COMPETITIVE ANALYSIS

Techniques for Industry and Competitive Analysis Tool-kit and conceptual framework for systematic analysis A framework of seven prominent questions

1. What are the Industry’s Dominant Economic Traits? Market size Scope of competitive rivals (local, national, international ) Market growth rate and place of industry in the growth cycle Number of rivals and their sizes Number of buyers and their relative sizes Prevalence of backward and forward integration

1. What are the Industry’s Dominant Economic Traits? Ease of entry and exit Technological changes in production process and new product introductions Extent of product differentiation among rivals Capacity utilization and low-cost efficiency Degree of learning and experience curve Capital requirements Level of industry profitability

2. How strong is the competition? The Five-Forces Model of Competition (Michael Porter)

“Strategy is a choice on how to compete.” - Michael Porter Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/ Stockdisc/ Getty Images

Michael Porter’s Five Forces Power of Buyer Threat of Entry Intensity of Rivalry Threat of Substitutes Power of Suppliers

How the Five Forces Shape Competition within an Industry The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry.      A weak competitive force may be viewed as an opportunity as it allows company to earn greater profits A strong competitive force may be viewed as a threat as it depresses industry profits Strength of forces may change As industry conditions change Through its choice of strategies, a company may alter the strength of one or more of the five forces to its advantage.

1. Intensity of rivalry among existing competitors Competitive Rivalry refers to the competitive struggle between companies in the same industry to gain market share from each other.

1. Intensity of rivalry among existing competitors Why rivalry : Competitors meet needs of same customer group. The intensity of rivalry is judged from the competitive tactics they employ e.g. price cuts, increased customer services, special promotion, etc. Mutual interdependence

1. Intensity of rivalry among existing competitors Competitive markets are economic battlefields To be successful a firm needs to produce a competitive edge over its rival The success of one firm depends on the strategic moves of its rival Cross-company rivalry also varies over time; Rivalry is dynamic and firms act and react to each other.

Two important points: competitive strategy of one firm intensifies competitive pressures on other companies the tactics used by rivals to outmaneuver each other shape the rules of competition

Rivalry intensifies as the number of competitors increase and competitors become more of equal size when demand for product is growing slowly when industry conditions tempt competitors to use price cuts or other competitive means to increase sales volume e.g. large fixed costs

Rivalry intensifies when customers’ cost to switch brands are low when one or more competitors makes move to increase its sales at the expense of rivals when strategic move of one firm pays off e.g. prizes

Rivalry intensifies when it costs more to get out of a business than to stay in when strong firms outside the industry acquire weak firms in the industry and makes aggressive moves

Intensity of rivalry is judged on the basis of industry profits. Above average ROI means low rivalry Acceptable ROI indicates moderate rivalry, and Declining ROI indicates intense rivalry

2. Threat of Entry Potential Competitors are companies that are not currently competing in an industry but have the capability to do so if they choose

2. Threat of Entry Ease in entry increases competition Barriers to entry and the expected reaction of a firm’s new entry Economies of scale ( share operations, joint costs ) Product differentiation ( brand identification, customers loyalty) Capital requirements Switching costs Access to distribution channels

2. Threat of Entry Cost disadvantage independent of size (Patent, favourable access to raw materials, favourable locations, government subsidies, learning or experience curve) Government policy ( licensing requirements, environment protection, access to raw materials. )

2. Threat of Entry How the existing firm will react? It depends on how the entry will affect the profit. Ease in exit: Difficulty to exit increase competition. High exit barriers

3. Pressure from Substitute Products: Substitute Products are the products from different businesses or industries that can satisfy similar customer needs. The existence of close substitutes is a strong competitive threat. Substitutes limit the price that companies can charge for their product. Substitutes are a weak competitive force if an industry’s products have few close substitutes. Other things being equal, companies in the industry have the opportunity to raise prices and earn additional profits.

3. Pressure from Substitute Products: Indicators of competitive strengths of substitute products are the rate at which their sales are growing the expansion plans of the rivals the size of their profits

4. Bargaining Power of Buyers Industry Buyers may be the consumers or end-users who ultimately use the product or intermediaries that distribute or retail the products. These buyers are most powerful when: Buyers are dominant. Buyers are large and few in number. The industry supplying the product is composed of many small companies. Buyers purchase in large quantities. Buyers have purchasing power as leverage for price reductions. The industry is dependant on the buyers. Buyers purchase a large percentage of a company’s total orders.

4. Bargaining Power of Buyers Switching costs for buyers are low. Buyers can play off the supplying companies against each other. Buyers can threaten to enter the industry themselves. Buyers produce themselves and supply their own product. Buyers can use threat of entry as a tactic to drive prices down.

4. Bargaining Power of Buyers All buyers are not likely to have same degrees of bargaining power with seller. Some are more sensitive and some are less.

5. Bargaining Power of Suppliers: Suppliers are firms or individuals that provide inputs such as material and labor into the industry. These suppliers are most powerful when: The product supplied is vital to the industry and has few substitutes. The industry is not an important customer to suppliers. Suppliers are not significantly affected by the industry.

5. Bargaining Power of Suppliers: Switching costs for companies in the industry are significant. Companies in the industry cannot play suppliers against each other. Suppliers can threaten to enter their customers’ industry. Suppliers can use their inputs to produce and compete with companies already in the industry. Companies in the industry cannot threaten to enter suppliers’ industry.

Co-optition – the sixth force Companies cooperating with each other in some activities SONY Betamax and standardized VHS IT companies sharing new inventions Role of forming alliance

ANALYZINF THE COMPETITIVE ENVIRONMENT To analyze the competitive environment, manager must assess the strength of each five competitive forces. Competitive environment is unattractive if: rivalry among the firms is tense, entry barriers are low, competition from substitutes is strong, and both suppliers and customers are able to exercise considerable bargaining power.

Role of Strategist As a strategist, mangers should insulate the firm as much as possible from the five competing forces, influence the industry’s competitive rules in the firm’s favour, and provide a strong, secure competitive edge over its rivals For this managers need to understand the competitive picture and the five forces model helps a manager to be so.

The Role of the Macroenvironment Changes in the forces in the macro-environment can directly impact: The Five Forces Relative Strengths Industry Attractiveness