External environment
Common "Weapons" for Competing with Rivals
- Discounting prices, holding clearance sales: Lowers price (P), increases total sales volume and market share, lowers profits if price cuts are not offset by large increases in sales volume - Offering coupons, advertising items on sale: Increases sales volume and total revenues, lowers price (P), increases unit costs (C), may lower profit margins per unit sold (P - C) - Advertising product or service characteristics, using ads to enhance a company's image: Boosts buyer demand, increases product differentiation and perceived value (V), increases total sales volume and market share, but may increase unit costs (C) and lower profit margins per unit sold - Innovating to improve product performance and quality: Increases product differentiation and value (V), boosts total sales volume, likely to increase unit costs (C) - Introducing new or improved features, increasing the number of styles to provide greater product selection: Increases product differentiation and value (V), strengthens buyer demand, boosts total sales volume and market share, likely to increase unit costs (C) - Increasing customization of product or service: Increases product differentiation and value (V), increases buyer switching costs, boosts total sales volume, often increases unit costs (C) - Building a bigger, better dealer network: Broadens access to buyers, boosts total sales volume and market share, may increase unit costs (C) - Improving warranties, offering low- interest financing: Increases product differentiation and value (V), increases unit costs (C), increases buyer switching costs, boosts total sales volume and market share
Thinking strategically about a company's external situation involves probing for answers to the following questions...
1. What are the strategically relevant factors in the macro-environment, and how do they impact an industry and its members? (Pestel) 2. What kinds of competitive forces are industry members facing, and how strong is each force? The strength of competition is a composite of five forces: (1) rivalry within the industry, (2) the threat of new entry into the market, (3) inroads being made by the sellers of substitutes, (4) supplier bargaining power, and (5) buyer power. (Porter) 3. What cooperative forces are present in the industry, and how can a company harness them to its advantage (The value net framework) 4. What factors are driving changes in the industry, and what impact will they have on competitive intensity and industry profitability? 5. What market positions do industry rivals occupy—who is strongly positioned and who is not? (Strategic group mapping) 6. What strategic moves are rivals likely to make next? Anticipating the actions of rivals can help a company prepare effective countermoves. SOAR Framework 7. What are the key factors for competitive success? (KSFs). 8. Is the industry outlook conducive to good profitability? (all analysis)
Matching Company Strategy to Competitive Conditions
A company's strategy is strengthened the more it provides insulation from competitive pressures, shifts the competitive battle in the company's favor, and positions the firm to take advantage of attractive growth opportunities. Effectively matching a company's business strategy to prevailing competitive conditions has two aspects: 1. Pursuing avenues that shield the firm from as many of the different competitive pressures as possible. 2. Initiating actions calculated to shift the competitive forces in the company's favor by altering the underlying factors driving the five forces.
The Expected Reaction of Industry Members in Defending against New Entry
A second factor affecting the threat of entry relates to the ability and willingness of industry incumbents to launch strong defensive maneuvers to maintain their positions and make it harder for a newcomer to compete successfully and profitably. Campaigns o hamper (or even defeat) a newcomer's attempt to gain a market foothold big enough to compete successfully can include any of the "competitive weapons". Even high entry barriers may not suffice to keep out certain kinds of entrants: those with resources and capabilities that enable them to leap over or bypass the barriers. Also, High entry barriers and weak entry threats todaydo not always translate into high entry barriers and weak entry threats tomorrow.
THE FIVE FORCES FRAMEWORK
Competitive pressures on companies within an industry come from five sources. These include: (1) competition from rival sellers, (2) competition from potential new entrants to the industry, (3) competition from producers of substitute products, (4) supplier bargaining power, and (5) customer bargaining power. Using the five forces model to determine the nature and strength of competitive pressures in a given industry involves three steps: Step 1: For each of the five forces, identify the different parties involved, along with the specific factors that bring about competitive pressures. Step 2: Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate, or weak). Step 3: Determine whether the five forces, overall, are supportive of high industry profitability.
Competitive pressures stemming from customer bargaining power
Competitive pressures from buyers increase when they have strong bargaining power and are price- sensitive. Buyer bargaining power is stronger when: - Buyer demand is weak in relation to industry supply. - The industry's products are standardized or undifferentiated. - Buyer costs of switching to competing products are low. - Buyers are large and few in number relative to the number of industry sellers. - Buyers pose a credible threat of integrating backward into the business of sellers. - Buyers are well informed about the quality, prices, and costs of sellers. - Buyers have the ability to postpone purchases (Consumers often have the option to delay purchases of durable goods (cars, major appliances), or decline to buy discretionary goods (massages, concert tick- ets) if they are not happy with the prices offered) Buyers are price-sensitive when: - Buyers earn low profits or low income. - The product represents a significant fraction of their purchases. - The product is undifferentiated or quality is not an important factor. Competitive pressures from buyers decrease under the opposite conditions.
Competition from producers of substitute products
Competitive pressures from substitutes are stronger when: • Good substitutes are readily available and attractively priced. • Substitutes have comparable or better performance features. • Buyers have low costs in switching to substitutes. Indicators of increasing competitive strength among substitutes • Sales of substitutes are growing faster than sales of the industry being analyzed. • Producers of substitutes are moving to add new capacity. • Profits of the producers of substitutes are on the rise.
Complementors
Complementors are the producers of complementary products, which are products that enhance the value of the focal firm's products when they are used together. E.g. pc/software, toothbrush/toothpaste Complementoryfirms: - Cooperate to increase the total pie - Compete to divide the value created - Co-opetition
Driving-forces analysis (industry dynamics)
Driving forces are the major underlying causes of change in industry and competitive conditions. Any strategies devised by management will therefore play out in a dynamic industry environment, so it's imperative that managers consider the factors driving industry change and how they might affect the industry environment. Industry and competitive conditions change because forces are enticing or pressuring certain industry participants (competitors, customers, suppliers, complementors) to alter their actions in important ways. The most powerful of the change agents are called driving forces because they have the biggest influences in reshaping the industry landscape and altering competitive conditions.Moreover, with early notice, managers may be able to influence the direction or scope of environmental change and improve the outlook. Driving-forces analysis has three steps: (1) identifying what the driving forces are; (2) assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive; and (3) determining what strategy changes are needed to prepare for the impact of the driving forces. All three steps merit further discussion.
KEY SUCCESS FACTORS
Key success factors are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are essential to surviving and thriving in the industry. KSFs vary from industry to industry, and even from time to time within the same industry, as change drivers and competitive conditions change. But regardless of the circumstances, an industry's key success factors can always be deduced by asking the same three questions: 1. On what basis do buyers of the industry's product choose between the competing brands of sellers? That is, what product attributes and service characteristics are crucial? 2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful? 3. What shortcomings are almost certain to put a company at a significant competitive disadvantage?
Difference between the five forces network and the value net framework
Like the five forces framework, the value net includes an analysis of buyers, suppliers, and substitutors. But differs in important ways: - the analysis focuses on the interactions of industry participants with a particular company (firm is in the center of the framework) - the category of "competitors" is defined to include not only the focal firm's direct competitors or industry rivals but also the sellers of sub- stitute products and potential entrants. - he value net framework introduces a new category of industry participant that is not found in the five forces framework— that of "complementors."
The six principal components of the macro-environment:
Political factors: include matters such as tax policy, fiscal policy, tariffs, the political climate, and the strength of institutions such as the federal banking system. Economic conditions: include the general economic climate and specific factors such as interest rates, exchange rates, the inflation rate, the unemployment rate, the rate of economic growth, trade deficits or surpluses, savings rates, and per-capita domestic product. Sociocultural forces: include the societal values, attitudes, cultural influences, and lifestyles that impact demand for particular goods and services, as well as demographic factors such as the population size, growth rate, and age distribution. Technological factors: include the pace of technological change and technical developments that have the potential for wide-ranging effects on society, such as genetic engineering, nanotechnology, and solar energy technology. Environmental forces: ecological and environmental forces such as weather, climate, climate change, and associated factors like flooding, fire, and water shortages. Legal and regulatory factors: include the regulations and laws with which companies must comply, such as consumer laws, labor laws, antitrust laws, and occupational health and safety regulation.
Competition from rival sellers
Rivalry increases and becomes a stronger force when: - Buyer demand is growing slowly or declining. (Rapidly expand- ing buyer demand produces enough new business for all industry members to grow without having to draw customers away from rival enterprises. But in markets where buyer demand is slow-growing or shrinking, companies eager to gain more business are likely to engage in aggressive price discounting, sales promotions, and other tactics to increase their sales volumes at the expense of rivals, sometimes to the point of igniting a fierce battle for market share.) - Buyer costs to switch brands are low. - The products of industry members are commodities or else weakly differentiated. (When the offerings of rivals are identical or weakly differentiated, buyers have less reason to be brand-loyal—a condition that makes it easier for rivals to convince buyers to switch to their offerings. Moreover, when the products of different sellers are virtu- ally identical, shoppers will choose on the basis of price, which can result in fierce price competition among sellers.) - The firms in the industry have excess production capacity and/or inventory. (Whenever a market has excess sup- ply (overproduction relative to demand), rivalry intensifies as sellers cut prices in a desperate effort to cope with the unsold inventory. A similar effect occurs when a product is perishable or seasonal, since firms often engage in aggressive price cutting to ensure that everything is sold.) - The firms in the industry have high fixed costs or high storage costs. (whenever fixed costs account for a large fraction of total cost so that unit costs are significantly lower at full capacity, firms come under significant pressure to cut prices whenever they are operating below full capacity. Unused capacity imposes a significant cost-increasing penalty because there are fewer units over which to spread fixed costs. The pressure of high fixed or high storage costs can push rival firms into offering price concessions, special discounts, and rebates and employing other volume-boosting competitive tactics.) - Competitors are numerous or are of roughly equal size and competitive strength. - Rivals have diverse objectives, strategies, and/or countries of origin. (A diverse group of sellers often contains one or more mavericks willing to try novel or rule-breaking market approaches, thus generating a more volatile and less predictable competitive environment. Globally competitive markets are often more rivalrous, especially when aggressors have lower costs and are intent on gaining a strong foothold in new country markets.) - Rivals have emotional stakes in the business or face high exit barriers. (. In industries where the assets cannot easily be sold or transferred to other uses, where workers are entitled to job protection, or where owners are commit- ted to remaining in business for personal reasons, failing firms tend to hold on longer than they might otherwise—even when they are bleeding red ink. Deep price discounting typically ensues, in a desperate effort to cover costs and remain in business. This sort of rivalry can destabilize an otherwise attractive industry.) Rivalry decreases and becomes a weaker force under the opposite conditions.
STRATEGIC GROUP ANALYSIS (strategic group mapping)
Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions. Within an industry, companies commonly sell in different price/quality ranges, appeal to different types of buyers, have different geographic coverage, and so on. Some are more attractively positioned than others. Understanding which companies are strongly positioned and which are weakly positioned is an integral part of analyzing an industry's competitive structure. The best technique for revealing the market positions of industry competitors is strategic group mapping. Two reasons account for why some positions can be more attractive than others: 1. Prevailing competitive pressures from the industry's five forces may cause the profit potential of different strategic groups to vary. 2. Industry driving forces may favor some strategic groups and hurt others.
The Value of Strategic Group Maps
Strategic group maps reveal which companies are close competitors and which are distant competitors. Some strategic groups are more favorably positioned than others because they confront weaker competitive forces and/or because they are more favorably impacted by industry driving forces. Since some strategic groups are more attractive than others, one might ask why less well-positioned firms do not simply migrate to the more attractive position. The answer is that mobility barriers restrict movement between groups in the same way that entry barriers prevent easy entry into attractive industries. The most profitable strategic groups may be protected from entry by high mobility barriers.
COMPETITOR ANALYSIS AND THE SOAR FRAMEWORK (Porter)
Studying competitors' past behavior and preferences provides a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace. Michael Porter's SOAR Framework for Competitor Analysis points to four indicators of a rival's likely strategic moves and countermoves. These include a rival's: - Strategy: How the rival company is competing currently - Objectives: The rival's strategic and performance objectives - Assumptions: What the rival believes about itself andthe industry - Resources and capabilities: The rival's key strengths and weaknesses
Competitive pressures stemming from supplier bargaining power
Supplier bargaining power is stronger when: - Suppliers' products and/or services are in short supply. - Suppliers' products and/or services are differentiated. (The more valuable a particular input is in terms of enhancing the performance or quality of the products of industry members, the more bargaining leverage suppliers have.) - Industry members incur high costs in switching their purchases to alternative suppliers. - The supplier industry is more concentrated than the industry it sells to and is dominated by a few large companies. (Suppliers with sizable market shares and strong demand for the items they supply generally have sufficient bargaining power to charge high prices and deny requests from industry members for lower prices or other concessions.) - Industry members do not have the potential to integrate backward in order to self-manufacture their own inputs. (As a rule, suppliers are safe from the threat of self-manufacture by their customers until the volume of parts a customer needs becomes large enough for the customer to justify backward integration into self- manufacture of the component) - Suppliers' products do not account for more than a small fraction of the total costs of the industry's products. (The more that the cost of a particular part or component affects the final product's cost, the more that industry members will be sensitive to the actions of suppliers to raise or lower their prices.) - There are no good substitutes for what the suppliers provide. - Industry members do not account for a big fraction of suppliers' sales. (The bargaining power of suppliers is stronger, then, when they are not bargaining with major customers). Supplier bargaining power is weaker under the opposite conditions.
Identifying the Forces Driving Industry Change
The Most Common Drivers of Industry Change: • Changes in the long-term industry growth rate • Increasing globalization • Emerging new Internet capabilities and applications • Shifts in buyer demographics • Technological change and manufacturing process innovation • Product and marketing innovation • Entry or exit of major firms • Diffusion of technical know-how across companies and countries • Changes in cost and efficiency • Reductions in uncertainty and business risk • Regulatory influences and government policy changes • Changing societal concerns, attitudes, and lifestyles
The Value Net analysis
The Value Net Model identifies four direct influences on business success: -customers suppliers - competitors (Includes substitutors and potential entrants) - complementors And explains strategies for establishing cooperative and productive relationships with them. Value net analysis can help managers discover the potential to improve their position through cooperative as well as competitive interactions.
Tools for assessing the company's industry and competitive environment
The five forces framework, the value net, driving forces, strategic groups, competitor analysis, and key success factors.
Is the industry outlook conducive to good profitability?
The last step in industry anal- ysis is summing up the results from applying each of the frameworks employed in answering questions 1 to 7: PESTEL, five forces analysis, Value Net, driving forces, strategic group mapping, competitor analysis, and key success factors. Applying multiple lenses to the question of what the industry outlook looks like offers a more robust and nuanced answer. If the answers from each framework, seen as a whole, reveal that a company's profit prospects in that industry are above- average, then the industry environment is basically attractive for that company. What may look like an attractive environment for one company may appear to be unattractive from the perspective of a different company. Hence, the important factors on which to base a conclusion include: - How the company is being impacted by the state of the macro-environment. - Whether strong competitive forces are squeezing industry profitability to subpar levels. - Whether the presence of complementors and the possibility of cooperative actions improve the company's prospects. - Whether industry profitability will be favorably or unfavorably affected by the prevailing driving forces. - Whether the company occupies a stronger market position than rivals. - Whether this is likely to change in the course of competitive interactions. How well the company's strategy delivers on the industry key success factors.
Pesten analysis: the macro-environment
The macro-environment encompasses the broad environmental context in which a company's industry is situated. Every company operates in a broad "macro-environment" that comprises six principal components: political factors; economic conditions in the firm's general environ- ment (local, country, regional, worldwide); sociocultural forces; technological factors; environmental factors (concerning the natural environment); and legal/regulatory conditions. Each of these components has the potential to affect the firm's more immediate industry and competitive environment, although some are likely to have a more important effect than others. PESTEL analysis can be used to assess the strategic relevance of the six principal components of the macro-environment: Political, Economic, Social, Technological, Environmental, and Legal/ Regulatory forces. Since macro-economic factors affect different industries in different ways and to different degrees, it is important for managers to determine which of these represent the most strategically relevant factors outside the firm's industry boundaries. By strategically relevant, we mean important enough to have a bearing on the decisions the company ultimately makes about its long-term direction, objectives, strategy, and business model.
Assessing the Impact of the Forces Driving Industry Change
The most important part of driving-forces analysis is to determine whether the collective impact of the driv- ing forces will increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability. Three questions need to be answered: 1. Are the driving forces, on balance, acting to cause demand for the industry's product to increase or decrease? 2. Is the collective impact of the driving forces making competition more or less intense? 3. Will the combined impacts of the driving forces lead to higher or lower industry profitability?
Adjusting the Strategy to Prepare for the Impacts of Driving Forces
The third step in the strategic analysis of industry dynamics—where the real payoff for strategy making comes—is for managers to draw some conclusions about what strategy adjustments will be needed to deal with the impacts of the driving forces.
Competition from potential new entrants to the industry
Threat of entry is a stronger force when (1) incumbents are unlikely to make retaliatory moves against new entrants and (2) entry barriers are low. Entry barriers are high (and threat of entry is low) when: - Incumbents have large cost advantages over potential entrants due to: High economies of scale, Significant experience-based cost advantages (hard to replicate) or learning curve effects, or other cost advantages (e.g., favorable access to inputs, technology, location, or low fixed costs) - Customers with strong brand preferences and/or loyalty to incumbent sellers - Patents and other forms of intellectual property protection - Strong network effects in customer demands (many other users of the product, such as video games) - High capital requirements (The larger the total dollar investment needed to enter the market successfully, the more limited the pool of potential entrants.) - Limited new access to distribution channels and shelf space (When existing sellers have strong, well-functioning distributor-dealer networks, a newcomer has an uphill struggle in squeezing its way into existing distribution channels. Potential entrants sometimes have to "buy" their way into wholesale or retail channels by cutting their prices to provide dealers and distributors with higher markups and profit margins or by giv- ing them big advertising and promotional allowances). - Restrictive government policies - Restrictive trade policies
Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?
n fact, intense competitive pressures from just one of the five forces may suffice to destroy the conditions for good profitability and prompt some companies to exit the business.As a rule, the strongest competitive forces determine the extent of the competitive pressure on industry profitability. In that sense, an industry with three to five strong forces is even more "unattractive" as a place to compete. Especially intense competitive conditions due to multiple strong forces seem to be the norm in tire manufacturing, apparel, and commercial airlines, three industries where profit margins have historically been thin. In contrast, when the overall impact of the five competitive forces is moderate to weak, an industry is "attractive" in the sense that the average industry member can reasonably expect to earn good profits and a nice return on investment.