Presentation on theme: "COURSE TITLE : COMPETITIVE STRATEGY"— Presentation transcript:
1 COURSE TITLE : COMPETITIVE STRATEGY Ashesi UniversityCOURSE TITLE : COMPETITIVE STRATEGY1ST SEMESTER : 2011/2012MODULE 2: Strategic Analysis: Industry and Competitor AnalysesLecturer : Ebow Spio
2 Learning ObjectivesAppreciate the role of Environmental Scanning, Monitoring, Competitive Intelligence and ForecastingExplain what an Industry is and identify the different types of industryUnderstand the industry’s Dominant Economic FeaturesUnderstand how forces in the competitive environment can affect profitability and how a firm can improve its competitive position by increasing its power vis-à-vis these forces (Porter’s Five Forces Model of Industry Competition)Understand Factors Driving Industry ChangeManagers are not prepared to act wisely in steering a company in a different direction or alteringits strategy until they have a deep understanding of the company’s situation.2. This understanding requires thinking strategically about two facets of the company’s situation:a. The industry and the competitive environment in which the company operates and the forcesacting to reshape that environment.b. The company’s own market position and competitiveness - its resources and capabilities, itsstrengths and weaknesses vis-E0-vis rivals, and its windows of opportunities3. Managers must be able to perceptively diagnosis a company’s external and internal environmentsto succeed in crafting a strategy that is an excellent fit with the company’s situation, is capable ofbuilding competitive advantage, and promises to boost company performance – the three criteriaof a winning strategy.4. Developing company strategy begins with a strategic appraisal of the company’s external andinternal situations to form a strategic vision of where the company needs to head, then movestoward an evaluation of the most promising alternative strategies and business models, and finallyculminates in a choice of strategy
3 Learning ObjectivesExplain the Concept of Market Positions and Strategic Groups within IndustriesUnderstanding Key Factors for Future Competitive Success and AttractivenessOutline a Framework for Competitor Analysis
5 Fig. 3.1: From Thinking Strategically about the Company’s Situation to Choosing a Strategy
6 Understanding the Factors that Determine a Company’s Situation Diagnosing a company’s situation has two facetsAssessing the company’s external or macro-environmentIndustry and competitive conditionsForces acting to reshape this environmentAssessing the company’s internal or micro-environmentMarket position and competitivenessCompetencies, capabilities, resource strengths and weaknesses, and competitivenessAll companies operate in a macro-environment shaped by influences emanating from the economy at large, population demographics, societal values and lifestyles, governmental legislation and regulation, technological factors, and the industry and competitive arena in whichthe company operates.Strictly speaking, a company’s macro-environment includes all relevant factors and influences outside a company’s boundaries. By relevance its means it is important enough to have a bearing on the decisions that the company ultimately makes about its direction, objectives, strategy and business model.
7 Thinking Strategically about a Company’s Macro-environment A company’s macro-environment includes all relevant factors and influences outside its boundariesDiagnosing a company’s external situation involves assessing strategically important factors that have a bearing on the decisions a company makes about itsDirectionObjectivesStrategyBusiness modelRequires that company managers scan the external environment toIdentify potentially important external developmentsAssess their impact and influenceAdapt a company’s direction and strategy as needed
8 Fig. 3.2: The Components of a Company’s Macro-environment
9 Thinking Strategically about a Company’s Macro-environment Porter Described Competitive Strategy as Primarily a Function of Industry Sector“The essence of formulating competive strategy is relating a company to its environment. Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the firm’s environment is the industry or industries in which it competes.” Competitive Strategy, 1980
10 Defining Industry boundaries A group of firms that are producing products that are substitutes for each other e.g. the mobile telecommunicationIdentify firms whose products do the same thing in the same way (e.g. air conditioners)Firms compete with each other through changes in price and valueTechnological similarity is needed to separate an industry from substitutes e.g. air conditioners vrs electric fansMarket interdependence means that a change in the value or price of one firm’s product affects demand for the product of a competitorAn industry will also have suppliers as well substitutes.
11 Types of Industry Monopoly This where only one firm serves the market e.g. Electricity Company of GhanaMonopolists tend to produce less and chargemoreThey make as much money as the customers and suppliers let them and given the substitute products availableThe returns to a monopoly serve as the benchmark for the highest profits possible in an industry
12 Types of Industry Perfect Competition It is composed of a large number of independent firms that produce or sell very similar productsEach firm is too small to affect the price of the product as market is quite large as compared to average firmThere is perfect mobility of resources so firms can enter or leave the industry in the long run without much difficultyFirms in the industry are “price takers” and can sell amount of their products at the prevailing market price.Additional industry volume will drive the market price down such that no firm makes a profit in the long run.However, it is important to understand the additional industry volume will drive the market price down such that no firm makes a profit in the long
13 Types of Industry Oligopoly Is a small group of firms that compete with each other and dominate rivalry in an industryThe aggressive action of one firm affects the returns of the othersCompetition is concentrated ( i.e. sales of the top firms expressed as percentage of total sales of the industry)Level of concentration is based on 2 factorsThe ratio of market size to the minimum setup costs necessary to competeLevel of sunk cost investment made by incumbent companies in activities such as advertising, research and development etc.
14 Strategic AnalysisThe Strategically Relevant Components of a Company’s External EnvironmentThinking Strategically About a Company’s Industry and Competitive EnvironmentQuestion 1: What Are the Industry’s Dominant Economic Features?Question 2: What Kinds of Competitive Forces Are Industry Members Facing, and How Strong Is Each Force?Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have?Question 4: What Market Positions Do Rivals Occupy—Who Is Strongly Positioned and Who Is Not?Question 5: What Strategic Moves Are Rivals Likely to Make Next?Question 6: What Are the Key Factors for Future Competitive Success?Question 7: Does the Outlook for the Industry Present an Attractive Opportunity?Thinking strategically about a company’s competitive environment entails using some well defined concepts and analytical tools to get clear answers to seven questions. Managers need not collect all information.
15 Key Questions Regarding the Industry and Competitive Environment What are the industry’s dominant economic traits?How strong are competitive forces?What forces are driving change in the industry?What market positions do rivals occupy? What moves will they make next?What are the key factors for competitive success?How attractive is the industry from a profit perspective?
16 Question 1: What are the Industry’s Dominant Economic Traits? Market size and growth rateNumber of rivalsScope of competitive rivalryBuyer needs and requirementsDegree of product differentiationProduct innovationSupply/demand conditionsPace of technological changeVertical integrationEconomies of scaleLearning and experience curve effectsBecause industries differ so significantly, analyzing a company’s industry and competitive environment begins with identifying the industry’s dominant economic features and forming a picture of the industry landscape.
17 Getting a handle on an industry’s distinguishing economic features not only sets the stage for the analysis to come but also promotes understanding of the kinds of strategic moves that industry members are likely to employ.The bigger the scale economies in an industry, the more imperative it becomes for the competing sellers to pursue strategies to win additional sales and market share – the company with the biggest sales volume gains sustainable competitive advantage as the low-cost producer.
18 Learning/Experience Effects Learning/experience effects exist when a company’s unit costs decline as its cumulative production volume increases because ofAccumulating production know-howGrowing mastery of the technologyThe bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
19 Question 2: What Kinds of Competitive Forces Are Industry Members Facing? Objectives are to identifyMain sources of competitive forcesStrength of these forcesKey analytical toolFive Forces Model of CompetitionThe character, mix, and subtleties of the competitive forces operating in a company’s industry are never the same from one industry to another.2. The most powerful and widely used tool for systematically diagnosing the principal competitive pressures in a market and assessing the strength and importance of each is the five-forces model3. This model holds that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market:of competition.
20 Fig. 3.3: The Five Forces Model of Competition Threat of new entrantsBargaining Power of buyersRivalry among existing sellersBargaining Power of Suppliers.Threat of substitute products or services
21 Analyzing the Five Competitive Forces: How to Do It Step 1: Identify the specific competitive pressures associated with each of the five forcesStep 2: Evaluate the strength of each competitive force -- fierce, strong, moderate to normal, or weak?Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits
22 Competitive Pressures Among Rival Sellers Usually the strongest of the five forcesKey factor in determining strength of rivalryHow aggressively are rivals using various weapons of competition to improve their market positions and performance?Competitive rivalry is a combative contest involvingOffensive actionsDefensive countermoves
23 Fig. 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry
24 What Causes Rivalry to be Stronger? Competitors are active in making fresh moves to improve market standing and business performanceSlow market growthNumber of rivals increases and rivals are of equal size and competitive capabilityBuyer costs to switch brands are lowIndustry conditions tempt rivals to use price cuts or other competitive weapons to boost volume e.g. perishable or seasonalA successful strategic move carries a big payoffDiversity of rivals increases in terms of visions, objectives, strategies, resources, and countries of originOutsiders acquire weak firms in the industry and use their resources to transform new firms into major market contendersRivalry can be characterized at Cutthrout or Brutal when competitors engage in protracted price wars or habitually employ other aggressive tactics that are mutually destructive to profitability. Rivalry can be considered fierce or strong when the battle for market share is so vigorous that the profit margins of most industry members are squeezed to bare-bone levels.
25 What Causes Rivalry to be Weaker? Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivalsRapid market growthProducts of rivals are strongly differentiated and customer loyalty is highBuyer costs to switch brands are highThere are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business
26 Competitive Pressures Associated With Potential Entry Seriousness of threat depends onSize of pool of entry candidates and available resourcesBarriers to entryReaction of existing firmsEvaluating threat of entry involves assessingHow formidable entry barriers are for each type of potential entrant andAttractiveness of growth and profit prospects
28 Common Barriers to Entry Sizable economies of scaleCost and resource disadvantages independent of sizeBrand preferences and customer loyaltyCapital requirements and/or other specialized resource requirementsAccess to distribution channelsRegulatory policiesTariffs and international trade restrictionsAbility of industry incumbents to launch vigorous initiatives to block a newcomer’s entry
29 When Is the Threat of Entry Stronger? There’s a sizable pool of entry candidatesEntry barriers are lowIndustry growth is rapid and profit potential is highIncumbents are unwilling or unable to contest a newcomer’s entry effortsWhen existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence
30 When Is the Threat of Entry Weaker? There’s only a small pool of entry candidatesEntry barriers are highExisting competitors are struggling to earn good profitsIndustry’s outlook is riskyIndustry growth is slow or stagnantIndustry members will strongly contest efforts of new entrants to gain a market foothold
31 Competitive Pressures from Substitute Products Substitutes matter when customers are attracted to the products of firms in other industriesConceptExamplesSugar vs. artificial sweetenersEyeglasses and contact lens vs. laser surgeryNewspapers vs. TV vs. Internet
32 How to Tell Whether Substitute Products Are a Strong Force Whether substitutes are readily available and attractively pricedWhether buyers view substitutes as being comparable or betterHow much it costs end users to switch to substitutes
33 Fig. 3.6: Factors Affecting Competition From Substitute Products
34 When Is the Competition From Substitutes Stronger? There are many good substitutes readily availableSubstitutes are attractively pricedThe higher the quality and performance of substitutesThe lower the end user’s switching costsEnd users grow more comfortable with using substitutes
35 Competitive Pressures From Suppliers and Supplier-Seller Collaboration Whether supplier-seller relationships represent a weak or strong competitive force depends onWhether suppliers can exercise sufficient bargaining leverage to influence terms of supply in their favorNature and extent of supplier-seller collaboration in the industry
36 Fig. 3.7: Factors Affecting Bargaining Power of Suppliers
37 When Is the Bargaining Power of Suppliers Stronger? Industry members incur high costs in switching their purchases to alternative suppliersNeeded inputs are in short supplySupplier provides a differentiated input that enhances the quality of performance of sellers’ products or is a valuable part of sellers’ production processThere are only a few suppliers of a specific inputSome suppliers threaten to integrate forward
38 When Is the Bargaining Power of Suppliers Weaker? Item being supplied is a commoditySeller switching costs to alternative suppliers are lowGood substitutes exist or new ones emergeSurge in availability of supplies occursIndustry members account for a big fraction of suppliers’ total salesIndustry members threaten to integrate backwardSeller collaboration with selected suppliers provides attractive win-win opportunities
39 Competitive Pressures: Collaboration Between Sellers and Suppliers Sellers are forging strategic partnerships with select suppliers toReduce inventory and logistics costsSpeed availability of next-generation componentsEnhance quality of parts being suppliedSqueeze out cost savings for both partiesCompetitive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships
40 Competitive Pressures From Buyers and Seller-Buyer Collaboration Whether seller-buyer relationships represent a weak or strong competitive force depends onWhether buyers have sufficient bargaining leverage to influence terms of sale in their favorExtent and competitive importance of seller-buyer strategic partnerships in the industry
41 Fig. 3.8: Factors Affecting Bargaining Power of Buyers
42 When Is the Bargaining Power of Buyers Stronger? Buyer switching costs to competing brands or substitutes are lowBuyers are large and can demand concessionsLarge-volume purchases by buyers are important to sellersBuyer demand is weak or decliningOnly a few buyers existsIdentity of buyer adds prestige to seller’s list of customersQuantity and quality of information available to buyers improvesBuyers have ability to postpone purchases until laterBuyers threaten to integrate backward
43 When Is the Bargaining Power of Buyers Weaker? Buyers purchase item infrequently or in small quantitiesBuyer switching costs to competing brands are highSurge in buyer demand creates a “sellers’ market”Seller’s brand reputation is important to buyerA specific seller’s product delivers quality or performance that is very important to buyerBuyer collaboration with selected sellers provides attractive win-win opportunities
44 Competitive Pressures: Collaboration Between Sellers and Buyers Partnerships are an increasingly important competitive element in business-to-business relationshipsCollaboration may result in mutual benefits regardingJust-in-time deliveriesOrder processingElectronic invoice paymentsData sharingCompetitive advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships
45 Strategic Implications of the Five Competitive Forces Competitive environment is unattractive from the standpoint of earning good profits whenRivalry is vigorousEntry barriers are low and entry is likelyCompetition from substitutes is strongSuppliers and customers have considerable bargaining power
46 Strategic Implications of the Five Competitive Forces Competitive environment is ideal from a profit-making standpoint whenRivalry is moderateEntry barriers are high and no firm is likely to enterGood substitutes do not existSuppliers and customers are in a weak bargaining position
47 Coping With the Five Competitive Forces Objective is to craft a strategy toInsulate firm from competitive pressuresInitiate actions to produce sustainable competitive advantageAllow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry
48 Where do driving forces originate? Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have?Industries change because forces are driving industry participants to alter their actionsDriving forces are the major underlying causes of changing industry and competitive conditionsWhere do driving forces originate?Outer ring of macroenvironmentInner ring of macroenvironment
49 Analyzing Driving Forces: Three Key Steps STEP 1: Identify forces likely to exert greatest influence over next yearsUsually no more than factors qualify as real drivers of changeSTEP 2: Assess impactAre the driving forces acting to cause market demand for product to increase or decrease?Are the driving forces acting to make competition more or less intense?Will the driving forces lead to higher or lower industry profitability?STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces
50 Common Types of Driving Forces Emerging new Internet capabilities and applicationsIncreasing globalization of industryChanges in long-term industry growth rateChanges in who buys the product and how they use itProduct innovationTechnological change/process innovationMarketing innovation
51 Common Types of Driving Forces (con’t) Entry or exit of major firmsDiffusion of technical knowledgeChanges in cost and efficiencyConsumer preferences shift from standardized to differentiated products (or vice versa)Changes in degree of uncertainty and riskRegulatory policies / government legislationChanging societal concerns, attitudes, and lifestyles
53 Question 4: What Market Positions Do Rivals Occupy? One technique to reveal different competitive positions of industry rivals is strategic group mappingA strategic group is a cluster of firms in an industry with similar competitive approaches and market positions
54 Strategic Group Mapping Firms in same strategic group have two or more competitive characteristics in commonHave comparable product line breadthSell in same price/quality rangeEmphasize same distribution channelsUse same product attributes to appeal to similar types of buyersUse identical technological approachesOffer buyers similar servicesCover same geographic areas
55 Procedure for Constructing a Strategic Group Map STEP 1: Identify competitive characteristics that differentiate firms in an industry from one anotherSTEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristicsSTEP 3: Assign firms that fall in about the same strategy space to same strategic groupSTEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales
56 Example: Strategic Group Map of Selected Retail Chains
57 Guidelines: Strategic Group Maps Variables selected as axes should not be highly correlatedVariables chosen as axes should expose big differences in how rivals competeVariables do not have to be either quantitative or continuousDrawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic groupIf more than two good competitive variables can be used, several maps can be drawn
58 Interpreting Strategic Group Maps The closer strategic groups are on the map, the stronger the cross-group competitive rivalry tends to beNot all positions on the map are equally attractiveDriving forces and competitive pressures often favor some strategic groups and hurt othersProfit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position
59 Question 5: What Strategic Moves Are Rivals Likely to Make Next? A firm’s best strategic moves are affected byCurrent strategies of competitorsFuture actions of competitorsProfiling key rivals involves gathering competitive intelligence aboutCurrent strategiesMost recent actions and public announcementsResource strengths and weaknessesEfforts being made to improve their situationThinking and leadership styles of top executives
60 Competitor AnalysisSizing up strategies and competitive strengths and weaknesses of rivals involves assessingWhich rival has the best strategy? Which rivals appear to have weak strategies?Which firms are poised to gain market share, and which ones seen destined to lose ground?Which rivals are likely to rank among the industry leaders five years from now? Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader?
61 Things to Consider in Predicting Moves of Rivals Which rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue?Which rivals have a strong incentive, along with resources, to make major strategic changes?Which rivals are good candidates to be acquired? Which rivals have the resources to acquire others?Which rivals are likely to enter new geographic markets?Which rivals are likely to expand their product offerings and enter new product segments?
62 For Discussion: Your Opinion Why does a company need to bother with studying competitors and trying to predict what moves rivals will make next? Why can’t it just choose whatever strategy it wants or make whatever moves in the marketplace it wishes without first worrying about what rivals are going to do?
63 Question 6: What Are the Key Factors for Competitive Success? KSFs are those competitive factors most affecting every industry member’s ability to prosperKSFs concernSpecific strategy elementsProduct attributesResourcesCompetenciesCompetitive capabilitiesthat a company needs to be competitively successfulKSFs are attributes that spell the difference betweenProfit and lossCompetitive success or failure
64 Identifying Industry Key Success Factors Pinpointing KSFs involves determiningOn what basis do customers choose between competing brands of sellers?What resources and competitive capabilities does a seller need to have to be competitively successful?What does it take for sellers to achieve a sustainable competitive advantage?KSFs consist of the major determinants for successRarely are there more than factors that are truly key to the future financial and competitive success of industry members
66 Example: KSFs for Beer Industry Full utilization of brewing capacity – to keep manufacturing costs lowStrong network of wholesale distributors – to gain access to retail outletsClever advertising – to induce beer drinkers to buy a particular brand
67 Example: KSFs for Apparel Manufacturing Industry Appealing designs and color combinations – to create buyer appealLow-cost manufacturing efficiency – to keep selling prices competitive
68 Question 7: Does the Outlook for the Industry Present an Attractive Opportunity? Involves assessing whether the industry and competitive environment is attractive or unattractive for earning good profitsUnder certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn unusually good profitsAttractiveness is relative, not absoluteConclusions about attractiveness have to be drawn from the perspective of a particular company
69 Factors to Consider in Assessing Industry Attractiveness Industry’s market size and growth potentialWhether competitive forces are conducive to rising/falling industry profitabilityWhether industry profitability will be favorably or unfavorably impacted by driving forcesDegree of risk and uncertainty in industry’s futureSeverity of problems facing industryFirm’s competitive position in industry vis-à-vis rivalsFirm’s potential to capitalize on vulnerabilities of weaker rivalsWhether firm has sufficient resources to defend against unattractive industry factors
70 Core Concept: Assessing Industry Attractiveness The degree to which an industry is attractive or unattractive is not the same for all industry participants or potential entrants.The opportunities an industry presents depend partly on a company’s ability to capture them.