Strategic Management

Analyzing External Environment: Opportunities and Threats

The External Environment: Opportunities
And Threats

 Overview: Content areas

 The firm’s external environment- General and industry
environment
 External environment analysis process
 General environmental segments
 Porter’s 5 Competitive Forces
 Strategic groups Analysis
 Competitor Analysis/ Intelligence

2
Learning Objectives
 Become aware of factors in a company’s broad macro-
environment that may have strategic significance.
 Gain command of the basic concepts and analytical tools
widely used to diagnose the attractiveness of a company’s
industry.
 Become adept at mapping the market positions of key
groups of industry rivals.
 Learn how to use multiple frameworks to determine
whether an industry’s outlook presents a company with
sufficiently attractive opportunities for growth and
profitability.
From Thinking Strategically about the
Company’s Situation to Choosing a Strategy

Thinking
strategically
about a firm’s
external
environment Form a
Identify Select the
strategic
promising best strategy
vision of
strategic and business
where the
options model for
firm needs
for the firm the firm
Thinking to head
strategically
about a firm’s
internal
environment
External Environment: General, Industry
and Competitor
 Three External Environment include:
 General (Macro)
 Industry
 Competitor

5
External Environment Analysis
 Opportunity
 General environment condition that, if exploited, helps a
company achieve strategic competitiveness

 Threat
 General environment condition that may hinder a company's
efforts to achieve strategic competitiveness

6
External Environment Analysis
 components of the Environmental Analysis
 Scanning
 Identifying early signals of environmental changes and trends
 Monitoring
 Detecting meaning through ongoing observations of
environmental changes and trends
 Forecasting
 Developing projections of anticipated outcomes based on monitored
changes and trends
 Assessing
 Determining the timing and importance of environmental changes and
trends for firms’ strategies and their management.

7
External Environment Analysis:
The General Environment
 The General (Macro) Environment
 encompasses the broad environmental context in which a company’s
industry is situated and includes strategically relevant components
over which the firm has no direct control.
 Grouped into 6 dimensions OR ‘environmental segments’ Each
segment composed of different elements
 PESTEL Analysis: Focuses on principal components of strategic
significance in the macro-environment:
 Political factors
 Economic conditions (local to worldwide)
 Sociocultural forces
 Technological factors
 Environmental factors (the natural environment)
 Legal/regulatory conditions
8
 The Components of Macro-Environment
Component Description
These factors include political policies and processes, including the extent to which a
government intervenes in the economy. They include such matters as tax policy, fiscal policy,
Political tariffs, the political climate, and the strength of institutions such as the Central banking
factors system. Some political factors, such as bailouts, are industry-specific. Others, such as energy
policy, affect certain types of industries (energy producers and heavy users of energy) more
than others.

Economic conditions include the general economic climate and specific factors such as
interest rates, exchange rates, the inflation rate, and the unemployment rate, the rate of
economic growth, trade deficits or surpluses, savings rates, and per capita domestic product.
Economic Economic factors also include conditions in the markets for stocks and bonds, which can
affect consumer confidence and discretionary income. Some industries, such as construction,
conditions
are particularly vulnerable to economic downturns but are positively affected by factors such
as low interest rates. Others, such as discount retailing, may benefit when general economic
conditions weaken, as consumers become more price-conscious.

Sociocultural forces include the societal values, attitudes, cultural factors, and lifestyles that
impact businesses, as well as demographic factors such as the population size, growth rate
and age distribution. Sociocultural forces vary by locale and change over time. An example is
Sociocultural the trend toward healthier lifestyles, which can shift spending toward exercise equipment
forces and health clubs and away from alcohol and snack foods. Population demographics can have
large implications for industries such as health care, where costs and service needs vary with
demographic factors such as age and income distribution.
 The Components of Macro-Environment
Component Description
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 and nanotechnology. They include institutions involved
Technological in creating new knowledge and controlling the use of technology, such as R&D
factors consortia, university-sponsored technology incubators, patent and copyright
laws, and government control over the Internet. Technological change can
encourage the birth of new industries, such as those based on nanotechnology,
and disrupt others, such as the recording industry.
This includes ecological and environmental forces such as weather, climate,
climate change, and associated factors like water shortages. These factors can
Environmental
directly impact industries such as insurance, farming, energy production, and
forces
tourism. They may have an indirect but substantial effect on other industries
such as transportation and utilities.
These factors include the regulations and laws with which companies must
Legal comply such as consumer laws, labor laws, antitrust laws, and occupational
and regulatory health and safety regulation. Some factors, such as banking deregulation, are
factors industry-specific. Others, such as minimum wage legislation, affect certain
types of industries (low-wage, labor-intensive industries) more than others.
External Environment:
General, Industry and Competitor
 Industry Environment
 Set of factors directly influencing
 A firm’s competitive actions/responses
 Relates to Porter’s 5 Forces Model
 Competitor Environment
 Competitor analysis: gather and interpret competitor
information
 Gives details about
 A firm’s direct and indirect competitors
 The competitive dynamics expected to impact a firm's efforts to
generate above-average returns

11
Assessing the Company’s Industry and Competitive
Environment

1. How strong are the industry’s competitive forces?

2. What are the driving forces in the industry, and what
impact will they have on competitive intensity and
industry profitability?
3. What market positions do industry rivals occupy —
who is strongly positioned and who is not?
4. What strategic moves are rivals likely to make next?
5. What are the industry’s key success factors?
6. Is the industry outlook conducive to good profitability?
Industry Environment Analysis: How Strong
are the Industry’s Competitive Forces?
 Industry
 Group of firms producing products or services that are close
substitutes
 Group of firms producing products or services that are perceived
by customers as meeting the same needs.
 Industry Environment
 Comprises suppliers, customers, and other firms, including those
that may enter the industry and those that may offer either
substitute or complementary products
 Firms in the industry and in the industry environment are
referred as market participants.
Industry Environment Analysis: How Strong
are the Industry’s Competitive Forces?
 Industry analysis is a tool for understanding how profits are
distributed among market participants.
 A firm’s profitability depends partly on the intensity of
competition from rivals in the industry and partly on the
influence of players (MP) in the industry environment.
 Essential tool in Strategy Development.
 A strategy is an integrated set of choices that positions the firm in its industry
in a way that generates superior financial returns over the long run.
 Managers, entrepreneurs, capital providers, investment bankers,
financial analysts, consultants, and even those making a career
choice can benefit from industry analysis.
Industry Environment Analysis: How Strong
are the Industry’s Competitive Forces?
 Managers can use it in the following ways:
 To identify opportunities to increase profits
 To discern threats to existing profits and develop ways to counter
them
 To decide whether to enter a market
 To decide whether to exit a market
 To position their firm to succeed in a given industry
 To assess the effect of a major change (such as deregulation, new
technology, complements, demographic shifts)
 To shape the industry environment
Industry Environment Analysis: How Strong
are the Industry’s Competitive Forces?

 Steps in analyzing an industry and applying the results

of the analysis:
1. Define the industry
2. Identify the players (the market participants)
3. Analyze the players’ influence on profitability
4. Test the analysis
5. Develop a way to deal with the industry environment
6. Analyze how the factors influencing profitability may
change and the response required.
Industry Environment Analysis:
The Five Forces Framework
 Michael Porter coined the term “five forces” to refer to the market
participants and their influence in determining who gets the profits
in an industry.
 Direct competitors, customers, suppliers, potential entrants to the
industry, and producers of substitute products are all competing for
their share of the profits.
 Managers who fail to consider all market participants put their firms
at risk.
 The Five Competitive Forces:
 Competition from rival sellers (Existing)
 Competition from potential new entrants
 Competition from producers of substitute products
 Supplier bargaining power
 Customer bargaining power
THE FIVE-FORCES
MODEL OF
INDUSTRY
ANALYSIS: A KEY
ANALYTICAL TOOL
Industry Environment Analysis:
The Methodology of Five Forces Analysis
 The strength of each force depends on the
economic characteristics of the industry.
 How do the five forces influence profitability?
 Simply, profitability is influenced by
 willingness to pay, the price, and the cost.
 The best way to use framework is to focus not
only on the forces, but also on the economic
factors that underlie them and how these
factors might change.
Industry Environment Analysis:
The Methodology of Five Forces Analysis
 The Threat of New Entrants
 When the potential for profit in an industry is high,
companies have a powerful incentive to enter. New
entrants increase competition, driving down prices
and profit. The impact of potential entrants on
profit depends on how easy it is to enter the
industry, which in turn depends on barriers to
entry. Strategists need to evaluate the size of the
barriers to entry, and how they may change., by
evaluating the following factors:
Industry Environment Analysis:
The Methodology of Five Forces Analysis
Factors Affecting the Threat of New Entrants into an Industry
Barriers to Entry Example/Rationale
Supply-side economies FedEx has a lower cost per package than a potential new entrant
of scale, scope, or because of its large scale.
experience
Demand-side benefits of eBay is more attractive to buyers than smaller competitors because
scale (Network Effects) of its large number of sellers (and sellers then also benefit from
more buyers).
Customer switching Microsoft Windows users who may want to switch to another
costs operating system must buy new software and learn how to use a
new operating system.
Capital costs A large required capital commitment can deter new entrants.
Incumbency advantages Incumbent mining companies may have locked up the best
reserves.
Unequal access to Movie producers with a track record and established relationships
distribution channels have an advantage in getting cinema distribution.
Restrictive government Patents can deter market entry by imitators.
policy
High barriers to exit High labor severance costs can deter market entry.
Anticipated vigorous The threat of price cuts or expensive advertising campaigns by
incumbent response deep-pocketed incumbents can deter entry.
Slow industry growth Newcomers must take share from incumbents.
Industry Environment Analysis:
The Methodology of Five Forces Analysis
 The Bargaining Power of Suppliers
 Every transaction is a tussle between a seller and a
buyer. The more powerful one secures the larger
portion of the available profit. Powerful suppliers
can raise prices and shift costs downstream to
industry participants.
 Price sensitivity is another source of power for the
suppliers. There is a subtle but important difference.
Bargaining power influences price, while price sensitivity
influences quantity.
Industry Environment Analysis:
The Methodology of Five Forces Analysis
Factors Affecting the Bargaining Power of Suppliers
Factor Example/Rationale
Suppliers are more Microsoft and Intel have bargaining power because
concentrated than the of their dominant market shares and fragmented
industry rivals PC manufacturing customers.
Industry participants A supplier has more bargaining power if it is
face switching costs difficult for customers to switch to competing
suppliers.
Suppliers offer If customers believe suppliers’ products differ
differentiated significantly, competition is reduced and prices
products tend to increase.
Few substitutes for Suppliers of patented pharmaceuticals with
supplier products unique benefits have significant bargaining
power.
Credible threat of Suppliers who can credibly threaten to compete
forward integration with their customers have more bargaining power
than those who cannot.
Suppliers do not Suppliers who do not depend on the industry have
depend heavily on the less incentive to moderate price demands.
industry
Price Sensitivity a small price reduction has a large impact on the
quantity the supplier is willing to provide.
Industry Environment Analysis:
The Methodology of Five Forces Analysis
Factors Affecting the Bargaining Power of Buyers
Factor
Customers are more
concentrated than the
industry they buy from
Customers face few
switching costs
Industry products are
undifferentiated
Credible threat of backward
integration
Industry purchases
represent a significant
fraction of their cost
Customers earn low profits
Customer’s quality is not
substantially affected by the
industry
Example/Rationale
Retailers such as Walmart are more concentrated than their
suppliers, and thus have significant bargaining power.
Airline customers have substantial bargaining power
because they have low switching costs.
If customers believe suppliers’ products do not differ
significantly,the customer has more pricing power.
Customers who can credibly threaten to manufacture their
own inputs have more bargaining power than those who
cannot.
Customers will be more sensitive to the price of inputs that
have a bigger impact on their bottom line.
Input costs have a proportionally greater impact on the
profits of low-profit customers than they do on those of
high-profit customers.
Where quality is not affected, the customer has no
incentive to accept a higher-priced, higher-quality input.
Industry Environment Analysis:
The Methodology of Five Forces Analysis
 The Threat of Substitutes
 Substitutes compete for industry profits, but from outside the industry.
 One product is a substitute for another if a price increase in one
increases the quantity demanded of the other.
 But even very different products may be substitutes.
 Substitutes exist for almost every product.
 One way to analyze the threat of substitutes is to consider the
customer’s perspective.
 The most potent threats come from substitutes that offer the same
benefits at lower cost.
Factor Example/Rationale
“Closeness” of The closer the substitute, the easier it is to switch to it.
substitute
Performance / A substitute that offers slightly lower performance at a much
Price ratio of lower price is more of a threat than one that offers slightly
lower performance with only a small reduction in price.
substitute
Industry Environment Analysis:
The Methodology of Five Forces Analysis
 Rivalry among Existing Competitors
 Rivalry among competitors threatens the profits of
all of them, although industries can differ in the
intensity and focus of their rivalry.
 Competition on price is the most threatening to
profits.
 Competition on dimensions other than price—
product features, support services, delivery time, or
brand image, for instance is less likely to erode
profitability.
Industry Environment Analysis:
The Methodology of Five Forces Analysis
Factors Affecting Rivalry among Competitors
Factor
Product lacks differentiation
Fixed costs are high and
marginal costs are low
Capacity must expand in large
increments
Product is perishable
Competitors are numerous
and roughly equal in size
Industry growth is slow
Exit barriers are high
Rivals have diverse approaches
Example/Rationale
If products are not very different, rivals must
compete on price.
Rivals have an incentive to price below average
cost.
Owners of unused capacity have an incentive to
cut prices.
Rivals have an incentive to cut price as the
product approaches the end of its saleable life.
Numerous and equal competitors reduce the
potential for tacit collusion.
Rivals must take others’ market share to grow.
High exit barriers tend to slow reduction of
industry overcapacity, which then produces price
competition.
Diverse approaches reduce the potential for
collusion.
Common “Weapons” For Competing With Rivals
Competitive Weapons
Price discounting, clearance sales
Couponing, advertising items on sale
Advertising product or service
characteristics, using ads to enhance
a company’s image
Innovating to improve product
performance and quality
Introducing new or improved features,
increasing the number of styles or
models to provide greater product
selection
Increasing customization of product or
service
Building a bigger, better dealer
network
Improving warranties, offering low-
interest financing
Primary Effects
Lowers price (P), acts to boost total sales volume and market share,
lowers profit margins per unit sold when price cuts are big and/or
increases in sales volume are relatively small
Acts to increase unit sales volume and total revenues, lowers price (P),
increases unit costs (C), may lower profit margins per unit sold (P – C)
Boosts buyer demand, increases product differentiation and perceived
value (V), acts to increase total sales volume and market share, may
increase unit costs (C) and/or lower profit margins per unit sold
Acts to increase product differentiation and value (V), boosts buyer
demand, acts to boost total sales volume, likely to increase unit costs
(C)
Acts to increase product differentiation and value (V), strengthens
buyer demand, acts to boost total sales volume and market share,
likely to increase unit costs (C)
Acts to increase product differentiation and value (V), increases
switching costs, acts to boost total sales volume, often increases unit
costs (C)
Broadens access to buyers, acts to boost total sales volume and market
share, may increase unit costs (C)
Acts to increase product differentiation and value (V), increases unit
costs (C), increases buyer costs to switch brands, acts to boost total
sales volume and market share
Extending Five Forces Analysis:
Addressing Cooperation and Complements
Extending Five Forces Analysis:
Addressing Cooperation and Complements
 The Five Forces Framework deal with competition- Sharing of pie.
 Sometimes a business will cooperate with customers or other
businesses in order to grow a market/ make the pie bigger.
 Complements: products that are typically consumed together;
enhance the value of the focal firm’s products when they are used
together. Ex. Computer and software
 Co-opetition: combination of cooperation and competition.
“Business is cooperation when it comes to creating a pie and competition
when it comes to dividing it up.” - Adam Brandenburger and Barry Nalebuff
 Complements can have such a powerful influence on an industry that
they can be considered a “sixth force.”
 Complements are everywhere and can influence the other five forces
Extending Five Forces Analysis:
Addressing Cooperation and Complements
Factors Influencing Complements
Factor Example/Rationale
Complements A dominant complementor can exert more influence on
are an industry than many smaller complementors that
concentrated compete with one another.
Relative If it is easier for users to switch across competitors than it
switching costs is across complements, complements have significant
power.
Ease of If a product and its complement are difficult to unbundle,
unbundling the complement has more influence over the product’s
customers. Ex. itunes
Influence on Content providers such as the UK’s Premier League
demand football have a powerful influence on the demand for
complementary products such as cable channels.
Asymmetric A complementor that can easily enter the product-
threats maker’s industry has more power than one that cannot.
Rate of growth Industries with low-profit growth are more likely to be
of the profit influenced by complements, as there are fewer alternatives
opportunity to grow profits.
Pankaj Ghemawat
The Value Net

Value Net Model: A tool that

helps business move away from a
"kill or be killed" ethic and achieve
greater success by operating
alongside, or even in association
with, other organizations.

Here, businesses form mutually

beneficial partnerships that make Excerpt(s) and "The Value Net Framework" from CO-OPETITION
by Adam M. Brandenburger, copyright © 1996 by Adam M.

both parties more competitive. Brandenburger and Barry J. Nalebuff. Used by permission of
Doubleday, an imprint of the Knopf Doubleday Publishing Group, a
division of Random House LLC. All rights reserved.
The Value Net
 The model helps identify the key players, so that firm can predict their behavior more accurately. It
illustrates the interdependencies between focal firm and the four other types of players:
 Customers – The people who buy your product or service.
 Suppliers – These provide your organization with the resources you need to produce a saleable
product. (suppliers can be outside organizations, or your own employees.)
 Competitors – Competitors take a share of your target market by offering a similar product or
service.
 Complementors – These are other players who provide a product or service that can be linked to
your own to make both offerings more attractive to your customers.
 Encourages managers discover the potential to improve their position through cooperative as well as
competitive interactions.
 Value Net Analysis- PARTS approach
 Step 1: Identify Players.
 Step 2: Calculate Added value.
 Step 3: Define Rules.
 Step 4: Identify Tactics.
 Step 5: Define Scope.
Is the Collective Strength of the Five
Forces Conducive to Good Profitability
 Is the state of competition in the industry stronger
than “normal”?
 Can industry firms expect to earn decent profits given
prevailing competitive forces?
 Are some of the competitive forces sufficiently
powerful to undermine industry profitability?
 Even one powerful force (Strongest) may be enough to
make the industry unattractive in terms of its profit
potential.
 Having more than one strong force means that an
industry has multiple competitive challenges with which
to cope.
Applying Industry Analysis- What
to do?
 The principal application of industry analysis is in developing a
way to profit within the industry environment.
 There are two ways to do this.
 The first is by finding or creating an attractive environment.
 The second is by developing a competitive advantage that enables
the company to be more profitable than its competitors, despite the
environment.
 These two approaches are not mutually exclusive. Even
companies with a competitive advantage need to focus on the
more profitable opportunities within their environment.

“Strategy can be viewed as building defenses against the competitive forces or as finding a
position in an industry where the forces are weakest.”- Porter
Applying Industry Analysis- What to do?
 When you start to think about what to do in response to your
industry analysis, bear in mind the following points:
 It is possible to make good money in a tough industry. The key is to find
a way to deal effectively with the five forces.

 There are different ways to react to competitive forces.

 A strategist may be able to identify a profitable position that is not yet occupied.
 It is possible to profit by spotting changes in industry structure before others do.
 It is possible to influence industry structure.
 Innovators can use their understanding of how technology affects competitive forces to
craft a strategy to protect their profits from imitators.

 Industry analysis is particularly important when moving to new

geographic areas or going into new businesses.
Applying Industry Analysis- What to do?
Possible Response to Threats to Profitability
Threat Possible Responses
Exploit network effects and economies of scale.
New entrants Create customer switching costs. Invest to preempt
entry. Lock in distribution channels. Develop a
reputation for retaliation. Exploit Legal/ patent
protection.
Bargaining power of Use standard instead of proprietary products. Secure
suppliers multiple sources. Encourage mutual dependence.
Build customer loyalty. Target small customers.
Bargaining power of “Lock in” customers to increase switching costs.
Differentiate the product. Target customer segments
buyers that are less sensitive to price.
Substitutes Cannibalize the business before others do. Target
consumers of substitutes with new product
offerings. Exploit complements.
Rivalry among Target less-competitive market segments.
existing Differentiate the product. Create switching
competitors costs. Seek to dominate a market segment.
Matching Company Strategy to
Competitive Conditions
 Effectively matching a firm’s business strategy to prevailing
competitive conditions has two aspects:
 Pursuing avenues that shield the firm from as many
competitive pressures as possible.
 Initiating actions calculated to shift competitive forces in
the firm’s favor by altering underlying factors driving the
five forces.

 A company’s strategy is increasingly effective the more it

provides some insulation from competitive pressures, shifts
the competitive battle in the company’s favor, and positions
firms to take advantage of attractive growth opportunities.
Industry Environment Analysis:
Performing and Applying Industry Analysis

 The most effective way to approach industry

analysis—or any analysis—is by using the scientific
method.
 Instead of collecting data and then “doing an industry
analysis,” the strategic issue is identified, hypotheses
about the answer are developed, and an analysis is
conducted that tests the hypotheses.
 The analysis that must be conducted will determine
the data that are needed.

Six-Step Process for Analyzing an Industry

Exploit Industry Changes (DFA)
 What Factors are Driving Industry Change,
and What Impacts Will They Have?
 Driving forces are the major underlying causes of
change in industry and competitive conditions.
 Driving forces analysis has three steps:
 Identifying what the driving forces are.
 Assessing whether the driving forces are, on the whole,
acting to make the industry more or less attractive.
 Determining what strategy changes are needed to
prepare for the impact of the driving forces.
Exploit Industry Change
The Most Common Drivers of Industry Change

1. Changes in the long-term industry growth rate

2. Increasing globalization
3. Emerging new Internet capabilities and applications
4. Changes in who buys the product and how they use it
5. Technological change and manufacturing process innovation
6. Product and marketing innovation
7. Entry or exit of major firms
8. Diffusion of technical know-how across firms and countries
9. Changes in cost and efficiency
10. Reductions in uncertainty and business risk
11. Regulatory influences and government policy changes
12. Changing societal concerns, attitudes, and lifestyles
Exploit Industry Change
Assessing the Impact of the Factors Driving Industry Change

 The most important part of driving forces analysis is to

determine :
 Are the driving forces as a whole causing demand for the industry’s
product to increase or decrease?
 Is the collective impact of the driving forces making competition more or
less intense?
 Will the combined impacts of the driving forces lead to higher or lower
industry profitability?
 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.
 What adjustments must be made immediately?
 What actions currently being taken should be halted or abandoned?
 What can we do now to prepare for adjustments we anticipate making in the future?
Strategic Groups
How Are Industry Rivals Positioned in the Market?
 Strategic Group consists of those industry members with similar
competitive approaches and positions in the market:
 Having comparable product-line breadth
 Emphasizing the same distribution channels
 Depending on identical technological approaches
 Offering the same product attributes to buyers
 Offering similar services and technical assistance

 Strategic group mapping is a technique for displaying the different

market or competitive positions that rival firms occupy in the
industry.
Comparative Market Positions of Producers in the
U.S. Beer Industry: A Strategic Group Map Example

Footnote: Circles are drawn roughly proportional to the sizes of the firms, based on revenues.
Constructing Strategic Group Maps
Assessing the Market Positions of Key Competitors
 Constructing a strategic group map:
 Identify the competitive characteristics that delineate strategic
approaches used in the industry. Typical variables are:
 Price/quality range (high, medium, low)
 Geographic coverage (local, regional, national, global)
 Product-line breadth (wide, narrow)
 Degree of service offered (no frills, limited, full)
 Distribution channels (retail, wholesale, Internet, multiple)
 Degree of vertical integration (none, partial, full)
 Degree of diversification into other industries (none, some, considerable)
 Plot the firms on a two-variable map using pairs of the competitive
characteristics.
 Assign firms occupying about the same map location to the same
strategic group.
 Draw circles around each strategic group, making the circles
proportional to the size of the group’s share of total industry sales
revenues.
Guidelines for Creating Strategic
Group Maps
 Variables selected as map axes should not be highly
correlated.
 Variables should reflect important (sizable) differences among
rival approaches.
 Variables may be quantitative, continuous, discrete and/or
defined in terms of distinct classes and combinations.
 Drawing group circles proportional to the combined sales of
firms in each group will reflect the relative sizes of each
strategic group.
 Drawing maps using different pairs of variables will show the
different competitive positioning relationships present in the
industry’s structure.
Strategic Group Map
Comparative Market Positions of Producers in the Industry

 Which strategic group is located in the least favorable

market position? Which group is in the most favorable
position?
 Which strategic group is likely to experience increased
intragroup competition?
 Which groups are most threatened by the likely strategic
moves of members of nearby strategic groups?

 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.
The Value of Strategic Group Maps?
 Maps are useful in identifying which industry
members are close rivals and which are distant rivals.
 Not all map positions are equally attractive:
 Prevailing competitive pressures from the industry’s five
forces may cause the profit potential of different
strategic groups to vary.
 Industry driving forces may favor some strategic groups
and hurt others.
Industry’s Key Success Factors
 Key Success Factors (KSFs)
 KSFs rae the strategy elements, product and service
attributes, operational approaches, resources, and
competitive capabilities that are necessary for
competitive success by any and all firms in an
industry.
 Vary from industry to industry, and over time within
the same industry, and in importance as drivers of
change and competitive conditions change.
Identification of Key Success Factors
 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 to
competitive success?
 Given the nature of competitive rivalry prevailing in the
marketplace, what resources and competitive capabilities must
a firm have to be competitively successful?
 What shortcomings are almost certain to put a firm
at a significant competitive disadvantage?

 In determining which factors are KSFs resist the temptation to

label a factor that has only minor importance.
  What are the
KSFs in Beer
Industry?

 In the beer industry,

although there are many
types of buyers
(wholesale, retail, end
consumer), it is most
important to understand
the preferences and
buying behavior of the
beer drinkers.
 Their purchase decisions
are driven by price, taste,
convenient access, and
marketing.

Identification of Key
Success Factors
Identification of Key Success Factors
 Thus the KSFs include a strong network of wholesale distributors
(to get the company’s brand stocked and favourably displayed where
beer is sold) and
 clever advertising (to induce beer drinkers to buy the brand and
thereby pull beer sales through the established wholesale and retail
channels).
 Because there is a potential for strong buyer power on the part of
large distributors and retail chains, competitive success depends on
some mechanism to offset that power, of which advertising (to
create demand pull) is one. Thus the KSFs also include superior
product differentiation (as in microbrews) or superior firm size and
branding capabilities (as in national brands).
 The KSFs also include full utilization of brewing capacity (to keep
manufacturing costs low and offset the high advertising, branding,
and product differentiation costs).
Is the Industry Outlook Conducive to Good
Profitability?
 The anticipated industry environment is fundamentally
attractive if it presents a company with good opportunity
for above-average profitability.

 The industry outlook is fundamentally unattractive if a

firm’s profit prospects are unappealingly low.
Factors to Consider in Assessing Industry
Attractiveness
 The industry’s growth potential (PESTEL).
 The anticipated strength of competitive forces—the overriding issue here is
whether competitive forces seem likely to intensify and squeeze industry
profitability to subpar levels or whether the company should be able to earn
good profits despite the expected strength of competitive forces.
 What is the scope and opportunities with complementors?
 Whether and to what degree industry profitability will be favorably or
unfavorably affected by the prevailing driving forces.
 Whether the company is strongly or weakly positioned on the industry’s
strategic group map.
 How well the company’s strategy, product offering, and capabilities stack up
against industry KSFs.
 The degrees of risk and uncertainty in the industry’s future and whether the
industry confronts severe problems relating to regulatory or environmental
issues, stagnating buyer demand, industry overcapacity, and so on.
Industry Attractiveness is not the Same for
All Participants
 The degree to which an industry is attractive or unattractive is
not the same for all industry participants and all potential
entrants.
 Even if a particular industry’s outlook is deemed unattractive, a favorably
situated and competitively capable company may see ample opportunity to
outcompete weaker rivals and significantly grow its revenues and profits.
 A weak competitor in an attractive industry may conclude that fighting a
steep uphill battle against much stronger rivals holds little promise of
eventual market success or even average profitability.
 Some Industry outsiders may conclude that they have the resources to easily
hurdle the barriers to entering an attractive industry while other outsiders
may find the same industry unattractive because they do not want to challenge
market leaders and have better opportunities elsewhere.

A particular industry’s attractiveness depends in large part on

whether a company has the resources and capabilities to be
competitively successful and profitable in that environment.
What Should a Current Competitor Decide
About its Industry?
 When a competitor decides an industry is attractive, it
should invest aggressively to capture the opportunities it
sees and to improve its long-term competitive position in
the business.
 When a strong competitor concludes its industry is
relatively unattractive and lacking in opportunity, it may
elect to protect its present position, investing cautiously if
at all and looking for opportunities in other industries.
 A competitively weak company in an unattractive industry
may see its best option as finding a buyer, perhaps a rival, to
acquire its business.
Competitor Analysis
What Strategic Moves are Rivals Likely to Make Next?
 Focusses on each company against which a firm directly competes.
 The firm seeks to understand the following:
 What drives the competitor, as shown by its future objectives?
 What the competitor is doing and can do, as revealed by its current strategy?
 What the competitor believes about the industry, as shown by its assumptions?
 What the competitor’s capabilities are, as shown by its strengths and
weaknesses?
 Information about these four dimensions helps the firm prepare an
anticipated response profile for each competitor.
 Competitive Intelligence
 Set of data and information the firm gathers to better understand and anticipate
competitors' objectives, strategies, assumptions, and capabilities.
 Information about rivals that is useful in anticipating their next strategic moves.
Competitor Analysis
What Strategic Moves are Rivals Likely to Make Next?

 Signals of the Likelihood of Strategic Moves:

 Rivals under pressure to improve financial
performance
 Rivals seeking to increase market standing
 Public statements of rivals’ intentions
 Profiles developed by competitive intelligence units
 Competitors’ past behavior and preferences
provides a help in anticipating what moves rivals
are likely to make next in the marketplace.
A Framework
for Competitor
Analysis- Porter
Predicting Your Competitor’s Reaction-
Coyne and Horn
 WILL YOUR COMPETITORS REACT AT ALL?
 If you can answer “no” to any of the following questions, the chances of a
response are low:

 Will your rivals see your move? Even if an action seems obvious to you,
your competitors may not recognize it. For instance, if your new product
will affect several of your rivals’ business units, it may not register as
significant to any one unit. So it may be overlooked.
 Will your rival feel threatened? If your competitor can still meet its financial
goals despite your planned move, it may not feel threatened. A rival might
not think that mounting a response is worth the expense and distraction.
 Will mounting a response be a priority? Your adversary has a full agenda
that would have to be curtailed to react to your move. If your rival is
already committed to plans that will occupy all its attention, it may be
reluctant to shift priorities.
 Can your rival overcome organizational inertia? Many within a rival
company might resist if reacting requires major organizational changes.
Predicting Your Competitor’s Reaction
 WHAT OPTIONS WILL A COMPETITOR ACTIVELY CONSIDER?
 Most companies consider fewer than four responses to a competitor’s move. And
the counter action they most commonly consider is often the most obvious. For
example, they weigh the possibility of introducing a me-too product if a rival comes
out with a new offering. And they consider matching a competitor’s price change.
 The lesson? There’s a good chance your adversary is seriously considering the most
obvious response to your move.

 WHICH OPTION WILL A COMPETITOR MOST LIKELY CHOOSE?

 It will most likely choose the one that promises to deliver the biggest payoff
according to its analytic technique. Look for clues in the success metrics it uses and
in prior decision making behaviours.
 To discover a rival’s metrics, ask, “What measure would have led to its recent
decisions?” Most companies use net present value or short-term (2–4 years out)
market share or earnings while weighing options. Also examine the patterns the
CEO or relevant executives have displayed in prior decisions.
 You’ll likely see a clear preference for one or two responses.