1. “Analysis is the critical starting point of strategic thinking.”
Kenichi Ohmae
“Things are always different--the art is figuring out which differences matter.”
“Quote”
Laszlo Birinyi
McGraw-Hill/Irwin
Copyright
2001 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Industry and Competitive Analysis
Chapter 3

3. Chapter Outline Role of Situation Analysis in Strategy-Making
Methods of Industry and Competitive Analysis
Industry’s Dominant Economic Traits
Industry’s Competitive Forces
Drivers of Industry Change
Competitive Positions of Rivals
Competitive Moves of Rivals
Key Success Factors
Conclusions: Overall Industry Attractiveness
Conducting an Industry and Competitive Analysis

4. What Is Situation Analysis?
Two considerations
Company’s external or macro-environment
Industry and competitive conditions
Company’s internal or micro-environment
Competencies, capabilities, resource strengths and weaknesses, and competitiveness

5. Figure 3.1: The Components of a Company’s Macro-Environment
The Economy at Large
Technology
Legislation and Regulation
Suppliers
Substitutes
COMPANY
Rival Firms
Buyers
New
Entrants
Societal Values and Lifestyles
Population Demographics 
IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT

6. Key Considerations Regarding the Industry and Competitive Environment
Industry’s dominant economic traits
Competitive forces and strength of each force
Drivers of change in the industry
Competitor analysis
Key success factors
Conclusions: Industry attractiveness

7. Industry’s Dominant Economic Traits
What is the definition of an industry?
What are the Industry’s dominant economic traits?
High capital requirements TRUE FALSE
do not create exit barriers
Industries characterized by TRUE FALSE
the need for economies of
scale do not require that firms
have high market share.

8. Industry’s Dominant Economic Traits
How does vertical integration affect an industry?
Capacity surpluses pull TRUE FALSE
industry prices up.
Consolidation is typical in TRUE FALSE
slow growth industries.
What are some possible industry exit barriers?
What is the Experience Curve?

9. Figure 3-3: Cost Advantages of Different Experience Curve Effects$1 $1
.90
.80
.81
10% Cost
Reduction
.729
.70
.64
.512
20% Cost
Reduction
Cost per Unit
.49
.343
30% Cost
Reduction 1
Million
Units 2
Million
Units 4
Million
Units 8
Million
Units

10. Figure 3-4: Five Forces Model of Competition
Substitute Products
(of firms in
other industries)
Suppliers of Key Inputs
Rivalry
Among
Competing
Sellers
Buyers
Potential
New
Entrants

11. Intensity of Rivalry
What factors cause a strong rivalry in the industry?
Competition in an industry is typically based upon what two things?

12. Competitive Force of Potential Entry
What is the potential impact of new entrants to existing firms?
What are some type of entry barriers?
What are some forms of retaliation to prevent new entrants into an industry?
New entrants in an TRUE FALSE industry do not benefit customers.

13. Competitive Force of Potential Entry
An industry which has economies True False
of scale may cause new entrants
to accept a cost disadvantage
High advertising costs is not a True False
a deterrent to entering an industry.
The threat of new entrants is True False
strong when the industry has high
brand loyalty.

14. Effects of Entry Barriers and Exit Barriers on Industry Profits
High, Risky Returns
Entry Barriers
Exit Barriers
High
Low
Low, Stable Returns
High, Stable Returns
Low, Risky Returns

15. Competitive Force of Substitute Products
What are substitute products?
How do substitutes affect the prices in the competing industry?
The threat of substitutes is TRUE FALSE
strong when switching costs
are high.
The threat of substitutes is TRUE FALSE
strong when substitutes have
better product attributes.
The threat of substitutes is TRUE FALSE
strong when the substitutes
prices are lower.

16. Competitive Force of Suppliers
Suppliers have power when there TRUE FALSE
are easily available substitute
products to their product
High switching costs for firms in TRUE FALSE
the industry gives suppliers more
power
Supplying to an industry that is a TRUE FALSE
major customer weakens supplier
When the suppliers’ product is a TRUE FALSE
large portion of the industry costs
the suppliers have more power.

17. Competitive Force of Suppliers
What are some reasons why sellers and suppliers collaborate?
Suppliers with good reputations TRUE FALSE
and growing demand have little
influence over the buying industry.
Suppliers that supply a standard TRUE FALSE
commodity available from
numerous other firms can exert
substantial power.
A lack of vertical integration in the TRUE FALSE
buyers’ industry gives suppliers
strong bargaining power.

18. Competitive Force of Buyers
High switching costs for buyers True False
in the industry decreases the
buyers power.
Buyers that purchase a large True False
amount of the industry’s output
have strong bargaining power.
An industry with a large number True False
of firms gives buyers more power.

19. Competitive Force of Buyers
An industry with buyers that True False
buy in large quantities have
buyers with strong power.
When buyers can backward True False
integrate into the selling industry
they have strong bargaining
power.
An industry with a standardized True False
product gives buyers less power.

20. Strategic Implications of the Five Competitive Forces
Competitive environment is unattractive from the standpoint of earning good profits when:
Rivalry is strong
Entry barriers are low and entry is likely
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power

21. Strategic Implications of the Five Competitive Forces
Competitive environment is ideal from a profit-making standpoint when:
Rivalry is moderate
Entry barriers are high and no firm is likely to enter
Good substitutes do not exist
Suppliers and customers are in a weak bargaining position

22. Industry Driving Forces
What is an industry driving force?
What are some common types of driving forces?
Name three driving forces in the Automotive Industry. Be prepared to discuss in class.
Name three driving forces in the Wireless Communications Industry. Be prepared to discuss in class.

23. Competitors and Strategic Group Mapping
What is a strategic group map?
What are some characteristics that you can use to compare firms in a strategic group map?
What are some possible sources of information about a firm’s competitors?

24. 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

25. Guidelines: Strategic Group Maps
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
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

26. Interpreting 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 group’s market position
The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be

27. Key Success Factors
What are Industry Key Success Factors ?
KSFs consist of the really major determinants of financial and competitive success in an industry
What are three Key Success Factors in the Fast Food/Leisure Segment of the Restaurant Industry. Be prepared to discuss in class.

28. Strategic Management Principle
A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!

29. Things to Consider in Assessing Industry Attractiveness
Industry’s 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 industry’s future

30. Conducting an Industry and Competitive Situation Analysis
Two things to keep in mind
1. Evaluating industry and competitive conditions cannot be reduced to a formula-like exercise--thoughtful analysis is essential
2. Sweeping industry and competitive analyses need to done every 1 to 3 years