 Course Material used from:

 Competitive Strategy by Michael E. Porter

 Strategic Management by Strickland & Thomson
 Strategic Management by Fred R. David
 Strategic Management by Pearce & Robinson

Salah uddin CBM 1

1. Situation Analyses
2. Company’s External Environment: PESTEL Analysis
3. Methods of Industry & Competitive Analysis
4. Porter’s Five Forces Model
5. Strategic Implications of Five Forces

Salah uddin CBM 2

WHY DO A SITUATION ANALYSIS?
To identify features in a firm’s external & internal
environment which impact its:
 STRATEGIC OPTIONS
 OPPORTUNITIES
 Focuses on:
o EXTERNAL factors: MACRO environment (industry & competitive
conditions)
o INTERNAL factors: MICRO environment (firm’s internal situation
& competitive position)

Salah uddin CBM 3

 A business environmental scan, which analyzes the external
macro environment (big picture) in which a business operates.
These are often factors which are beyond the control or
influence of a business,
business however are important to be aware of
when doing product development, business or strategy
planning:

 POLITICAL
 ECONOMIC
 SOCIAL
 TECHNOLOGICAL
 ENVIRONMENTAL
 LEGAL

Salah uddin CBM 4

 Legal and regulatory parameters within which firms must
operate
 Political constraints are placed on firms through anti-trust
laws, tax programs, minimum wage legislation, etc.
aimed at protecting employees, the consumers, the
general public & environment
 Such laws mostly being restrictive limit the potential
profits of firms
 Some political actions are designed to benefit and protect
firms e.g. patent laws, government subsidies, product
research grants
 E.g: Microsoft’s bad experience in China & Pakistan due to
lack of anti- piracy laws. US government’s war against terror
created enormous investments in Aviation related technology
Salah uddin CBM 5
 Nature & direction of economy in which a firm operates
 General availability of credit, level of disposable income,
income
propensity to spend, prime interest rates,
rates inflation rates,
rates
trends in growth of GDP…..all
GDP these factors should be
monitored
 Emergence of new international power brokers viz. EEC,
OPEC and coalition of developing countries
 E.g: EEC members eliminated quotas and established
tariff-free trade area for industrial products among its
members; this economic cooperation has helped
members to compete more effectively in non-EEC
markets

Salah uddin CBM 6

 Beliefs, values, opinions and lifestyles
 With change in social attitudes demand changes for
various types of clothing, leisure activities etc.
 Social forces are dynamic with constant change resulting
from people to satisfy their desires and needs by
adapting to environmental factors
 Entry of females into labor market has created or
expanded the demand for products and services
necessitated by their absence from home……microwave
ovens, day care centers, convenience foods etc.
 Accelerated interest of employees in quality of life
issues….e.g.
issues demand for flexible hours, five day week,
vacation plans and opportunities for advanced training
Salah uddin CBM 7
 Change in mean age e.g. in USA it changed form 27.9
years in 1970 to 34.9 in 2000; unfavorable impact on
producers of youth-oriented goods
 Sharp increase in demands made by senior citizens…e.g.
citizens
Bank Al Habib’s Senior Citizen Account, Senior Citizen
fare by PIA
 Concern for individual’s health…social
health concern about
obesity in USA has forced McDonalds to consider
changing strategy to market new healthier products
 Cannot be forecasted accurately,
accurately but informed estimates
of such social changes can help a strategizing firm in its
attempts to prosper

Salah uddin CBM 8

 To avoid obsolescence and promote innovation a firm
must be aware of technological changes
 Possibilities for new products or improvement in existing
products through creative technological adaptations
 Technological breakthrough can have a sudden and
dramatic effect …may create new markets and products
or shorten the anticipated life of a manufacturing facility
 Technological forecasting:
forecasting attempt to foresee
advancements and estimate their impact on a firm’s
operations….can help protect and improve the
profitability e.g. Advancement in photo-copying
technology was a key to Xerox’s success but caused
major difficulties for carbon paper manufacturers

Salah uddin CBM 9

 Reciprocal relationship between business and ecology…
ecology
relationship between human beings and other living
things, air, soil, and water that support them
 Pollution concerns leading to global warming,
warming loss of
habitat and biodiversity: Earth’s life forms depend on a
well functioning ecosystem e.g. advances in disease
treatment attributed to substance found in plants. As
species become extinct’ life support system is irreparably
harmed. E.g. earth’s primary tropical forests could be
destroyed in five decades
 Coal burning factories produce acid rain which can
destroy aquatic and plant life

Salah uddin CBM 10

 Industrial toxic wastes are dumped into waterways
causing water pollution and disposed in underground
sites causing land pollution
 Businesses are being asked to incorporate ecological
concerns in their strategy so as to eliminate by-products
of their current manufacturing processes
 Examples: 3M cut its pollution by half by reformulating
products and processes;
processes automobile industry is required
to install expensive emission controls, Pepsi moving to
biodegradable plastic soft drink bottles
 Environmental legislation impacts corporate strategies
worldwide, also an opportunity to create new
environment friendly products

Salah uddin CBM 11

 Industry’s dominant economic traits ?
 Competitive forces at work in industry & strength ?
 Drivers of change in industry ?
 Firms in strongest/weakest competitive positions ?
 Competitive moves of rivals ?
 Factors determining competitive success or failure in
industry ?
 Attractiveness of industry ?
Answers to these questions help understand a firm’s
surrounding environment & form the basis for matching
strategy to changing industry conditions and
competitive realities
Salah uddin CBM 12
An industry’s economic characteristics impose
boundaries on the kinds of strategic approaches a
company can pursue:

 Market size & growth rate/stage in life cycle

 Scope of competitive rivalry
 Number of competitors & relative sizes
 Entry/exit barriers
 Nature & pace of technological change
 Product & customer characteristics
 Scale economies & experience curve effects
 Capacity utilization & capital requirements
 Industry profitability
Salah uddin CBM 13
 An experience curve exists when unit costs decline
as cumulative production volume increases due to
o Increased KNOWLEDGE about or
o FAMILIARITY with the process

 The bigger the experience curve effect, the bigger

the cost advantage of the firm with
o Largest CUMULATIVE production volume

Salah uddin CBM 14

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!

Salah uddin CBM 15

Objective: to identify
 Main SOURCES of competitive forces and
 STRENGTH of these pressures

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.

CORPORATE STRATEGY should meet the opportunities &

threats that exist in the external environment
Salah uddin CBM 16
 POTENTIAL
ENTRANTS

THREAT OF NEW ENTRANTS

BARGAINING
POWER OF SUPPLIERS

BARGAINING
POWER OF
INDUSTRY BUYERS
SUPPLIERS BUYERS
COMPETITORS

RIVALRY

THREAT OF SUBSTITUTE
PRODUCTS OR SERVICES

SUBSTITUTES

Salah uddin CBM 17

Salah uddin CBM 18
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

These forces determine the intensity of competition &
hence the profitability &, therefore , the attractiveness of a
industry.
Salah uddin CBM 19
An industry is likely to be profitable if it has:

 low rivalry
 High barriers to entry
 Many buyers
 No threats of substitution
 Many small & non-critical suppliers

Salah uddin CBM 20

 In order to increase profitability, an organization might try to:
 Reduce the level of rivalry e.g. by only chasing a particular
market segment or through gaining geographical advantage
viz. Wal-Mart going to China / India
 Prevent new entrants by increasing the cost of entry e.g.
Making customers dependent on proprietary technology viz.
Microsoft
 Reduce the bargaining power of your customers e.g. by
locking in long term contracts
 Reduce the bargaining power of your suppliers e.g. by
encouraging more suppliers to start-up in the industry or e.g.
Southwest Airlines switching to smaller airports
 Prevent customers switching to substitutes

Salah uddin CBM 21

 MOST POWERFUL of the five competitive forces
 COMPETITIVE RIVALRY results from:
 Price
 Quality
 Performance features offered
 Customer service
 Warranties and guarantees
 Advertising & special promotions
 Dealer networks
 Product innovation
Salah uddin CBM 22
 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!

Salah uddin CBM 23

WHAT CAUSES RIVALRY TO BE STRONGER?
 Lots of firms, equal in size and capability
 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, and resources

Salah uddin CBM 24

 In an industry where rivalry is low, there is little pressure
on organizations to provide better prices to their
customers. This creates temptation for collusion to keep
prices high. E.g. OPEC which keeps prices high.

 Many countries have legislation and enforcement

mechanisms that makes it illegal to collude.

Salah uddin CBM 25

 New entrants boost competitive pressures & affect
profitability and viability of the industry
 By bringing new production capacity into play
 Through actions to build market share, by sacrificing
profit margins
 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

Salah uddin CBM 26

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
 Access to distribution channels
 Regulatory policies
 Tariffs & international trade restrictions

Salah uddin CBM 27

 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

Salah uddin CBM 28

 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

Salah uddin CBM 29

 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

Salah uddin CBM 30

 Competitively priced substitutes can place CEILING on
PRICES
 Price ceiling can cap the 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

Salah uddin CBM 31

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

Salah uddin CBM 32

 Competitive threat of substitute products is strong
when:

 Prices of substitutes are considered attractive by buyers

 Buyers’ costs of switching to substitutes are low
 Buyers view substitutes as having equal or better
performance features

Salah uddin CBM 33

Suppliers are a strong competitive force when
 Item supplied 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

Salah uddin CBM 34

 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

Salah uddin CBM 35

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
 Product being purchased does NOT save buyer
money or has low value to buyer

Salah uddin CBM 36

 Buyers become a stronger competitive force the more
they can exercise bargaining leverage over

 Price
 Quality
 Service
 Other terms & conditions of sale

Salah uddin CBM 37

Competitive environment is unattractive when:

 Rivalry is very strong

 Entry barriers are low
 Competition from substitutes is strong
 Suppliers & customers have considerable bargaining
power

Salah uddin CBM 38

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!

Salah uddin CBM 39

 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!

 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
Salah uddin CBM 40
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

Salah uddin CBM 41

 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

Salah uddin CBM 42

 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

Salah uddin CBM 43

 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

Salah uddin CBM 44

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

Salah uddin CBM 45

Salah uddin CBM 46