“Analysis is the critical starting point of strategic thinking.” EXTERNAL ANALYSIS (INDUSTRY AND COMPETITION) Payne (4) Key Text Readings: Chapter 2, Chapter 3, Appendix A “Analysis is the critical starting point of strategic thinking.” Kenichi Ohmae

Assessing Environmental Scanning Formulation & Planning Environmental Monitoring Forecasts projections Forecasting: Involves the development of plausible projections about the direction, scope, speed and intensity of environmental change. Competitive Intelligence

INTERNAL or MICRO-ENVIRONMENT Environmental Analysis Levels EXTERNAL or MACRO-ENVIRONMENT Industry and competitive conditions (opportunities and threats) INTERNAL or MICRO-ENVIRONMENT Its competencies, capabilities, resources, and competitiveness (strengths and weaknesses) Connect Firm Industry Level Macro Level Competitors Suppliers Substitutes Customers Demographic Technological Political/Legal Social Economic Global

Health Care Environment Environmental Analysis Levels (of a Health Care Organization) General Environment Government Institutions Educational Institutions Religious Institutions Research Organizations Consumers Service Area Competitors Government Services Businesses Non-profits Other Locals Educational Institutions Individuals/Consumers Health Care Environment Planning / Regulatory Primary Providers Secondary Providers Provider Representative Consumers/Patients Organization

Macro Environment (1) Socio-cultural segment Political/Legal Segment Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

Macro Environment (2) Economic segment Technological Segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product Technological Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

Macro Environment (3) Global Segment Demographic Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes Demographic Population size Age structure Geographic distribution Ethnic mix Income distribution

Impact of General Environmental Trends on Various Industries Segment/Trends/Events Industry Positive Neutral Negative Demographic Aging population Rising affluence Health Care Baby products Brokerage services Fast foods Upscale pets and supplies  Sociocultural More women in the workforce Greater concern for health & fitness Clothing Baking Products (staples) Home exercise equipment Meat products  Political/legal Tort reform ADA (Americans with Disabilities Act) Legal Services Auto Manufacturing Retail Manufacturers of elevators, escalators & ramps  Technological Genetic engineering Pollution/global warming Pharmaceutical Publishing Engineering Services Petroleum  Economic Interest Rate Increases Residential construction Most common grocery products  Global Increasing Global Trade Emergence of China as an economic power Shipping Personal service Soft drinks Defense

Five Forces Model of Competition Substitute Products (of firms in other industries) Threat of Substitutes Rivalry Intensity Among Competing Sellers Suppliers of Key Inputs Buyers Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Potential New Entrants

Analyzing the Five Competitive Forces: How to Do It Assess strength of each competitive force (Strong? Moderate? Weak? ) Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers 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

Rivalry Among Competing Sellers Usually the most powerful of the five forces Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position Price Quality Performance features offered Customer service Warranties/guarantees Advertising/promotions Dealer networks Product innovation

What Causes Rivalry to Be Stronger? Lots of firms, more equal in size and capability Slow market growth Industry conditions tempt some firms to go on the offensive to boost volume and market share Customers have low costs in switching brands One or more firms initiates moves to bolster their 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, and countries of origin

Competitive Force of Threat of New Entry Seriousness of threat depends primarily on: Barriers to entry Reaction of existing firms to entry Barriers exist when: Newcomers confront obstacles Economic factors put potential entrant at a disadvantage relative to incumbent firms

Common Barriers to Entry Economies of scale Inability to gain access to specialized technology Existence of learning/experience curve effects Strong brand preferences and customer loyalty Capital requirements and/or other specialized resource requirements Cost disadvantages independent of size Access to distribution channels Regulatory policies, tariffs, trade restrictions

How to Tell Whether Substitute Products Are a Strong Force Sales of substitutes are growing rapidly Producers of substitutes are planning to add new capacity Substitutes’ profits are up The competitive threat of substitutes is stronger when they are: Readily available Attractively priced Believed to have comparable or better performance features Customer switching costs are low

Competitive Force of Substitute Products Concept Substitutes matter when customers are attracted to the products or services of firms in other industries Examples Eyeglasses vs. Contact Lens MD vs. DPM vs. DC Plastic vs. Glass vs. Metal

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 Suppliers are a stronger force the more they can exercise power over: Prices charged Quality/performance of items supplied Amounts and delivery times

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 standardized Their costs in switching to substitutes or other brands are low They can purchase from several sellers Product purchased does not save buyer money Buyers are a stronger competitive force the more they have leverage to bargain over: Price or Quality or Service Other terms and conditions of sale

Strategic Implications of the Five Forces Competitive environment is unattractive when: Rivalry is strong Entry barriers are low Competition from substitutes is strong Suppliers and customers have considerable bargaining power Competitive environment is ideal when: Rivalry is moderate Entry barriers are high Good substitutes do not exist Suppliers and customers are in a weak bargaining position Objective is to craft a strategy that will: Insulate firm from competitive forces Influence competitive pressures in ways that favor firm Build a sustainable competitive advantage

Stakeholder Analysis

Who are Stakeholders? Identifying stakeholders is one way of sizing up the internal and external constituents that influence the firm. Stakeholders are individuals and groups who can affect and are affected by a firm’s strategic outcomes and who have enforceable claims on its performance Stakeholders include individuals, groups, and other organizations who have an interest in the actions of an organization and who have the ability to influence it Stakeholders may be categorized as internal, interface and external.

Building Stakeholder Relationships Managing down Relationships with subordinates Managing up Relationships with bosses and corporate staff Managing out Relationships with customers and suppliers Managing across Relationships with peers

Stakeholder Analysis

Examples of Stakeholder Groups Internal stakeholders Management Professionals Support Personnel Interface stakeholders Shareholders Board of Directors Medical Staff External stakeholders Suppliers Competitors Government Agencies Patients

Relationships with Stakeholders Organizations have dependency relationships with stakeholders Firms are not equally dependent on all stakeholders and not every stakeholder has the same level of influence An effective organization strategy requires consensus from a plurality of key stakeholders about what it should be doing and how these things should be done

Key Success Factors KSFs or CSFs are competitive elements that most affect every strategic group member’s ability to prosper in the marketplace: Specific strategy elements Product attributes Resources or Competencies Competitive capabilities KSFs spell difference between: Profit and loss Competitive success or failure Ask: For our organization to be successful, we MUST be especially good at ___________?

Key Success Factors Optimize Performance A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!

Identifying Key Success Factors Answers to three questions pinpoint KSFs On what basis do customers choose between competing brands or offerings of sellers? What must a seller/provider do to be competitively successful -- what resources and competitive capabilities does it need? What does it take for sellers/providers to achieve a sustainable competitive advantage? KSFs consist of the 3 - 5 really major determinants of financial and competitive success in a strategic group. (Recall our discussion on developing objectives?)

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

Example: KSFs for the Refractive Eye Surgery Industry High numbers of procedures, which is a component of price, experience, and service. Low rate of complications and high rate of success (20/20) Positive word-of-mouth and reputation

Strategic Group Mapping One technique for revealing the different competitive positions of industry rivals is strategic group mapping A strategic group consists of those rivals with similar competitive approaches in an industry

Strategic Group Mapping Firms in same strategic group have two 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

Procedure: 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

Example: Strategic Group Map of Retail Jewelry Industry High Small Independent Guild Jewelers National, Regional, & Local Guild - “Fine Jewelry” Stores Prestige Departmentalized Retailers Upscale Department Stores Price / Quality / Image Medium National Jewelry Chains Local Jewelers Chains Credit Jewelers Catalog Showrooms Off-Price Retailers Discounters Outlet Mall Retailers Low Specialty Jewelers Full-line Jewelers Limited-category Retailers Broad-category Retailers Product Line / Merchandise Mix

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 (i. e Interpreting Strategic Group Maps (i.e., Implications of the Strategic Groups Concept) Driving forces and competitive pressures often favor some strategic groups and hurt others – such recognition may be the key to developing a competitive advantage. Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position. Important niches may be identified that are not currently being filled by competitors. The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be (“Organizations most like yours are the most dangerous.”)

Within or Between Strategic Groups High Price / Quality / Image Medium Low Specialty Full-line Providers Limited-category Retailers Broad-category Retailers Product Line / Merchandise Mix

Breadth of Product Line The World Automobile Industry High Ferrari Lamborghini Porsche Mercedes* BMW Toyota Ford General Motors Chrysler* Honda Nissan Price Hyundai Kia High Low Low Breadth of Product Line

Strategic Groups Within the World Petroleum Industry INTERNATIONAL UPSTREAM COMPANIES Premier Oil INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM Apache Dana Petroleum Kuwait Petroleum PDVSA INTEGRATED DOMESTIC OIL COMPANIES NATIONAL PRODUCTION COMPANIES Iran NOC 0 0.5 1.0 1.5 2.0 Statoil BP-Amoco Exxon -Mobil Vertical Balance Chevron Texaco Pemex Petronas INTEGRATED INTERNATIONAL MAJORS Royal Dutch -Shell Gp. Lukoil Conoco Phillips ENI Elf-Fina-Total Repsol YPF PetroChina Indian Oil Phillips Petrobras ENI Nippon Repsol INTERNATIONAL DOWNSTREAM OIL COMPANIES Valero Neste Ashland Sunoco 0 10 20 30 40 50 60 70 80 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES Geographical Scope

Competitor Analysis and Strength Assessment Successful strategists take great pains in scouting competitors Understanding their strategies Watching their actions Evaluating their vulnerability to driving forces and competitive pressures Sizing up their resource strengths and weaknesses and their capabilities Trying to anticipate rivals’ next moves

Predicting Strategic Moves of Rivals A firm’s own best strategic moves are affected by: Current strategies of competitors Actions competitors are likely to take next Predicting rivals’ next moves involves: Analyzing their current competitive positions Examining public pronouncements about what it will take to be successful in industry Gathering information from grapevine about current activities and potential changes Studying past actions and leadership Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy

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 Striving for low-cost leadership Regional Overtake industry leader Well-entrenched Mostly defensive Mostly focusing on a market niche National Be among industry leaders Expansion via internal growth Stuck in the middle of the pack Combination of offensive & defensive Pursuing differentiation based on Quality Service Technology superiority Breadth of product line Image & reputation More value for the money Other attributes Multi-country Move to 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

Assessing a Company’s Competitive Strength versus Key Rivals 1. List industry key success factors and other relevant measures of competitive strength 2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong) 3. Decide whether to use a weighted or unweighted rating system 4. Sum individual ratings to get overall measure of competitive strength for each rival 5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

Unweighted Competitive Strength Assessment KSF/Strength Measure ABC Co. Rival 1 Rival 2 Rival 3 Rival 4 Quality/product performance 8 5 10 1 6 Reputation/image 8 7 10 1 6 Manufacturing capability 2 10 4 5 1 Technological skills 10 1 7 3 8 Dealer network/distribution 9 4 10 5 1 New product innovation 9 4 10 5 1 Financial resources 5 10 7 3 1 Relative cost position 5 10 3 1 4 Customer service capability 5 7 10 1 4 Overall strength rating 61 58 71 25 32 Rating Scale: 1 = Very weak; 10 = Very strong

A Weighted Competitive Strength Assessment KSF/Strength Measure Weight ABC Co. Rival 1 Rival 2 Rival 3 Rival 4 Quality/product performance 0.10 8/0.80 5/0.50 10/1.00 1/0.10 6/0.60 Reputation/image 0.10 8/0.80 7/0.70 10/1.00 1/0.10 6/0.60 Manufacturing capability 0.10 2/0.20 10/1.00 4/0.40 5/0.50 1/0.10 Technological skills 0.05 10/0.50 1/0.05 7/0.35 3/0.15 8/0.40 Dealer network/distribution 0.05 9/0.45 4/0.20 10/0.50 5/0.25 1/0.05 New product innovation 0.05 9/0.45 4/0.20 10/0.50 5/0.25 1/0.05 Financial resources 0.10 5/0.50 10/1.00 7/0.70 3/0.30 1/0.10 Relative cost position 0.35 5/1.75 10/3.50 3/1.05 1/0.35 4/1.40 Customer service capability 0.15 5/0.75 7/1.05 10/1.50 1/0.15 4/1.60 Sum of weights 1.00 Overall strength rating 6.20 8.20 7.00 2.10 2.90 Rating Scale: 1 = Very weak; 10 = Very strong