Is the Industry Attractive (or unattractive)? Why?

Develop conclusions about whether the industry and competitive

environment is attractive or unattractive, both near- and long-term, for

earning good profits.

Objective

A firm uniquely well-suited in an otherwise unattractive industry can,

under certain circumstances, still earn unusually good profits.

Principle

F ff i h I d A i


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Industrys market size and growth potential.

Whether competitive conditions are conducive to rising/falling industry profitability.

Will competitive forces become stronger or weaker.

Whether industry will be favorably or unfavorably impacted by driving forces.

Potential for entry/exit of major firms.

Stability/dependability of demand.

Severity of problems facing industry.

Degree of risk and uncertainty in industrys future.

Factors affecting the Industry Attractiveness

I d t & C titi Sit ti A l i


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Industry & Competitive Situation Analysis

1. Evaluating industry and competitive conditions cannot be reduced to

a formula-like exercise, thoughtful analysis is essential.

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

years (subject to the nature of Industry).

Two things to keep in mind:

R


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Recap

cs02 - external factor analysis

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