Chapter 3 CAP
The third step in the strategic analysis of industry dynamics is
where the real payoff for strategy making comes 0 is for mangers to draw some conclusions about what strategy adjustments will be needed to deal with the impacts of the driving forces.
What factors increase buyer price sensitivity?
1) Buyer price sensitivity increases when buyers are earning low profits or have low income 2) if the product represents a large fraction of their total purchases
Identifying the forces driving industry change :
1) Changes in an industries long term growth rate 2) increasing globalization 3) emerging new internet capailtiies and applications 4) shifts in who buys the products and how the products are used 5) technplogical change and manufacturing process innovation 6) product innovation 7) entry or exit of major firms 8) diffusion of technical know how across companies and countries 9) changes in cost and efficiency 10) reductions in uncertainty and business risk 11) regulatory influence and government policy changes 12) changing societal concerns, attitudes, and lifestyles.
What can be learned from the strategic group maps
1) Helps identify which industry members are close rivals and which are not 2) not all positions on the map are equally attractive
What are the six principal components of macro environment
: 1) political factors 2) economic conditions in the firms general environment 3) sociocultural forces 4) technological factors 5) environmental factors (natural environment) 6) legal/regulatory conditions.
Objectives:
Financial and strategic objectives. Look at whether or not they have been successful ata meeting their objectives and if they have pressure to improve. If they are consistently doing well they will likely not change
Current strategy questions to consider:
How is the competitor positioned in the market? What is the basis for its competitive advantage? What kinds of investments is it making(as an indicator of its growth trajectory)?
INDUSTRY DYNAMICS AND THE FORCES DRIVING CHANGE
INDUSTRY DYNAMICS AND THE FORCES DRIVING CHANGE
THE INDUSTRY OUTLOOK FOR PROFITABILITY
THE INDUSTRY OUTLOOK FOR PROFITABILITY
True or false: Rivals may race one another to differentiate their products by offering better performance features or higher quality or improved customer service or a wider product selecion.
TRUE
True or false: Competitive battles can assume many forms that extend well beyond lively price competitions:
TRUE! Rivals may resort to marketing tactics like special sales promotions, heavy advertising, rebates, or low interest rate financing to drum up additional sales.
True or false: All of the methods discussed in this chapter are good helpful, but are more helpful separate than combined?
False. Combing the provides a richer understanding
Which of the five competitive forces is often the strongest?
The rivalry for buyer patronage among competing sellers of a product or service.
The choice of competitive weapons
The choice of competitive weapons
True or false: 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.
True!
True or false: even the threat of a new entry puts added competitive pressure on current industry members and functions as an important competitive force .
True! This is because credible threat of entry often prompts industry members to lower their prices and initiate defensive actions in an attempt to deter new entrants.
True or false: Companies in one industry are vulnerable to competitive pressure from the actions of companies in closely adjoining industry?
True! This is is true whenever the buyers view the products of the two industries as good substitutes.
True or false: barriers to entering an industry can become stronger or weaker over time?
True. For example when the patent on 3D printers expired in 2014 competition surged
True or false: Having more than one strong force will not worsen the effect on industry profitability?
True. It does ean that the undusty has multiple competitive challenges with which to cope.
Assumptions:
What are the assumptions of the company? Companies that take on the too big to fail mindset may take on risk that can be exploited.
It is important to recognize that not all buyers of an industries product have
equal degrees of bargaining power with sellers, and some may be less sensitive than others to prive, quality or service differences.
Managers must , scan the external environment and be alert
for potentially important outer ring developments, aasses their impact and influence ,adn adapt the companies direction and strategy as needed.
Thinking strategically about internal and external environment leads to >
forming a strategic vision where the company needs to head which leads to > identifying promising strategic options for the company which leads to selecting the best strategy and business model for the company.
A companies strategy is increasingly effective the more it provides some
insulation from competitive pressures, shifts the competitive battle in the companies favor and positions the firm to take advantage of attractive growth options.
Strategic group:
is a cluster of industry rivals that have similar competitive approaches and market positions.
How do I determine whether an industry's outlook presents a company with succieentyly attractive opportunities for growth and profitability.
1) How the company is being impacted by the sate of the macro environment 2) whether strong competitive forces are squeezing industry profitability to subpar levels 3) whether the rpescence of complementors and the possibility of cooperative actions improve the companies prospects 4) whether industry profitability will be favrable or unfavorable affected by the prevailing driving forces 5) whether the company occupies a strong market positon than rivals6) whether this is likelto change in the course of competitive interactions 7) how well the companies strategy delivers on the industry key success factors.
Why are not all positions on the map equally attractive?
1) Prevailing competitive pressures from the industries 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.
Three questions need to be answered
1) are the driving forces, on balance,acting to cause demand for the industries 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
Buyers bargaining power is stronger when
1) biyer demand is weak in relation to the available supply 2) industry goods are standardized or differentiation is weak 3) buyers costs of switching to competing brands or substitutes are relatively low 4) buyers are large and few in number relative to the number of sellers 5) buyers pose a credible threat of integrating backward into the business of sellers 6) buyers are well informed about the product offerings of sellers (product features and quality, prices, buyer reviews) and the cost of production (an indicator of markup) 7) buyers have discretion to delay their purchases or perhaps even not make a purchase at all
Rivalry increases and becomes a stronger force when:
1) buyer demand is growing slowly(less buyers mean competitors have to steal from each others) 2) buyer costs to switch brands are low 3) the products of industry members are commodtories or else weekly differentiated 4) the firms of the industry have excess production capacity and inventory 5) the firms in the industry have high fixed costs or high storage costs 6) competitors are numerous or are of roughly equal size and competitive strength 7) rivals have diverse objectives, strategies, and/or countries of origin 9every group has a maverick that is willing to do something novel or rulebreaking which makes the market less predictable and more volatile). 8) rivals have motional stakes in the business or face high exit barriers (difficult to sell assets, jobs entitled to protect, owners are committed to remaining in business for personal reasons. Firms hold on longer than they should and take risky/deep price discounting moves to do it
The five forces framework include
1) competition from rival sellers, 2) competition from potential new entrants, 3) competition from producers, 4) supplier bargaining power, 5) customer bargaining power.
What are Michael Porters four thingies?
1) current strategy 2) objecivres 3) resources and capabilities 5) and assumptions about itself in the industry.
Supplier power is strong when
1) demand for suppliers products is high and the products are in short supply 2) suppliers provide differentiated inputs that enhance the performance of the industry;s product 3) it is difficult or costly for industry members to switch their purchase from one supplier to another 4) the supplier industry is dominated by a few large companies and it is more concentrated than the industry it sells to 5) industry members are incapable of integrating backward to self manufacture items they have been buyin from suppliers 6) suppliers provide an item that accounts for no more than a sall fraction of the costs of the industry's product 7) good substitutes are not available for the suppliers products 8) industry members are not major customers of suppliers
How do companies identify subsittutes?
1) determining where the industry boundaries lie and 2) figuring out which other products or services can address the same basic customer needs as those produced by industry members.
Types of competitive weapons
1) discounting prices/holding clearance sales 2) offering coupons/advertising items on sale 3) advertising product or service characteristics using ads to enhance a company's image 4) innovating to improve product performand and quality 5) introducing new or improved features, increasing the number of styles to provide greater product selection 6) increasing customization of product or service 7) building a bigger, better dealer network 8) improving warranties, offering low interest financing. COME BACK 55
Thinking strategically about the competitive environment requires some analytic tools like
1) five forces framework, the value net, driving forces, strategic groups, competitor analysis, and key success factors.
What three factors determine whether the competitive pressures from substitute products are strong or week?
1) good substitutes are readily available and are attractively priced 2) buyers view he substitutes as comparable or better in terms of quality, performance, and other relevant attributes 3) the costs that buyers incur in switching to the substitutes are low.
What is the procedure for constructing a strategic group map?
1) identify the competitive characteristics that delineate strategic approaches used in the industry. Typical variables used in creating strategic group maps are price/quality range( high, medium, low), geographic coverage (local, regional, national, global), product line breadth (narrow vs wide), degree of service offered (no frills, limited, full), use of distribution channels (retail, wholesale, internet, multiple), degree of vertical integration ( none, partial, full), and degree of diversification into other industries (none, some, considerable). 2) plot the firms on a two variable map using pairs of these variables ^ 3) assign firms occupying about the same map location to the same strategic group 4) draw circles around each strategic group, making the circles proportional to the size of the groups share of the total industry sales revenues.
Driving forces analysis has three steps
1) identifying what the driving forces are 2) assessing whether th drivers of change are, on the whole, acting to make the industry more or elss attractive 3) determining what strategy changes are needed to preatpe for the impact of the driving forces
How can an industry;s key success factors be determined
1) on what basis do buyers of industry product choose between the competing brands of sellers? That is, what product attributes and service characteristics are crucial? 2) Give the nature of competitive rivalry prevailing in the marketplace, what resorucs acompetive capabilities must a company have to competitively successful? 3) What shortcomings are almost certain to put a company at a significant competitive disadvantage?
Effectively matching a company's business strategy to prevailing competitive conditions has two aspects
1) pursuin avenues that shield the firm from as many of the different competitive pressures as possible. 2) Inititaing actions calculated to shift the competitive forces in the company's favor by altering the underlying factors driving the five forces.
How does the value net differ from the five forces framework?
1) the analysis focuses on the interactions of industry participants with the particular company. 2) the category competitors is defined to include not only the focal firms direct competitors or industry rivals but also the sellers of substitute products and potential entrants 3) the value net framework introduces a new category of industry participants that is not found in the five force framework - that of complementors.
Whether buyers are able to exert strong competitive pressures on industry members depends on .
1) the degree to which buyers have bargaining power 2) the extent to which buyers are price sensitive
What determines how threatening a new entry is in a particular market?
1) the expected reaction of the incumbent firms to new entry 2) and what are known as barriers to entry,
Entry barriers are high under the following conditions
1) there are sizable economies of scale in production, distribution, advertising and other activities 2) incumbents have other hard to replicate cost advantages over new entrants 3) customers have strong brand preferences and high degrees of loyalty to seller 4) patents and other forms of intellectual property protection are in place 5) there are strong network effects in customer demand 6) capital requirements are high 7) there are difficulties in buildin a network of distributive dealers or in securing adequate space on retailers shelves 8) there are restrictive regulatory policies 9) there are restrictive trade policies
New entrants into an industry threaten the position of rival forums because
1) they will competitive fiercely for market share 2) add to the number of industry rivals 3) and add to the industries production capacity.
ASSESING THE COMPANY'S INDISUTRY AND COMPETIVIE ENVIRONMENT
ASSESING THE COMPANY'S INDISUTRY AND COMPETIVIE ENVIRONMENT
Adjusting the strategy to prepare for the impacts of driving forces
Adjusting the strategy to prepare for the impacts of driving forces
Driving forces:
Are the major underlying causes of change in industry and competitive conditions. Some emerge out of the outer ring of competitive conditions. But most originate in the companies more immediate industry and competitive environment
Complementors:
Are the producers of complementary products, which are products that enhance the value of the focal forms products when they are used together. Example snorkels and swim fins
Assessing the impact of the forces driving industry change
Assessing the impact of the forces driving industry change
Why do industry and competitive conditions change?
Because forces are enticing or pressuring certain industry participants (competitors, customers, suppliers, compliments) to alter their actions in important ways.
The value of strategic group maps:
COME BACK
COMPETITOR ANALYSIS
COMPETITOR ANALYSIS
In what ways may companies in the same strategicgroup resemble one another?
Comparable product line, sell in the same price/quality range, employ the same distribution channels, depend on identical technological approaches, compete in much the same geographic areas, pr offer buyers essential the same product attributes or similar services and technical assistance.
Competitive pressures created by rivalry among competing sellers
Competitive pressures created by rivalry among competing sellers
Competitive pressures from the sellers of substitute products
Competitive pressures from the sellers of substitute products
Competitive pressures stemming from buyer bargaining power and price sensitivity
Competitive pressures stemming from buyer bargaining power and price sensitivity
Competitive pressures stemming from supplier bargaining power
Competitive pressures stemming from supplier bargaining power
Competivie pressures associated with the threat of new entrants
Competivie pressures associated with the threat of new entrants
Complementors and the value net NEW SECTION
Complementors and the value net NEW SECTION
Macroenviornment:
Encompasses the broad environmental context in which a company's industry is situated.
Environmental factors
Include ecological and environmental forces such as weather, climate, climate change, and assocaitated factors like water shortages. Directly impact industreues like insurance, farming, energy production, and tourism but have an indirect effect on other industries like transportation and utilities.
Political factors:
Include matters such as tax policy, fiscal policy, tariffs, the political climate, the strength of institutions such as the federal banking system.
Legal and regulatory factors:
Include regulations and laws with which companies must compy such as consumer laws, labor laws, antitrust laws, OSHA,. Some factors such as financial services regualtation are industry specific. Others such as the minimum wage alloy to all.
Economic conditions:
Include the general economic climate and specific factors such as interest rates, exchange rates, inflation, unemployment rate, economic growth rate, trade deficits and surpluses, savings rates, and per capita domestic product.
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. They include institutions such as R&D , university patents and copyright laws.
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 population size, growth rate, and age distribution, (shif to healthy living which changes products. Or shift in support for gay rights)
Strategic group mapping:
Is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.
PESTEL Analysis:
Is an acronym for the six conditions Poltiical, economic, sociocultural, technological, environmental, and legal
Is the collective strength of the five competitive forces conducive to good profitability?
Is the collective strength of the five competitive forces conducive to good profitability?
KEY SUCCESS FACTORS
KEY SUCCESS FACTORS
MATCHING COMPANY STRATY TO COMPETITIVE CONDITIONS.
MATCHING COMPANY STRATY TO COMPETITIVE CONDITIONS.
Michael Porters Framework for competitors Analsysis:
Points tofour indicators of rival strategic moves and countermoves.
STRATEGIC GROUP ANALYSIS
STRATEGIC GROUP ANALYSIS
How does the five forces framework, work?
Step 1) for each of the five forces, identify the different parties involved, along with the specific factors that bring about competitive pressures 2) evaluate how strong the rpessures stemming from each of the five forces are (strong, moderate, or week) step 3) determine whether the fice forces, overall, are supportive of high industry profitability.
Resources and capabilities:
Strategic moves and countermoves are both enabled and constrained by a companies resources and capabilities. How much and how a company seeks to acquire these is important
What happens when a supplier has strong bargaining powr.
They get to help direct the terms and conditions which allows them to charge higher prices, pass costs off on buyers, and limit others opportunities to find better deals. Microsoft and intel both use these practices because everyone needs an operating system and processor
What are the five forces framework used for?
To determine the nature and strength of competitive pressures in a given industry.
What is the most extreme case of competitively unnattractive industry>
When all five forces are producing strong competitive pressure: Rivalry among sellers is vigorous, low barrier to entry allows new rivals to gain a market foothold, competition from substitutes is intense, and both suppliers and buyers are able to exercise considerable leverage
How do you classify entrants barrier to entry as low or high? =
Whether an industries entry barriers ought to be considered high or low depends on the resources and capabilities possessed by the the pool of potential entrants
Can a market be competitively unattractive without all five competitive forces being strong?
YES! In fact, intense competitive pressures from just one of the five forces may suffice to destroy the conditions for good profitability and prompt some compainees to exit the business.
Do macroeconomic factors affect different industries in different ways?
YES! Which is why its important for managers to determine which represent the most strategically relevant factors.
True or false: It is difficult to determine your substitutes?
Yes. There are no hard clear rules and its often based on perspective.
Key Success Factors (KSF)
are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are essential to surviving and thriving in the industry. Distinguishes a strong vs weak competitor and a profitable vs non profitable firm
While it is critical to understand the nature and intensity of competitive cooperative forces in an industry, it is equally
critical to understand that th eintensitty of these forces is fluid and subject to change.
What determines if suppliers are a weak or strong competitive force?
degree to which suppliers have bargaining power to influence the terms and conditions in their favor.
Strategically relevant:
means important enough to have a bearing on the decisions the company ultimately makes about its long-term direction, objectives, strategy, and business model.
As a rule, the strongest competitive forces determine the extent of the competitive pressure
on industry profitability. This in evaluating the strength of the five forces overall, managers should look to the strongest force.
As a general proposition, the anticipated industry environment is fundamentally attractive if it
presents a company with good opportunity for above average profit ability; the industry out look is fundamentally unnatravrice if a companies profit prospects are unappealingly low
The popular hypothesis that industries go through a life cycle of
takeoff, tapid growth, maturing, market saturation, and slowing growth followed by stagnation or decline is but one aspect of industry change - many other new developments and emerging trends cause industry change.
While many forces of change may be at work in a given industry, no more than
three or four are likely to be true driving forces powerful enough to qualify as major determinants.