strat mgt

chapter 3

Chapter 3 presents the concepts and analytical tools for assessing a single-business company's external environment. Attention centers on the competitive arena in which a company operates, together with the technological, societal, regulatory, or demographic influences in the macro-environment that are acting to reshape the company's future market arena. LECTURE OUTLINE I. Introduction 1. In the opening paragraph of Chapter 1, we said that one of the three central questions that manager's must address in evaluating their company business prospects is "What's the company's present situation?" Two facets of a company's situation are especially pertinent: a. The industry and competitive environment in which the company operates b. The company's collection of resources and capabilities, its strengths and weaknesses as compared to it rivals, and its windows of opportunities. 3. Managers must be able to insightfully analyze a company's external and internal environments to succeed in crafting a strategy that is an excellent fit with the company's situation, is capable of building competitive advantage, and holds good prospect for boosting a company performance - the three criteria of a winning strategy. 4. Developing company strategy begins with a strategic appraisal of the company's external and internal situations to form a strategic vision of where the company needs to head, then moves toward an evaluation of the most promising alternative strategies and business models, and finally culminates in a choice of strategy. 5. Figure 3.1, From Thinking Strategically about the Company's Situation to Choosing a Strategy, depicts the sequence recommended for managers to pursue. CORE CONCEPT The -environment encompasses the broad environmental context in which a company's industry is situated.  II. The Strategically Relevant Components of a Company's External Environment 1. All companies operate in a macro-environment shaped by influences emanating from the economy at large, population demographics, societal values and lifestyles, governmental legislation and regulation, technological factors, and the industry and competitive arena in which the company operates. 2. Figure 3.2, The Components of a Company's Macro-environment, identifies the arenas within an organization's macro-environment. Table 3.1 provides descriptions of each of the seven components of the macro-environment. 3. Strictly speaking, a company's macro-environment includes all relevant factors and influences outside a company's boundaries. 4. For the most part, influences coming from the outer ring of the macro-environment have a low impact on a company's business situation and shape only the edges of the company's direction and strategy. There are exceptions to this, of course, such as the cigarette industry. 5. There are enough strategically relevant trends and developments in the outer-ring of the macro-environment to justify managers maintaining a watchful eye. 6. The factors and forces in a company's macro-environment having the biggest strategy-shaping impact almost always pertain to the company's immediate competitive environment. III. Thinking Strategically About a Company's Industry and Competitive Environment 1. Thinking strategically about a company's competitive environment entails using some well defined concepts and analytical tools to get clear answers to seven questions: a. Does the industry offer attractive opportunities for growth? b. What kinds of competitive forces are industry members facing and how strong is each force? c. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability? d. What market positions do industry rivals occupy—who is strongly positioned and who is not? e. What strategic moves are rivals likely to make next? f. What are the key factors for competitive success in the industry? g. Does the outlook for the industry offer good prospects for attractive profits?  IV. Question 1: Does the industry offer attractive opportunities for growth? 1. Because industries differ so significantly, analyzing a company's industry and competitive environment begins with identifying the attractiveness of available opportunities for growth. 2. An industry's dominant economic features are defined by such factors as: a. Overall size and market growth rate b. Number and sizes of buyers and sellers c. Geographic boundaries of the market d. The degree to which sellers products are differentiated e. The pace of product innovation f. Market supply/demand conditions g. The extent of vertical integration h. Extent to which costs are affected by scale economies i. Learning/experience curve effects V. Question 2: What kinds of competitive forces are industry members facing and how strong is each force? 1. The character, mix, and subtleties of the competitive forces operating in a company's industry are never the same from one industry to another. 2. The most powerful and widely used tool for systematically diagnosing the principal competitive pressures in a market and assessing the strength and importance of each is the five-forces model of competition. 3. Figure 3.3, The Five-Forces Model of Competition: A Key Analytical Tool, depicts this tool. 4. This model holds that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market: a. Competitive pressures associated with the market maneuvering and jockeying for buyer patronage that goes on among rival sellers in the industry b. Competitive pressures associated with the threat of new entrants into the market c. Competitive pressures coming from the attempts of companies in other industries to win buyers over to their own substitute products d. Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration e. Competitive pressures stemming from buyer bargaining power and seller-buyer collaboration 5. The way one uses the five-forces model to determine what competition is like in a given industry is to build the picture of competition in three steps: a. Step One: Identify the specific competitive pressures associated with each of the five forces b. Step Two: Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak) c. Step Three: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits A. Competitive Pressures Associated with the Jockeying among Rival Sellers 1. The strongest of the five competitive forces is nearly always the rivalry among competing sellers - the marketing maneuvering and jockeying for buyer patronage that continually go on. 2. In effect, a market is a competitive battlefield where it is customary and expected that rival sellers will employ whatever resources and weapons they have in their business arsenal to improve their market positions and performance. 3. Table 3.2, Common Weapons for Competing with Rivals, shows a sampling of competitive weapons that firms can deploy in battling rivals and indicates the factors that influence the intensity of their rivalry. 4. A brief discussion of some of the factors that influence the tempo of rivalry among industry competitors is in order: a. Rivalry intensifies when competing sellers are active in launching fresh actions to boost their market standing and business performance. 5. Figure 3.4, Factors Affecting the Strength of Rivalry, provides a visual summary of forces that create stronger or weaker rivalry. 6. Other indicators of the intensity of rivalry among industry members include: a. Whether industry members are racing to offer better performance features or higher quality or improved customer service or a wider product selection b. How frequently rivals resort to such marketing tactics as special sales promotions, heavy advertising, or rebates or low interest rate financing to drum up additional sales c. How actively industry members are pursuing efforts to build stronger dealer networks or establish positions in foreign markets or otherwise expand their distribution capabilities and market presence d. How hard companies are striving to gain a market edge over rivals by developing valuable expertise and capabilities 7. Normally, industry members are proactive in drawing upon their competitive arsenal of weapons and deploying their organizational resources in a manner calculated to strengthen their market position and performance. 8. Additional factors that influence the tempo of rivalry among industry competitors include: a. Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capability b. Rivalry is usually stronger in slow-growing markets and weaker in fast-growing markets c. Rivalry is usually weaker in industries comprised of so many rivals that the impact of any one company's actions is spread thinly across all industry members, likewise, it is often weak when there are fewer than five competitors d. Rivalry increases when buyer demand falls off and sellers find themselves with excess capability and/or inventory. e. Rivalry increases as it becomes less costly for buyers to switch brands f. Rivalry increases as the products of rival sellers become more standardized g. Rivalry is more intense when industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volumes h. Rivalry increases in proportion to the size of the payoff from a successful strategic move i. Rivalry becomes more volatile and unpredictable as the diversity of competitors increases in terms of visions, strategic intents, objectives, strategies, resources, and countries of origin j. Rivalry increases when strong companies outside acquire weak firms in the industry and launch aggressive, well-funded moves to transform their newly acquired competitors into major market contenders k. A powerful, successful competitive strategy employed by one company greatly intensifies the competitive pressures on its rivals to develop effective strategic responses or be relegated to also-ran status  B. Competitive Pressures Associated with the Threat of New Entrants 1. Several factors affect the strength of the competitive threats of potential entry in a particular industry. 2. Figure 3.5, Factors Affecting the Strength of Threat of Entry, identifies several factors that affect how strong the competitive threat of potential entry is in a particular industry. 3. One factor relates to the size of the pool of likely entry candidates and the resources at their command. As a rule, competitive pressures intensify as the pool of entry candidates increases in size. 4. Frequently, the strongest competitive pressures associated with potential entry come not from outsiders but from current industry participants looking for growth opportunities. 5. Existing industry members are often strong candidates to enter market segments or geographic areas where they currently do not have a market presence. 6. A second factor concerns whether the likely entry candidates face high or low entry barriers. The most widely encountered barriers that entry candidates must hurdle include: a. The presence of sizable economies of scale in production or other areas of operation - When incumbent companies enjoy cost advantages associated with large-scale operation, outsiders must either enter on a large scale or accept a cost disadvantage and consequently lower profitability. b. Cost and resource disadvantages not related to size - Existing firms may have low unit costs as a result of experience or learning-curve effects, key patents, partnerships with the best and cheapest suppliers of raw materials and components, proprietary technology know-how not readily available to newcomers, favorable locations, and low fixed costs. c. Strong brand preferences and high degree of customer loyalty - In some industries, buyers are strongly attached to established brands. d. High capital requirements - The larger the total dollar investment needed to enter the market successfully, the more limited the pool of potential entrants. e. The difficulties of building a network of distributors or retailers and securing adequate space on retailers' shelves. f. Restrictive regulatory policies - Government agencies can limit or even bar entry by requiring licenses and patents. g. Tariffs and international trade restrictions - National governments commonly use tariffs and trade restrictions to raise entry barriers for foreign firms and protect domestic producers from outside competition. h. The ability and willingness of industry incumbents to launch vigorous initiatives to block a newcomer's successful entry. 7. In evaluating whether an industry's entry barriers ought to be considered strong or weak, company managers must must also look at: a. How formidable the entry barriers are for each type of potential entrant b. How attractive the growth and profit prospects are for new entrants 8. The best test of whether potential entry is a strong or weak competitive force in the marketplace is to ask if the industry's growth and profit prospects are strongly attractive to potential entry candidates. 9. The stronger the threat of entry, the more that incumbent firms are driven to seek ways to fortify their positions against newcomers, pursuing strategic moves to not only protect their market shares, but also make entry more costly or difficult. 10. The threat of entry changes as the industry's prospects grow brighter or dimmer and as entry barriers rise or fall. C. Competitive Pressures from the Sellers of Substitute Products 1. 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. 2. Just how strong the competitive pressures are from sellers of substitute products depends on three factors: a. Whether substitutes are readily available and attractively priced b. Whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes c. How much it costs end-users to switch to substitutes 3. Figure 3.6, Factors Affecting Competition from Substitute Products, lists factors affecting the strength of competitive pressures from substitute products and signs that indicate substitutes are a strong competitive force. 4. As a 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. D. Competitive Pressures Stemming from Supplier Bargaining Power and Supplier-Seller Collaboration 1. Whether supplier-seller relationships represent a weak or strong competitive force depends on: a. Whether the major suppliers can exercise sufficient bargaining power to influence the terms and conditions of supply in their favor b. The nature and extent of supplier-seller collaboration 2. How Supplier Bargaining Power Can Create Competitive Pressures: When the major suppliers to an industry have considerable leverage in determining the terms and conditions of the item they are supplying, they are in a position to exert competitive pressures on one or more rival sellers. 3. The factors that determine whether any of the suppliers to an industry are in a position to exert substantial bargaining power or leverage are fairly clear-cut: a. Whether certain needed inputs are in short supply b. Whether certain suppliers provide a differentiated input that enhances the performance or quality of the industry's product c. Whether the item being supplied is a commodity that is readily available from many suppliers at the going market price d. Whether a few large suppliers are the primary sources of a particular item e. Whether it is difficult or costly for industry members to switch their purchases from one supplier to another or to switch to attractive substitute inputs f. Whether there are good substitutes available for supplier's products. g. Whether industry members account for a sizable fraction of supplier's total sales. h. Whether the supplier industry is dominated by a few large companies and whether it is more concentrated than the industry it sells to. i. Whether it makes good economic sense for industry members to integrate backward and self-manufacture items they have been buying from suppliers 4. Figure 3.7, Factors Affecting Suppliers, summarizes the conditions that tend to make supplier bargaining power strong or weak E. Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity 1. Whether seller-buyer relationships represent a weak or strong competitive force depends on: a. Whether some or many of the buyers have sufficient bargaining leverage to obtain price concessions and other favorable terms and conditions of sale b. The extent to which buyers are price sensitive 2. How Buyer Bargaining Power Can Create Competitive Pressures: The leverage that certain types of buyers have in negotiating favorable terms can range from weak to strong. 3. Even if buyers do not purchase in large quantities or offer a seller important market exposure or prestige, they gain a degree of bargaining leverage in the following circumstances: a. Buyer bargaining power is greater when their costs of switching to competing brands or substitutes are relatively low. b. Buyer power increases when industry goods are standardized or differentiated. c. Buyers have more power when they are large and few in number relative to the number of sellers. d. Buyer power increases when buyer demand is weak an industry members are scrambling to sell more units. e. Buyers gain leverage if they are well informed about sellers' products, prices, and costs. f. Buyers' bargaining power is greater when they pose a credible threat of integrating backward into the business of sellers. e. Buyer leverage increases if buyers have discretion to delay their purchases or perhaps not even make a purchase at all. 4. Figure 3.8, Factors Affecting the Bargaining Power of Buyers, summarizes the circumstances that make for strong or weak bargaining power on the part of buyers. 5. Not all buyers of an industry's product have equal degrees of bargaining power with sellers and some may be less sensitive than others to price, quality, or service differences. 6. Even if buyers are interested in purchasing goods and services, their sensitivity to price varies: a. Buyer price sensitivity increases when buyers are earning low profits or have low income. b. Buyer are more price sensitive if the product represents a large fraction of their total purchases. c. Buyer are more price sensitive if product performance has limited consequences. F. Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? 1. Scrutinizing each competitive force one by one provides a powerful diagnosis of what competition is like in a given market. 2. Is the Industry Competitively Attractive or Unattractive? As a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants. CORE CONCEPT The strongest of the five forces determines how strong the forces of competition are overall and the extent of the downward pressure on an industry's level of profitability. 3. The most extreme case of a competitively unattractive industry is when all five forces are producing strong competitive pressures. Fierce to strong competitive pressures coming from all five directions nearly always drive industry profitability to unacceptably low levels, frequently producing losses for many industry members and forcing some out of business. Intense competitive pressures from just two or three of the five forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business. 4. In contrast, when the collective impact of the five competitive forces is moderate to weak, an industry is competitively attractive in the sense that industry members can reasonably expect to earn good profits and a nice return on investment. 5. The ideal competitive environment for earning superior profits is one in which both suppliers and customers are in weak bargaining positions, there are no good substitutes, high barriers block further entry, and rivalry among present sellers generates only moderate competitive pressures. 6. Matching Company Strategy to Competitive Conditions? Working through the five-forces model step-by-step not only aides strategy makers in assessing whether the intensity of competition allows good profitability but it also promotes sound strategic thinking about how to better match company strategy to the specific competitive character of the marketplace. 7. Effectively matching a company's strategy to the particular competitive pressures and competitive conditions that exist has three aspects: a. Pursuing avenues that shield the firm from as many of the prevailing competitive pressures as possible b. Initiating actions calculated to produce sustainable competitive forces in the company's favor by altering the underlying factors driving the five forces. c. Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.  VI. Question 3: What Factors are Driving Industry Change and What Impacts Will They Have? 1. An industry's present conditions do not necessarily reveal much about the strategically relevant ways in which the industry environment is changing. 2. All industries are characterized by trends and new developments that gradually or speedily produce changes important enough to require a strategic response from participating firms. 3. The popular hypothesis that industries go through a life cycle of takeoff, rapid growth, early maturity, market saturation, and stagnation or decline helps explain industry change - but it is far from complete. A. The Concept of Drivers of Change 1. Although it is important to judge what growth stage an industry is in, there is more analytical value in identifying the specific factors causing fundamental industry and competitive adjustments. 2. Industry and competitive conditions change because certain forces are enticing or pressuring industry participants to alter their actions. 3. Drivers of Change are those that have the biggest influence on what kinds of changes will take place in the industry's structure and competitive environment. 4. Analyzing Industry Dynamics has three steps: a. Identifying what the drivers of change b. Assessing whether the drivers of change are individually or collectively acting to make the industry more or less attractive c. Determining what strategy changes are needed to prepare for the impacts of the anticipated change CORE CONCEPT Dynamic industry analysis involves determining how the drivers of change are affecting industry and competitive conditions. B. Identifying an Industry's Drivers of Change 1. Many developments can affect an industry powerfully enough to qualify as driving forces. Some are unique and specific to a particular industry situation, but most drivers of change fall into one of the following categories: a. Changes in the long-term industry growth rate - Shifts in industry growth are a driving force for industry change, affecting the balance between industry supply and buyer demand, entry and exit, and the character and strength of competition. b. Increasing globalization of the industry - Competition begins to shift from primarily a regional or national focus to an international or global focus when industry members begin seeking out customers in foreign markets or when production activities begin to migrate to countries where costs are lowest. c. Changes in who buys the product and how they use it - Shifts in buyer demographics and new ways of using the product can alter the state of competition by opening the way to market an industry's product through a different mix of dealers and retail outlets. d. Technological change - Advances in technology can dramatically alter an industry's landscape, making it possible to produce new and better products at lower cost and opening up whole new industry frontiers. e. Emerging new Internet capabilities and applications - The Internet and the adoption of Internet technology applications represent a driving force of historical and revolutionary proportions f. Product and marketing innovation - Competition in an industry is always affected by rivals racing to be first to introduce one new product or product enhancement after another. Many firms are successful in introducing new ways to market their products, they can spark a burst of buyer interest, widen industry demand, increase product differentiation, and lower unit costs-any or all of which can alter the competitive positions of rival firms and force strategy revisions. g. Entry or exit of major firms - The entry of one or more foreign companies into a geographic market once dominated by domestic firms nearly always shakes up competitive conditions. h. Diffusion of technical know-how across more companies and more countries - As knowledge about how to perform a particular activity or execute a particular manufacturing technology spreads, the competitive advantage held by firms originally possessing this know-how erodes. i. Improvements in cost and efficiency in closely adjoining markets - Widening or shrinking differences in the costs among key competitors tend to dramatically alter the state of competition. j. Reductions in uncertainty and business risk - An emerging industry is typically characterized by much uncertainty over potential market size, how much time and money will be needed to surmount technological problems, and what distribution channels and buyer segments to emphasize. k. Regulatory influences and government policy changes - Government regulatory actions can often force significant changes in industry practices and strategic approaches. l. Changing societal concerns, attitudes, and lifestyles - Emerging social issues and changing attitudes and lifestyles can be powerful instigators of industry change. 2. Table 3.3, The Most Common Driving Forces, summarizes these 12 most common forces. 3. The large number of different potential driving forces explains why it is too simplistic to view industry change only in terms of the life-cycle model and why a full understanding of the causes underlying the emergence of new competitive conditions is a fundamental part of industry analysis. 4. Company strategists must resist the temptation to label every change they see as a driving force; the analytical task is to evaluate the forces of industry and competitive change carefully enough to separate major factors from minor ones. C. Assessing the Impact of Factors Driving Industry Change 1. The second phase of driving forces analysis is to determine whether the driving forces are acting to make the industry environment more or less attractive. Answers to three questions are needed here: a. Overall, are the factors driving change causing demand for the industry's product to increase or decrease? b. Is the collective impact of the drivers of change making competition more or less intense? c. Will the combined impacts of the change drivers lead to higher or lower industry profitability? 2. Getting a handle on the collective impact of the driving forces usually requires looking at the likely effects of each force separately, since the driving forces may not all be pushing change in the same direction. D. Developing a Strategy That Takes the Changes in Industry Conditions into Account Driving-forces analysis, when done properly, pushes company managers to think about what's around the corner and what the company needs to be doing to get ready for it. The real payoff of driving-forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces. 1. Sound analysis of an industry's drivers of change is a prerequisite to sound strategy making. 2. Dynamic Industry analysis is not something to take lightly; it has practical value and is basic to the task of thinking strategically about where the industry is headed and how to prepare for the changes. VII. Question 4: What Market Positions Do Rivals Occupy—Who is Strongly Positioned and Who is Not? 1. Understanding which companies are strongly positioned and which are weakly positioned is an integral part of analyzing an industry's competitive structure. 2. The best technique for revealing the market positions of industry competitors is strategic group mapping. This analytical tool is useful for comparing the market positions of each firm separately or for grouping them into like positions when an industry has so many competitors that it is not practical to examine each one in depth. CORE CONCEPT Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. A. Using Strategic Group Maps to Assess the Market Positions of Key Competitors 1. A strategic group consists of those industry members with similar competitive approaches and positions in the market. CORE CONCEPT A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions. 2. The procedure for constructing a strategic group map is straightforward: a. Identify the competitive characteristics that differentiate firms in the industry b. Plot the firms on a two-variable map using pairs of these differentiating characteristics c. Assign firms that fall in about the same strategy space to the same strategic group d. Draw circles around each strategic group, making the circles proportional to the size of the group's respective share of total industry sales revenue 3. Illustration Capsule 3.1, Comparative Market Positions of Selected Retail Chains: A Strategic Group Map Application, represents a two-dimensional diagram for the retailing industry. Illustration Capsule 3.1, Comparative Market Positions of Selected Retail Chains: A Strategic Group Map Example Discussion Question: 1. According to the diagram, which companies comprise the strategic group of firms to which Walmart belongs? Why is the circle containing Walmart and Kmart larger than Target's circle? B. What Can Be Learned from Strategic Group Maps CORE CONCEPT Strategic group maps reveal which companies are close competitors and which are distant competitors. 1. Generally speaking, the closer strategic groups are to each other on the map, the stronger the cross-group competitive rivalry tends to be. 2. Not all locations in a group map are equally attractive due to profit prospects, prevailing competitive pressures, and drivers of change. VIII. Question 5: What Strategic Moves Are Rivals Likely to Make Next? 1. Unless a company pays attention to what competitors are doing and knows their strengths and weaknesses, it ends up flying blind into competitive battle. 2. Competitive intelligence about rivals' strategies, their latest actions and announcements, their resource strengths and weaknesses, the efforts being made to improve their situation, and the thinking and leadership styles of their executives is valuable for predicting or anticipating the strategic moves competitors are likely to make next in the marketplace. Good competitive intelligence on rivals provide a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace. A. Developing Competitive Intelligence 1. Keeping close tabs on a competitor's strategy entails monitoring what the rival is doing in the marketplace, what its management is saying in company press releases, information posted on the company's Web site, and such public documents as annual reports and 10-K filings, articles in the business media, and the reports of securities analysts. 2. Those who gather competitive intelligence on rivals, however, can sometimes cross the fine line between honest inquiry and unethical or even illegal behavior. 3. Illustration Capsule 3.2, Business Ethics and Competitive Intelligence provides an example of legal but unethical development of competitive intelligence in the cosmetics industry. Illustration Capsule 3.2 Business Ethics and Competitive Intelligence Discussion Question: 2. In what way were Avon's efforts to gain information about their largest rival unethical? Answer: Just because an activity in business is legal, does not mean it is ethical. Organizations and individuals sometimes confuse the idea of must vs. must not with should vs. should not. Must vs. must not deals with legal standards while should vs. should not deals with value based standards. While going through a competitor's garbage is not illegal (it does not violate the law), the action does not represent the values of honesty and fair competition (it does violate organizational values), making the actions unethical. 5. In sizing up the strategies and the competitive strengths and weaknesses of competitors, it makes sense for company strategists to make three assessments: a. Which competitor have strategies that are producing good results? b. Which competitors are losing ground in the marketplace or are struggling to develop a good strategy? c. Which competitors are poised to gain market share, and which ones seem destined to lose ground? d. Which competitors are likely to rank among the industry leaders five years from now? Do one or more up-and-coming competitors have powerful strategies and sufficient capabilities to overtake the current industry leader? e. Which rivals badly need to increase their unit sales and market share? 6. Predicting the next strategic moves of competitors is the hardest yet most useful part of competitor analysis. 7. Since the moves a competitor is likely to make are generally predicated on the views their executives have about the industry's future and their beliefs about their firm's situation, it makes sense to closely scrutinize the public pronouncements of rival company executives about where the industry is headed and what it will take to be successful, what they are saying about their firm's situation, information from the grapevine about what they are doing, and their past actions and leadership styles. 8. Considerations in trying to predict what strategic moves rivals are likely to make next include the following: a. Which rivals are likely to enter new geographic markets? b. Which rivals are strong candidates to expand their product offerings and enter new product segments where they do not currently have a presence? c. Which rivals are good candidates to be acquired? 9. To succeed in predicting a competitor's next moves, company strategists need to have a good feel for each rival's situation, how its managers think, and what its best options are. IX. Question 6: What are the Key Factors for Future Competitive Success? 1. An industry's key success factors (KSF) are those competitive factors that most affect industry members' ability to prosper in the marketplace. CORE CONCEPT Key success factors are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities with the greatest impact on competitive success in the marketplace. 2. How well a company's product offering, resources, and capabilities measure up against and industry's KSFs has a direct bearing on company profitability and determines just how financially and competitively successful that company will be. 3. The answer to three questions help identify an industry's key success factors: a. On what basis do buyers of the industry's product choose between the competing brands of sellers? What product attributes and service characteristics are crucial? b. What resources and competitive capabilities does a company need to have to be competitively successful? c. What shortcomings are almost certain to put a company at a significant competitive disadvantage? 4. Only rarely are there more than five or six key factors for future competitive success. 5. Correctly diagnosing an industry's KSFs raises the company's chances of crafting a sound strategy. 6. Being distinctly better than rivals on one or two key success factors tends to translate into competitive advantage. X. Question 7: Does the Industry Offer Good Prospects for Attractive Profits? 1. The final step in evaluating the industry and competitive environment is to use the preceding analysis to decide whether the outlook for the industry presents the company with sufficiently attractive prospects for profitability and growth. 2. The important factors on which to base such a conclusion include: a. The industry's growth potential b. Whether strong competitive forces are squeezing industry profitability to subpar levels c. Whether industry profitability will be favorably or unfavorably affected by the prevailing drivers of change in the industry d. Whether the company occupies a stronger market position than rivals e. How well the company's strategy delivers on the industry key success factors 3. As a general proposition, if an industry's overall profit prospects are above average, the industry environment is basically attractive; if industry profit prospects are below average, conditions are unattractive. 4. When a company decides an industry is fundamentally attractive and presents good opportunities, a strong case can be made that it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business. 5. The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants; the attractiveness of the opportunities an industry presents depends partly on a company has the resource strengths and competitive capabilities to capture them. 

chapter 4

Chapter 4 discusses the techniques of evaluating a company's internal circumstances—its resource capabilities, relative cost position, and competitive strength versus rivals. The analytical spotlight will be trained on five questions: (1) How well is the company's present strategy working? (2) What are the company's competitively important resources and capabilities? (3) Is the company able to take advantage of market opportunities and overcome external threats to its external well-being? (4) Are the company's prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition? (5) Is the company competitively stronger or weaker than key rivals? (5) What strategic issues and problems merit front-burner managerial attention? In probing for answers to these questions, four analytical tools—SWOT analysis, value chain analysis, benchmarking, and competitive strength assessment will be used. All four are valuable techniques for revealing a company's competitiveness and for helping company managers match their strategy to the company's own particular circumstances. LECTURE OUTLINE I. Question 1: How Well is the Company's Present Strategy Working? 1. In evaluating how well a company's present strategy is working, a manager has to start with what the strategy is. 2. Figure 4.1, Identifying the Components of a Single-Business Company's Strategy, shows the key components of a single-business company's strategy. 3. The first thing to pin down is the company's competitive approach. 4. Another strategy-defining consideration is the firm's competitive scope within the industry 5. Another good indication of the company's strategy is whether the company has made moves recently to improve its competitive position and performance. 6. While there is merit in evaluating the strategy from a qualitative standpoint (its completeness, internal consistency, rationale, and relevance), the best quantitative evidence of how well a company's strategy is working comes from its results. 7. The two best empirical indicators are: a. Whether the company is achieving its stated financial and strategic objectives b. Whether the company is an above-average industry performer 8. Other indicators of how well a company's strategy is working include: a. Whether the firm's sales are growing faster, slower, or about the same pace as the market as a whole. b. Whether the company is acquiring new customers at an attractive rate as well as retaining existing customers. c. Whether the firm's profit margins are increasing or decreasing and how well its margins compare to rival firms' margins d. Trends in the firm's net profits and returns on investment and how these compare to the same trends for other companies in the industry. e. Whether the company's overall financial strength and credit rating are improving or declining. f. How shareholders view the company based on trends in the company's stock price and shareholder value. g. Whether the firm's image and reputation with its customers are growing stronger or weaker. h. How well the company stacks up against rivals on technology, product innovation, customer service, product quality, delivery time, getting newly developed products to market quickly, and other relevant factors on which buyers base their choices. i. Whether key measures of operating performance are improving, remaining steady, or deteriorating. 9. The stronger a company's current overall performance, the less likely the need for radical changes in strategy. The weaker a company's financial performance and market standing, the more its current strategy must be questioned. Weak performance is almost always a sign of weak strategy, weak execution, or both. II. Question 2: What are the Company's Competitively Important Resources and Capabilities? 1. Table 4.1 Key Financial Ratios: How to Calculate Them and What They Mean, provides a detailed list of profitability ratios, liquidity ratios, leverage ratios, activity ratios, and other important measures of financial performance. The stronger a company's financial performance and market position, the more likely it has a well-conceived, well-executed strategy. CORE CONCEPT A resource is a productive input or competitive asset that is owned or controlled by the firm while a capability is the capacity of a firm to perform some activity proficiently. 2. It is essential that managers be able to identify the company's resources and capabilities in order to craft strategy. Resource and capability analysis is a powerful tool for sizing up a company's competitive assets and determining if they can support a sustainable competitive advantage over market rivals. CORE CONCEPT A company's resources and capabilities represent its competitive assets and are big determinants of its competitiveness and ability to succeed in the marketplace. 3. Identifying Resources - Table 4.2 Types of Company Resources, provides a detailed list of both tangible and intangible resources found in most firms. 4. Identifying Capabilities - Organizational capabilities are more complex than resources and are harder to categorize and search out. Two methods for identifying capabilities are available (1) start with a list of resources since capabilities are built from resources and look for clues about the types of capabilities the firm is likely to have accumulated and (2) start with a list of functions within the organization as capabilities are largely derived from key functional components of the organization. CORE CONCEPT A resource bundle is a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities. 5. Determining if a company's resources and capabilities are potent enough to produce a sustainable competitive advantage is based upon four tests of competitive power: CORE CONCEPT A sustainable competitive advantage is and advantage over market rivals that persists despite efforts of the rivals to overcome it. a. Is the resource or capability competitively valuable - Is it directly relevant to the company's strategy. b. Is the resource or capability rare - Is it something rivals lack. c. Is the resource or capability hard to copy - Is it built over time or unique. d. Can the resource or capability be trumped by different types of resources or capabilities. - Are good substitutes available for the resource or capability. CORE CONCEPT Social complexity and casual ambiguity are two factors that inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities. Casual ambiguity makes it very hard to figure out how a complex resource or capability contributes to competitive advantage and therefore exactly what to imitate. 6. A company's resources and capabilities must be managed dynamically. This requires a constantly evolving portfolio to sustain its competitiveness and help drive improvements in its performance. CORE CONCEPT A dynamic capability is the capacity of a company to modify its existing resources and capabilities to create new ones. III. Question 3: Is the Company Able to Seize Market Opportunities and Nullify External Threats? 1. Appraising a company's resource strengths and weaknesses and its external opportunities and threats, commonly known as SWOT analysis, provides a good overview of whether its overall situation is fundamentally healthy or unhealthy. A first-rate SWOT analysis provides the basis for crafting a strategy that capitalizes on the company's resources, aims squarely at a capturing the company's best opportunities, and defends against the threats to its well being. CORE CONCEPT SWOT analysis is a simple but powerful tool for sizing up a company's resource capabilities and deficiencies, its market opportunities, and the external threats to its future well-being. 2. Identifying a Company's Internal Strengths - Assessing a company's competencies involved looking for activities it perms well. One of the most important aspects of appraising a company's resource strengths has to do with its competence level in performing key pieces of its business. Company competencies can range from merely a competence in performing an activity to a core competence to a distinctive competence. CORE CONCEPT A competence is an activity that a company has learned to perform well. a. A competence is something an organization is good at doing. It is nearly always the product of experience, representing an accumulation of learning and the buildup of proficiency in performing an internal activity. CORE CONCEPT A core competence is a competitively important activity that a company performs better than other internal activities. b. A core competence is a proficiently performed internal activity that is central to a company's strategy and competitiveness. A core competence is a more valuable resource strength than a competence because of the well-performed activity's core role in the company's strategy and the contributions it makes to the company's success in the marketplace. c. A distinctive competence is a competitively important activity that a company performs better than its rivals. CORE CONCEPT A distinctive competence is a competitively important activity that a company performs better than its rivals - it thus represents a competitively superior internal strength. d. The conceptual differences between a competence, a core competence, and a distinctive competence draw attention to the fact that competitive capabilities are not all equal. e. Core competencies are competitively more important than simple competencies because they add power to the company's strategy and have a bigger positive impact on its market position and profitability. f. The importance of a distinctive competence to strategy-making rests with (1) the competitively valuable capability it gives a company, (2) its potential for being the cornerstone of strategy, and (3) the competitive edge it can produce in the marketplace 3. Identifying a Company's Weaknesses and Competitive Deficiencies - A weakness or competitive deficiency is something a company lacks or does poorly in comparison to others or a condition that puts it at a disadvantage in the marketplace. CORE CONCEPT A company's strengths represent its competitive assets; its weaknesses are shortcomings that constitute competitive liabilities. 4. Table 4.3 What to Look for in Identifying a Company's Strengths, Weaknesses, Opportunities, and Threats, provides a detailed list of potential strengths and competitive assets, potential weaknesses and competitive deficiencies, potential market opportunities, and potential external threats to a company's future profitability. 5. Identifying a Company's Market Opportunities - Seeking out attractive opportunities is a critical management function. However, a company is well advised to pass on a particular market opportunity unless it has or can acquire the resources to capture it. a. Market opportunity is a big factor in shaping a company's strategy. b. Managers cannot properly tailor strategy to the company's situation without first identifying its opportunities and appraising the growth and profit potential each one holds. c. In evaluating a company's market opportunities and ranking their attractiveness, managers have to guard against viewing every industry opportunity as a company opportunity. d. The market opportunities most relevant to a company are those that match up well with the company's financial and organizational resource capabilities, offer the best growth and profitability, and present the most potential for competitive advantage. 5. Identifying the External Threats to Profitability - Certain factors in a company's external environment pose threats to its profitability and competitive well-being. a. Examples of threats include: the emergence of cheaper or better technologies, rivals' introduction of new or improved products, lower-cost foreign competitors' entry into a company's market stronghold, new regulations, and so on. b. It is management's job to identify the threats to the company's future profitability and to evaluate what strategic actions can be taken to neutralize or lessen their impact.  6. What do the SWOT listings Reveal - SWOT analysis involves more than making four lists. The two most important parts of SWOT analysis are: a. Drawing conclusions from the SWOT listings about the company's overall situation b. Acting on those conclusions to better match the company's strategy to its resource strengths and market opportunities, to correct important weaknesses, and to defend against external threats c. Figure 4.2, The Three Steps of SWOT Analysis: Identify, Draw Conclusions, Translate into Strategic Action d. Just what story the SWOT analysis tells about the company's overall situation can be summarized in a series of questions relating strengths to weakness, strengths to opportunities, and strengths to threats. 7. Implications for SWOT analysis for strategic action - A company's internal strengths should always serve as the basis of its strategy. This places a heavy reliance on a company's best competitive assets and is the soundest route to attracting customers and competing successfully against rivals. IV. Question 4: Are the Company's Prices and Costs Competitive with Those of Key Rivals, and Does it Have an Appealing Customer Value Proposition? 1. One of the most telling signs of whether a company's business position is strong or precarious is whether its prices and costs are competitive with industry rivals. 2. Price-cost comparisons are especially critical in a commodity-product industry where the value provided to buyers is the same from seller to seller, price competition is typically the ruling force and lower-cost companies have the upper hand. The higher a company's costs are above those of close rivals, the more competitively vulnerable it becomes. 3. Two analytical tools are particularly useful in determining whether a company's prices and costs are competitive and thus conducive to winning in the marketplace: value chain analysis and benchmarking. A. The Concept of a Company's Value Chain CORE CONCEPT A company's value chain identifies the primary activities that create customer value and the related support activities. 1. Figure 4.3, A Representative Company Value Chain, depicts the linked set of value creating activities. A company's cost competitiveness depends not only on the costs of internally performed activities (its own value chain) but also on costs in the value chain of its suppliers and forward channel allies. 2. The value chain consists of two broad categories of activities: a. Primary activities: foremost in creating value for customers b. Support activities: facilitate and enhance the performance of primary activities 3. Illustration Capsule 4.1, Estimated Value Chain Costs for Just Coffee, a Producer of Fair-Trade Organic Coffee, shows representative costs for various activities performed by the producers and marketers of music CDs. Illustration Capsule 4.1, Value Chain Costs for Just Coffee, a Producer of Fair-Trade Coffee Organic Coffee Discussion Question: 1. What are the total costs associated with production and packaging of a pound of Fair-Trade Organic Coffee? Why is having this knowledge important to such a company? Answer: According to the information provided in the table, Just Coffee's costs are $7.40l. With an average markup of $2.59, the average price to the consumer is $9.99. This information is important because a company most know its actual and correct costs of production in order to establish fair product pricing in the marketplace. B. Why the Value Chains of Rival Companies Often Differ 1. A company's value chain and the manner in which it performs each activity reflect the evolution of its own particular business and internal operations, its strategy, the approaches it is using to execute its strategy, and the underlying economics of the activities themselves. 2. Because these factors differ from company to company, the value chain of rival companies sometimes differ substantially—a condition that complicates the task of assessing rivals' relative cost positions. C. The Value Chain System for an Entire Industry 1. Accurately assessing a company's competitiveness in end-use markets requires that company managers understand the entire value chain system for delivering a product or service to end-users, not just the company's own value chain. 2. Figure 4.4, A Representative Value Chain for an Entire Industry, explores a value chain for an entire industry. 3. Suppliers' value chains are relevant because suppliers perform activities and incur costs in creating and delivering the purchased inputs used in a company's own value chain. 4. Forward channel and customer value chains are relevant because: a. The costs and margins of a company's distribution allies are part of the price the end user pays b. The activities that distribution allies perform affect the end user's satisfaction D. Activity-Based Costing: A Tool for Assessing a Company's Cost Competitiveness 1. The next step in evaluating a company's cost competitiveness involves disaggregating or breaking down departmental cost accounting data into the costs of performing specific activities. 2. Traditional accounting identifies costs according to broad categories of expense. A newer method, activity-based costing, entails defining expense categories according to the specific activities being performed and then assigning costs to the activity responsible for creating the cost. 3. Table 4.3, The Differences between Traditional Cost Accounting and Activity-Based Cost Accounting: A Supply Chain Activity Example, provides an illustrative example of the difference between traditional cost accounting and activity-based accounting. 4. Perhaps 25% of the companies that have explored the feasibility of activity-based costing have adopted this accounting approach. E. Benchmarking: A Tool for Assessing Whether a Company's Value Chain Costs are in Line 1. Benchmarking is a tool that allows a company to determine whether the manner in which it performs particular functions and activities represent industry "best practices" when both cost and effectiveness are taken into account. CORE CONCEPT Benchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques or "best practices" to improve the cost and effectiveness of a company's own internal activities. 2. Benchmarking entails comparing how different companies perform various value chain activities. 3. The objectives of benchmarking are: a. To identify the best practices in performing an activity b. To learn how other companies have actually achieved lower costs or better results in performing benchmarked activities c. To take action to improve a company's competitiveness whenever benchmarking reveals that its costs and results of performing an activity do not match those of other companies 4. The tough part of benchmarking is not whether to do it but rather how to gain access to information about other companies practices and costs. CORE CONCEPT Benchmarking the costs of company activities against rivals provides hard evidence of a company's cost-competitiveness. 5. Sometimes benchmarking can be accomplished by collecting information from published reports, trade groups, and industry research firms and by talking to knowledgeable industry analysts, customers, and suppliers. 6. Making reliable cost comparisons is complicated by the fact that participants often use different cost accounting systems. 7. The explosive interest of companies in benchmarking costs and identifying best practices has prompted consulting organizations to gather benchmarking data, do benchmarking studies, and distribute information about best practices without identifying sources. Having an independent group gather the information and report it in a manner that disguises the names of individual companies permits participating companies to avoid disclosing competitively sensitive data to rivals and reduces the risk of ethical problems. 8. Illustration Capsule 4.2, Benchmarking and Ethical Conduct, lists some guidelines with regard to benchmarking and ethical conduct. Illustration Capsule 4.2 Benchmarking and Ethical Conduct Discussion Question: 1. Identify why ethical conduct is important in benchmarking. Answer: In a benchmarking situation, ethical conduct is important because the discussion between benchmarking partners can involve competitively sensitive data that can conceivably raise questions about possible restraint of trade or improper business conduct. F. Strategic Options for Remedying a Cost Disadvantage 1. Value chain analysis and benchmarking can reveal a great deal about a firm's cost competitiveness. 2. There are three main areas in a company's overall value chain where important differences in the costs of competing firms can occur: a company's own activity segments, suppliers' part of the industry value chain, and the forward channel portion of the industry chain. 3. Improving the Efficiency and Effectiveness of Internally Performed Value Chain Activities a. When the source of a firm's cost disadvantage is internal, managers can use any of the following eight strategic approaches to restore cost parity: 1. Implement the use of best practices throughout the company, particularly for high-cost activities 2. Try to eliminate some cost-producing activities altogether by revamping the value chain 3. Redesign the product and/or some of its components to eliminate high cost components so that it can be manufactured or assembled quickly and more economically 4. See if certain internally performed activities can be outsourced from vendors or performed by contractors more cheaply than they can be done internally 5. Shift to lower-cost technologies and/or invest in productivity enhancing cost saving technological improvements. 6. Stop performing activities that add little or no customer value. b. To improve the effectiveness of the company's value proposition there are several steps the company may take 1. Implement the use of best practices for quality throughout the company. 2. Adopt best practices and technologies that spur innovation, improve design, and enhance creacivity. 3. Implement the use of best practices in customer service. 4.. Reallocate resources towards activities that have the biggest impact of value delivered to the customer. 5. Gain a deep understanding of how company activities impact the buyer's value chain and improve those that have the most significant impact. 6. Adopt best practices for signaling value to the customer. 4. Improving the Efficiency and Effectiveness of Suppler Related Value Chain Activities: Supplier-related cost disadvantages can be attacked by pressuring suppliers for lower prices, switching to lower-priced substitute inputs, and collaborating closely with suppliers to identify mutual cost-saving opportunities. 5. Improving the Efficiency and Effectiveness of Distribution Related Value Chain Activities: There are three main ways to combat a cost disadvantage in the forward portion of the industry value chain: a. Pressure dealer-distributors and other forward channel allies to reduce their costs and markups so as to make the final price to buyers more competitive with the prices of rivals. b. Collaborate with forward channel allies to identify win-win opportunities to reduce costs. c. Change to a more economical distribution strategy, including switching to cheaper distribution channels or perhaps integrating forward into company-owned retail outlets. G. Translating Proficient Performance of Value Chain Activities into Competitive Advantage 1. A company that does a first-rate job of managing its value chain activities relative to competitors stands a good chance of leveraging its competitively valuable competencies and capabilities into sustainable competitive advantage. 2. Performing value chain activities in ways that give a company the capabilities to either outmatch the competencies and capabilities of rivals or else beat them on costs are two good ways to secure competitive advantage. 3. Figure 4.5, Translating Company Performance of Value Chain Activities into Competitive Advantage, shows the process of translating proficient company performance into competitive advantage. V. Question 5: Is the Company Competitively Stronger or Weaker Than Key Rivals? A. Competitive Strength Assessments 1. Using value chain analysis and benchmarking to determine a company's competitiveness on price and cost is necessary but not sufficient. 2. The answers to two questions are of particular interest: a. How does the company rank relative to competitors on each of the important factors that determine market success? b. Does the company have a net competitive advantage or disadvantage to major competitors? 3. An easy method for answering the questions posed above involves developing quantitative strength ratings for the company and its key competitors on each industry key success factor and each competitively decisive resource capability. 4. The followings are steps for compiling a competitive strength assessment: a. Step 1: make a list of the industry's key success factors and most telling measures of competitive strength or weakness b. Step 2: assign weights to each of the measures based upon perceived importance c. Step 3: rate the firm and its rivals on each factor d. Step 4: multiply the rating by the weight to obtain the score for each measure e. Step 5: sum the weighted scores for measure to get an overall measure of competitive strength for each company being rated d. Step 6: use the overall strength ratings to draw conclusions about the size and extent of the company's net competitive advantage or disadvantage and to take specific note of areas of strengths and weaknesses 5. Table 4.4, A Representative Weighted Competitive Strength Assessment, provides an examples of a weighted competitive strength assessment. 6. Using a weighted rating system is more effective because the different measures of competitive strength are unlikely to be equally important. 7. No matter whether the differences between the important weights are big or little, the sum of the weights must equal 1.0. 8. Summing a company's weighted strength ratings for all the measures yields an overall strength rating. Comparisons of the weighted overall strength scores indicate which competitors are in the strongest and weakest competitive positions and who has how big a net competitive advantage over whom. B. Strategic Implications of Competitive Strength Assessments 1. Competitive strength assessments provide useful conclusions about a company's competitive situation. 2. The competitive strength ratings point to which rival companies may be vulnerable to competitive attack and the areas where they are weakest. 3. High competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage. VI. Question 6: What Strategic Issues and Problems Merit Front-Burner Managerial Attention? 1. The final and most important analytical step is to zero in on exactly what strategic issues that company managers need to address and resolve for the company to be more financially and competitively successful in the years ahead. 2. This step involves drawing on the results of both industry and competitive analysis and the evaluations of the company's own competitiveness. 3. Pinpointing the precise problems that management needs to worry about sets the agenda for deciding what actions to take next to improve the company's performance and business outlook. 4. Zeroing in on the strategic issues a company faces and compiling a "worry list" of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention. 5. The "worry list" of issues and problems can include such things as: a. How to stave off market challenges from new foreign competitors b. How to combat rivals' price discounting c. How to reduce the company's high costs to pave the way for price reductions d. How to sustain the company's present growth rate in light of slowing buyer demand e. Whether to expand the company's product line f. Whether to acquire a rival company to correct the company's competitive deficiencies g. Whether to expand into foreign markets rapidly or cautiously h. Whether to reposition the company and move to a different strategic group i. What to do about the aging demographics of the company's customer base 6. A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the company's financial and competitive success in the years ahead.