1. Competing For Advantage
Part II – Strategic Analysis
Chapter 3 – The External Environment:
Opportunities, Threats, Industry Competition,
and Competitor Analysis

2. Skate to where the puck is going, not to where the puck has been.
Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness.
Michael Porter
When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact.
Warren Buffett
Skate to where the puck is going, not to where the puck has been.
Wayne Gretsky

3. External Environments
Key Terms
General Environment – composed of dimensions in the broader society that influence an industry and the firms within it
Industry Environment – set of factors that directly influence a firm and its competitive actions and competitive responses
Competitor Environment – details about a firm’s direct and indirect competitors and the competitive dynamics expected to impact a firm's efforts to generate above-average returns
The General, Industry, and Competitor Environments - Firms analyze and use information about the external environment, selecting and implementing appropriate strategies based on this information.
Three ways of defining the external environment in which a firm operates:
The general environment
The industry environment
The competitor environment

4. Components of External Analysis
Scanning – Identifying early signals
Monitoring – Following signals or change identifies in scanning to identify patterns
Forecasting – Projections of what might happen
Assessing – Determining the timing and significance of forecasted change

5. Assessing the General Environment
A firm assesses the general environment in which it operates by analyzing the elements of six environmental segments (demographic, economic, political/legal, sociocultural, technological, and global) which are beyond its direct control.

6. General Environment Demographic Economic Political Socioculture
Technical
Global

7. 1) Demographic Segment Characteristics of the population
e.g., age, race, gender, sexual orientation and social classes
Ethnic structure
Income distribution
Geographic distribution

8. 2) Economic Segment
General health/wellbeing of the local, regional, national or global economy.
e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

9. 3) Political/Legal Segments
Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

10. 4) Sociocultural Segment
Attitudes of society towards work, careers, products, services and consumer activism.
e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.

11. 5) Technological Segment
Changes in technology that affect the workplace, and the products and services consumers expect
e.g., Information technologies, entertainment technologies, product technologies.

12. 6) Global Segment
New and existing markets around the world, and changes in the political, cultural and institutional terrain.

13. General Environment
Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance
Cast a wide net and to identify the emerging trends
Then determine which factors are relevant, and how these changes will have an effect upon the firm.

14. ROIC Across Industries 1995-2004

15. Each of these forces affect costs/prices, therefore, profitability
Porter’s Five Forces
Competitive Rivalry
Power of Buyers
Power of Suppliers
Potential Entrants
Substitute Products
Each of these forces affect costs/prices,
therefore, profitability

16. Substitute Products Rivalry Among Suppliers of Buyers Competing
(of firms in
other industries)
Rivalry
Among
Competing
Sellers
Suppliers of
Key Inputs
Buyers
Potential
New
Entrants

17. { Porter’s 5-forces is all about margins Price
What factors increase/decrease margins within an industry, thus affecting profitability.
Profits
Costs

18. When industry structural variables are weak…...
Prices can be kept high {
Profits can soar
Costs can be kept low

19. When industry structural variables are strong
Prices will be pushed down {
Profits shrink
Costs will rise

20. What kind of businesses might you start?
Suppose you had to start a new business and start generating revenues…
… today
… in a week
… in 2 months
… in 1 year
What kind of businesses might you start?

21. Potential New Entrants
Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents.
Firms can create “barriers to enter”
Barriers of entry are desirable for entrenched firms

22. Barriers to Entry Economies of scale Product differentiation & loyalty
Capital & resource requirement
Switching costs
Distribution
Cost disadvantage independent of size
Regulatory policies
Access to technology & know-how
Learning, costs, experience curves
Threat of retaliation

23. Suppliers Who are you key suppliers?
Suppliers are a strong competitive force when:
Only a few suppliers exist and is more concentrated than industry to which it is selling
Few substitutes available to the industry firm
Industry not important buyers to supplier group
Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality
It is costly for buyers to switch suppliers
Forward integration by suppliers is a credible threat
Suppliers can supply at a lower cost

24. Buyers Who are your key buyers? - who provides our revenues?
Can they force:
lower prices, higher quality and service – affect the terms and conditions of the exchange?
When do you, as a consumer, have power?
Two issues
Price sensitivity
Can you actually bargain

25. Buyers What affect buyers’ power? Volume/Frequency of purchase
When buyers represent a large portion of sellers revenues
When buyers can easily switch to another product
When the product the buyers are buying is undifferentiated
When buyers can self-source or backwards integration
Criticality
Buyers’ knowledge
Buyers’ profitability

26. Substitutes Product/service which fulfills similar need Price cap
3 Questions
Are they available?
Can we switch?
Price-performance relationship?

27. Substitutes and Business Definition
How we define our business defines our substitutes and our rivals
Carbonated Soft Drink
Soft Drinks
Beverages
Many Substitutes
Few Substitutes
Few Rivals
Many Rivals

28. Rivalry and Profitability
Industry profitability is a collective good.
Collective good is served by coordination
Are there industries were pricing is coordinated?
Incentive to violate

29. Rivalry – What drives it?
Numerous or equally balanced competitors
Slow growth, excess capacity
High fixed costs
High storage costs
High obsolescence costs
Lack of differentiation
Low switching costs
Perceptions of high payoff from competitive actions
High exit barriers

30. Exit Barriers Specialized assets Fixed costs of exit
Strategic interrelationships among business units
Emotional barriers

31. Industries and Segments
What is a segment?
Different segments…..
posses different combinations of 5-forces
therefore:
reward different strategies
possess different levels of profitability

32. Segments in the Automotive Industry
Economy Luxury
Which segment is more attractive? Why?

33. Porter’s..in conclusion
Attractiveness of industry/segment
current industry
adjacent segments
industries you might consider entering
Which forces possess the greatest influence?
Can we influence them?

34. Static model & Hypercompetition
If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing competition and profit.

35. Complementors Key Terms
Complementors – companies that sell complementary goods or services that are compatible with the focal firm's own product or services
Complementors - Providers of complementary products can also be a powerful influence on competition (sometimes considered a "sixth force").

36. Interpreting Industry Analysis
The ways in which competitive analysis provides insight into the attractiveness of an industry by determining its potential for above-average returns over the long term
Interpreting Industry Analysis – It is important to consider international implications as they relate to industry analysis. The forces competitive analysis provides insight into the attractiveness of an industry by determining its potential for above-average returns over the long-term.

37. Analysis of Direct Competitors
Key Terms
Strategic Group – set of firms emphasizing similar strategic dimensions to use a similar strategy
Strategic Dimensions – areas that firms in a strategic group treat similarly
Analysis of Direct Competitors - Take the results of the five forces analysis forward to understand the positions, intentions, and performance of direct competitors, including the closest of these competitors which fall into a strategic group.
Strategic Groups - This section defines the dynamics of strategic groups within an industry, the strategic dimensions that define the similarities of firms within a strategic group, and the implications of strategic groups.

38. Implications from Strategic Group Dynamics
Intra-strategic group rivalry is more intense than inter-strategic group rivalry
Membership in a strategic group partially defines the essential characteristics of firms' strategies
The more similar strategies are seen across strategic groups, the greater the level of expected rivalry
The strengths of industries' five forces differ across strategic groups
Implications can be derived from strategic group dynamics:
Intra-strategic group rivalry is more intense than inter-strategic group rivalry, increasing the threat to industry profitability
Membership in a strategic group partially defines the essential characteristics of firms' strategies, and the more similar strategies are across strategic groups, the greater the level of expected rivalry
The strengths of industries' five forces differ across strategic groups
Strategic groups have several implications. First, because firms within a group offer similar products to the same customers, the competitive rivalry among them can be intense. The more intense the rivalry, the greater the threat to each firm’s profitability. Second, the strengths of the five industry forces (the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors) differ across strategic groups. Third, the more similar the strategies across the strategic groups, the greater the likelihood of rivalry among the groups.

39. Competitor Analysis Components
The result of a complete study of the four components of competitor analysis is an anticipated response profile for each competitor.
In gathering competitive intelligence, two guidelines should be followed by all firms:
Competitor intelligence practices must be legal
Competitor intelligence practices must be ethical
Future Objectives
How do our goals compare with our competitors’ goals?
Where will the emphasis be placed in the future?
What is the attitude toward risk?
Current Strategy
How are we currently competing?
Does this strategy support changes in the competitive structure?
Assumptions
Do we assume the future will be volatile?
Are we operating under a status quo?
What assumptions do our competitors hold about the industry and themselves?
Capabilities
What are our strengths and weaknesses?
How do we rate compared to our competitors?
Response
What will our competitors do in the future?
Where do we hold an advantage over our competitors?
How will this change our relationship with our competitors?
Additional Discussion Notes for the Competitor Environment - These notes present examples to illustrate how firms should respond to new competitors: by leading, following, and ignoring.
Example of Leading: Universal Studios’ Universal Park, a New Entrant - Reaction by Established Firm Disney
Response I
In response to Universal Studios building its Universal Park in Orlando, Florida, on Disney’s home turf, Disney aggressively built New Parks, new attractions to retain the buying public’s interest:
In 2000, Disney expanded the MGM Park by adding new rides (Tower of Doom, etc.)
In 2001, Disney completed its newest masterpiece, Disney’s Animal Kingdom, a cross between a traditional zoo and a traditional Disney theme park
Response II
Disney also expanded from its core Orlando turf by building attractions and/or strengthening attractions at its other theme parks:
In 2000 Disney opened its California Adventure
Disney also added attractions to both its Paris and Tokyo theme parks in order to maintain or expand its market position
Disney is planning on building a new park in Hong Kong in order to tap into the growing affluence of East Asia, especially the Chinese market
Example of Following: Amazon.com, a New Delivery Channel for Books - Reaction by Established Firms Barnes & Nobles and Border Books
Barnes & Nobles
After the initial shock and denial, Barnes & Nobles has spawned out its own online bookstore. It also used its brick-and-mortar presence to deliver community experience and worked to establish new joint ventures. For example, Barnes & Nobles used existing assets that Amazon.com does not have to create “community centers” and “places of leisure” with comfy sofas, coffee bars, poetry readings, music recitals, art shows, etc.
Borders Books
Borders engaged in even deeper denial and “wait-and-see” tactics. Finally it maintained its current platform by merging with Waldenbooks to imitate Barnes & Nobles’ community centers strategy and by using Amazon.com as its online platform.
Example of Following: CNN, the All-News Cable Television Channel - Reaction by Established Firm NBC
NBC
NBC tried to “tap” into the growing market for cable news television and follow CNN’s all-day news channel by creating MSNBC, a joint venture with Microsoft, to broaden its news operations.
Facts
MSNBC and MSNBC.com launched in 1996
As of July 2002, MSNBC’s viewership was 76 million
MSNBC revamped its format towards more talk news shows in order to expand its product line and to retain and expand its market share in response to Fox News
Note: No financial data available.
Example of Ignoring: CNN, the All-News Cable Television Channel - Reaction by Established Firms CBS and ABC Television Broadcast Networks
CBS and ABC decided to ignore CNN’s entrance into the marketplace and maintained core news programming without launching a 24-hour news only channel as a direct reaction to CNN.
CBS Lineup
6:00 Evening News
60 Minutes I and II feature news story programs
48 Hours Investigates feature news story program
ABC Lineup
20/20 feature news story program
Primetime feature news story program
Peter Jennings' special broadcast shows (e.g., Islam-related broadcasts)

40. Identification of Key Success Factors?
KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability
opportunities for competitive advantage

41. 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

42. Identifying Key Success Factors (KSFs) - vary by segment
Automotive Industry