EXTERNAL ANALYSIS (INDUSTRY AND COMPETITION)

Payne (4)

Key Text Readings: Chapter 2, Chapter 3, Appendix A “Analysis is the critical starting point of strategic thinking.”

Kenichi Ohmae

1

Environmental Scanning Environmental Monitoring Competitive Intelligence Assessing Forecasts

projections

Formulation & Planning

Forecasting : Involves the development of plausible projections about the direction, scope, speed and intensity of environmental change. 2

Environmental Analysis Levels

Economic Social Competitors

Macro Level Industry Level

Substitutes Political/Legal

Firm

Connect Customers Demographic Suppliers Technological Global 

EXTERNAL or MACRO ENVIRONMENT

 Industry and competitive conditions (opportunities and threats) 

INTERNAL or MICRO ENVIRONMENT

 Its competencies, capabilities, resources, and competitiveness (strengths and weaknesses) 3

Environmental Analysis Levels

(of a Health Care Organization)

General Environment

• • • • • Government Institutions Educational Institutions Religious Institutions Research Organizations Consumers

Service Area

• • • • • • • Competitors Government Services Businesses Non-profits Other Locals Educational Institutions Individuals/Consumers

Health Care Environment

• • • • • Planning / Regulatory Primary Providers Secondary Providers Provider Representative Consumers/Patients

Organization

4

Macro Environment (1)

 Socio-cultural segment      

Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences

 Political/Legal Segment     

Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

5

Macro Environment (2)

 Economic segment       

Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product

 Technological Segment    

Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

6

Macro Environment (3)

 Global Segment    

Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes

 Demographic     

Population size Age structure Geographic distribution Ethnic mix Income distribution

7

Impact of General Environmental Trends on Various Industries

Industry Positive Neutral Negative Segment/Trends/Events

Demographic

Aging population Rising affluence

Health Care

Baby products Brokerage services Fast foods Upscale pets and supplies     

Sociocultural

More women in the workforce Greater concern for health & fitness Clothing Baking Products (staples)

Home exercise equipment

Meat products    

Political/legal

Tort reform ADA (Americans with Disabilities Act) Legal Services Auto Manufacturing Retail

Manufacturers of elevators, escalators & ramps

   

Technological

Genetic engineering Pollution/global warming

Pharmaceutical

Publishing Engineering Services Petroleum    

Economic

Interest Rate Increases Residential construction Most common grocery products  

Global

Increasing Global Trade Emergence of China as an economic power Shipping Personal service Soft drinks Defense     8

Five Forces Model of Competition

Substitute Products (of firms in other industries)

Threat of Substitutes

Suppliers of Key Inputs

Rivalry Intensity

Among Competing Sellers Buyers

Threat of New Entrants

Potential New Entrants

9

Analyzing the Five Competitive Forces: How to Do It

   Assess

strength

of each competitive force (

Strong? Moderate? Weak?

)  Rivalry among competitors  Substitute products  Potential entry  Bargaining power of suppliers  Bargaining power of buyers Explain how

each

force acts to create competitive pressure Decide whether

overall competition

is brutal, fierce, strong, normal/moderate, or weak 10

Rivalry Among Competing Sellers

  Usually the

most powerful

of the five forces Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position  Price  Quality   Performance features offered Customer service  Warranties/guarantees  Advertising/promotions  Dealer networks  Product innovation 11

What Causes Rivalry to Be Stronger?

        Lots of firms, more 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 brands One or more firms initiates moves to bolster their standing at expense of rivals A successful strategic move carries a big payoff Costs more to get out of business than to stay in Firms have diverse strategies, corporate priorities, resources, and countries of origin 12

Competitive Force of Threat of New Entry

 Seriousness of threat depends primarily 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 13

Common Barriers to Entry

        Economies of scale Inability to gain access to specialized technology Existence of learning/experience curve effects Strong brand preferences and customer loyalty Capital requirements and/or other specialized resource requirements Cost disadvantages independent of size Access to distribution channels Regulatory policies, tariffs, trade restrictions 14

How to Tell Whether Substitute Products Are a Strong Force

 Sales of substitutes are growing rapidly  Producers of substitutes are planning to add new capacity  Substitutes’ profits are up The 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 15

Competitive Force of Substitute Products

Concept

Substitutes

matter when customers are attracted to the products or services of firms in other industries

Examples

 Eyeglasses vs. Contact Lens  MD vs. DPM vs. DC  Plastic vs. Glass vs. Metal 16

Competitive Force of Suppliers

 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  Buying firms are not important customers

Suppliers

over:  are a

stronger

Prices charged  force the more they can exercise power Quality/performance of items supplied  Amounts and delivery times 17



Competitive Force of Buyers

Buyers are a

strong

competitive force

when:

 They are large and purchase a sizable percentage of industry’s product  They buy in volume 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  Product purchased does not save buyer money

Buyers

are a

stronger

competitive force the more they have leverage to bargain over:  Price or Quality or Service  Other terms and conditions of sale 18

Strategic Implications of the Five Forces

  Competitive environment is

unattractive

 Rivalry is strong  Entry barriers are low  Competition from substitutes is strong  when: Suppliers and customers have considerable bargaining power Competitive environment is

ideal

 Rivalry is moderate  Entry barriers are high  Good substitutes do not exist  when: Suppliers and customers are in a weak bargaining position

Objective is to craft a strategy that will:

   Insulate firm from competitive forces Influence competitive pressures in ways that favor firm Build a sustainable competitive advantage 19

Stakeholder Analysis

Stakeholder A Stakeholder B Focal Firm Stakeholder C 20

Who are Stakeholders?

 Identifying stakeholders is one way of sizing up the internal and external constituents that influence the firm.  Stakeholders are individuals and groups who can affect and are affected by a firm’s strategic outcomes and who have enforceable claims on its performance  Stakeholders include individuals, groups, and other organizations who have an interest in the actions of an organization and who have the ability to influence it  Stakeholders may be categorized as internal, interface and external.

21

Building Stakeholder Relationships

    Managing down  Relationships with subordinates Managing up  Relationships with bosses and corporate staff Managing out  Relationships with customers and suppliers Managing across  Relationships with peers 22

Stakeholder Analysis

23

Examples of Stakeholder Groups

 Internal stakeholders – – – Management Professionals Support Personnel  Interface stakeholders – – – Shareholders Board of Directors Medical Staff  External stakeholders – – Suppliers Competitors – Government Agencies – Patients 24

Relationships with Stakeholders

   Organizations have dependency relationships with stakeholders Firms are not equally dependent on all stakeholders and not every stakeholder has the same level of influence An effective organization strategy requires consensus from a plurality of key stakeholders about what it should be doing and how these things should be done 25

Key Success Factors

 

KSFs or CSFs

are competitive elements that most affect

every strategic group member’s

ability to prosper in the marketplace:     Specific strategy elements Product attributes Resources or Competencies Competitive capabilities

KSFs

spell difference between:   Profit and loss Competitive success or failure

Ask: For our organization to be successful, we MUST be especially good at ___________?

26

Key Success Factors

KSF 1 Optimize Performance KSF 3 KSF 2

A sound strategy incorporates efforts to be

competent on all

industry key success factors and to

excel on at least one

factor!

27

Identifying Key Success Factors

  Answers to three questions pinpoint

KSFs

 On what basis do customers choose between competing brands or offerings of sellers?

 What must a seller/provider do to be competitively successful -- what resources and competitive capabilities does it need?

 What does it take for sellers/providers to achieve a sustainable competitive advantage?

KSFs

consist of the

3 - 5

really

major

determinants of financial and competitive success in a strategic group.

(Recall our discussion on developing objectives?) 28

Common Types of Key Success Factors

Technology related Manufacturing -related Distribution related Marketing related Skills-related Organizational capability Other types

Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection 29

Example: KSFs for the Refractive Eye Surgery Industry

 High numbers of procedures , which is a component of price, experience, and service.

 Low rate of complications and high rate of success (20/20)  Positive word-of-mouth and reputation 30

Strategic Group Mapping

 One technique for revealing the different competitive positions of industry rivals is

strategic group mapping

 A

strategic group

consists of those rivals with similar competitive approaches in an industry 31

Strategic Group Mapping

 Firms in

same strategic group

have two or more competitive characteristics in common . . .

 Sell in same price/quality range  Cover same geographic areas  Be vertically integrated to same degree  Have comparable product line breadth  Emphasize same types of distribution channels  Offer buyers similar services  Use identical technological approaches 32

Procedure: Constructing a Strategic Group Map

STEP 1

: Identify competitive characteristics that differentiate firms in an industry from one another

STEP 2

: Plot firms on a two-variable map using pairs of these differentiating characteristics

STEP 3

: Assign firms that fall in about the same strategy space to same strategic group

STEP 4

: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales 33

Example: Strategic Group Map of Retail Jewelry Industry

High Small Independent Guild Jewelers National, Regional, & Local Guild - “Fine Jewelry” Stores Prestige Departmentalized Retailers Upscale Department Stores Medium National Jewelry Chains Local Jewelers Chains Outlet Mall Retailers Credit Jewelers Catalog Showrooms Off-Price Retailers Discounters Low Specialty Jewelers Full-line Jewelers Limited-category Retailers Product Line / Merchandise Mix Broad-category Retailers

34

Guidelines: Strategic Group Maps

     Variables selected as axes should

not

correlated be highly Variables chosen as axes should expose

big

differences in how rivals compete Variables do

not

continuous have to be either quantitative or Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group If more than two good competitive variables can be used, several maps can be drawn 35

Interpreting Strategic Group Maps

(i.e., Implications of the Strategic Groups Concept)  Driving forces and competitive pressures often favor some strategic groups and hurt others – such recognition may be the key to developing a competitive advantage.

 Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position. Important niches may be identified that are not currently being filled by competitors.

 The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be (“Organizations most like yours are the most dangerous.”) 36

High

Within or Between Strategic Groups

Medium Low Specialty Full-line Providers Limited-category Retailers Product Line / Merchandise Mix Broad-category Retailers

37

The World Automobile Industry

High Price Ferrari Lamborghini Porsche Mercedes* BMW Low Low Hyundai Kia Breadth of Product Line Toyota Ford General Motors Chrysler* Honda Nissan High

38

Strategic Groups Within the World Petroleum Industry 0 Kuwait Petroleum PDVSA Iran NOC

NATIONAL PRODUCTION COMPANIES

Statoil Apache

INTERNATIONAL UPSTREAM COMPANIES

Dana Petroleum

INTEGRATED DOMESTIC OIL COMPANIES

Premier Oil

INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM

Pemex Petronas Lukoil PetroChina Indian Oil Petrobras Nippon Valero Sunoco Phillips ENI Elf-Fina-Total ENI Repsol YPF Chevron Texaco BP-Amoco

INTEGRATED INTERNATIONAL MAJORS

Exxon -Mobil Royal Dutch -Shell Gp.

Neste Ashland

INTERNATIONAL DOWNSTREAM OIL COMPANIES NATIONALLY-FOCUSED DOWNSTREAM COMPANIES

10 20 30 40 50

Geographical Scope

60 70 80

39

Competitor Analysis and Strength Assessment

 Successful strategists take great pains in scouting competitors  Understanding their strategies  Watching their actions  Evaluating their vulnerability to driving forces and competitive pressures   Sizing up their resource strengths and weaknesses and their capabilities Trying to anticipate rivals’ next moves 40

Predicting Strategic Moves of Rivals

  A firm’s own best strategic moves are affected by:  Current strategies of competitors  Actions competitors are likely to take next Predicting rivals’ next moves involves:  Analyzing their current competitive positions  Examining public pronouncements about what it will take to be successful in industry  Gathering information from grapevine about current activities and potential changes  Studying past actions and leadership  Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy 41

Competitive Scope

•

Local

•

Regional

•

National

•

Multi-country

•

Global

Categorizing the Objectives and Strategies of Competitors

Strategic Intent Market Share Objective Competitive Position Strategic Posture

•

Be dominant leader

•

Overtake industry leader

•

Be among industry leaders

•

Move to top 10

•

Move up a notch in rankings

•

Maintain current position

•

Just survive

•

Aggressive expansion via acquisition & internal growth

•

Expansion via internal growth

•

Expansion via acquisition

•

Hold on to present share

•

Give up present share to achieve short term profits

•

Getting stronger; on the move

•

Well entrenched

•

Stuck in the middle of the pack

•

Going after a different position

•

Struggling; losing ground

•

Retrenching to a position that can be defended

•

Mostly offensive

•

Mostly defensive

•

Combination of offensive & defensive

•

Aggressive risk-taker

•

Conservative follower Competitive Strategy

•

Striving for low-cost leadership

•

Mostly focusing on a market niche

•

Pursuing differentiation based on

–

Quality

–

Service

–

Technology superiority

–

Breadth of product line

– –

Image & reputation More value for the money

–

Other attributes

42

Assessing a Company’s Competitive Strength versus Key Rivals

1.

List industry key success factors measures of competitive strength and other relevant

2.

Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)

3.

Decide whether to use a

weighted

rating system or

unweighted

4.

Sum individual ratings to get overall measure of competitive strength for each rival

5.

Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage 43

Unweighted Competitive Strength Assessment

KSF/Strength Measure ABC Co.

Rival 1 Rival 2 Quality/product performance Reputation/image Manufacturing capability Technological skills Dealer network/distribution New product innovation Financial resources 8 8 2 10 9 9 5 5 7 10 1 4 4 10 10 10 4 7 10 10 7 Relative cost position Customer service capability 5 5 10 7 3 10 Overall strength rating 61 58 71 Rating Scale: 1 = Very weak; 10 = Very strong Rival 3 1 1 25 1 1 5 3 5 5 3 Rival 4 4 4 32 6 6 1 8 1 1 1

44

A Weighted Competitive Strength Assessment

KSF/Strength Measure Weight ABC Co.

Rival 1 Rival 2 Quality/product performance Reputation/image Manufacturing capability Technological skills Dealer network/distribution New product innovation Financial resources Relative cost position Customer service capability Sum of weights 0.10

0.10

0.10

0.05

0.05

0.05

0.10

0.35

0.15

1.00

8

/

0.80

8/0.80

2/0.20

10/0.50

9/0.45

9/0.45

5/0.50

5/1.75

5/0.75

5/0.50

7/0.70

10/1.00

1/0.05

4/0.20

4/0.20

10/1.00

10/3.50

7/1.05

10/1.00

10/1.00

4/0.40

7/0.35

10/0.50

10/0.50

7/0.70

3/1.05

10/1.50

Overall strength rating 6.20

8.20

7.00

Rating Scale: 1 = Very weak; 10 = Very strong Rival 3 1/0.10

1/0.10

5/0.50

3/0.15

5/0.25

5/0.25

3/0.30

1/0.35

1/0.15

2.10

Rival 4 6/0.60

6/0.60

1/0.10

8/0.40

1/0.05

1/0.05

1/0.10

4/1.40

4/1.60

2.90

45