Transcript External Analysis

Assessing a Company’s Industry and
Competitive Environment: The Seven
Key Questions to Answer
1.
2.
3.
4.
What are the industry’s business and
economic traits?
What are the nature and strength of
competitive forces?
What forces are driving industry change?
What market positions do industry rivals
occupy?
5.
What strategic moves are rivals likely to
make next?
6.
What are the key factors of competitive
success?
7.
Does the industry outlook offer good
prospects for profitability?
4-1
1. Identifying the Industry’s
Dominant Economic Features
 Market size and growth
rate
 Number of rivals
 Scope of competitive rivalry
 Pace of technological change
 Degree of vertical integration
 Need for economies of scale
 Learning and experience curve effects
4-2
2. Porter’s Five Forces Model of
Competition
4-3
When Is the Bargaining
Power of Buyers Stronger ?
 Buyers are large and can demand
concessions
 Buyer switching costs for substitutes are
low
 The number of buyers is small
 Buyer demand is weak or declining
 Buyers are well-informed about sellers’
products, prices, and costs
 Buyers threaten to
integrate backward
4-4
When Is the Competition
From Substitutes Stronger ?
 There are many good substitutes that
are readily available
 Substitutes are attractively priced
 Substitutes have comparable or better
quality and performance
 End-users have low switching costs
4-5
When Is the Bargaining
Power of Suppliers Stronger ?
 Industry members incur high switching
costs
 Needed inputs are in short supply
 Supplier provides a differentiated input
that enhances the quality or performance
of sellers’ products
 There are only a few suppliers of a
specific input
 Some suppliers threaten to integrate
forward
4-6
When Is the Threat of Entry Stronger ?
 Industry growth is
rapid and profit
potential is high
 Incumbents are
unwilling or unable
to contest a
newcomer’s entry
efforts
 The pool of entry candidates is large
 Entry barriers are low
4-7
What Causes Rivalry to Be
Stronger ?
 Competing sellers
regularly launch fresh
actions to boost
market standing
 Declining demand or slow market
growth
 The products or services offered by
rivals are standardized or weakly
differentiated
 One or more industry rivals becomes
dissatisfied with their market standing
4-8
What Causes Rivalry to Be
Stronger ?
 Number of rivals increases
 Buyer costs to switch brands are low
 Industry conditions tempt rivals use
price cuts or other competitive
weapons to boost volume
 Outsiders have recently
acquired weak firms in
the industry and are trying
to turn them into major
market contenders
4-9
When the Five Competitive Forces
Result in Attractive Market
Conditions
 An industry’s competitive environment tends
to be attractive from a profit-making standpoint
when
 Rivalry is moderate
 Entry barriers are high
and no firm is likely to enter
 Good substitutes
do not exist
 Suppliers and customers are
in a weak bargaining position
thereby producing competitive
pressures that are very weak!
4-10
When the Five Competitive Forces
Result in Unattractive Market
Conditions
 An industry’s competitive environment tends
to be unattractive from a profit-making
standpoint when
 Rivalry is strong
 Entry barriers are low
and new competitors are
likely to enter
 Good substitutes exist
 Suppliers and customers are
in a strong bargaining position
thereby producing competitive
pressures that are very intense
or fierce!
4-11
3. Analyzing Driving Forces
1.
Identify forces
likely to reshape
industry competitive
conditions

Changes likely to take place within
next 1 – 3 years

Usually no more than 3 - 4
factors qualify as real drivers of
change
4-12
Analyzing Driving Forces
2.
3.
Assess impact of driving forces on
industry attractiveness

Are the driving forces causing demand for
product to increase or decrease?

Are the driving forces acting to make
competition more or less intense?

Will the driving forces lead to higher or lower
industry profitability?
Determine what strategy changes
are needed to prepare for impact of
driving forces
4-13
External Environmental Factors
Shaping A Company’s Choice of
Strategy
4-14
Basic Driving Forces
 Economic Conditions
 Technological change
 Demographics
 Legislation and regulation
 Social Values and Lifestyles
4-15
4. Identifying the Market Positions of
Rivals: Strategic Group Maps
4-16
What Can Be Learned from
Strategic Group Maps
 Driving forces and competitive pressures
often favor some strategic groups and
hurt others
 Competitive pressures may cause the
profit potential of different strategic
groups to vary
 Identification of competitive
“white spaces” or
“blue ocean” opportunities
4-17
5. Predicting the Next Strategic
Moves Rivals Are Likely to Make
 Profiling key rivals involves gathering
competitive intelligence about
 Thinking and leadership styles of top
executives
 Identifying trends in the timing of new
product launches and marketing promotions
 Considering which rivals have the motivation
and capability to make major strategy
changes
4-18
6. Pinpointing the Key Factors
for Competitive Success
 Key Success Factors (or KSFs) are
competitive factors most affecting
every industry member’s ability to
prosper.
 KSFs include:
 Specific product attributes
 Necessary resources,
competencies, and capabilities
 Specific intangible assets
 Competitive capabilities
4-19
Three Questions to Ask in
Identifying Industry Key Success
Factors
1. On what basis do buyers choose
between brands?
2. What resources are needed to
compete successfully?
3. What shortcomings are almost
certain to put a company at a
competitive disadvantage?
4-20
Example: KSFs for the
Beer Industry
 Full utilization of brewing capacity -to keep manufacturing costs low
 Strong network of wholesale
distributors -- to gain access to
retail outlets
 Clever advertising -- to induce beer
drinkers to buy a particular brand
4-21
Example: KSFs for Apparel
Manufacturing Industry
 Appealing designs and
color combinations -- to
create buyer appeal
 Low-cost manufacturing
efficiency -- to keep
selling prices competitive
4-22
Example: KSFs for Tin and
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
4-23
7. Deciding Whether the Industry
Presents an Attractive Opportunity
 Involves assessing whether the industry
and competitive environment is attractive or
unattractive for earning good profits
 Draws upon all the previous analysis
 The industry’s growth potential
 The intensity of competition
 Whether the impacts of the driving forces
are positive or negative
 The company’s competitive position in the industry
relative to rivals
 How well the company performs the industry’s key
success factors
4-24