CHAPTER 3 ANALYSING A COMPANY’S EXTERNAL ENVIRONMENT – Industry and External Analysis

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: Factors Shaping the Choice of Company Strategy Company’s Strategic Situation Craft the strategy  External Factors  Internal Factors Social, political, regulatory and community factors Competitive conditions and industry attractiveness Company opportunities and threats to company’s well-being Resource strengths, capabilities, and weaknesses Influences of key executives Shared values and company culture Identify and evaluate alternatives Determine relevance of internal and external factors

Figure 3.2: The Components of a Company’s Macro-Environment Legislation and Regulation Societal Values and Lifestyles Population Demographics Technology The Economy at Large COMPANY SuppliersSubstitutes Buyer s New Entrants Rival Firms  IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT MACROENVIRONMENT

Figure 3.3: Strategic Thinking and Analysis Leads to Good Strategic Choices 1. Industry’s dominant economic traits 2. Nature of competition & strength of competitive forces 3. Drivers of industry change 4. Competitive position of rivals 5. Strategic moves of rivals 6. Key success factors 7. Conclusions about industry attractiveness Assess Industry & Competitive Conditions 1. Assessment of company’s present strategy 2. Resource strengths and weaknesses, market opportunities, and external threats 3. Company’s costs compared to rivals 4. Strength of company’s competitive position 5. Strategic issues that need to be addressed Assess Company Situation Identify Strategic Options for the Company Select the Best Strategy for the Company

Competitive Conditions and Industry Attractiveness A company’s strategy has to be responsive to – Fresh moves of rival competitors – Changes in industry’s price-cost-profit economics – Shifting buyer needs and expectations – New technological developments – Pace of market growth

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 7 Key Considerations Regarding the Industry and Competitive Environment

Strategic Management Principle A company’s strategy can’t produce real market success unless it is well-matched to industry and competitive conditions!

Company Opportunities and Threats For strategy to be successful, it has to – Be well matched to capturing a company’s best opportunities – And help counteract threats to the company’s well-being

Question 1: What are the Industry’s Dominant Economic Traits? Market size and growth rate Number of competitors and their relative sizes Entry/exit barriers Nature and pace of technological change Product and customer characteristics Scale economies Industry profitability

Figure 3.4: Five Forces Model of Competition Substitute Products (of firms in other industries) Suppliers of Key Inputs Buyers Potential New Entrants Rivalry Among Competing Sellers

Analyzing the Five Competitive Forces:  Assess strength of each of the five competitive forces  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  Explain how each force acts to create competitive pressure - What are the factors that cause each force to be strong or weak?

Rivalry Among Competing Sellers 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?

What Causes Rivalry to be Stronger? Active jockeying for position among rivals and frequent launches of new offensives to gain sales and market share 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 Costs more to get out of business than to stay in

Factors That Affect the Strength of Rivalry Rivalry is generally stronger when: Rivals are active in making fresh moves to increase sales and market share  Buyer demand is growing slowly  The number of rivals ranges from at least 5 to upwards of 12 or more  Rivals are of roughly equal size and capability  Buyer costs to switch brands are low  One or more rivals is dissatisfied with their current position and market share and make aggressive moves to improve their market prospects  When rivals have diverse strategies and objectives and are located in different countries  When one or two rivals have powerful strategies and other rivals are scrambling to stay in the game Rivalry is generally weaker when:  Rivals move only infrequently or in a non- aggressive manner to draw sales and market share away from rivals  Buyer demand is growing rapidly  Buyer costs to switch brands are high The “Weapons” of Competitive Rivalry Lower prices  More appealing features  Better product performance  Higher quality  Strong brand image and appeal  Better customer service capabilities  Wider product selection  Bigger/better dealer network  Stronger product innovation capabilities  Longer warranties  Higher levels of advertising Rivalry among Competing Sellers Efforts of rivals to gain better market position, higher sales and market share, and competitive advantage

Competitive jockeying among rival firms is dynamic and ever-changing As industry members initiate new offensive and defensive moves As emphasis swings from one mix of competitive weapons to another

Competitive Force of Potential Entry Seriousness of threat depends 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

Factors Affecting the Threat of Entry Potential New Entrants The Rivalry Among Competing Sellers Competitive pressures coming from the threat of entry of new rivals Entry threats are weaker when  The pool of entry candidates is small  Entry barriers are high  Existing competitors are struggling to earn good profits  The industry’s outlook is risky or uncertain  Buyer demand is growing slowly or is stagnant Entry threats are 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

Factors Affecting the Threat of Entry Sizable economies of scale Inability to gain access to specialized technology Existence of strong learning/experience curve effects Strong brand preferences and customer loyalty Large capital requirements and/or other specialized resource requirements Cost disadvantages independent of size Difficulties in gaining access to distribution channels Regulatory policies, tariffs, trade restrictions

Threat of entry is stronger when:  Entry barriers are low  Sizable pool of entry candidates exists  Incumbents are unwilling or unable to contest a newcomer’s entry efforts  Newcomers can expect to earn attractive profits

Competitive Force of Substitute Products Substitutes matter when customers are attracted to the products of firms in other industries  Eyeglasses vs. Contact Lens  Sugar vs. Artificial Sweeteners  Newspapers vs. TV vs. Internet

How to Tell Whether Substitute Products are a Strong Force Sales of substitutes are growing rapidly Producers of substitutes plan to add new capacity Profits of producers of substitutes are up

Competitive pressures coming from the attempts of companies outside the industry to win buyers over to their products Firms in Other Industries Offering Substitute Products Rivalry among Competing Sellers Competitive pressures from substitutes are stronger when  Good substitutes are readily available or new ones are emerging  Substitutes are lower priced relative to the performance they deliver  Buyers have low costs in switching to substitutes  Buyers grow more comfortable with using substitutes Competitive pressures from substitutes are weaker when:  Good substitutes are not readily available or don’t exist  Substitutes are higher priced relative to the performance they deliver  Buyers have high costs in switching to substitutes Factors Affecting Competition from Substitutes

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

Whether supplier-seller relationships represent a weak or strong competitive force 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 From Suppliers and Supplier-Seller Collaboration

 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 Competitive Force of Suppliers

Factors Affecting Supplier Bargaining Power Suppliers of Raw Materials, Parts, Components, or Other Resource Inputs Competitive pressures stemming from supplier bargaining power and seller-supplier collaboration Rivalry Among Competing Sellers Supplier bargaining power is stronger when  Seller switching costs to alternative suppliers are high  Some suppliers are a threat to integrate forward into the business of their customers  Needed inputs are in short supply Supplier bargaining power is weaker when  Seller switching costs to alternative suppliers are low  There is a surge in the availability of supplies  Good substitute inputs exist or new ones emerge  Supplier-seller collaboration or partnering provides attractive win-win opportunities

Rival sellers are forming long-term strategic partnerships with select suppliers to – Promote just-in-time 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 Competitive Pressures: Collaboration Between Sellers and Suppliers

Suppliers are a stronger force the more they can exercise power over: – Prices charged – Quality and performance of items supplied – Reliability of deliveries

Competitive Pressures From Buyers and Seller-Buyer Collaboration Whether seller-buyer relationships represent a weak or strong competitive force depends on – Whether buyers have sufficient bargaining leverage to influence terms of sale in their favor – Extent and competitive importance of collaborative partnerships between one or more sellers and their customers

Buyers are a strong competitive force when: – They are large and purchase a sizable percentage of industry’s product – They buy in large 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 Competitive Force of Buyers

Partnerships are an increasingly important competitive element in business-to-business relationships Collaboration may result in mutual benefits regarding – Just-in-time deliveries – Order processing Competitive advantage potential may accrue to industry rivals who do the best job of managing seller-buyer partnerships Competitive Pressures: Collaboration Between Sellers and Buyers

Factors Affecting Buyer Bargaining Power Rivalry Among Competing Sellers Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration Buyers Buyer bargaining power is stronger when  Buyer switching costs to competing brands are low  Buyers are large and purchase in large quantities  Quantity and quality of information available to buyers improves  Some buyers are a threat to integrate backward into the business of sellers Buyer bargaining power is weaker when  Buyer switching costs to competing brands are high  There is a surge in buyer demand  Seller-buyer collaboration or partnering provides attractive win-win opportunities

Buyers are a stronger competitive force the more they have leverage to bargain over:  Price – Quality – Service – Other terms and conditions of sale