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© Adapted from Thompson, 1998, McGraw-Hill INDUSTRY AND COMPETITIVE ANALYSIS.

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Presentation on theme: "© Adapted from Thompson, 1998, McGraw-Hill INDUSTRY AND COMPETITIVE ANALYSIS."— Presentation transcript:

1 © Adapted from Thompson, 1998, McGraw-Hill INDUSTRY AND COMPETITIVE ANALYSIS

2 “Analysis is the critical starting point of strategic thinking.” Kenichi Ohmae “Quote”

3 © Adapted from Thompson, 1998, McGraw-Hill What is Competition Like & How Strong Are the Competitive Forces? To identify 4 Main sources of competitive forces 4 Strength of these forces Key analytical tool Five Forces Model of Competition Objective

4 © Adapted from Thompson, 1998, McGraw-Hill Five Forces Model of Competition Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Potential New Entrants Suppliers of Key Inputs Buyers Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Potential New Entrants Suppliers of Key Inputs Buyers

5 © Adapted from Thompson, 1998, McGraw-Hill Analysing the Five Competitive Forces: How to Do It Assess strength of each competitive force (Strong? Moderate? Weak? ) 4 Rivalry among competitors 4 Substitute products 4 Potential entry 4 Bargaining power of suppliers 4 Bargaining power of buyers Explain how each force acts to create competitive pressure Decide whether overall competition is brutal, fierce, strong, normal/moderate, or weak

6 © Adapted from Thompson, 1998, McGraw-Hill Rivalry Among Competing Sellers Usually the most powerful of the five forces Check which factors of competitive rivalry are most actively used by rivals for position ie Price Quality Performance features offered Customer service Warranties/guarantees Advertising/promotions Dealer networks Product innovation

7 © Adapted from Thompson, 1998, McGraw-Hill Competitive Force of Potential Entry Seriousness of threat depends on 4 Barriers to entry 4 Reaction of existing firms to entry Barriers exist when 4 Newcomers confront obstacles 4 Environmental factors put potential entrant at a disadvantage relative to incumbent firms (ie economic & technology)

8 © Adapted from Thompson, 1998, McGraw-Hill Common Barriers to Entry l Economies of scale l Inability to gain access to specialised technology l Existence of learning/experience curve effects l Strong brand preferences and customer loyalty l Capital requirements and/or other specialised resource requirements l Cost disadvantages independent of size l Access to distribution channels l Regulatory policies, tariffs, trade restrictions

9 © Adapted from Thompson, 1998, McGraw-Hill Principle of Competitive Markets Threat of entry is stronger when: 4 Entry barriers are low 4 Sizable pool of entry candidates exists 4 Incumbents are unwilling or unable to contest a newcomer’s entry efforts 4 Newcomer can expect to earn attractive profits

10 © Adapted from Thompson, 1998, McGraw-Hill Competitive Force of Substitute Products Substitutes matter when customers are attracted to the products of firms in other industries Concept Eyeglasses vs. Contact Lens Sugar vs. Artificial Sweeteners Plastic vs. Glass vs. Metal Newspapers vs. TV vs. Internet Examples

11 © Adapted from Thompson, 1998, McGraw-Hill How to Tell Whether Substitute Products Are a Strong Force l Sales of substitutes are growing rapidly l Producers of substitutes are planning to add new capacity l Their profits are up

12 © Adapted from Thompson, 1998, McGraw-Hill Principle of Competitive Markets The competitive threat of substitutes is stronger when they are: 4 Readily available 4 Attractively priced 4 Believed to have comparable or better performance features 4 Customer switching costs are low

13 © Adapted from Thompson, 1998, McGraw-Hill Competitive Force of Suppliers Suppliers are a strong competitive force when: 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 suppliers They have good reputations and growing demand They can supply a component cheaper than industry members can make it themselves They do not have to contend with substitutes Buying firms are not important customers

14 © Adapted from Thompson, 1998, McGraw-Hill Principle of Competitive Markets Suppliers are a stronger force the more they can exercise power over: 4 Prices charged 4 Quality/performance of items supplied 4 Amounts and delivery times

15 © Adapted from Thompson, 1998, McGraw-Hill Competitive Force of Buyers Buyers are a strong competitive force when: They are large and purchase a sizable percentage of industry’s product They buy in volume quantities They can integrate backward Industry’s product is standardised Their costs in switching to substitutes or other brands are low They can purchase from several sellers Product purchased does not save buyer money

16 © Adapted from Thompson, 1998, McGraw-Hill Principle of Competitive Markets l Buyers are a stronger competitive force the more they have leverage to bargain over: l Price l Quality l Service l Other terms and conditions of sale

17 © Adapted from Thompson, 1998, McGraw-Hill Strategic Implications of the Five Competitive Forces l Competitive environment is unattractive when: 4 Rivalry is strong 4 Entry barriers are low 4 Competition from substitutes is strong 4 Suppliers and customers have considerable bargaining power

18 © Adapted from Thompson, 1998, McGraw-Hill Strategic Implications of the Five Competitive Forces l Competitive environment is ideal when: 4 Rivalry is moderate 4 Entry barriers are high 4 Good substitutes do not exist 4 Suppliers and customers are in a weak bargaining position

19 © Adapted from Thompson, 1998, McGraw-Hill Coping With the Five Competitive Forces l Objective is to craft a strategy that will: 4 Insulate you from competitive forces 4 Influence competitive pressures in ways that favour you 4 Build a sustainable competitive advantage

20 © Adapted from Thompson, 1998, McGraw-Hill Competitor Analysis l Successful strategists take great pains in scouting competitors 4 Understanding their strategies 4 Watching their actions 4 Evaluating their vulnerability to driving forces and competitive pressures 4 Sizing up their resource strengths and weaknesses and their capabilities 4 Trying to anticipate rivals’ next moves

21 © Adapted from Thompson, 1998, McGraw-Hill Categorizing the Objectives and Strategies of Competitors Competitive Scope Strategic Intent Market Share Objective Competitive Position Strategic Posture Competitive Strategy Local Be dominant leader Aggressive expansion via acquisition & internal growth Getting stronger; on the move Mostly offensive Regional Overtake industry leader Well- entrenched Mostly defensive National Be among industry leaders Expansion via internal growth Stuck in the middle of the pack Combination of offensive & defensive Multicountry Move into top 10 Expansion via acquisition Going after a different position Aggressive risk-taker Global Move up a notch in rankings Hold on to present share Struggling; losing ground Conservative follower Maintain current position Give up present share to achieve short-term profits Retrenching to a position that can be defended Just survive Striving for low-cost leadership Mostly focusing on a market niche Pursuing differentiation based on – Quality – Service – Technology superiority – Breadth of product line – Image & reputation – More value for the money – Other attributes

22 © Adapted from Thompson, 1998, McGraw-Hill Predicting Moves of Rivals l Predicting rivals’ next moves involves 4 Analyzing their current competitive positions 4 Examining public pronouncements about what it will take to be successful in industry 4 Gathering information from grapevine about current activities and potential changes 4 Studying past actions and leadership 4 Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy

23 © Adapted from Thompson, 1998, McGraw-Hill Question 6: What Are the Key Factors for Competitive Success? l KSFs are competitive elements that most affect every industry member’s ability to prosper in the marketplace 4 Specific strategy elements 4 Product attributes 4 Resources 4 Competencies 4 Competitive capabilities l KSFs spell difference between 4 Profit and loss 4 Competitive success or failure

24 © Adapted from Thompson, 1998, McGraw-Hill Identifying Industry Key Success Factors l Answers to three questions pinpoint KSFs 4 On what basis do customers choose between competing brands of sellers? 4 What must a seller do to be competitively successful -- what resources and competitive capabilities does it need? 4 What does it take for sellers to achieve a sustainable competitive advantage? l KSFs consist of the really major determinants of financial and competitive success in an industry

25 © Adapted from Thompson, 1998, McGraw-Hill Common Types of Key Success Factors Technology- related Manufacturing- related Distribution- related Marketing- related Skills-related Organizational capability Other types Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low- cost product design; Flexibility to make a range of products Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection

26 © Adapted from Thompson, 1998, McGraw-Hill Example: KSFs for Beer Industry l Utilization of brewing capacity -- to keep manufacturing costs low l Strong network of wholesale distributors -- to gain access to retail outlets l Clever advertising -- to induce beer drinkers to buy a particular brand

27 © Adapted from Thompson, 1998, McGraw-Hill Example: KSFs for Apparel Manufacturing Industry l Fashion design -- to create buyer appeal l Low-cost manufacturing efficiency -- to keep selling prices competitive

28 © Adapted from Thompson, 1998, McGraw-Hill Example: KSFs for Tin and Aluminum Can Industry l Locating plants close to end-use customers -- to keep costs of shipping empty cans low l Ability to market plant output within economical shipping distances

29 © Adapted from Thompson, 1998, McGraw-Hill 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!

30 © Adapted from Thompson, 1998, McGraw-Hill Question 7: Is the Industry Attractive or Unattractive and Why? Develop conclusions about whether the industry and competitive environment is attractive or unattractive, both near- and long-term, for earning good profits Objective Principle A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

31 © Adapted from Thompson, 1998, McGraw-Hill Things to Consider in Assessing Industry Attractiveness l Industry’s market size and growth potential l Whether competitive conditions are conducive to rising/falling industry profitability l Will competitive forces become stronger or weaker l Whether industry will be favorably or unfavorably impacted by driving forces l Potential for entry/exit of major firms l Stability/dependability of demand l Severity of problems facing industry l Degree of risk and uncertainty in industry’s future

32 © Adapted from Thompson, 1998, McGraw-Hill Conducting an Industry and Competitive Situation Analysis l 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


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