1. SITATION ANALYSIS OUTLINE
Role of Situation Analysis in Strategy-Making
Methods of Industry & Competitive Analysis
Profiling Industry’s Dominant Economic Traits
Analyzing Industry’s Competitive Forces
Analyzing Drivers of Industry Change
Assessing Competitive Positions of Rivals
Predicting Competitive Moves of Rivals
Pinpointing Key Success Factors
Drawing Conclusions About Overall Industry Attractiveness
Conducting an Industry & Competitive Analysis

2. WHY DO A SITUATION ANALYSIS?
Identify features in a firm’s external & internal environment which frame its window of
STRATEGIC OPTIONS
OPPORTUNITIES
Focuses on two considerations:
EXTERNAL factors: MACRO environment (industry & competitive conditions)
INTERNAL factors: MICRO environment (firm’s internal situation & competitive position)
Objective

3. Figure 3-1: How Strategic Thinking and Analysis Lead to Good Choices
Thinking Strategically
About Industry
and Competitive
Conditions
Identifying
Strategic Options
Open to the
Company
Choice of
The Best
Strategy
Thinking Strategically
About a Company’s
Own Situation

4. KEY QUESTIONS REGARDING EXTERNAL ENVIRONMENT
1. Industry’s dominant economic traits
2. Competitive forces at work in industry & strength
3. Drivers of change in industry
4. Firms in strongest/weakest competitive positions
5. Competitive moves of rivals
6. Key factors determining competitive success or failure in industry
7. Attractiveness of industry

5. INDUSTRY ECONOMIC TRAITS
An industry’s economic characteristics impose boundaries on the kinds of strategic approaches a company can pursue!
Concept

6. IDENTIFYING AN INDUSTRY’S DOMINANT ECONOMIC TRAITS
Market size & growth rate/stage in life cycle
Scope of competitive rivalry
Number of competitors & relative sizes
Prevalence of backward/forward integration
Entry/exit barriers
Nature & pace of technological change
Product & customer characteristics
Scale economies & experience curve effects
Capacity utilization & capital requirements
Industry profitability

7. EXPERIENCE CURVE EFFECTS
An experience curve exists when unit costs decline as cumulative production volume increases due to
Increased KNOWLEDGE about or
FAMILIARITY with the process
The bigger the experience curve effect, the bigger the cost advantage of the firm with
Largest CUMULATIVE production volume

8. Figure 3-2: Comparison of Experience Curve Effects$1 $1 90 80 81
72.9
10% Cost
Reduction 70 64
51.2
20% Cost
Reduction
Cost per Unit 49
34.3
30% Cost
Reduction 1
Million
Units 2
Million
Units 4
Million
Units 8
Million
Units

9. EXPERIENCE CURVE EFFECTS
Basic Concept
When a strong learning/experience curve effect causes unit costs to decline substantially as cumulative production volume builds, a strategy to become the largest volume manufacturer can offer the COMPETITIVE ADVANTAGE of being the industry’s LOWEST-COST producer!

10. ANALYSIS OF COMPETITIVE FORCES
Objective
To identify
Main SOURCES of competitive forces and
STRENGTH of these pressures
COMPETITIVE FORCES MATTER BECAUSE:
To be successful, strategy must be designed
to cope effectively with competitive pressures -
objective must be to build a strong, market
position based on competitive advantage!

11. Figure 3-3: The Five Forces Model of Competition: A Key Analytical Tool
Substitute
Products
Rivalry
Among
Competing
Sellers
Suppliers
Buyers
Potential
New
Entrants

12. THE FIVE COMPETITIVE FORCES
1. RIVALRY among competing sellers in an industry
2. SUBSTITUTE PRODUCTS offered by firms in OTHER industries
3. Potential ENTRY of new competitors
4. Bargaining power of SUPPLIERS
5. Bargaining power of BUYERS

13. PROCEDURE: ANALYZING THE FIVE COMPETITIVE FORCES
Identify main sources of competitive pressures
Rivalry among competitors
Substitute products
Potential entry
Bargaining power of suppliers
Bargaining power of buyers
Assess strength of each competitive force
Strong? Moderate? Weak?
Scale of 1 - 5: 1 = weak; 5 = strong
Explain how each competitive force works & its role in overall competitive picture

14. RIVALRY AMONG COMPETING SELLERS
Usually the MOST POWERFUL of the five competitive forces
Weapons of COMPETITIVE RIVALRY
Price
Quality
Performance features offered
Customer service
Warranties and guarantees
Advertising & special promotions
Dealer networks
Product innovation

15. PRINCIPLES OF COMPETITIVE RIVALRY
A powerful competitive strategy
launched by one firm INTENSIFIES
competitive pressures on rivals!
Use of various competitive weapons by
rivals to out maneuver one another shapes
Rules of competition &
Requirements for competitive success

16. PRINCIPLE OF COMPETITIVE MARKETS
Competitive jockeying among rival firms is a dynamic process as
Firms initiate new offensive & defensive moves
Emphasis swings from one mix of competitive weapons to another

17. WHAT CAUSES RIVALRY TO BE STRONGER?
Lots of firms, equal in size and capability, exit
Demand for product growing slowly
Industry conditions tempt firms to use competitive weapons to boost volume
Switching costs incurred by customers are low
A firm initiates moves to bolster its standing at expense of rivals
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, & countries of origin

18. COMPETITIVE FORCE OF POTENTIAL ENTRY
New entrants boost competitive pressures
By bringing new production capacity into play
Through actions to build market share
Seriousness of threat of entry depends on
BARRIERS to entry
Expected REACTION of existing firms to entry
Barriers to entry exist WHEN
It is difficult for newcomers to enter market
A new entrant’s small sales volume puts it a price/cost disadvantage

19. COMMON BARRIERS TO ENTRY
Economies of scale
Inability to gain access to specialized technology
Existence of learning/experience curve effects
Brand preferences and customer loyalty
Capital requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies
Tariffs & international trade restrictions

20. REACTION OF EXISTING FIRMS CAN BE AN ENTRY BARRIER
WHEN existing firms
Indicate they’ll aggressively defend their position
Have substantial resources to wage defense
Can use leverage with customers to keep their business
THEN potential entrants likely to be discouraged by
Prospects of a costly struggle
Strong threat of competitive retaliation
WHICH makes entry barriers HIGHER

21. WHEN IS POTENTIAL ENTRY A STRONG COMPETITIVE FORCE?
Competitive threat of outsiders entering a market is stronger when
Entry barriers are low
Incumbent firms do not vigorously fight newcomer
Newcomer can expect to earn attractive profits

22. COMPETITIVE FORCE OF SUBSTITUTE PRODUCTS
SUBSTITUTES matter when products of firms in another industry enter the market picture
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic Containers vs. Glass vs. Tin vs. Aluminum
Aspirin vs. Other Types of Pain Relievers
Concept
Examples

23. WHY SUBSTITUTE PRODUCTS MATTER
Competitively priced substitutes can place CEILING on PRICES industry can charge for its product
Price ceiling can place LID on PROFITS industry members can earn
Availability of substitutes invites customers to make QUALITY & PERFORMANCE comparisons as well as PRICE comparisons
The lower the SWITCHING COSTS, easier it is for customers to shift to substitute products

24. INDICATORS OF STRENGTH OF SUBSTITUTE PRODUCTS
Growth rate of sales of substitutes
Market inroads of substitutes
Plan of manufacturers of substitutes to expand capacity
Profits of firms producing substitutes

25. PRINCIPLE OF COMPETITIVE MARKETS
Competitive threat of substitute
products is strong when
Prices of substitutes are viewed attractive by buyers
Buyers’ costs of switching to substitutes are low
Buyers view substitutes as having equal or better performance features

26. COMPETITIVE FORCE OF SUPPLIERS
Suppliers are a strong competitive force when
Item makes up large portion of costs of product, is crucial to production process, and/or significantly affects product quality
It is costly for buyers to switch suppliers
They have good reputations & growing demand for their product
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

27. PRINCIPLE OF COMPETITIVE MARKETS
Whether suppliers are a strong or weak competitive force depends on if they have bargaining power to put rivals at a competitive disadvantage based on:
Prices they can command
Quality & performance of items supplied
Reliability of deliveries
Other terms & conditions of supply

28. COMPETITIVE FORCE OF BUYERS
Buyers are a strong competitive force when
They are large & purchase a sizable percentage of industry’s product
They buy in volume quantities
They incur low costs in switching to substitutes
They have flexibility to purchase from several sellers
Selling industry’s product is standardized
They can integrate backward
Product being purchased does NOT save buyer money or has low value to buyer

29. PRINCIPLE OF COMPETITIVE MARKETS
Buyers become a stronger competitive force the more they can exercise bargaining leverage over
Price
Quality
Service
Other terms & conditions of sale

30. STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES
Competitive environment is unattractive when:
Rivalry is very strong
Entry barriers are low
Competition from substitutes is strong
Suppliers & customers have considerable bargaining power

31. STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES
Competitive environment is ideal when:
Rivalry is only moderate
Entry barriers are relatively high
There are no good substitutes
Suppliers & customers are in a weak bargaining position
The weaker the competitive forces, the GREATER an industry’s PROFITS!
Principle

32. COPING WITH THE FIVE COMPETITIVE FORCES
Concept
A company whose strategy and market position provide a GOOD DEFENSE against the five forces can earn above-average profits even when some or all of the five forces are strong!

33. COPING WITH THE FIVE COMPETITIVE FORCES
Objective is to craft a strategy that will
Insulate company from competitive forces
Influence industry’s competitive rules in company’s favor
Provide a strong position from which “to play the game” of competition
Help create sustainable competitive advantage

34. IDENTIFYING & ASSESSING DRIVING FORCES
Concept
Industry conditions change because EXTERNAL FORCES are DRIVING industry participants to alter their actions
DRIVING FORCES are the MAJOR UNDERLYING CAUSES of changing industry & competitive conditions

35. IDENTIFYING & ASSESSING DRIVING FORCES
Role of driving forces analysis in strategy-making
Indicates EXTERNAL FACTORS likely to have greatest impact on a firm over next years
Must assess difference driving forces will make to be able to craft a strategy responsive to emerging conditions

36. DRIVING FORCES ANALYSIS
Analysis of driving forces has two steps
1. Identifying RELEVANT driving forces
2. ASSESSING IMPACT they will have
Task of driving forces analysis is:
SEPARATE MAJOR causes of industry change from MINOR ones
IDENTIFY the THREE or FOUR driving forces likely to have greatest impact on a firm over next years

37. TYPES OF DRIVING FORCES
Changes in long-term industry growth rate
Changes in who buys the product & how they use it
Product innovation
Technological change/process innovation
Marketing innovation
Entry or exit of major firms
Diffusion of technical knowledge

38. TYPES OF DRIVING FORCES
Increasing globalization of industry
Changes in cost and efficiency
Shifting from standardized to differentiated products (or vice versa)
Regulatory influences & government policy changes
Changing societal concerns, attitudes, & lifestyles
Changes in degree of uncertainty & risk

39. ENVIRONMENTAL SCANNING
Definition
A broad-ranging effort to monitor & interpret social, political, economic, ecological, & technological events in an effort to spot budding trends & conditions that could eventually impact industry
Raise consciousness of managers about potential developments that could
Have important impact on industry conditions
Pose new opportunities & threats
Purpose

40. ASSESSING COMPETITIVE POSITIONS: STRATEGIC GROUPS
A STRATEGIC GROUP consists of those rival firms with similar competitive approaches & positions in an industry
A STRATEGIC GROUP MAP displays different competitive positions that rival firms occupy

41. STRATEGIC GROUP MAPS
Firms in same strategic group have one or more competitive characteristics in common . . .
Sell in same price/quality range
Cover same geographic areas
Be vertically integrated to same degree
Have comparable product line breadth
Emphasize same types of distribution channels
Offer buyers similar services
Use identical technological approaches

42. 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 strategic group, making circles proportional to size of group’s respective share of total industry sales

43. 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

44. INTERPRETING STRATEGIC GROUP MAPS
Driving forces & competitive pressures often favor some strategic groups & hurt others
Profit potential of different strategic groups varies due to strengths & 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

45. COMPETITOR ANALYSIS A firm’s strategic moves are affected by
Current strategies of competitors
Actions competitors are likely to take next
Profile of key competitors involves studying:
Current position in industry
Strategic objectives & recent actions
Basic competitive approaches

46. COMPETITOR ANALYSIS
Successful strategists take great pains in scouting competitors by
Understanding their strategies
Watching their actions
Evaluating their vulnerability to driving forces & competitive pressures
Sizing up their strengths & weaknesses
Trying to anticipate rivals’ next moves

47. PREDICTING MOVES OF RIVAL COMPETITORS
Predicting rivals’ next moves involves
Analyzing current competitive positions
Examining public pronouncements about what it will take to be successful in industry
Gathering information from grapevine about current activities & potential changes
Studying past actions & leadership
Determining who has flexibility to make major strategic changes & who is locked into pursuing same basic strategy

48. Managers who fail to study competitors closely risk being
PRINCIPLE
Managers who fail to study
competitors closely risk being
blindsided by “surprise” actions
on the part of competitors!

49. PINPOINTING INDUSTRY KEY SUCCESS FACTORS
Basic Concept
KEY SUCCESS FACTORS (KSFs) spell difference between
Profit & loss
Competitive success or failure
A KEY SUCCESS FACTOR can be
Specific skill or talent
Competitive capability
Something a firm must do to satisfy customers

50. PINPOINTING INDUSTRY KEY SUCCESS FACTORS
Identifying KSFs is top priority as they are good cornerstones of a firm’s strategy
Winning COMPETITIVE ADVANTAGE often hinges on being distinctively better than rivals at one or more of the KSFs
KSFs consist of the really major determinants of financial & competitive success in industry

51. EXAMPLE: INDUSTRY KEY SUCCESS FACTORS
Beer/Brewing Industry
Utilization of brewing capacity - to keep manufacturing costs low
Developing a strong network of wholesale distributors - to gain access to retail outlets
Clever advertising - to induce beer drinkers to buy a particular brand

52. EXAMPLE: INDUSTRY KEY SUCCESS FACTORS
Apparel Manufacturing Industry
Fashion design - to create buyer appeal
Low-cost manufacturing efficiency - to keep selling prices competitive

53. EXAMPLE: INDUSTRY KEY SUCCESS FACTORS
Tin & Aluminum Can Industry
Locating plants close to end-use customers - to keep costs of shipping empty cans low
Ability to market plant output within economical shipping distances

54. STRATEGIC MANAGEMENT PRINCIPLE
A sound strategy incorporates industry key success factors!

55. CONCLUSION: OVERALL INDUSTRY ATTRACTIVENESS
Objective
To review overall situation & develop conclusions about relative attractiveness or unattractiveness of the industry, both near- and long-term
A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits
Principle

56. ASSESSING OVERALL INDUSTRY ATTRACTIVENESS
Industry’s market size & growth potential
Whether industry will be favorably or unfavorably impacted by driving forces
Potential for entry/exit of major firms
Stability/dependability of demand
Will competitive forces become stronger or weaker
Severity of problems facing industry
Degree of risk & uncertainty in industry’s future
Whether competitive conditions are conducive to rising/falling industry profitability

57. CONDUCTING AN INDUSTRY & COMPETITIVE SITUATION ANALYSIS
Two things to consider:
1. Task of analyzing a firm’s EXTERNAL situation cannot be reduced to a formula-like exercise
2. Sweeping industry & competitive analyses need to done every 1 to 3 years