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1. SITATION ANALYSIS OUTLINE
Role of Situation Analysis in Strategy-Making
Methods of Industry & Competitive Analysis
Profiling Industry’s Dominant Economic Traits
Analyzing Industry’s Competitive Forces
Analyzing Drivers of Industry Change
Assessing Competitive Positions of Rivals
Predicting Competitive Moves of Rivals
Pinpointing Key Success Factors
Drawing Conclusions About Overall Industry
Attractiveness
Conducting an Industry & Competitive Analysis

2. WHY DO A SITUATION ANALYSIS?
Identify features in a firm’s external & internal
environment which frame its window of
STRATEGIC OPTIONS
OPPORTUNITIES
Focuses on two considerations:
EXTERNAL factors: MACRO environment
(industry & competitive conditions)
INTERNAL factors: MICRO environment
(firm’s internal situation & competitive position)
Objective

3. Figure 3-1: How Strategic Thinking and
Analysis Lead to Good Choices
Thinking Strategically
About Industry
and Competitive
Conditions
Thinking Strategically
About a Company’s
Own Situation
Identifying
Strategic Options
Open to the
Company
Choice of
The Best
Strategy

4. KEY QUESTIONS REGARDING
EXTERNAL ENVIRONMENT
1. Industry’s dominant economic traits
2. Competitive forces at work in industry &
strength
3. Drivers of change in industry
4. Firms in strongest/weakest competitive
positions
5. Competitive moves of rivals
6. Key factors determining competitive
success or failure in industry
7. Attractiveness of industry

5. IDENTIFYING AN INDUSTRY’S
DOMINANT ECONOMIC TRAITS
Market size & growth rate/stage in life cycle
Scope of competitive rivalry
Number of competitors & relative sizes
Prevalence of backward/forward integration
Entry/exit barriers
Nature & pace of technological change
Product & customer characteristics
Scale economies & experience curve effects
Capacity utilization & capital requirements
Industry profitability

6. EXPERIENCE CURVE EFFECTS
An experience curve exists when unit costs
decline as cumulative production volume
increases due to
Increased KNOWLEDGE about or
FAMILIARITY with the process
The bigger the experience curve effect, the
bigger the cost advantage of the firm with
Largest CUMULATIVE production volume

7. Figure 3-2: Comparison of Experience
Curve Effects
$1
$1 90
80
70
81
64
49
72.9
51.2
34.3
10% Cost
Reduction
20% Cost
Reduction
30% Cost
Reduction
1
Million
Units
2
Million
Units
4
Million
Units
8
Million
Units
CostperUnit

8. EXPERIENCE CURVE EFFECTS
When a strong learning/experience curve
effect causes unit costs to decline
substantially as cumulative production
volume builds, a strategy to become the
largest volume manufacturer can offer the
COMPETITIVE ADVANTAGE of being the
industry’s LOWEST-COST producer!
Basic Concept

9. ANALYSIS OF COMPETITIVE FORCES
To identify
Main SOURCES of competitive forces and
STRENGTH of these pressures
Objective
COMPETITIVE FORCES MATTER BECAUSE:
To be successful, strategy must be designed
to cope effectively with competitive pressures -
objective must be to build a strong, market
position based on competitive advantage!

10. Figure 3-3: The Five Forces Model of
Competition: A Key Analytical Tool
Substitute
Products
Rivalry
Among
Competing
Sellers
Potential
New
Entrants
Suppliers Buyers

11. THE FIVE COMPETITIVE FORCES
1. RIVALRY among competing sellers in
an industry
2. SUBSTITUTE PRODUCTS offered by
firms in OTHER industries
3. Potential ENTRY of new competitors
4. Bargaining power of SUPPLIERS
5. Bargaining power of BUYERS

12. PROCEDURE: ANALYZING THE FIVE
COMPETITIVE FORCES
Identify main sources of competitive pressures
Rivalry among competitors
Substitute products
Potential entry
Bargaining power of suppliers
Bargaining power of buyers
Assess strength of each competitive force
Strong? Moderate? Weak?
Scale of 1 - 5: 1 = weak; 5 = strong
Explain how each competitive force works & its
role in overall competitive picture

13. RIVALRY AMONG
COMPETING SELLERS
Usually the MOST POWERFUL of the five
competitive forces
Weapons of COMPETITIVE RIVALRY
Price
Quality
Performance features offered
Customer service
Warranties and guarantees
Advertising & special promotions
Dealer networks
Product innovation

14. PRINCIPLES OF
COMPETITIVE RIVALRY
Use of various competitive weapons by
rivals to out maneuver one another shapes
Rules of competition &
Requirements for competitive success
A powerful competitive strategy
launched by one firm INTENSIFIES
competitive pressures on rivals!

15. PRINCIPLE OF
COMPETITIVE MARKETS
Competitive jockeying among rival
firms is a dynamic process as
Firms initiate new offensive &
defensive moves
Emphasis swings from one mix of
competitive weapons to another

16. WHAT CAUSES RIVALRY
TO BE STRONGER?
Lots of firms, equal in size and capability, exit
Demand for product growing slowly
Industry conditions tempt firms to use competitive
weapons to boost volume
Switching costs incurred by customers are low
A firm initiates moves to bolster its 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, & countries of origin

17. COMPETITIVE FORCE
OF POTENTIAL ENTRY
New entrants boost competitive pressures
By bringing new production capacity into play
Through actions to build market share
Seriousness of threat of entry depends on
BARRIERS to entry
Expected REACTION of existing firms to entry
Barriers to entry exist WHEN
It is difficult for newcomers to enter market
A new entrant’s small sales volume puts it a
price/cost disadvantage

18. COMMON BARRIERS TO ENTRY
Economies of scale
Inability to gain access to specialized
technology
Existence of learning/experience curve effects
Brand preferences and customer loyalty
Capital requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies
Tariffs & international trade restrictions

19. REACTION OF EXISTING FIRMS
CAN BE AN ENTRY BARRIER
WHEN existing firms
Indicate they’ll aggressively defend their
position
Have substantial resources to wage defense
Can use leverage with customers to keep their
business
THEN potential entrants likely to be discouraged
by
Prospects of a costly struggle
Strong threat of competitive retaliation
WHICH makes entry barriers HIGHER

20. WHEN IS POTENTIAL ENTRY A
STRONG COMPETITIVE FORCE?
Competitive threat of outsiders entering
a market is stronger when
Entry barriers are low
Incumbent firms do not vigorously
fight newcomer
Newcomer can expect to earn
attractive profits

21. COMPETITIVE FORCE OF
SUBSTITUTE PRODUCTS
SUBSTITUTES matter when products of firms in
another industry enter the market picture
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic Containers vs. Glass vs. Tin vs. Aluminum
Aspirin vs. Other Types of Pain Relievers
Concept
Examples

22. WHY SUBSTITUTE
PRODUCTS MATTER
Competitively priced substitutes can place
CEILING on PRICES industry can charge for
its product
Price ceiling can place LID on PROFITS
industry members can earn
Availability of substitutes invites customers to
make QUALITY & PERFORMANCE
comparisons as well as PRICE comparisons
The lower the SWITCHING COSTS, easier it is
for customers to shift to substitute products

23. INDICATORS OF STRENGTH
OF SUBSTITUTE PRODUCTS
Growth rate of sales of substitutes
Market inroads of substitutes
Plan of manufacturers of substitutes to
expand capacity
Profits of firms producing substitutes

24. PRINCIPLE OF
COMPETITIVE MARKETS
Competitive threat of substitute
products is strong when
Prices of substitutes are viewed
attractive by buyers
Buyers’ costs of switching to
substitutes are low
Buyers view substitutes as having
equal or better performance features

25. COMPETITIVE FORCE OF SUPPLIERS
Suppliers are a strong competitive force whenwhen
Item makes up large portion of costs of product,
is crucial to production process, and/or
significantly affects product quality
It is costly for buyers to switch suppliers
They have good reputations & growing demand
for their product
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

26. PRINCIPLE OF
COMPETITIVE MARKETS
Whether suppliers are a strong or weak
competitive force depends on if they have
bargaining power to put rivals at a
competitive disadvantage based on:
Prices they can command
Quality & performance of items supplied
Reliability of deliveries
Other terms & conditions of supply

27. COMPETITIVE FORCE OF BUYERS
Buyers are a strong competitive force when
They are large & purchase a sizable percentage
of industry’s product
They buy in volume quantities
They incur low costs in switching to substitutes
They have flexibility to purchase from several
sellers
Selling industry’s product is standardized
They can integrate backward
Product being purchased does NOT save buyer
money or has low value to buyer

28. PRINCIPLE OF
COMPETITIVE MARKETS
Buyers become a stronger competitive
force the more they can exercise
bargaining leverage over
Price
Quality
Service
Other terms & conditions of sale

29. STRATEGIC IMPLICATIONS OF THE
FIVE COMPETITIVE FORCES
Competitive environment is unattractive
when:
Rivalry is very strong
Entry barriers are low
Competition from substitutes is
strong
Suppliers & customers have
considerable bargaining power

30. STRATEGIC IMPLICATIONS OF THE
FIVE COMPETITIVE FORCES
Competitive environment is ideal when:
Rivalry is only moderate
Entry barriers are relatively high
There are no good substitutes
Suppliers & customers are in a weak
bargaining position
The weaker the competitive forces, the
GREATER an industry’s PROFITS!
Principle

31. COPING WITH THE
FIVE COMPETITIVE FORCES
A company whose strategy and market
position provide a GOOD DEFENSE
against the five forces can earn above-
average profits even when some or all
of the five forces are strong!
Concept

32. COPING WITH THE
FIVE COMPETITIVE FORCES
Objective is to craft a strategy that will
Insulate company from competitive
forces
Influence industry’s competitive rules in
company’s favor
Provide a strong position from which
“to play the game” of competition
Help create sustainable competitive
advantage

33. IDENTIFYING & ASSESSING
DRIVING FORCES
Industry conditions change because
EXTERNAL FORCES are DRIVING
industry participants to alter their actions
DRIVING FORCES are the MAJOR
UNDERLYING CAUSES of changing
industry & competitive conditions
Concept

34. IDENTIFYING & ASSESSING
DRIVING FORCES
Role of driving forces analysis in
strategy-making
Indicates EXTERNAL FACTORS
likely to have greatest impact on a firm
over next 1 - 3 years
Must assess difference driving forces
will make to be able to craft a strategy
responsive to emerging conditions

35. DRIVING FORCES ANALYSIS
Analysis of driving forces has two steps
1. Identifying RELEVANT driving forces
2. ASSESSING IMPACT they will have
Task of driving forces analysis is:
SEPARATE MAJOR causes of industry
change from MINOR ones
IDENTIFY the THREE or FOUR driving
forces likely to have greatest impact on a
firm over next 1 - 3 years

36. TYPES OF DRIVING FORCES
Changes in long-term industry growth rate
Changes in who buys the product & how
they use it
Product innovation
Technological change/process innovation
Marketing innovation
Entry or exit of major firms
Diffusion of technical knowledge

37. TYPES OF DRIVING FORCES
Increasing globalization of industry
Changes in cost and efficiency
Shifting from standardized to differentiated
products (or vice versa)
Regulatory influences & government policy
changes
Changing societal concerns, attitudes, &
lifestyles
Changes in degree of uncertainty & risk

38. ENVIRONMENTAL SCANNING
A broad-ranging effort to monitor & interpret social,
political, economic, ecological, & technological
events in an effort to spot budding trends &
conditions that could eventually impact industry
Raise consciousness of managers about potential
developments that could
Have important impact on industry conditions
Pose new opportunities & threats
Definition
Purpose

39. ASSESSING COMPETITIVE
POSITIONS: STRATEGIC GROUPS
A STRATEGIC GROUP consists of
those rival firms with similar
competitive approaches & positions in
an industry
A STRATEGIC GROUP MAP displays
different competitive positions that
rival firms occupy

40. STRATEGIC GROUP MAPS
Firms in same strategic group have one 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

41. COMPETITOR ANALYSIS
A firm’s strategic moves are affected by
Current strategies of competitors
Actions competitors are likely to take
next
Profile of key competitors involves studying:
Current position in industry
Strategic objectives & recent actions
Basic competitive approaches

42. COMPETITOR ANALYSIS
Successful strategists take great pains in
scouting competitors by
Understanding their strategies
Watching their actions
Evaluating their vulnerability to driving
forces & competitive pressures
Sizing up their strengths & weaknesses
Trying to anticipate rivals’ next moves

43. PREDICTING MOVES
OF RIVAL COMPETITORS
Predicting rivals’ next moves involves
Analyzing current competitive positions
Examining public pronouncements about
what it will take to be successful in industry
Gathering information from grapevine about
current activities & potential changes
Studying past actions & leadership
Determining who has flexibility to make
major strategic changes & who is locked into
pursuing same basic strategy

44. PRINCIPLE
Managers who fail to study
competitors closely risk being
blindsided by “surprise” actions
on the part of competitors!

45. PINPOINTING INDUSTRY
KEY SUCCESS FACTORS
KEY SUCCESS FACTORS (KSFs) spell
difference between
Profit & loss
Competitive success or failure
A KEY SUCCESS FACTOR can be
Specific skill or talent
Competitive capability
Something a firm must do to satisfy
customers
Basic Concept

46. PINPOINTING INDUSTRY KEY
SUCCESS FACTORS
Identifying KSFs is top priority as they
are good cornerstones of a firm’s strategy
Winning COMPETITIVE ADVANTAGE
often hinges on being distinctively
better than rivals at one or more of the
KSFs
KSFs consist of the 3 - 5 really major
determinants of financial & competitive
success in industry

47. EXAMPLE: INDUSTRY
KEY SUCCESS FACTORS
Utilization of brewing capacity - to keep
manufacturing costs low
Developing a strong network of wholesale
distributors - to gain access to retail outlets
Clever advertising - to induce beer drinkers
to buy a particular brand
Beer/Brewing Industry

48. EXAMPLE: INDUSTRY
KEY SUCCESS FACTORS
Fashion design - to create buyer appeal
Low-cost manufacturing efficiency - to
keep selling prices competitive
Apparel Manufacturing Industry

49. EXAMPLE: INDUSTRY
KEY SUCCESS FACTORS
Locating plants close to end-use
customers - to keep costs of shipping
empty cans low
Ability to market plant output within
economical shipping distances
Tin & Aluminum Can Industry

50. STRATEGIC MANAGEMENT PRINCIPLE
A sound strategy
incorporates industry
key success factors!

51. CONCLUSION: OVERALL
INDUSTRY ATTRACTIVENESS
To review overall situation & develop conclusions
about relative attractiveness or unattractiveness
of the industry, both near- and long-term
A firm uniquely well-suited in an otherwise
unattractive industry can, under certain
circumstances, still earn unusually good profits
Objective
Principle

52. ASSESSING OVERALL
INDUSTRY ATTRACTIVENESS
Industry’s market size & growth potential
Whether industry will be favorably or unfavorably
impacted by driving forces
Potential for entry/exit of major firms
Stability/dependability of demand
Will competitive forces become stronger or weaker
Severity of problems facing industry
Degree of risk & uncertainty in industry’s future
Whether competitive conditions are conducive to
rising/falling industry profitability

53. CONDUCTING AN INDUSTRY &
COMPETITIVE SITUATION ANALYSIS
Two things to consider:
1. Task of analyzing a firm’s
EXTERNAL situation cannot be
reduced to a formula-like exercise
2. Sweeping industry & competitive
analyses need to done every 1 to 3
years