Strategic Management: Value Creation, Sustainability, and Performance, 3e, 2014 Industry and Competitive Analysis Chapter 4

1. Connect phrase "competitive advantage" to strategy and performance. 2. How to define an industry. 3. How 4 other forces beyond competition can affect strategy and performance. 4. Employ "strategy maps" to identify strategic groups. 5. How "driving forces" shape an industry. 6. How industry change affects strategy. Learning Objectives

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 (Source: Porter, 2008)

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

1. Define the industry boundaries 2. Evaluate external "Driving Forces" 3. Conduct "Five Forces" analysis 4. Draw conclusions  Industry attractiveness  Key Success Factors (KSFs) 5. Competitive KSF analysis 6. Strategy maps Steps in Industry Analysis

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 Defining an Industry

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

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" "Five Forces" Analysis

Calculating Concentration Ratios Preferred method is Herfindahl Index (HHI)

1. Is this an attractive industry?  Are profits available to Rivals  Not siphoned off to other four forces  Not competed away by Intensity of Rivalry 2. What are the Key Success Factors  How is value created for customers?  How must we compete against Rivals to succeed? Draw Conclusions

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? Key Success Factors

Competitive KSF Analysis

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 Draw Strategy Maps

Hypothetical PC Industry Map Strategic Group