Transcript Chapter 2 Students.ppt

Chapter 2
External Analysis
It’s not recognizing that change
will occur that is the problem,
it’s figuring out:
what will happen?
how it will affect us?
what to do about it?
Therefore, forecasting is necessary to
predict direction and the effect of
BROAD/REMOTE/MACROENVIRONMENT
The Economy
at Large
Suppliers
Rival
Firms
Substitutes
COMPANY
New
Entrants

IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT
Buyer
s
Broad/Remote/
Macroenvironment Segments
Macroeconomic
Demographic
Political/Legal
Technological
Social
Firms CAN NOT
Directly Control Them
?
Question 2: What Are the
Industry’s Dominant Economic Traits?

Market size and growth rate

Scope of competitive rivalry
Number of competitors/buyers and their relative sizes
Types/Access to Distribution channels
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Prevalence of backward/forward integration
Entry/exit barriers
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Nature and pace of technological change
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Product and customer characteristics (same/differentiated)
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Scale economies and experience curve effects
Capacity utilization and resource requirements
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Industry profitability
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Porter’s Five Forces
Competitive Rivalry
Power of Buyers
Power of Suppliers
Potential Entrants
Substitute Products
Each of these forces affect costs/prices,
therefore, profitability
Substitute
Products
(of firms in
other industries)
Rivalry
Among
Competing
Sellers
Suppliers of
Key Inputs
Potential
New
Entrants
Complementors
Buyers
Price
Porter’s 5-forces is all about
margins - What factors
increase/decrease margins, i.e.,
profitability.
Profits
Costs
{
When industry structural variables are weak…...
Prices can be kept high
Profits can soar
Costs can be kept low
{
When industry structural variables are strong…...
Prices will be pushed down
Profits shrink
Costs will rise
{
Potential Entrants
Firms enter when industries are attractive,
unless they find themselves at an
immediate disadvantage relative to
incumbents.
Firms can create “barriers to enter”
Barriers of entry are desirable for
entrenched firms
Barriers to Entry
Threat of Substitutes
Product/service which fulfills similar need
Price cap
3 Questions
1) Are they available?
2) Price-performance relationship?
3) Can we switch?
Power of Buyers
Who are the Buyers?
Can they force:
lower prices, higher quality and service, or play
competitors against one another?
Based on two issues
1 Price sensitivity
• purchase is a large portion of costs
• no differentiation
• if they exist in a competitive, low profit industry
Power of Buyers (cont.)
2 Whether buyers can bargain down
prices
•
•
•
•
few buyers
buyers are knowledgeable
low switching costs
backward integration is a valid threat
Competitive Force of
Suppliers
Who are the suppliers?
Suppliers are a strong competitive force
when:
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Only a few suppliers exist
Few substitutes
Buyers not important customers
Suppliers provide a product crucial to
production process, and/or significantly affects
product quality
– It is costly for buyers to switch suppliers
– Forward integration a credible threat
– They can supply a component cheaper than the
Rivalry and Profitability
Industry profitability is a collective good.
Collective good is served by coordination
Are there industries were pricing is
coordinated?
Incentive to violate
Usually the most powerful of the five forces
How actively and aggressively are rivals
employing competitive weapons in jockeying
for a stronger market position and increasing
sales?
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–
–
–
–
–
Is price competition vigorous?
Active efforts to improve quality?
Are rivals racing to offer better
performance features? better
customer service?
Lots of advertising/sales promotions?
Active efforts to build a stronger
dealer network?
Active product innovation?
Active use of other weapons of rivalry?
Rivalry – What drives it?
Porter’s..in conclusion
Determines the attractiveness of industry
Can we influence any of these structural
attributes?
Static model & Hypercompetition
– If the pace of transformation is rapid, if entry rapidly undermines
the market power of dominant firms, if innovation speedily
transforms industry structure by changing process technology,
creating new substitutes, and by shifting the basis on which firms
compete, then there is little merit in using industry structure as a
basis for analyzing competition and profit.
Porter’s Five Forces - Two
Examples
Campus Bookstore
Rivals? Entry Barriers? Substitutes Supplier Power Buyer Power Profitable?
PCs
Rivals Entry Barriers Substitutes Supplier Power Buyer Power Profitable ?
Industries and Segments
What is a segment?
Different segments…..
posses different combinations of 5-forces
therefore:
reward different strategies
possess different levels of profitability
What Forces Are at
Work to Change Industry Conditions?
Industries change because
forces are driving industry
participants to alter their
actions
Driving forces are the major
underlying causes of
changing industry and
competitive conditions
Common Types of Driving
Forces
Changes in long-term industry growth rate
Changes in who buys the product and how they
use it
Product innovation
Technological change/process innovation
Marketing innovation
Entry or exit of major firms
Diffusion of technical knowledge
Common Types of Driving
Forces
Increasing globalization of industry
Changes in cost and efficiency
Market shift from standardized to differentiated
products (or vice versa)
New regulatory policies and/or government
legislation
Changing societal concerns, attitudes, and
lifestyles
Changes in degree of uncertainty and risk
Which Companies are in Strongest /
Weakest Positions?
Strategic group mapping
A strategic group consists of those rivals with
similar competitive approaches in an industry
Price
Cartier
Tiffany
National Jewelry Retailers
Nordstroms
Sachs
Jerrods
Marks & Morgan
Zales
Kay
Pawn Shop
Chain-by-the-Foot Carts
Burdines
Dillards
Sears
JCP
Target
WalMart
Kmart
Breadth of Product Line
What strategic moves are rivals likely to
make? - Competitive Analysis
Important in concentrated industries
Benefits
– forecast future actions, predict reactions
– can we influence rivals’ behavior?
Four Steps of CA
Identify their strategy
Identify the objectives
Identify their assumptions
Identity their capabilities
Strategy
Objectives
Assumptions
Capabilities
Strategic
Action
What are the Key Success Factors?
KSFs are product attributes,
competencies, competitive capabilities,
and market achievements with the
greatest direct bearing on profitability
opportunities for competitive advantage
Example: KSFs for Beer
Industry
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
Identifying Key Success Factors
(KSFs) - vary by segment
Automotive Industry
Is the industry attractive?
Growth?
Five forces?
Driving forces?
Well-positioned?
Capitalize on rivals’ vulnerabilities?
Can it defend itself?
Do our capabilities match KSFs?