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- 1. 1 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright INDUSTRY AND COMPETITIVE ANALYSIS CHAPTER 3 Screen graphics created by: Jana F. Kuzmicki, PhD, Mississippi University for Women
- 2. 2 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright What Is Situation Analysis? Two considerations Company’s external or macro-environment Industry and competitive conditions Company’s internal or micro-environment Competencies, capabilities, resource strengths and weaknesses, and competitiveness
- 3. 3 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Figure 3.1: The Components of a Company’s Macro-Environment MACROENVIRONMENT The Economy at Large COMPANY Suppliers Substitutes Buyer s New Entrants Rival Firms IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT
- 4. 5 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Key Considerations Regarding the Industry and Competitive Environment Industry’s dominant economic traits Competitive forces and strength of each force Drivers of change in the industry Competitor analysis Key success factors Conclusions: Industry attractiveness
- 5. 6 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Question 1: What are the Industry’s Dominant Economic Traits? Market size and growth rate Scope of competitive rivalry Number of competitors and their relative sizes Prevalence of backward/forward integration Entry/exit barriers Nature and pace of technological change Product and customer characteristics Scale economies and experience curve effects Capacity utilization and resource requirements Industry profitability
- 6. 7 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright The Experience Curve Effect An experience curve exists when a company’s unit costs decline as its cumulative production volume increases because of Accumulating production know-how Growing mastery of the technology The bigger the experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
- 7. 8 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Figure 3-3: Cost Advantages of Different Experience Curve Effects $1 $1 .90 .80 .70 .81 .64 .49 .729 .512 .343 10% Cost Reduction 20% Cost Reduction 30% Cost Reduction 1 Million Units 2 Million Units 4 Million Units 8 Million Units Cost per Unit
- 8. 10 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Figure 3-4: Five Forces Model of Competition Substitute Products (of firms in other industries) Suppliers of Key Inputs Buyers Potential New Entrants Rivalry Among Competing Sellers
- 9. 11 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Analyzing the Five Competitive Forces: How to Do It Assess strength of each of the five competitive forces (Strong? Moderate? Weak? ) Rivalry among competitors Competition from substitute products Competitive threat from potential entrants Bargaining power of suppliers and supplier-seller collaboration Bargaining power of buyers and buyer-seller collaboration Explain how each force acts to create competitive pressure—What are the factors that cause each force to be strong or weak? Decide whether overall competition (the combined effect of all five competitive forces) is brutal, fierce, strong, normal/moderate, or weak
- 10. 12 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Factors That Affect the Strength of Rivalry Rivalry is generally stronger when: •Rivals are active in making fresh moves to increase sales and market share Buyer demand is growing slowly The number of rivals ranges from at least 5 to upwards of 12 or more Rivals are of roughly equal size and capability Buyer costs to switch brands are low One or more rivals is dissatisfied with their current position and market share and make aggressive moves to improve their market prospects When rivals have diverse strategies and objectives and are located in different countries When one or two rivals have powerful strategies and other rivals are scrambling to stay in the game Rivalry is generally weaker when: Rivals move only infrequently or in a non- aggressive manner to draw sales and market share away from rivals Buyer demand is growing rapidly Buyer costs to switch brands are high The “Weapons” of Competitive Rivalry •Lower prices More appealing features Better product performance Higher quality Strong brand image and appeal Better customer service capabilities Wider product selection Bigger/better dealer network Stronger product innovation capabilities Longer warranties Higher levels of advertising Rivalry among Competing Sellers Efforts of rivals to gain better market position, higher sales and market share, and competitive advantage
- 11. 13 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Common Barriers to Entry Sizable economies of scale Inability to gain access to specialized technology Existence of strong learning/experience curve effects Strong brand preferences and customer loyalty Large capital requirements and/or other specialized resource requirements Cost disadvantages independent of size Difficulties in gaining access to distribution channels Regulatory policies, tariffs, trade restrictions
- 12. 14 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Competitive Pressures From Buyers and Seller-Buyer Collaboration Whether seller-buyer relationships represent a weak or strong competitive force depends on Whether buyers have sufficient bargaining leverage to influence terms of sale in their favor Extent and competitive importance of collaborative partnerships between one or more sellers and their customers
- 13. 15 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright 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 large 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
- 14. 16 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Factors Affecting Buyer Bargaining Power Buyers Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration Rivalry Among Competing Sellers Buyer bargaining power is stronger when Buyer switching costs to competing brands are low Buyers are large and purchase in large quantities Quantity and quality of information available to buyers improves Some buyers are a threat to integrate backward into the business of sellers Buyer demand is weak or declining Buyer bargaining power is weaker when Buyer switching costs to competing brands are high There is a surge in buyer demand Seller-buyer collaboration or partnering provides attractive win-win opportunities
- 15. 17 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Strategic Implications of the Five Competitive Forces Competitive environment is unattractive from the standpoint of earning good profits when: Rivalry is strong Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power
- 16. 18 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Competitive environment is ideal 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 Strategic Implications of the Five Competitive Forces
- 17. 19 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Common Types of Driving Forces Internet and e-commerce opportunities Increasing globalization of industry 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
- 18. 20 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Entry or exit of major firms Diffusion of technical knowledge Changes in cost and efficiency Market shift from standardized to differentiated products (or vice versa) Regulatory policies / government legislation Changing societal concerns, attitudes, and lifestyles Changes in degree of uncertainty and risk Common Types of Driving Forces
- 19. 21 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright 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
- 20. 22 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Procedure for 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
- 21. 23 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Example: Strategic Group Map of the Video Game Industry Types of Video Game Suppliers/Distribution Channels Overall Cost to Players of Video Games Low (Coin-operated equipment) Medium (Console players cost $100-$300) High (Use PC) Arcades Home PCs Video game consoles Online/Internet Sony, Sega, Nintendo, several others Arcade operators Publishers of games on CD-ROMs MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN
- 22. 24 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Interpreting Strategic Group Maps Driving forces and competitive pressures often favor some strategic groups and hurt others Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be
- 23. 25 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Identifying Industry Key Success Factors Answers to three questions pinpoint KSFs On what basis do customers choose between competing brands of sellers? What resources and competitive capabilities does a seller need to have to be competitively successful? What does it take for sellers to achieve a sustainable competitive advantage? KSFs consist of the 3 - 5 really major determinants of financial and competitive success in an industry