“Analysis is the critical starting point of strategic thinking.” Kenichi Ohmae “Things are always different--the art is figuring out which differences matter.” “Quote” Laszlo Birinyi McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Industry and Competitive Analysis Chapter 3

Chapter Outline Role of Situation Analysis in Strategy-Making Methods of Industry and Competitive Analysis Industry’s Dominant Economic Traits Industry’s Competitive Forces Drivers of Industry Change Competitive Positions of Rivals Competitive Moves of Rivals Key Success Factors Conclusions: Overall Industry Attractiveness Conducting an Industry and Competitive Analysis

What Is Situation Analysis? Two considerations Company’s external or macro-environment Industry and competitive conditions Company’s internal or micro-environment Competencies, capabilities, resource strengths and weaknesses, and competitiveness

Figure 3.1: The Components of a Company’s Macro-Environment The Economy at Large Technology Legislation and Regulation Suppliers Substitutes COMPANY Rival Firms Buyers New Entrants Societal Values and Lifestyles Population Demographics  IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT

Key Considerations Regarding the Industry and Competitive Environment Industry’s dominant economic traits Competitive forces and strength of each force Drivers of change in the industry Competitor analysis Key success factors Conclusions: Industry attractiveness

Industry’s Dominant Economic Traits What is the definition of an industry? What are the Industry’s dominant economic traits? High capital requirements TRUE FALSE do not create exit barriers Industries characterized by TRUE FALSE the need for economies of scale do not require that firms have high market share.

Industry’s Dominant Economic Traits How does vertical integration affect an industry? Capacity surpluses pull TRUE FALSE industry prices up. Consolidation is typical in TRUE FALSE slow growth industries. What are some possible industry exit barriers? What is the Experience Curve?

Figure 3-3: Cost Advantages of Different Experience Curve Effects $1 $1 .90 .80 .81 10% Cost Reduction .729 .70 .64 .512 20% Cost Reduction Cost per Unit .49 .343 30% Cost Reduction 1 Million Units 2 Million Units 4 Million Units 8 Million Units

Figure 3-4: Five Forces Model of Competition Substitute Products (of firms in other industries) Suppliers of Key Inputs Rivalry Among Competing Sellers Buyers Potential New Entrants

Intensity of Rivalry What factors cause a strong rivalry in the industry? Competition in an industry is typically based upon what two things?

Competitive Force of Potential Entry What is the potential impact of new entrants to existing firms? What are some type of entry barriers? What are some forms of retaliation to prevent new entrants into an industry? New entrants in an TRUE FALSE industry do not benefit customers.

Competitive Force of Potential Entry An industry which has economies True False of scale may cause new entrants to accept a cost disadvantage High advertising costs is not a True False a deterrent to entering an industry. The threat of new entrants is True False strong when the industry has high brand loyalty.

Effects of Entry Barriers and Exit Barriers on Industry Profits High, Risky Returns Entry Barriers Exit Barriers High Low Low, Stable Returns High, Stable Returns Low, Risky Returns 1 2 3 4

Competitive Force of Substitute Products What are substitute products? How do substitutes affect the prices in the competing industry? The threat of substitutes is TRUE FALSE strong when switching costs are high. The threat of substitutes is TRUE FALSE strong when substitutes have better product attributes. The threat of substitutes is TRUE FALSE strong when the substitutes prices are lower.

Competitive Force of Suppliers Suppliers have power when there TRUE FALSE are easily available substitute products to their product High switching costs for firms in TRUE FALSE the industry gives suppliers more power Supplying to an industry that is a TRUE FALSE major customer weakens supplier When the suppliers’ product is a TRUE FALSE large portion of the industry costs the suppliers have more power.

Competitive Force of Suppliers What are some reasons why sellers and suppliers collaborate? Suppliers with good reputations TRUE FALSE and growing demand have little influence over the buying industry. Suppliers that supply a standard TRUE FALSE commodity available from numerous other firms can exert substantial power. A lack of vertical integration in the TRUE FALSE buyers’ industry gives suppliers strong bargaining power.

Competitive Force of Buyers High switching costs for buyers True False in the industry decreases the buyers power. Buyers that purchase a large True False amount of the industry’s output have strong bargaining power. An industry with a large number True False of firms gives buyers more power.

Competitive Force of Buyers An industry with buyers that True False buy in large quantities have buyers with strong power. When buyers can backward True False integrate into the selling industry they have strong bargaining power. An industry with a standardized True False product gives buyers less power.

Strategic Implications of the Five Competitive Forces Competitive environment is unattractive from the standpoint of earning good profits when: Rivalry is strong Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power

Strategic Implications of the Five Competitive Forces Competitive environment is ideal from a profit-making standpoint when: Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist Suppliers and customers are in a weak bargaining position

Industry Driving Forces What is an industry driving force? What are some common types of driving forces? Name three driving forces in the Automotive Industry. Be prepared to discuss in class. Name three driving forces in the Wireless Communications Industry. Be prepared to discuss in class.

Competitors and Strategic Group Mapping What is a strategic group map? What are some characteristics that you can use to compare firms in a strategic group map? What are some possible sources of information about a firm’s competitors?

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

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

Interpreting Strategic Group Maps Driving forces and competitive pressures often favor some strategic groups and hurt others Profit potential of different strategic groups varies due to strengths and 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

Key Success Factors What are Industry Key Success Factors ? KSFs consist of the 3 - 5 really major determinants of financial and competitive success in an industry What are three Key Success Factors in the Fast Food/Leisure Segment of the Restaurant Industry. Be prepared to discuss in class.

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!

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

Conducting an Industry and Competitive Situation Analysis 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