ANALYZING COMPANYS

EXTERNAL ENVIRONMENT
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Strategy formulation begin with an analysis of the

forces that shape competition in the industry in
which a company is operate or based
The purposes are to identify opportunities and
threats and then to be base for formulating
strategies

Opportunities are when a company can take advantage of its environment

profitable
Threats are the situation endanger the integrity and profitability of the
companys business

INDUSTRY
a group of companies offering products
or services that are close substitutes
for each other-products that satisfy
the same basic customer needs.
(Hill & Jones, p:43, 2009)

Sector is a group of closely related industries

Industries boundaries can change-computer and
telecommunication

SECTOR AND INDUSTRY

COMPETITION IN AN INDUSTRIES: HOW

STRONG ARE COMPETITIVE FORCES?

In general, competition within an industry

is driven by five basic competition forces
The Forces are:
Buyers, Rivalries, Suppliers, New
Entrants, and Product Substitutes
(as the collective strength of the forces) of
that industry

STRUCTURAL DETERMINANTS OF
THE INTENSITY OF COMPETITION
The strongest force or forces are governing
and become crucial from the point of
view of strategy formulation
An example: a company with a very strong position in
an industry would have no guarantee in gaining
expected profitability, if the company faces a
superior, lower-cost product substitution
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THE FIVE FORCES MODEL OF

COMPETITION

COMPETITIVE PRESSURES AMONG

RIVAL SELLERS
Lower prices
More or different
performance features
Better product
performance
Stronger brand image
and appeal
Wider selection of
models and styles

Bigger/better dealer
network
Higher levels of
advertising
Stronger product
innovation capabilities
Better customer service
Stronger capabilities to
provide buyers with
custom-made products

SOME FACTORS WOULD CAUSE DEGREE OF

COMPETITION AMONG RIVALRY
Industry

rivals move to draw sales from rivals

(frequently or infrequently)

Market

growth (rapid or slow)

Products

Low)

Differentiation of Rivals (High or

Customer
Buyer

loyalty of Rivals (High or Low)

costs to switch brands (High or Low)

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COMPETITIVE PRESSURES
ASSOCIATED WITH POTENTIAL
ENTRY
Seriousness
Size

of threat depends on

of pool of entry candidates

and available resources
Barriers to entry
Reaction of existing firms

Evaluating

assessing

threat of entry involves

How

formidable entry barriers are for each

type of potential entrant and
Attractiveness of growth and profit prospects
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COMMON BARRIERS TO ENTRY

Sizable

economies of scale
Brand preferences and customer loyalty
Capital requirements and/or other
specialized resource requirements
Access to distribution channels
Regulatory policies
Tariffs and international trade restrictions
Ability of industry incumbents to launch
vigorous initiatives to block a newcomers
entry
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THREATS OF ENTRY: COST DISADVANTAGES INDEPENDENT OF SCALE (FOR THE ESTABLISHED PLAYERS)

Proprietary

product technology

Airplane-maker

or aerospace, mining, machine for racing

cars, handwritten batik

Favorable

access to raw materials

Favorable

locations

Oil,

gas, gold

Asia

region: China, Vietnam, Indonesia

Government
National

Learning

subsidies

companies: PT KAI

or experience curve

Electronic,

automotive product,

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LEARNING/EXPERIENCE EFFECTS
Learning/experience

effects exist when

a companys unit costs decline as its
cumulative production volume increases
because of
Accumulating
Growing

production of know-how

mastery of the technology

bigger the learning or experience

curve effect, the bigger the cost
advantage of the firm with the largest
cumulative production volume

The

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LEARNING/EXPERIENCE EFFECTS
Tendency for unit costs to decline as the firm gains
more cumulative experience in producing a product
(more efficient, more specialized)
Cost declines with experience do not relate to the entire
firm but arise from the individual operations or
functions that make up the firm
In comparison with economies of scale, experience curve
relates with cumulative volume, while economies of
scale are dependent on volume per period;
The decline in cost from experience can be augmented if
there are diversified firms in the industry who share
operations or functions subject to such a decline with
other units in the company
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COMPETITIVE PRESSURES FROM

SUBSTITUTE PRODUCTS
Substitutes

matter when customers are

attracted to the products of firms in other
industries
Sugar

versus artificial sweeteners

Eyeglasses and contact lens
versus laser surgery
Newspapers versus InternetNews
Notebook versus Smartphone

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FACTORS LEADING WHETHER SUBSTITUTE

PRODUCTS ARE A STRONG FORCE
Whether

substitutes are readily available and

attractively priced

Whether

buyers view substitutes as being

comparable or better

How

much it costs end users to switch to

substitutes

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WHEN IS THE BARGAINING

POWER OF SUPPLIERS STRONGER?
Industry

members incur high costs in

switching their purchases to alternative
suppliers
Needed inputs are in short supply
Supplier provides a (better) quality or
differentiated input
There are only a few suppliers of a specific
input
Some suppliers threaten to integrate
forward
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WHEN IS THE BARGAINING POWER OF

BUYERS STRONGER?
Buyer switching costs to competing brands or
substitutes are low
Large-volume purchases by buyers are important to
sellers
Buyer demand is weak or declining
Only a few buyers exists
Identity of buyer adds prestige to sellers list of
customers
Quantity and quality of information available to
buyers
Buyers have ability to postpone purchases until later

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STRATEGIC IMPLICATIONS OF
THE FIVE COMPETITIVE FORCES
environment is
unattractive from
the standpoint of earning good profits
when

Competitive

Rivalry
Entry

is vigorous

barriers are low and entry is likely

Competition

from substitutes is strong

Suppliers

and customers have considerable

bargaining power
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STRATEGIC IMPLICATIONS OF
THE FIVE COMPETITIVE FORCES
environment is ideal from
a profit-making standpoint when

Competitive
Rivalry
Entry

enter

Good

is moderate

barriers are high and no firm is likely to

substitutes do not exist

Suppliers

and customers are in a weak

bargaining position
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(3) WHAT FORCES ARE

DRIVING INDUSTRY CHANGE
AND WHAT IMPACTS WILL
THEY HAVE?

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FACTORS DRIVING INDUSTRY

CHANGE
change because forces
are driving industry participants
to alter their actions
Driving forces are the major
underlying causes of changing industry
and competitive conditions
Industries

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SOME FORCES DRIVING CHANGES

Emerging

new Internet capabilities and

applications
Increasing globalization of industry
Changes in long-term industry growth rate
Product innovation
Technological change/process innovation
Marketing innovation
Regulatory policies / government legislation
Changing societal concerns, attitudes, and
lifestyle
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(4) WHAT MARKET

POSITIONS DO RIVALS
OCCUPY?

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STRATEGIC GROUP
strategic group is a cluster of firms in an
industry with similar competitive approaches
and market positions

Strategic

group mapping is one technique to

reveal different competitive positions of
industry rivals

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STRATEGIC GROUP MAPPING

in same strategic group have two or
more competitive characteristics in common

Firms

Have

comparable product line breadth

Have similarity in price/quality range
Emphasize similar distribution channels
Use similar product attributes to appeal
to similar types of buyers
Use identical technological approaches
Offer buyers similar services
Cover same geographic areas

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EXAMPLE: STRATEGIC GROUP MAP OF SELECTED RETAIL CHAINS

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INTERPRETING STRATEGIC
GROUP MAPS
The closer strategic groups are
on the map, the stronger the cross-group
competitive rivalry tends to be

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(5) WHAT STRATEGIC MOVES

ARE RIVALS LIKELY TO MAKE
NEXT?
A

firms best strategic moves are affected by

Current

strategies of competitors
Future actions of competitors

Profiling

key rivals involves gathering

competitive intelligence about
Current

strategies
Most recent actions
Resource strengths and weaknesses

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(6) WHAT ARE THE KEY

FACTORS FOR COMPETITIVE
SUCCESS?

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THE KEY FACTORS FOR

COMPETITIVE SUCCESS

KSFs are those competitive factors most affecting

every industry members ability to compete with
successfully
Key factors as request for companies to compete
with in an industry

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IDENTIFYING INDUSTRY KEY SUCCESS

FACTORS
On what basis do customers choose
between competing brands of sellers?
What resources and competitive capabilities does a
seller need to have to be competitively successful?
What does it take for companies (competitor) to achieve
a sustainable competitive advantage?

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(7) FACTORS TO BE THE INDUSTRY

OUTLOOK:
A GOOD OPPORTUNITY TO PROFITABILITY
Industrys market size and growth potential
Competitive forces influencing industry profitability
The driving forces affect the industry profitability
Degree of risk and uncertainty in industrys future
Severity of potential problems facing industry
Firms competitive position in industry vis--vis
rivals
Firms potential to capitalize on vulnerabilities of
weaker rivals
Whether firm has sufficient resources to
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defend against unattractive industry factors

CORE CONCEPT: ASSESSING

INDUSTRY ATTRACTIVENESS
The degree to which an industry
is attractive or unattractive is not the same
for all industry participants
or potential entrants.
The opportunities an industry

presents depend partly on a

companys ability to capture them

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