Understanding the Factors that Determine a Companys Situation

Diagnosing a companys situation has two facets

Assessing the companys external or macro-environment

Industry and competitive conditions

Forces acting to reshape this environment Assessing the companys internal or micro-environment Market position and competitiveness Competencies, capabilities, resource strengths and weaknesses, and competitiveness

Key Questions Regarding the Industry and Competitive Environment

What are the industrys dominant economic traits?

How strong are competitive forces?

What market positions do rivals occupy? What moves will they make next?

What forces are driving change in the industry? What are the key factors for competitive success? How attractive is the industry from a profit perspective?

Porters 5 Competitive Forces

Competition in an industry, and thus potential profit & attractiveness, is a composite of,
1. Current sellers competing in the market
Typically, the strongest force

2. Threat of new competitors market entry

Consider barriers to entry and expected response of current competitors

3. Substitute products stealing market share

Consider price attractiveness, quality comparison by buyers, and relative ease of substituting

5 Forces, (cont)
4. Competitive pressures resulting from supplier---seller relationships
Consider supplier power and potential collaborative relationships

5. Competitive pressures resulting from seller--- buyer relationships

Remember the unit of analysis is firm-level buying Consider volume buying, switching costs, and potential backward integration threat

General rule: greater collective forces means less collective profitability of industry firms & lower industry attractiveness

The Five Forces Model of Competition

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 pressureWhat 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

Strategic Implications of the Five Competitive Forces

Competitive environment is unattractive from the standpoint of earning good profits when Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have

considerable bargaining power

Strategic Implications of the Five Competitive Forces

Competitive environment is worth considering 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

Analyzing Driving Forces: Three Key Steps

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

STEP 2: Assess impact

Are the driving forces acting to cause market demand for product to increase or decrease? Are the driving forces acting to make competition more or less intense? Will the driving forces lead to higher or lower industry profitability?

STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces

Common Types of Driving Forces

Emerging new Internet capabilities and applications

Increasing globalization of industry [trade barriers, labor]

Changes in long-term industry growth rate [SUVs, CDs] Changes in who buys the product and how they use it [iPods, cell phones] Product innovation [video games, Rx]

Technological change/process innovation [VOIP, steel]

Marketing innovation [pop-ups, cell phone ads]

Common Types of Driving Forces (cont)

Entry or exit of major firms [Google in China]

Diffusion of technical knowledge [tech transfer]

Changes in cost and efficiency [hybrids] Consumer preferences shift from standardized to differentiated products (or vice versa) [alcohol & texts; netbooks] Changes in degree of uncertainty and risk [online auction] Regulatory policies / government legislation [unions, Do Not Call registry] Changing societal concerns, attitudes, and lifestyles [going green, Baby Boomer products]

What Market Positions Do Rivals Occupy?

One technique to reveal different competitive positions of industry rivals is strategic group mapping

A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions

Example: Strategic Group Map of Selected Retail Chains

What Are the Key Factors for Competitive Success?

KSFs are those competitive factors most affecting every industry members ability to prosper
KSFs concern Specific strategy elements Product attributes Resources Competencies Competitive capabilities that a company needs to be competitively successful

KSFs are attributes that spell the difference between Profit and loss Competitive success or failure