Industry and Competitive Analysis Chapter 4

Learning Objectives Connect phrase "competitive advantage" to strategy and performance. How to define an industry. How 4 other forces beyond competition can affect strategy and performance. Employ "strategy maps" to identify strategic groups. How "driving forces" shape an industry. How industry change affects strategy.

Markets All firms identical No competitive advantage One firm dominates All competitive advantage

Where Strategy is Important Where industry profits exist and firms compete for them Where firms are different Where entry barriers can prevent new firms from competing Where "mobility barriers" can prevent firms from imitating others

Profitability Varies Across Industries

What macro trends might impact the KSFs over time? Industry Analysis Advice on Actions Helps to Determine Entry & Exit Decisions   Industry Attractiveness (Profit Potential) Industry Structure Actions: Entry Barriers Price/Value Equation Supplier/Customer Relations Mobility Barriers Competitive Actions: How can we create value? How must we compete? Key Success Factors Driving Forces Changing Competition: What macro trends might impact the KSFs over time?

Steps in Industry Analysis Define the industry boundaries Evaluate external "Driving Forces" Conduct "Five Forces" analysis Draw conclusions Industry attractiveness Key Success Factors (KSFs) Competitive KSF analysis Strategy maps

Defining an Industry Narrow boundaries Use similar inputs, and Produce similar outputs

Defining an Industry Broader boundaries Acknowledges wider competitive substitutes Different KSFs and industry dynamics Often a more realistic competitive set

Defining an Industry Use NAICS code classifications

Evaluate External "Driving Forces" Conditions & trends affecting entire industry Beyond the control of any company. See Figure 4.6

"Five Forces" Analysis Examine each of the five forces (Figure 4.8) Use data & analysis to quantify impact Bargaining Power of Buyers/Suppliers Calculate relative concentration ratios Switching costs – real and perceived Substitutes Based on Price-Performance characteristics Consider encroaching influences coming from other "industries"

Calculating Concentration Ratios Preferred method is Herfindahl Index (HHI)

Draw Conclusions Is this an attractive industry? Are profits available to Rivals Not siphoned off to other four forces Not competed away by Intensity of Rivalry What are the Key Success Factors How is value created for customers? How must we compete against Rivals to succeed?

Key Success Factors No more than 4-6 factors – a "short list" What each company must make strategic investments in to succeed in the industry Measure each KSF Based on data, not "guess-timates" Can be compared across competitors How might KSFs change because of Driving Forces?

Competitive KSF Analysis

Draw Strategy Maps Use pairs of KSFs Use "common sized" comparable data Orient axes with "desirable" position at end Circles represent size of competitor Identify strategic group Companies competing in nearly the same way on the plotted KSF dimensions

Hypothetical PC Industry Map Strategic Group