1. MODULE 3
INDUSTRY AND
COMPETITIVE
ANALYSIS

2. MODULE OUTLINE
Role of Situation Analysis in Strategy-Making Methods of industry & Competitive
Analysis
Profiling industry’s Dominant Economic
Trails
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

3. WHY DO A SITUATION ANALYSIS
Objective
Identify features in a firm’s external &
internal environment which frames 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)

4. How Strategic Thinking and Analysis Lead Good Choices
Thinking Strategically
About Industry
And competitive
conditions
Choice of
The Best
Strategy
Identifying
Strategic Options
Open to the
Company
Thinking Strategically
About Industry
And competitive
conditions

5. KEY QUESTIONS REGARDING EXTERNAL ENVIRONMENT
Industry’s dominate economic traits
Competitive forces at work in industry & strength
Drivers of change in industry
Firms in strongest/weakest competitive
positions
Competitive moves of rivals
Key factors determining competitive
Success or failure in industry
Attractiveness of industry

6. INDUSTRY ECONOMIC TRAITS
Concept
An industry’s economic
Characteristics impose boundaries
On the kinds of strategic approaches a
Company can pursue!

7. 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

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

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

10. 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 o being the
industry’s LOWEST-COST production

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

12. The Five Forced Model of Competition: A Key Analytical Tool
Substitute
Products
Rivalry
Among
Competing
Sellers
Suppliers
Buyers
Potential
New
Entrant

13. THE FIVE COMPETITIVE FORCES
RIVALRY among competing sellers in an
Industry
SUBSTITUTE PRODUCTS offered by firms in OTHER industries
Potential ENTRY of new competitors
Bargaining power of SUPPLIERS
Bargaining power of BUYERS

14. 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? 1-5 : 1= weak; 5= strong
Explain how each competitive force works & its role in overall competitive picture

15. 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

16. 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

17. 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

18. 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 of business than to stay in Firms have divers strategies, corporate priorities, resources, & countries of origin

19. 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

20. 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

21. 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 be discouraged by
Prospects of a costly struggle
Strong threat of competitive retaliation
WHICH makes entry barriers HIGHER

22. 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

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

24. WHY SUBSTITUTE ORODUCTS 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

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

26. 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

27. 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 products 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

28. 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

29. 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

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

31. 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

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

33. CONCEPT WITH THE FIVE COMPETITIVE FORCES
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!

34. 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

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

36. 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 1-3 years
Must assess difference driving forces will make to be able to craft a strategy
responsive to emerging conditions

37. DRIVING FORCES ANALYSIS
Analysis of driving forces has two steps
Identifying RELEVANT driving forces
ASSESSING IMPACT they will have
Task of driving forces analysis is :
SEPARATE MAJOR cause of industry
change from MINOR ones
IDENTIFY the THREE or FOUR
driving forces likely to have greatest
impact on a firm over next 1-3 years

38. 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

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

40. 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
Purpose
Raise consciousness of managers about potential
Developments that could
Have important impact on industry conditions
Pose new opportunities & threats

41. 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
occupy

42. 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

43. CONSTRUCTING A STRATEGIC GROUP MAP
Identify competitive characteristics that
differentiate firms in an industry from one
another
Plot firms on a two – variable map using pairs of these differentiating characteristics
Assign firms that fall in about the same strategy space to same strategy group
Draw circles around each strategic group, making circles proportional to size of group’s respective share of total industry sales

44. DUIDELINES: STRATEGIC GROUP MAPS
Variables selected as axes should NOT be highly correlate
Variable 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

45. INTERPRETING STRATEGIC GROUP MAPS
Driving forces & competitive pressures often favor some strategic groups & hurt others profit potential of different strategic groups various 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.

46. 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

47. 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

48. 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

49. PRINCIPLE Managers who fail to study Competitors closely risk being
Blindsided by “ surprise” actions
On the part of competitors!

50. 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

51. PINPOINTING INDUSTRY KEY SUCCESS FACTORS
Identifying KSFs is top priority as they are good
Cornerstones of a firm’s strategy
Winning hinges on being distinctively
better than rivals at one or more of the KSFs
KSFs consist of the 3-5 really major determinants
of financial & competitive success in industry

52. 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

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

54. 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

55. STRATEGIC MANAGEMENT PRINCIPLE
A Sound strategy
incorporates industry
Key success factors!

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

57. ASSESSING OVERALL INDUSTRY ATTRACTIVENESS
Industry 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 conductive to
risking/falling industry profitability

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