Transcript Chapter 6 Competitive Strategies

Environmental Analysis
Environmental Scanning
The process by which organizations monitor their opportunities and
threats affecting their business is known as environmental scanning
Environmental scanning refers to possession and utilization of
information about occasions, patterns, trends, and relationships
within an organization’s internal and external environment.
It helps the managers to decide the future path of the organization.
Scanning must identify the threats and opportunities existing in the
environment.
While strategy formulation, an organization must take advantage of
the opportunities and minimize the threats. A threat for one
organization may be an opportunity for another
Environmental scanning
External analysis
Macro environment
PEST analysis
Internal analysis
Micro environment
Five force analysis
Tools for Analyzing the Environment –
PESTL Analysis
SWOT ANALYSIS (Internal
Scanning)
 Environmental factors internal to the firm usually can be classified as
strengths (S) or weaknesses (W), and those external to the firm can
be classified as opportunities (O) or threats (T). Such an analysis of
the strategic environment is referred to as a SWOT analysis.
 The SWOT analysis provides information that is helpful in matching
the firm's resources and capabilities to the competitive environment
in which it operates. As such, it is instrumental in strategy
formulation and selection.
Strength
Weakness
Opportunity
Threats
Competitors
Shoppers Stop
SWOT Analysis
1. It has strong domestic presence with 50+ stores in India
2. Shoppers stop has become highest benchmark for retail industry
3. Loyal customer base with more than 750,000 first citizen members
4.Increasing footfalls and conversion rates
5. Management team is strongly established as well as skilled labor
force
1. It has lesser promotional strategies on both ATL and BTL level
compared to global leaders
2. It always follows low risk strategy in business or entering into new
segment
1. Big opportunity to enter into new geographies nationally
2.Foreign players see it as preferred partner for making investment in
India
4.It could enter into Hypercity -high retail value category
1. Due to global slowdown consumers’ purchase power has reduced
for top high value brands
2.Increasing brand awareness among consumers across all socioeconomic classes
Competition
1.Pantaloons
2.Westside
3.Wills Lifestyle
4. Globus
Porter’s Five Forces Model
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The five forces framework developed by Michael Porter is the most
widely known tool for analysing the competitive environment, which
helps in explaining how forces in the competitive environment shape
strategies and affect performance. The frame work as shown in Figure
suggests that there are competitive forces other than direct rivals which
shape up the competitive environment. These competitive forces are as
follows:
1) The rivalry among competitors in the industry
2) The potential entrants
3) The substitute products
4) The bargaining power of suppliers
5) The bargaining power of buyers
However, these five forces are not independent of each other. Pressures
from one direction can trigger off changes in another which is capable of
shifting sources of competition.
PORTER’s FIVE FORCEs MODEL
Potential
entrants
Threat of
new entrants
Industry competitors
Bargaining power
of suppliers
Suppliers
Rivalry among
existing firms
Threat of
substitutes
Substitute
products
Buyers
Bargaining power
of buyers
Structural reasons
why …
… some industries were profitable
* Established cost advantages
* Product differentiation
* Economies of scale
Structural reasons …
… all represented barriers to entry
in certain industries, thus
allowing those industries to be
more
profitable than others.
Porters Five Forces …
* Threat of Entry
* Bargaining Power of Suppliers
* Bargaining Power of Buyers
* Development of Substitute
Products or Services
* Rivalry among Competitors
Barriers to Entry …
… large capital requirements or the
need to gain economies of scale
quickly.
… strong customer loyalty or strong
brand preferences.
… lack of adequate distribution
channels or access to raw
materials.
Power of Suppliers …
… high when
* A small number of dominant, highly
concentrated suppliers exists.
* Few good substitute raw materials or
suppliers are available.
* The cost of switching raw materials
or suppliers is high.
Power of Buyers …
… high when
* Customers are large or buy in volume .
* The products being purchased are
standard or undifferentiated making it
easy to switch to other suppliers.
• Customers’ purchases represent a
major portion of the sellers’ total
revenue.
• Backward integration
Substitute products …
… competitive strength high when
* The relative price of substitute
products declines .
* Consumers’ switching costs decline.
Rivalry among
competitors
… intensity increases as
* The number of competitors increases
* Demand for the industry’s products
declines or industry growth slows.
* Fixed costs or barriers to leaving the
industry are high.
 Key Points:
 Porter's Five Forces Analysis is an important tool for assessing the
potential for profitability in an industry. With a little adaptation, it is
also useful as a way of assessing the balance of power in more
general situations.
 It works by looking at the strength of five important forces that
affect competition:
 Supplier Power: The power of suppliers to drive up the prices of
your inputs.
 Buyer Power: The power of your customers to drive down your
prices.
 Competitive Rivalry: The strength of competition in the industry.
 The Threat of Substitution: The extent to which different products
and services can be used in place of your own.
 The Threat of New Entry: The ease with which new competitors can
enter the market if they see that you are making good profits (and
then drive your prices down).
Summary …
As rivalry among competing
firms intensifies, industry
profits decline, in some
cases to the point where an
industry becomes inherently
unattractive.
Porter’s five force model
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Coca-cola
 Traditional competition:
 Prices of Pepsi, local brands
 Market share
 Promotional actions of competition
• New entrants:
 New “look-a-like” manufacturers
• Substitute products:
 Fashionable new drinks, milk drinks, coffee...
Coca-cola
 Suppliers:
 Price and availability of ingredients on world market
• Buyers/consumers:
 High as a result of intense competition both among
branded and unbranded products.
 Combined purchase power of shops, bars, supermarkets
Competitor analysis is necessary for formulating right
strategies and determining the right positioning for the firm in the
industry. Competitor analysis seeks to find answers to certain basic
questions such as:
(i) Who are the competitors of the firm?
(ii) What are the strategies of the competitors?
(iii) What are their future goals ?
(iv) What drives the competitor?
(v) Where is the competitor vulnerable?
(vi) How are the competitors likely to respond to the strategies of
others?
Porter has suggested a framework for competitor analysis,
consisting of four diagnostic components, viz.,
1.
2.
3.
4.
future goals,
current strategy,
assumptions and
capabilities.
As Porter observes, its goals, assumptions, and current strategy
will influence the likelihood, timing, nature, and intensity of
competitor’s reactions. Its strengths and weaknesses will
determine its ability to initiate or react to strategic
moves and to deal with environmental or industry events that
occur.
COMPETITOR RESPONSE PROFILE
Answers to critical questions such as: What
moves or developments will provoke the
competitor and how is the competitor likely to
respond or retaliate? The competitor response
profile seeks to predict the competitor's
offensive moves and defensive capabilities.
1. Future Goals
2. Current Strategy
3. Capabilities
VALUE CHAIN
Value is the amount which buyers are willing to pay for what a firm
provides them. The total revenue reflects the value. Creating value for
buyers that exceeds the cost of activities are the physically and
technologically distinct activities a firm performs.
 Primary activities include: (i) inbound logistics (activities associated
with receiving, storing and disseminating inputs to products); (ii)
operations (processing activities); (iii) marketing and sales; and (iv)
services.
 Support activities include: (i) procurement (purchasing of inputs); (ii)
technology development; (iii) human resource management; (iv)
firm infrastructure (includes general management, planning,
finance, accounting, legal and government affairs and quality
management).
BENEFITS OF STRUCTURAL
ANALYSIS
The purpose of the structural analysis is to
diagnose the competitive forces and to identify
the strengths and weakness of the firm vis-à-vis
the industry, to help formulate an effective
competitive strategy that "takes offensive or
defensive action in order to create a defendable
position against the five competitive forces".
COMPETITIVE ADVANTAGE AND HOW IT IS
OBTAINED
 Competitive Advantage
 What sets an organization apart -- competitive edge
 Controlling or having something others do not have
 Doing something better than other organizations
 Doing something other organizations cannot do
 Competitive strategies are designed to exploit an
organization’s competitive advantage
 Implies there are other competitors also trying to
develop competitive advantage & attract customers
Understanding the Competitive
Environment
 What is competition?
 When organizations battle for some desired object or
outcome
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Customers
Market share
Survey rankings
Needed resources
Competitive Advantage &
Competitive Strategy
 What is competitive strategy?
• Consists of business approaches to
– Attract customers by fulfilling their expectations
– Withstand competitive pressures
– Strengthen market position
 Exploits competitive advantage by
 finding ways to use resources & capabilities to set
firm apart from competitors
PORTER’S GENERIC COMPETITIVE
STRATEGIES
 Competitive advantage come from one of two
sources:
 Having the lowest cost in the industry
 Possessing a product or offering a service that is
perceived as unique in the industry
 Another important factor is the scope of the
product-market (broad or narrow)
 Mix of these factors provide basis for
 Cost leadership strategy (low-cost strategy)
 Differentiation strategy
 Focus strategy
PORTER’S GENERIC COMPETITIVE
STRATEGIES
Competitive Advantage
Low Cost
Differentiation
Broad
Cost Leadership
Market
Scope
Narrow
Focus
(Low Cost)
Differentiation
Focus
(Differentiation)
Cost Leadership Strategy
• Objective:
– Gain sustainable competitive advantage over
competitors, using low-cost (not price)
– Produce for broad customer base
• Basic Theme (Keys to Success):
– Low-cost relative to competitors
 Low cost implies OVERALL LOW COST
 Not just low manufacturing or production cost
 Product quality cannot be ignored
Differentiation Strategy
• Objective
– Offering products/services perceived as unique over the
brands of rivals in an industry
• Keys to Success
– Offer products/services that create value to customers
– Offer products/services not easily matched or easily
copied by rivals
– Not spending more to differentiate the firm’s products or
service than the price premium that can be charged
Differentiation Themes
• Superior service -- FedEx, Ritz-Carlton
• More for your money -- McDonald’s, Wal-Mart
• Engineering design and performance -- Mercedes
• Prestige -- Rolex
• Quality manufacture -- Honda , Toyota
• Top-of-the-line image -- Ralph Lauren, Chanel
Focus Strategy
 Firm pursues either a cost leadership or
differentiation strategy but in a narrow customer
group of segment
 Concentrates on serving specific market niche
 Geographical area
 Type of customer -- specific group of customers
 Specific & specialized product line
Focus Strategy
 Objective
 Serve the niche customers better than competitors
 Keys to Success
 Choose a market niche where buyers have distinctive
preferences, special requirements, or unique needs
 Develop unique capabilities to serve needs of target
buyer segment
Focus Approaches
 Approach 1: Cost Advantage
 Achieve lower cost than rivals in serving the specific or
narrow segment
 Approach 2: Differentiation Advantage
 Offer customers in niche market something unique in
that market
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Product features
Product innovations
Product quality
Customer responsiveness
Examples of Focus Strategy
• Focus Low-cost
– Ikea: Young furniture buyers who want style at low cost (price
sensitive and low service customer groups)
– Southwest Airlines: Short-haul, point-to-point service
between midsize cities & secondary airports in large cities
(low pricing & low service)
• Focus Differentiation
– Rolex: Serve highest end of wristwatch market (premium
pricing & image)
 Rolls-Royce: Serving luxurious end of automobile market
(premium pricing & image)
Global Competiveness Index
 The World Economic Forum has ranked 139
economies in its 2010-2011 Global
Competitiveness Report.
 In overall competitiveness India scores a passable
51st place. It ranks notably ahead of Latin
America’s powerhouse Brazil (58) and way ahead
of its neighbors Pakistan (123), Sri Lanka (62) and
Bangladesh (107), but behind China (27).
 Switzerland tops the chart and USA is on 4th
position due to economic instability from 2007-10
Delhi tops 2010 ranking of India's most competitive
city
 Chennai cornered the second position in the list ahead of Mumbai ,
which dropped to third place from second position last year.
Chennai's ranking improved on the back of good performance under
all the sub-indices used to benchmark the cities, particularly its
educated workforce and logistics infrastructure, while Mumbai's fall
was primarily due to the worsening state of its physical infrastructure.
Bengaluru is at fourth place in the list, followed by Kolkata,
Hyderabad , Ahmedabad, Pune, Nagpur and Jaipur.
 Ahmedabad and Pune have emerged as the most competitive tier-
two cities in India.
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