Slide strategic core concept and analytical approach 5e by thomson chapter3

 The Strategically Relevant Factors Influencing a Company’s External Environment Assessing a Company’s Industry and Competitive Environment ► Question 1: What Competitive Forces Do Ind

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Strategy – Core Concepts and Analytic Approaches 5e

Authur A Thompson, The University of Alabama

CHAPTER 1 What Is Strategy and Why Is It Important?

Strategy – Core Concepts and Analytic Approaches 5e

Authur A Thompson, The University of Alabama

CHAPTER 1 What Is Strategy and Why Is It Important?

The University of Alabama Arthur A Thompson The University of Alabama

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Analysis is the critical starting point of strategic thinking.

Kenichi Ohmae,

consultant and author

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Things are always different—the art is figuring out which differences matter.

Laszlo Birinyi,

investments manager

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In essence, the job of a strategist is to understand and cope with competition.

Michael E Porter,

Harvard Business School professor

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Kenichi Ohmae, consultant and author

No matter what it takes, the goal of strategy is to beat the competition

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1. To gain command of the basic concepts and analytical tools widely used to diagnose a company’s

industry and competitive conditions

2. To become adept in recognizing the factors that cause competition in an industry to be fierce, more

or less normal, or relatively weak

3. To learn how to determine whether an industry’s outlook presents a firm with sufficiently attractive

opportunities for growth and profitability

4. To understand why in-depth evaluation of specific industry and competitive conditions is a

prerequisite to crafting a strategy well matched to a firm’s situation

Learning Objectives

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 The Strategically Relevant Factors Influencing a Company’s External Environment

 Assessing a Company’s Industry and Competitive Environment

► Question 1: What Competitive Forces Do Industry Members Face, and How Strong Are They?

► Question 2: What Forces Are Driving Changes in the Industry and What Impacts Will They

Have on Competitive Intensity and Industry Profitability?

► Question 3: What Market Positions Do Rivals Occupy—Who Is Strongly Positioned and Who Is

Not?

► Question 4: What Strategic Moves Are Rivals Likely to Make Next?

► Question 5: What Are Key Factors for Future Competitive Success?

► Question 6: Is the Industry Outlook Conducive to Good Profitability?

Chapter 3 Roadmap

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 Actions to steer a firm in a different direction or alter its strategy must be predicated

on deep understanding of two facets of its situation:

1. The industry and competitive environment in which the firm operates and the forces acting

to reshape this environment

2. The firm’s own market position and competitiveness

• Its resources and capabilities

• Its strengths and weaknesses vis-à-vis rivals

• Its windows of opportunity

Understanding a Company’s Situation

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Figure 3.1 From Thinking Strategically about the Company’s Situation

to Choosing a Strategy

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 External factors and influences in the “macro-environment” that influence a firm’s

decisions about its direction, objectives, strategy, and business model include:

► General economic conditions

► Political, regulatory, and legal influences

► Technological influences

► Sociocultural forces (values, lifestyles, and shifting population demographics)

► Considerations relating to the natural environment

The Strategically Relevant Factors Influencing a Firm’s External

Environment

The Strategically Relevant Factors Influencing a Firm’s External

Environment

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FIGURE 3.2 The Components of a Company’s Macroenvironment

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There are six questions that must be asked and answered:

1. What competitive forces do industry members face, and how strong are they?

2. What forces are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?

3. What market positions do industry rivals occupy—who is strongly positioned and who is not?

4. What strategic moves are rivals likely to make next?

5. What are the key factors for future competitive success?

6. Is the industry outlook conducive to good profitability?

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Assessing a Company’s Industry and Competitive Environment

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The state of competition in an industry is a composite of five competitive forces:

1. The market maneuvering and jockeying for buyer patronage among rival sellers in the industry

2. The threat of new entrants into the market

3. The attempts of companies in other industries to win buyers over to their own substitute products

4. The exercise of supplier bargaining power

5. The exercise of buyer (or customer) bargaining power

Question 1: What Competitive Forces Do Industry Members Face?

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FIGURE 3.3 The Five-Forces Model of Competition: A Key Analytical Tool

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How to Analyze the Five Competitive Forces

Step 1 Identify the specific competitive pressures associated with each of the five

forces.

Identify the specific competitive pressures associated with each of the five forces.

Step 2 Evaluate how strong the pressures comprising each of the five forces are

(fierce, strong, moderate to normal, or weak).

Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak).

Step 3 Determine whether the collective strength of the five competitive forces is

conducive to earning attractive profits.

Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.

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The ongoing maneuvers and jockeying for position create a continually evolving

competitive landscape where the market battle ebbs and flows, sometimes takes

unpredictable twists and turns, and produces winners and losers

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 A market is a competitive battlefield where the contest among industry rivals is ongoing and dynamic

► Each rival is motivated to use whatever “weapons” in its business arsenal will attract and retain

buyers, strengthen its market position, and yield good profits

► The challenge is to craft a competitive strategy that at the very least allows a firm to hold its own

against rivals and, more ideally, strengthens its ability to compete successfully enough to produce

a competitive edge over rivals

Competitive Pressures Created by the Rivalry among Competing Sellers

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Why Rivalry Is Usually the Strongest

of the Five Competitive Forces

Why Rivalry Is Usually the Strongest

of the Five Competitive Forces

 When one competitor deploys a strategy or makes a new strategic move that produces good results, its rivals must

respond with offensive or defensive countermoves calculated to preserve their market standing and avoid lower profitability

 This pattern of move and countermove, attack and defend, adjust and readjust makes the competitive battle among rivals dynamic and fluid, with firms gaining or losing ground in the marketplace according to whether their strategic maneuvers succeed or fail.

 The winners—current market leaders—have no guarantees of continued leadership; their market success is only as

durable as the power of their strategies to fend off the strategies of ambitious challengers

All this constant maneuvering and jockeying quite often results in the competitive battle among industry rivals being

the strongest of the five competitive forces.

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FIGURE 3.4 The “Weapons” That Can Be Used to Battle Rivals

business of particular buyers

and/or to strengthen brand awareness or brand image

sales, advertising items on sale

don’t have

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FIGURE 3.4 The Factors Affecting the Strength of Rivalry

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 Rivalry is more intense when:

► Competing sellers are active in making fresh moves to improve their market standing and business

performance

► Buyer demand is growing slowly.

► Buyers incur low costs in switching to rival brands.

► The products of rival sellers are essentially identical or else weakly differentiated, resulting in little

or no buyer brand loyalty

► Sellers have idle capacity and/or excess inventory.

► The industry’s product is costly to hold in inventory, perishable, or seasonal.

What Causes Rivalry to Become Stronger?

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What Causes Rivalry to Become Stronger? (continued)

 Rivalry is more intense when:

► The number of rivals increases and/or rivals are of roughly equal size and competitive capability

► One or more rivals are dissatisfied with their business performance and are making aggressive

moves to attract more customers

► Outsiders have recently acquired weak competitors and are spending heavily to turn them into

major contenders

► Rivals have diverse industry outlooks, objectives, or strategies and/or have production facilities in

countries where production costs are materially different

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 Rivalry tends to be less intense when:

► Industry members infrequently launch aggressive actions to take sales and market share away from rivals

► Buyer demand is growing rapidly

► The products of rival sellers are strongly differentiated and the loyalty of buyers to their preferred brand is high

► Buyer costs to switch to rival brands are high

► Industry rivals are so numerous that any one firm’s attempt to grow its business has little direct impact on rival businesses and thus provokes little need for retaliation

What Causes Rivalry to Become Weaker?

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What Causes Rivalry to Become Weaker? (continued)

 Rivalry tends to be less intense when:

► Sellers have small inventories and/or little idle capacity

► Rivals have low fixed costs and low inventory storage costs

► A few large sellers have the majority of sales and dominant market shares

► Rivals have similar costs and similar industry outlooks—there are no industry mavericks to disrupt

the status quo

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Characterizing Industry Rivalry

that prove mutually destructive to profitability, causing many/most industry members to lose money

When competitors engage in protracted price wars or habitually undertake other aggressive strategic moves

that prove mutually destructive to profitability, causing many/most industry members to lose money

Fierce to Strong When the battle for market share is so vigorous that the profit margins of most industry members are

squeezed to sub-par or even bare-bones levels

When the battle for market share is so vigorous that the profit margins of most industry members are squeezed to sub-par or even bare-bones levels

Weak

When most industry firms are relatively well satisfied with their sales growth and market shares, rarely undertake offensives to steal customers away from one another, and—because of weak competitive forces—earn consistently good profits and returns on investment

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The increase in competitive pressures faced by industry members due to the threat of market entry of new firms depends on:

 Whether the barriers to successfully entering the industry are high or low

 The size of the pool of entry candidates and the resources at their command to hurdle the entry barriers

 The expected reaction of existing industry members to the entry of newcomers

 How attractive the industry’s growth and profit prospects

are to potential entrants

Competitive Pressures Associated with the Threat of Potential Entry

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 Cost advantages held by industry incumbents

 Strong brand preferences and high degrees of customer loyalty to the brands they are currently purchasing

 High capital requirements

 The difficulties of building a network of distributors or retailers and securing space on retailers’ shelves

 Restrictive or costly regulatory policies that limit/bar new entrants

 Tariffs and international trade restrictions

 The likelihood that industry incumbents will strongly resist entrants’ efforts to secure a profitable volume of sales

Common Barriers to Entry

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Current industry members may have cost advantages that a new entrant cannot easily overcome:

1. Scale economies in production, distribution, or other activities

2. Learning-based costs savings that accrue from in-industry experience in performing certain activities such as

manufacturing or new product development or inventory management

3. Cost-savings accruing from patents or proprietary technology

4. Partnerships with the best and cheapest suppliers of raw materials and components

5. Favorable locations

6. Low fixed costs (because incumbents have older facilities that have been mostly depreciated)

The Cost Advantages of Incumbents:

An Important Entry Barrier

The Cost Advantages of Incumbents:

An Important Entry Barrier

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FIGURE 3.5 Factors Affecting the Threat of Entry

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 Entry threats are stronger when:

► The pool of entry candidates is large and some have resources that make them strong market

contenders

► Entry barriers are low or can be easily hurdled by entry candidates

► Industry members can expand their presence into other product segments or geographic areas

► Newcomers can expect to earn attractive profits

► Buyer demand is growing rapidly

► Industry members are unable (or unwilling) to strongly contest the entry of new firms

Competitive Pressures Associated with the Threat of New Entrants

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Core Concept

The threat of entry is stronger

 when entry barriers are low,

 when incumbent firms are unable or unwilling to vigorously contest a newcomer’s

entry,

 when there’s a sizable pool of entry candidates, and

 when the industry’s outlook is highly attractive to outsiders.

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 Entry threats are weaker when:

► The pool of entry candidates is small

► Entry barriers are high

► Existing competitors are struggling to earn

good profits

► The industry’s outlook is risky or uncertain

► Buyer demand is growing slowly or is stagnant

► Industry members will strongly contest the efforts of new entrants to gain a market foothold

When Is the Threat of Entry Weaker?

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The Best Test of Whether the Entry

of New Competitors Is Likely

The Best Test of Whether the Entry

of New Competitors Is Likely

Are the industry’s growth and profit prospects strongly attractive

to potential entry candidates?

A “Yes” answer = Threat of potential entry is a strong competitive force

A “No” answer = Threat of potential entry is a

weak competitive force

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 Rapidly growing market demand and high potential profits act as magnets, growing the pool of entry candidates and motivating potential entrants ( most usually including

resource-rich companies capable of becoming formidable competitors!!! ) to commit the resources needed to hurdle entry barriers—in which case the high probability of new entry qualifies as a strong competitive force.

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When the Threat of Entry Is Certain

to Be High

When the Threat of Entry Is Certain

to Be High

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Competitive Pressures from the Sellers

of Substitute Products

Competitive Pressures from the Sellers

of Substitute Products

 Companies in one industry come under competitive pressure from the actions of

companies in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes

 Examples of substitutes

► Attending movies at theaters versus subscribing to Netflix

► Cell phone cameras versus traditional digital cameras

► Beer versus wine versus hard liquors

► Contact lens versus prescription glasses

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FIGURE 3.6 Factors Affecting Competition from Substitute Products

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When Are Substitute Products

a Strong Competitive Force?

When Are Substitute Products

a Strong Competitive Force?

 The strength of competitive pressures from substitute products depends on:

► Whether substitutes are readily available and attractively priced

► Whether buyers view substitutes as being comparable or better in term of attributes

► How much it costs buyers to switch to substitutes

Rule

The lower the price of substitutes, the higher their quality and performance, and the lower the user’s switching costs, the more intense the competitive pressures posed by substitute products.

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 Competitive pressures from substitutes are stronger when:

► Substitutes are readily available and attractively priced

► Substitutes are of comparable or better quality and have desirable performance features

► Buyers incur low costs in switching to substitutes

► Buyers are growing more comfortable with using substitutes

When Is Competition from Substitutes Stronger?

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 Competitive pressures from substitutes are weaker when:

► Good substitutes are not readily available or don’t exist

► Substitutes are higher priced relative to the value they deliver to buyers

► Substitutes lack comparable or better performance features

► Buyers have high costs in switching to substitutes

When Is Competition from Substitutes Weaker?

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1 Sales of substitutes are growing faster than overall sales of the industry in question

► An indication that the sellers of substitutes are

stealing the industry’s customers away

2 The producers of substitute products are investing in added production capacity and

expanding their market coverage

3 Profits of the producers of substitutes are rising

Three Signs that Substitute Products Are a Strong Competitive Force

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