Cs02 - External Factor Analysis

INDUSTRY AND COMPETITIVE ANALYSIS
INDUSTRY & COMPETITIVE ANALYSIS Analysis is the critical starting point of strategic thinking. Things are always different--the art is figuring out which differences matter.
Kenichi Ohmae Laszlo Birinyi
Discussion Points
Role of Situation Analysis in Strategy-Making. INDUSTRY & COMPETITIVE ANALYSIS
Methods of Industry and Competitive Analysis.
Situation Analysis Indirect External

INDUSTRY & COMPETITIVE ANALYSIS
Direct External Factors
Factors
Internal Factors
Political,
Dominant Industry
Economical,
Social, Technological, Ecological, & Legislative Conditions.
Traits,
Industry Drivers, and
Competencies,
Capabilities,
Resource Strengths & Weaknesses, and Overall Competitiveness.
Overall
Competitive Conditions.
Industry & Competitive Environment Key Considerations
Assess the nature of the environment Audit environmental influences Identify key competitive forces Identify competitive position Identify key opportunities and threats
Strategic Strategic position position
Environmental Conditions
Simple
Complex
Environmental Conditions
Dynamic
Static
Trend Extrapolation
Delphy Analysis
Experience & Learning
Scenario Planning
Industrys Dominant Economic Traits
Key Success Factors
CONCLUSION Overall Industry Attractiveness
Competitive Forces, and the Strength of each Competitive Force
Strategic moves of the Key Rivals
Change Drivers in the Industry
Competitor Analysis

#1: Industrys Dominant Economic Traits? INDUSTRY & COMPETITIVE ANALYSIS
Economies of Scale
Capacity utilization and resource requirements.
Number of competitors, their relative sizes & their growth trends.
Learning / Experience Curve Effect An experience curve exists when (a Companys) incremental input required to produce unit incremental output reduces. example: unit costs decline as cumulative production volume increases, because of: Accumulating production know-how.
Growing mastery of the technology.

The bigger the experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume.
Scale Economy Achieving Economical Cost while moving up the scale of Production (or any other operation, like Distribution, Marketing etc.) .
Comes with Experience Curve Effect. Scope Economy Creating Synergies and getting Economical Cost by combining different functions or operations, using same resource for multiple or enriched use, etc. Comes with Strategic Moves like integration, Diversification etc.
Learning / Experience Curve Effect
External Factors
Social INDUSTRY & COMPETITIVE ANALYSIS Political Demographic
(At Large)
Entry & Exit Barriers
Ecological
Suppliers
Industry Rivals Substitutes
Buyers
Economic
Infra Structural
Technological
Legal

#2: What is Competition Like & How Strong are the Competitive Forces?
Five Forces Model of Competition
Exit? Mobility?
Complete Supply Chain?
Complete Buying Chain?
Complementary Products?
Five Force Model of Competition
Assess the Strength of each of the 5 competitive forces - Strong/Moderate/Weak: Rivalry among Competitors. Competition from Substitute Products. Competitive threat from Potential Entrants. Bargaining power of Suppliers, and Supplier-Seller Collaboration. Bargaining power of Buyers, and Buyer-Seller Collaboration. Identify the factors that cause each force to be strong or weak? Explain how each force acts to create Competitive pressure. Assess the Direction of each Competitive Force Growing / Stagnant / Declining. Look for and Filter the Exceptions. Decide whether overall competition (the combined effect of all 5 competitive forces) is Brutal, Fierce, Strong, Moderate, or Weak.
Competitive Force of Industry-Rivalry Rivalry among Competing Sellers Efforts of rivals to gain better market
position, higher sales and market share, and competitive advantage
Usually the most powerful of the five forces; The big factor determining the strength of rivalry is how actively and aggressively are rivals employing the various weapons of competition in jockeying for a stronger market position and seeking bigger sales: Is price competition vigorous? Active efforts to improve quality? Are rivals racing to offer better performance features? Are rivals racing to offer better customer service? Lots of advertising/sales promotions? Active efforts to build a stronger dealer network? Active product innovation? Active use of other weapons of rivalry?
Indicators of Intense Industry-Rivalry Active jockeying for position among rivals and frequent launches of new offensives to gain sales and market share: One or more firms initiate moves to bolster their standing at expense of rivals. Lots of firms that are relatively 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 to Rival Brands. 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 Potential-Entry

Concept INDUSTRY & COMPETITIVE ANALYSIS
Competitive pressures coming from the threat of entry of new rivals. Has direct effect on Competitive Rivalry.
Threat of New Entry is Stronger, when
The pool of entry-candidates is large. Entry barriers are low or can be readily hurdled by the likely entry candidates. When existing industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence.
Industry members are earning attractive profits.

Buyer demand is growing rapidly.
Competitive Force of Potential-Entry

Some Common Barriers to Entry INDUSTRY & COMPETITIVE ANALYSIS
Sizable Economies of Scale. Cost disadvantages independent of size.
Inability to gain access to specialized technology; distribution channels.

Regulatory policies, tariffs, trade restrictions. Large Capital (&/or other specialized resource) requirements. Existence of strong Learning / Experience curve effects. Strong brand preferences, and customer loyalty.
Seriousness of Threat depends on:
Barriers to entry exist when: Newcomers confront obstacles. Economic factors put potential entrant at a disadvantage relative to incumbent firms. Strong reaction of existing firms expected to the potential new entrant.
Competitive Force of Substitute-Products
Concept
Competitive pressures coming
from the attempts of
companies outside the industry to win buyers over to their products.
Substitutes matter when customers are attracted to the products of firms in other industries.
Examples
Eyeglasses vs. Contact Lens. Sugar vs. Artificial Sweeteners. Foreign Trip vs. Home Theatre. Newspapers vs. TV vs. Internet. eMail vs. Overnight Delivery Courier Service.
Factors Affecting the Strength of Substitute Products
Competitive threat of substitutes is stronger when they are:

Readily available, and/or Attractively priced , and/or Believed to have (at least) comparable or (even) better performance features , and/or Customer switching costs are low , and/or Customer loyalty is low , and/or ..
Key Indicators
Rapid growth in the Sales / Profits of the Substitutes. Producers of Substitutes planning to expand further.
Competitive Force of Suppliers
Concept
Competitive pressures stemming from supplier bargaining power and seller-supplier collaboration
Suppliers mean
Suppliers of Raw Materials, Parts, Components, or Other
Resource Inputs.
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 to other / new suppliers. they have good reputations and also growing demand.
they can supply a component cheaper than its rivals, and than the industry members can make it themselves.
they do not have to contend with substitutes. buying firms are not important customers.
Competitive Pressures: Supplier-Seller Collaboration
Whether Supplier-Seller Relationships represent a weak or strong competitive

force, primarily depends on:
Whether suppliers can exercise sufficient bargaining leverage to influence

terms of supply in their favor. Extent and competitive importance of collaborative partnerships between one or more sellers and their suppliers.
Competitive Pressures: Supplier-Seller Collaboration Rival sellers form Long-Term strategic partnerships with select suppliers to..
Promote JIT / VMI deliveries and reduced inventory and logistic costs. Speed availability of next-generation components. Enhance quality of parts being supplied. Reduce suppliers costs which paves way for lower prices on items supplied.
Competitive advantage potential may accrue to industry rivals doing the best job of managing supply-chain relationships.
Suppliers are a stronger force the more they can exercise power over the.. Prices charged. Quality and Performance of the items supplied. Reliability of Deliveries.
Competitive Force of Buyers
Concept
Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration.
Buyers mean
End Consumers.
Supply Chain Partners / Intermediaries.

But, not Internal Customers.
Competitive Force of Buyers
Buyers are a Strong Competitive Force when:

they are large and purchase a sizable percentage of industrys / sellers product. they can integrate backward. industrys / sellers product is standardized. buyers cost of switching to substitutes (or competitive brands) are low.
buyers can purchase from several sellers.

product purchased does not save buyer money. buyers are more aware and informed. Overall demand is declining.
Competitive Pressures: Sellers-Buyers Collaboration Partnerships are an increasingly important competitive element in B2B
relationships.
Collaboration may result in mutual benefits regarding: JIT deliveries / VMI. Improved Order processing and Stock Levels. Electronic Invoicing / Payments. On-line sharing of sales at the cash register. Implementation of CPFRS.
Competitive advantage potential may accrue to industry rivals who do the best job of managing Seller-Buyer partnerships.
Strategic Implications of the 5 Competitive Forces
From the Standpoint of earning Good-Profits, the Competitive Environment is: INDUSTRY & COMPETITIVE ANALYSIS
Unattractive, when..
Rivalry is strong.
Attractive, when..
Rivalry is moderate (not low).
Entry barriers are low and new entry

is likely. Competition from substitutes is strong.
Entry barriers are high and no firm is

likely to enter. Good substitutes do not exist, or not in a position to challenge.
Suppliers have considerable

bargaining power. Customers have considerable bargaining power.
Suppliers and customers are in a weak

bargaining position.
Coping with the 5 Competitive Forces
Objective is to craft a strategy:

To insulate firm from competitive forces. To help make the rules, placing added pressure on rivals. Which allows firm to define the business model for the industry.

#2: What is Competition Like & How Strong are the Competitive Forces?
Five Forces Model of Competition (Example: Farming)
Threat of New Entrant (-)

Not too expensive to enter the industry. Experience needed but training easily available. Some economies of scale. Some cost benefits if in business for some time. No Technology protection. Low barriers to entry.
Buyer Power (--)

Few large supermarkets. Very large orders. Homogeneous product. Extreme Price sensitivity. Ability to substitute.
Competitive Rivalry (- -)
Very many competitors Low switching Cost High cost of leaving industry
Supplier Power ( )
Moderate number of Suppliers. Large Suppliers. Similar Products. Able to Substitute.
Threat of Substitution (-)

Some cross-product substitutes. Ability to import food.

#3: What Forces are at Work to Change Industry Conditions? INDUSTRY & COMPETITIVE ANALYSIS
Industries change because forces are driving industry participants actions.
to alter their
Driving forces are the major underlying causes of changing the industry and the
competitive conditions.
Analyzing the Driving Forces
Identify those forces likely to exert greatest influence over next 1-3 years; Usually no more than 3 - 4 factors qualify as real drivers of change.
Assess the impact of the identified Driving-Forces What difference will the forces make - favorable? unfavorable?
Some Common Driving Forces e-commerce opportunities.

Globalization. Long-term industry growth rate. Policies / legislation. Entry or exit of major firms. Diffusion of technical knowledge. Changes in cost and efficiency. Societal concerns, attitudes, and lifestyles. Innovation: Product, Technological, Marketing etc. Market shift from standardized from/to differentiated products. Who buys, and how they use it? Degree of uncertainty and risk.
Identifying the Driving Forces The Environmental Scanning
Definition
Monitoring and interpreting sweep of social, political, economic, ecological, legislative and technological events to spot budding trends that could eventually impact industry.
Purpose
Raise consciousness of managers about potential developments that could: Have important impact on industry conditions. Pose new opportunities and threats to the organization.

#4: Assessment of Competitive Positions
Strategic Group Mapping
Firms in same Strategic Group have two or more competitive characteristics in
common, for example the firms:

Sell in same price/quality range. Cover same geographic areas.
Are vertically integrated to same degree.

Have comparable product line breadth. Emphasize same types of distribution channels.
Offer buyers similar Services.

Use identical technological approaches
Strategic Groups Map World Automobile Industry

High INDUSTRY & COMPETITIVE ANALYSIS
Price
Low
Variety
High
How to Construct Strategic Group Maps? 1. Identify competitive characteristics that differentiate firms in an industry from one another. 2. Plot firms on a two-variable map using pairs of these differentiating characteristics. 3. Assign firms that fall in about the same strategy space to same strategic group. 4. Draw circles around each group, making circles proportional to size of groups respective share of total industry sales.
Variables selected as axes should not be highly correlated. Variables do not have to be either quantitative or continuous. If more than 2 good competitive variables can be used, several maps can be drawn.
How to Interpret 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 groups market position.

The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be.

#5: Expected Moves by Rivals INDUSTRY & COMPETITIVE ANALYSIS
A firms own best strategic moves are affected by Current strategies of competitors and Future actions of competitors.
Profiling key rivals involves gathering competitive intelligence about their Current
strategies, Most recent moves, Resource strengths and weaknesses, Announced plans.
Successful strategists take great pain in scouting competitors to:

Understand their strategies. Watch their actions.
Evaluate their vulnerability to driving forces and competitive pressures.

Size up their resource strengths and weaknesses and their capabilities. Try to anticipate rivals next moves.
Categorizing Competitors
Scope
..
Strategic Intent
Competitors by Strategy Share Objective
Strategic Posture
Strategic Position
Closely Predicting Rivals Moves
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.

#6: Industrys Key Success Factors INDUSTRY & COMPETITIVE ANALYSIS
Competitive elements most affecting every industry members ability to prosper:

Specific strategy elements. Resources.
Product attributes.
Competencies. Competitive capabilities.
KSFs spell the difference between Profit or loss; Competitive success or failure. Answers to three questions pinpoint KSFs:
On what basis do customers choose between competing brands? What resources and competitive capabilities does a seller need to have to be competitively successful? How sellers to achieve a sustainable competitive advantage?
KSFs consist of the 3-5 really major determinants of financial and competitive success in an industry.
Some Common KSFs
Technology
..
Manufactng
KSFs Organizatal capability Distribution
Skills
Marketing

Conclusion: Is the Industry Attractive (or unattractive)? Why? INDUSTRY & COMPETITIVE ANALYSIS
Objective
Develop conclusions about
whether the industry and competitive
environment is attractive or unattractive, both near- and long-term, for earning good profits.
Principle
A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits.
Factors affecting the Industry Attractiveness
Industrys 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 industrys future.
Industry & 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 & competitive analyses need to be done every 1-3 years (subject to the nature of Industry).
Recap

Cs02 - External Factor Analysis

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Cs02 - External Factor Analysis

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INDUSTRY AND COMPETITIVE ANALYSIS

Kenichi Ohmae Laszlo Birinyi

Methods of Industry and Competitive Analysis.

Situation Analysis Indirect External

Direct External Factors

Industry & Competitive Environment Key Considerations

INDUSTRY & COMPETITIVE ANALYSIS

Strategic Strategic position position

Industry & Competitive Environment Key Considerations

INDUSTRY & COMPETITIVE ANALYSIS

Experience & Learning

Industry & Competitive Environment Key Considerations

INDUSTRY & COMPETITIVE ANALYSIS

Industrys Dominant Economic Traits

Key Success Factors

CONCLUSION Overall Industry Attractiveness

Competitive Forces, and the Strength of each Competitive Force

Strategic moves of the Key Rivals

Change Drivers in the Industry

Industry & Competitive Environment Key Considerations

Capacity utilization and resource requirements.

Number of competitors, their relative sizes & their growth trends.

INDUSTRY & COMPETITIVE ANALYSIS

Growing mastery of the technology.

Learning / Experience Curve Effect

INDUSTRY & COMPETITIVE ANALYSIS

Entry & Exit Barriers

Industry Rivals Substitutes

Industry & Competitive Environment Key Considerations

INDUSTRY & COMPETITIVE ANALYSIS

Complete Supply Chain?

Complete Buying Chain?

Five Force Model of Competition

INDUSTRY & COMPETITIVE ANALYSIS

position, higher sales and market share, and competitive advantage

INDUSTRY & COMPETITIVE ANALYSIS

Competitive Force of Potential-Entry

Threat of New Entry is Stronger, when

Industry members are earning attractive profits.

Competitive Force of Potential-Entry

Sizable Economies of Scale. Cost disadvantages independent of size.

Inability to gain access to specialized technology; distribution channels.

Seriousness of Threat depends on:

Competitive Force of Substitute-Products

Competitive pressures coming

from the attempts of

companies outside the industry to win buyers over to their products.

Factors Affecting the Strength of Substitute Products

Competitive threat of substitutes is stronger when they are:

Competitive Force of Suppliers

Suppliers of Raw Materials, Parts, Components, or Other

Competitive Force of Suppliers

Suppliers are a strong competitive force when:

Competitive Pressures: Supplier-Seller Collaboration

Whether Supplier-Seller Relationships represent a weak or strong competitive

force, primarily depends on:

Whether suppliers can exercise sufficient bargaining leverage to influence

Competitive Force of Buyers

Supply Chain Partners / Intermediaries.

Competitive Force of Buyers

Buyers are a Strong Competitive Force when:

buyers can purchase from several sellers.

Strategic Implications of the 5 Competitive Forces