1. Microenvironment analysis

3. Awareness of competitive forces can help a companystake out a position in its industry that is less vulnerable to attack. Michael E. Porter Competitive Strategy

4. The Objectives of Competitive Analysis To understand how industry structure drives competition, which determines the level of industry profitability To assess industry attractiveness To use evidence on changes in industry structure to forecast future profitability To formulate strategies to change industry structure to improve industry profitability To identify Key Success Factors

5. Competitive Forces Assessment Porter’s Five Forces

7. Who is my competitor?

8. Industry Competition: Rivalry Among Competitors (2) Industry Growth –If the industry is growing, there’s more room for everybody; less pressure on the firm Product Differentiation –If products are differentiated, markets are in a sense, segmented

9. Strategic Group Analysis Strategic groups is a cluster of companies in an industry Groups of companies clustered around prezent a similar competitive approach or strategic position Companies in a group are similar to each other but different from companies in other groups

10. 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

12. Variables to be used 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

13. Video Game Industry Types of Video Game Suppliers/Distribution Channels Overall Cost to Players of Video Games Low (Coin-operated equipment) Medium (Video players cost $100-$300) High (Use PC) Video arcades, coin-operated machines Home PCs Video game consoles Online game sites Sony, Sega, Nintendo, several others Arcade operators Publishers of games on CD-ROMs MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN

14. Interpretation Identify factors that prevent firms in one groups from competing with companies in other groups Evaluate the degree of rivalry between groups Recognize group’s strengths and weaknesses Identify the strategic group that represents the greatest opportunity

15. Identify next step Create a new group Move to a better group Strengthen the existing group Strengthen company’s position within existing group Move to a new group and make it better

16. Strategic Maps of the United States Airline Industry Braniff TWA Eastern United American Delta Western RepublicOzark USAirPiedmont Frontier AirCal PSA South- west Texas Int’l United South- west Americ a West International National Regional No Frills Full Service Quality of Service Geographic Scope The Late 1970sThe Early 1990s Reno Air Continental Pan Am North west Laker World American TWA Delta USAir Northwest Conti- nental Kiwi Others

17. Build a strategic group map based on the data below Small independent ŻabkaChata Polska Polo Market PSS ‘Społem’ Minimal No of storesUp to 2More than 10 3-10 Up to 2 Area of average store (m2) up 100 100-400 More than 400 Intensity of marketing activities lowmedium high Asortmentnarrow Price levelmediumhigh low Market share53,2%11,2%4,7%5,1%22,0%3,8%

18. Competitive Forces Assessment Porter’s Five Forces

19. New Entrants: Barriers to Entry Economies of Scale –To the extent that there are economies of scale, it will be difficult for a new firm to come in and compete with established firms. Product Differentiation –To the extent that the firm’s products are distinct and non- copiable, new firms won’t be able to come in and take away customers. Brand Identification –To the extent that there is brand identification, customers will remember the firm’s product and will resist switching. Switching Cost –If it is costly for the customer to switch, new entrants won’t be able to convince them to do so.

20. New Entrants: Barriers to Entry Access to Distribution Channels –If the firm has preferential or monopolistic access to distribution channels, it is more resistant to competition. Capital Requirements –If capital requirements are high, new under-capitalized firms won’t be able to enter the industry. Access to Latest Technology –If technology is important in the industry, new firms are less likely to have access to them, which is good for established firms. Experience and Learning Effects –If experience is necessary for a firm to figure out how to operate efficiently, established firms have a distinct advantage.

21. Barriers to Entry: Examples Regulatory restrictions (e.g. banking license) brand names (e.g. Xerox, McDonalds – can develop customer loyalty; hard to develop and/or imitate) patents (illegal to exploit without ownership; e.g. new drugs) unique know-how (e.g. WalMart’s “hot docking” technique of logistics management)

22. Competitive Forces Assessment Porter’s Five Forces

23. Number of Important Suppliers –The fewer the number of important suppliers, the more power they have over the firm. Availability of Substitutes for the Suppliers’ Products –This would reduce supplier power Differentiation or Switching Costs of Suppliers’ Products –If it’s difficult for the firm to switch to other suppliers, the current suppliers can charge more

24. Suppliers’ Threat of Forward Integration –To the extent that suppliers might potentially themselves become competitors, they are less reliable and need to be looked at strategically Suppliers’ Contribution to Quality or Service of the Industry Products –How crucial are suppliers in the maintenance of the quality of industry products? If very crucial, this will increase supplier power. Importance of the Industry to Suppliers’ Profits

25. Competitive Forces Assessment Porter’s Five Forces

26. Number of Important Buyers –The greater the number of important buyers, the less power does the firm have to manipulate prices Availability of Substitutes for the Industry Products –The impact of this on price elasticity of demand for the industry’s products is obvious. Buyer’s Switching Costs –This is relevant both in terms of switching to competitors’ products and switching to products manufactured by other industries. Buyer’s Threat of Backward Integration –The buyer might choose to integrate backward and manufacture his input goods, himself. This means that buyers have to be looked at strategically.

27. Competitive Forces Assessment Porter’s Five Forces

28. Substitutes matter when customers are attracted to the products of firms in other industries  Eyeglasses and contact lens v. laser surgery  Sugar v. artificial sweeteners  Newspapers v. TV v. Internet Examples

29. Threat of substitutes depend on: –Availability of Close Substitutes –User’s Switching Costs –Substitute Producer’s Profitability and Aggressiveness –Where is the substitute product located on the Price/Value dimensions?