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INDUSTRY
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COMPET
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INDUSTRY
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COMPET
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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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Industry & Competitive EnvironmentKey Considerations
Trend Extrapolation Delphy Analysis
Experience &Learning
Scenario Planning
Simple Complex
Static
Dynamic
Environmental Conditions
EnvironmentalConditio
ns
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Industry & Competitive EnvironmentKey Considerations
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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Industry & Competitive EnvironmentKey Considerations
#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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Industry & Competitive EnvironmentKey Considerations
#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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Industry & Competitive EnvironmentKey Considerations
#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?
Industry & Competitive EnvironmentKey Considerations
#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
Industry & Competitive EnvironmentKey Considerations
#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.
Industry & Competitive EnvironmentKey Considerations
#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.
Industry & Competitive EnvironmentKey Considerations
#6: Industrys Key Success Factors
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Some Common KSFs
KSFs
Technology
Manufactng
Distribution
MarketingSkills
Organizatalcapability
..
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Industry & Competitive EnvironmentKey Considerations
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