Analysis of the Competitive Environment

Chapter 7

Learning Objectives
      

Quick review of analysis of the external macroenvironment Key definitions Understand the significance of industry and market analysis Understand and be able to apply Porter s 5 Forces model, and understand its limitations Define competitive vs. collaborative behavior in industries Understand and be able to apply the resource-based resourceframework of analysis of the competitive environment Define strategic groups

Quick Review
 Analysis

of the external environment includes:

Analysis of the macroenvironment ( far environment) Analysis of the microenvironment ( near environment, or competitive environment)

External Environment
External macro or far environment

External micro Internal Environment or near environment

Quick Review: Analysis of the Macroenvironment

 Tool

for analysis: SPENT Analysis  Socio-demographic ocio Political  Economic  Natural Environmental  Technological

Quick Review: Conducting Macroenvironmental Analysis

    

Scanning Monitoring Forecasting Assessing NOTE: The ability to predict trends and changes in the macroenvironment that impact a business, and the ability to make changes based on the prediction, can be a source of competitive advantage

Analysis of the Competitive Environment: Key Definitions

 Macroenvironment  Microenvironment  Industry  Market  Switching

costs  Substitute products

Purpose of Analysis of Microenvironment (Industry and Markets)

 Identify

opportunities for competence leveraging  Understand customers and their needs  Identify current and potential threats  Understand resource markets

Industry Analysis: Classification

 Porter:

Industry is a group of businesses whose products are close substitutes  Other definitions: by production process
Examples: SIC (Standard Industrial Classification) and NACE (Nomenclature Generale des Activites Economiques dans les Communautes Europeenes)

SIC Examples
UK SIC(92)  Examples: D Manufacturing
 Link:
 DA Manufacture of food products, beverages and tobacco  DB Manufacture of textiles  DC Manufacture of leather and leather products

Example: Industry Classification

 

Philip Morris Headquarters: New York City. Chairman, chief executive: Geoffrey Bible. Major tobacco brands: Marlboro, Merit, Basic, Virginia Slims, Cambridge. U.S. cigarette market share: 47.5 percent in 1997, up from 46.3 percent in 1996. Cigarette division: Philip Morris USA. Financial highlights: Net income of $6.3 billion, or $7.68 a share, on sales of $68.9 billion. Other businesses: Kraft Foods, Inc., the largest U.S. food company (Oscar Mayer, Jell-O, Post cereals, Maxwell House); Miller Brewing JellCo., the No. 2 U.S. brewer (Miller, Red Dog, and Lowenbrau); financial services and real estate. Number of employees: 154,000.

Industry Analysis Checklist

 Location

of support and resource markets  Extent of concentration or fragmentation  Product types produced  Levels of output, growth and lifecycle position  Ownership issues  Other activities of industry members
 Location

Porter s 5 Forces Model of Industry Analysis

 Developed

in 1980 to analyze the nature and extent of competition within an industry  Porter identified 5 competitive forces that determine the nature of competition within an industry

Bio on Michael Porter

 Born

1947  Degree in aeronautical engineering (Princeton); doctorate in economics (Harvard)  Member of the faculty at Harvard  Seminal work: Competitive Strategy (1980)  Other works: The Competitive Advantage of Nations (1990)

Porter s 5 Forces Model

 Threat

of new entrants  Threat of substitute products  Power of buyers or customers  Power of suppliers  Rivalry among businesses

Advantage of the Model

 According

to Porter, businesses can use the model to identify how to position itself to take advantage of opportunities and overcome threats

Force 1: Threat of New Entrants

 

Force 1 depends on the height of barriers to entry Barriers to entry include:

Costs of capital investment needed to enter Regulatory and legal barriers Brand loyalty and customer switching costs Economies of scale utilized by existing competitors Access to suppliers and distributors Resistance from existing competitors

Force 2: Threat of Substitute Products

 Substitute

products: products that meet the same needs  The threat existing from substitute products depends upon:
Extent to which price and performance of a substitute can match the industry s product Willingness of buyers to switch to the substitute

Example: Threat of substitute products

 The

threat of substitutes makes it difficult to increase prices and improve margins  Example: The price of aluminum cans is restricted by the threat of substitutes like glass bottles, steel cans and plastic containers

Force 3: Bargaining Power of Buyers or Customers



The threat is related to how much power buyers or customers have over the industry (the higher the power, the lower the price) Bargaining power of buyers or customers depends upon:
Number of customers and volume of their purchases Number and size of businesses supplying the product Switching costs

Bargaining Power of Buyers

 Monopsony

a market where there are many suppliers and one buyer  Thus, buyer has a great deal of power over price  In order to decrease the power of buyers, sellers need to find buyers with lower power to negotiate, switch suppliers or develop offers strong buyers can t refuse

Force 4: Bargaining Power of Suppliers

 The

threat is related to how much power suppliers have over the industry  Bargaining power of suppliers depends upon:
Uniqueness and scarcity of the supplied resource Switching costs How many industries require the resource Number and size of resource suppliers

Example: Bargaining Power of Suppliers

 DeBeers

worldwide diamond supplier  DeBeers controls most of the productive diamond mines in the world  Thus, they have extremely high power in the industry  In this situation, it s better to build winwinwin relationships with the supplier

Force 5: Intensity of Rivalry



Intensity of rivalry of competitors in the industry is related to competition on both price and nonnon-price bases Force 5 is directly related to the other 4 forces, and depends upon:
Height of entry barriers and number and size of competitors Maturity of the industry Degree of brand loyalty Power of buyers and availability of substitutes

Intensity of Rivalry
    

Concentrated vs. Fragmented industries SIC classification is useful to assess this portion High concentration ratio means the majority of market share is held by a few firms Low concentration ratio means the industry has many rivals, none with significant market share Competitive strategies include:
Changing prices Improving product differentiation Creatively using channels of distribution Exploiting relationships with suppliers

Porter s 5 Forces and Profit

Force
Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Threat of substitutes

Profitability will be higher if:

Weak suppliers Weak buyers

Profitability will be lower if:

Strong suppliers Strong buyers

High entry barriers Low entry barriers Few possible substitutes Many possible substitutes Intense rivalry

Competitive rivalry Little rivalry

Criticisms of Porter s 5 Forces Model



   

Porter s 5 Forces is designed to assess industry profitability. Other argue that company-specific factors company(for example, competences) are more important Implies the five forces apply equally to all competitors in the industry No consideration of product and resource markets It cannot be applied without consideration of the macroenvironment Assumes relationships with competitors, buyers and suppliers is not cooperative, but competitive

CoCo-operative Environment
 One

of the criticisms of Porter s 5 Forces Model is that it views all relationships as competitive, not cooperative  BUT: Most organizations have formal and informal co-operative relationships with cosuppliers and distributors

CoCo-operative Environment (Cont.)

 Co-operative Co-

environment is important because it may:

Help achieve sustainable competitive advantage Produce lower costs Provide sustainable relationships with those outside the organization

Analysis of the Co-operative CoEnvironment

Government Links Informal Co-operative Links

Organization

Complementors

Formal Co-operative Links

CoCo-operative Links


  

Informal co-operative links organizations link cotogether for mutual or common purpose without legally binding contracts Formal co-operative links links bound by some cosort of contract Complementors companies whose products add value to the organization s basic product Government links relationships with governments

Informal Co-operative Links Co Examples:

Chambers of Commerce, Industry Associations, Keiretsu (Japan), Chaebol (Korea)  These networks provide strong support for the organizations which belong to them  Strong support links may provide competitive advantage

Formal Co-operative Links Co Examples:

Joint Ventures, Strategic

Alliances  Links can be with suppliers, distributors and even competitors  Real world examples: Benetton, Toyota, Marks & Spencer  Strong links may deliver lower prices and higher quality service to the organization

Complementors
 Examples:

Software is a complementor of

hardware  Usually, complementors work with the organization to provide a joint offering  Real world example: Microsoft

Government Links
 Examples:

negotiations with government on tax, investment and legal issues; organization lobbies  Real world examples: For companies in the defense and pharmaceutical industries (Boeing, Smith Kline Beecham), strong government links are essential

CoCo-operative Links: Summary

 

CoCo-operative links can be opportunities, and cocooperative links of competitors may be threats Porter s 5 Forces analysis focuses on the competitiveness of relationships, BUT, competitive advantage may be gained through cooperation Establishing cooperative links is an emergent approach to strategy development

Alternative to 5 Forces Analysis: ResourceResource-based Framework

 Resource-based Resource-

framework is designed to compensate for disadvantages in traditional models (like Porter s 5 Forces)  Emphasizes the importance of core competence in achieving competitive advantage

ResourceResource-based Framework
 Complicated

and comprehensive

analysis  Analysis of 5 inter-related areas: interOrganization Industry Product markets Resource markets Other industries

ResourceResource-based Framework
Competitive Rivalry Company Industry Buyer Power Supplier Power Resource Markets Product Markets New Markets Organization s Products

Organization

Competence Related Industry Threat of new entrants

Threat of Substitutes

Substitutes

ResourceResource-based Framework: Organization

 Focuses

on competences, core competences, resources and value chain (as we discussed in detail in Chapter 2)  This part of the analysis includes an analysis of:
Resources Organizational competences, core competences and activities Value chain

ResourceResource-based Framework: Industry

 Focuses

on analysis of competitors :

Skills and competences Configuration of value-adding activities valueTechnology Number and size Performance (focus on financial performance) Ease of entry and exit (barriers) (barriers) Strategic groupings

A Note on Strategic Groupings



Strategic groups the group of competitors representing an organization s closest competitors Example: a group of branded clothes including Polo (Ralph Lauren), Tommy Hilfiger, and Izod (Lacoste), among others, may be a strategic group, even though there are other lower quality brands that are technically competitors Example 2: Rolex, Tag Heuer, Tissot may be part of a strategic group that does not include Swatch, Timex, Seiko, even though they are all watchmakers

ResourceResource-based Framework: Product Markets



Analysis is focused on:

Customer needs and satisfaction Unmet customer needs Market segments and profitability Number of competitors to the market and relative market share Number of customers and their purchasing power Access to distribution channels Ease of entry Potential for competence leveraging Need for new competence building

ProductProduct-based Framework: Resource Markets



Resource markets: where organizations obtain finance, human resources, human resources, physical resources, technological resources Analysis focuses on:
Resource requirements Number of actual and potential suppliers Size of suppliers Potential collaboration with suppliers (cooperation) Access by competitors to suppliers Nature of the resource and availability of substitutes

ResourceResource-based Framework: CompetenceCompetence-related Industries

 Focuses

on analysis of other industries with similar competences and which may produce products that can be substitutes of the organization s products  Analysis is useful to identify:
Potential threats Other industries in which the organization may be able to leverage their competences New markets

Next Class: Tutorial

      

UK Outbound tour operations industry, pp.370 390 Consider analysis of the industry by Porter s 5 Forces Analysis, Resource-based Framework ResourceIdentify any parts of the value chain Identify an strategic groups Discuss the intensity of rivalry in the industry Identify SPENT influences Identify any cooperative links