external environment(continued). strategic implications of the five competitive forces chapter...

EXTERNAL ENVIRONMENT(continued)

Strategic Implications of theFive Competitive Forces

Chapter Outline

• 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

• Competitive environment is ideal from a profit making standpoint when:

– Rivalry is moderate

– Entry barriers are high and no firm is likely toenter

– Good substitutes do not exist

– Suppliers and customers are in a weak bargaining position

Matching a company’s strategy to particular competitive pressures and competitive conditions has two aspects:

• Pursuing actions to shield the firm as much as possible from prevailing competitive pressures

• Initiating actions to produce sustainable competitive advantage- shifting competition in favour of company, add pressure on rivals and even defining the business model for the industry

Question 3: What Forces Are atWork to Change Industry Conditions?

All industries are characterised by trends and new developments that produce changes to require a strategic response.

• Driving forces are those that have the biggest influence on what kinds of changes will take place in the industry’s structure and competitive environment.

•Some driving forces originate in the company’s macroenvironment and some within the company’s competitive industry and competitive environment

Driving forces analysis has two aspects:

1) Identifying what the driving forces are

2) Assessing the impact they will have on the industry

•Growing use of the internet and emerging new internet technology applications -(new distribution channel, extend geographic reach, extending rivalry,find best suppliers, revamp internal operations)

•Increasing globalisation - open up foreign markets, locate where production costs lowest, reduction of trade barriers

•Changes in the long-term industry growth rate – affects industry supply and demand, entry and exit and character and strength of competition

•Changes in who buys the product and how they it – different distribution channels, broaden or narrow product lines, different sales approaches, changes in service offerings

Identifying an Industry’s Driving Forces

• Product Innovation – Strengthens market position ( e.g digital cameras, mobile phones, video games)

• Technological change and manufacturing process innovation – better products at lower cost, new capital requirements, distribution channels and logistics, experience and learning curve effects

•Marketing Innovation – spark buyer interest, increase demand, increase differentiation, lower unit costs e.g internet marketing, stock brokerage,

•Entry or exit of major firms – entry of foreign competitors, firms from another industry, exit of firms reduces rivals, increase dominance of leaders, cause rush to capture market share left behind


•Diffusion of technical how how across more companies and more countries – eroding the competitive advantage of firms possessing the know-how e.g journals, on site plant tours, word of mouth, employees, internet, licensing, partnerships, acquisitions•Changes in costs and efficiency – widening or shrinking differences in costs e.g email and fax v/s postage, electricity production using alternative sources•Growing buyer preferences for differentiated products or conversely more standardised product – e.g buyer preferences for motor vehicles increasingly diverseOr buyers prefer budget priced no frills products


• Degree of risk and uncertainty in industry’s future – e.g emerging industry uncertainty over market size, technological problems to be solved, which distribution channels and buyer segments to target.Emerging industries attract risk taking entrepreneurs.

Also uncertainties in entry into foreign markets

• Regulatory influences and government policy changes – e.g deregulations in banking, airlines, host government policies towards foreign firms, protectionism

•Changing societal concerns, attitudes and lifestyles – e.g anti smoking sentiment,healthy eating, safety concerns, physical fitness, pollution


Assessing the Impact of Driving Forces

1. Identify those forces likely to exert greatest influence over next 1 - 3 years .Usually no more than 3 - 4 factors qualify as real drivers of change.

2. Assess impact - What difference will the forces make?- Are driving forces causing demand for industry to increase or

decrease?- Are driving forces acting to make competition more or less

intense?- Will the driving forces lead to higher or lower industry

profitability?

Question 4: Which Companies are in Strongest / Weakest Positions?

•Companies - different prices/quality ranges,different distribution channels, different channels, different geographic coverage

• Enjoy different market positions•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

• Identify competitive characteristics that differentiate the firms in the industry.

• Plot the firms on a two variable map using pairs of differentiating characteristics.

• Assign firms that fall in the same strategic space to the same strategic group.

• Draw circles around each strategic group making circles proportional to the group’s share of total industry sales revenues.

Strategic Group Mapping

Question 5: What Strategic Moves Are Rivals Likely to Make Next?

A firm’s own best strategic moves are affected by

• Current strategies of competitors

• Future actions of competitors

Profiling key rivals involves gathering competitive intelligence about their

• Current strategies

• Most recent moves

• Resource strengths and weaknesses

• Announced plans

Table 3.3: Categorizing Objectivesand Strategies of Competitors

Competitive Scope

Strategic Intent

Market Share Objective

Competitive Position

Strategic Posture

Competitive Strategy

• Local• Be dominant

leader

• Aggressive expansion via acquisition & internal growth

• Getting stronger; on the move

• Mostly offensive

• Regional• Overtake

industry leader

• Well-entrenched

• Mostly defensive

• National• Be among

industry leaders

• Expansion via internal growth

• Stuck in the middle of the pack

• Combination of offensive & defensive

• Multicountry• Move into

top 10

• Expansion via acquisition

• Going after a different position

• Aggressive risk-taker

• Global• Move up a

notch in rankings

• Hold on to present share

• Struggling; losing ground

• Conservative follower

• Maintain current position

• Give up present share to achieve short-term profits

• Retrenching to a position that can be defended• Just survive

• Striving for low-cost leadership

• Focusing on market niche

• Pursuing differentiation based on

QualityServiceTechnology

superiorityBreadth of

product lineImage &

reputationMore value

for the money

Other attributes

• Maintain current position

• Just survive

• Aggressive risk-taker

• The thinking and leadership styles of their executives

Having such information to predict the strategic direction and likely moves of key competitors allows:

• Company to prepare defensive countermoves

•To craft company’s own strategy with confidence about what maneuvers to expect from rivals

•To exploit any openings that arise from competitors strategy missteps or strategy flaws

What Strategic Moves Are Rivals Likely to Make Next? (cont)

Keeping tabs on competitors’ strategy entails:

•Monitoring what rival is doing in the marketplace

•What its management is saying in press releases

•Information on the company’s website

•Presentations its management makes to analysts

•Public reports such as annual reports

•Articles in business media and reports by analysts

May also pick up information from rivals’ exhibits in trade shows, from rivals’ customers, suppliers and former employees ( be careful about the ethical and legal aspect )

Identifying Competitors’ Strategies and Resources Strengths and Weaknesses

Identifying Competitors’ Strategies and Resources Strengths and Weaknesses (cont)

In sizing up competitive strengths and weaknesses of competitors, have to make 3 assessments:

1. Which competitor has the best strategy? Which competitors appear to have flaws in their strategies or weak strategies?

2.Which competitors are poised to gain market share?And which ones seem destined to lose ground?

3.Which competitors are likely to rank among industry leaders five years from now? Do one or more up and coming competitors have strategies and resources capabilities to overtake the current industry leader?

Some leaders may be plagued with weaknesses that cause them to lose ground or lack resources and capabilities to remain leaders given superior strategies and capabilities of up and coming companies

In evaluating competitors, company strategists need to focus on why there is a potential for some rivals to do better or worse than other rivals

A competitor’s prospects are a function of its vulnerability to :•Driving forces

•Competitive pressures

•Whether its strategy has resulted in competitive advantage or disadvantage

•Whether its resources and capabilities are well suited for competing ahead

Identifying Competitors’ Strategies and Resources Strengths and Weaknesses (cont)

Clues about what a specific company is likely to undertake can be gleaned from:

•How it is faring in the market place

•The problems or weaknesses it needs to address

•How much pressure it is under to improve its financial performance

•Views, beliefs, announcements and leadership styles of the rivals executives

Content rivals are likely to maintain current strategy with minor fine-tuning

Rivals that are performing poorly will probably come up with fresh strategic moves

Ambitious rivals are strong candidates for launching strategic offensives, pursue new market opportunities or exploit vulnerabilities of weaker rivals

Predicting Competitors’ Next Moves

Predicting Competitors’ Next Moves (cont)

Other considerations in trying to predict what strategic moves rivals are likely to make:•Which rivals need to increase their sales and market share?What strategic options are they most likely to pursue?

•Which rivals have a strong incentive as well as resources to move to a different strategic position on the strategic group map?Which rivals are likely to pursue same basic strategy with minor adjustments?

•Which rivals are good candidates to be acquired?Which rivals may be looking and financially able to make an acquisition?

•Which rivals are likely to enter new geographic markets?

•Which rivals are strong candidates to expand their product offerings and enter new product segments?

An industry’s key success factors are those competitive factors that most affect industry members to prosper in the marketplace:

• Strategy elements

•Product attributes

•Product attributes

•Resources, competencies,competitive capabilities

•Market achievements

Key success factors (KSFs) make the difference between competitive success or failure

All firms in the industry must be competent at performing or achieving them

Question 6: What are the Key Factors for Future Competitive Success

Key Success Factors

How well a company’s offering, resources and capabilities measure up against an industry KSFs determines how financially and competitively successful the company will be

Identifying KSFs in the light of the prevailing and anticipated industry and competitive position is a top priority strategic consideration

Must separate the factors that are the most important from that are less important for competitive success

KSFs vary from industry to industry and even from time to time within the same industry as driving forces and competitive conditions change.

KSFs for Apparel Manufacturing Industry

KSFs for Tin and Aluminum Can Industry

• Fashion design -- to create buyer appeal

• Low-cost manufacturing efficiency -- to keep selling prices competitive

• Locating plants close to end-use customers -- to keep costs of shipping empty cans low

• Ability to market plant output within economical shipping distances

Key Success Factors (cont)

Distribution-related

Marketing-related

Skills-related

Organizational capability

Other types

Technology-related

Manufacturing-related

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

Table 3.4: Common Types ofKey Success Factors

I

An industry’s KSFs can be deduced from an analysis of the industry and competitive conditions

In addition answering 3 questions help to identify KSFs:• On what basis do buyers choose between the competing brands of sellers?What attributes of competitors’ product offerings are crucial?

•Given the nature of rivalry and competitive forces prevailing, what resources and competitive capabilities does company need to be successful?

•What weaknesses will put a company at a significant competitive disadvantage?

Usually only 3-5 factors are key for competitive success

Key Success Factors (cont)

A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!

Companies that excel on a particular KSF is likely to enjoy a stronger market position

Using the industry’s KSFs as a cornerstone for the company’s strategy and trying to gain a sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy approach

Question 7: Does the Outlook for the Industry present an Attractive Opportunity?

The final step in evaluating industry and competitive environment – use preceding analysis to see whether industry presents sufficiently attractive prospects for profitability and growth:•Industry growth potential

•Whether powerful competitive forces are squeezing industry profitability or competition appears to grow stronger or weaker

•Whether industry profitability will be favorably or unfavorably affected by prevailing driving forces

•Degrees of risk and uncertainty in industry’s future

•Whether industry as a whole confronts problems?Regulatory or environmental issues,stagnating buyer demand,industry overcapacity,increasing competition

Question 7: Does the Outlook for the Industry present an Attractive Opportunity? (cont)

•The company’s competitive position in the industry vis a vis rivals( leader, strong contender or weak)

•The company’s potential to capitalise on the vulnerabilities of weaker rivals

•Whether the company has sufficient competitive strengths to counteract6 the factors that make the industry unattractive

•Whether continued participation in the industry adds to the firm’s ability to be successful in other industries in which it has business interests


If industry overall profit prospects above average, industry environment attractive

If industry overall profit prospects below average, conditions unattractive

A particular industry is not equally attractive or unattractive to all industry participants and potential entrants

Industries attractive to insiders may be unattractive to outsiders given entry barriers, challenging current market leaders

Industries unattractive to weak competitors may be attractive to strong competitors


If company decides that industry is attractive – should invest to capture opportunities it sees and improve its long term competitive position

If a strong competitor finds industry relatively unattractive, it can elect to simply protect its position or look for opportunities I other industries

A competitively weak company in an unattractive industry may see its best option as finding a buyer, maybe a current rival to acquire its business

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