Topic2 Str Analysis

Analyzing a Company’s External Environment

“ Things are always different--the art is figuring out which differences matter.”

Two Aspects: Company’s external environment Macro-environment (distant) Industry and competitive conditions Operating environment Company’s internal or micro-environment Competencies, Capabilities, Strengths, Weaknesses, & competitiveness Situation Analysis?

Components of Macro-Environment

Key Questions Regarding the Industry and Competitive Environment Industry’s dominant economic traits Competitive forces and strength of each force Drivers of change in the industry Competitor analysis Key success factors Conclusions: Industry attractiveness

Key Aspects of Industry Attractiveness Dominant Economic Traits Competitive Forces & Strength of each Drivers of Change Competitor Analysis Key Success Factors

Some Definitions Industry A group of companies offering products or services that are close substitutes for each other Competitors Rival companies that serve the same basic customer needs

Some Definitions(cont’d) Sector A group of closely related industries Market segments Distinct groups of customers within a market that can be differentiated from each other based on their distinct attributes and demands

The Computer Sector: Industries and Segments

#1.Industry’s Dominant Economic Traits? Market size and growth rate Scope of competitive rivalry Number of rivals Buyer needs and requirements Production capacity Pace of technological change Vertical integration Product innovation Degree of product differentiation Economies of scale Learning and experience curve effects

Identification of : Main sources of competitive forces Strength of these forces #2: Competitive Forces Faced by Firms?

5-Forces I. Rivalry Among Competing Sellers Usually the strongest of the five forces How aggressively are rivals using various weapons of competition to improve their market positions and performance?, through: Offensive actions Defensive countermoves

Typical Weapons for Competing? Vigorous price competition More or different performance features Better product performance Higher quality Stronger brand image and appeal Wider selection of models and styles Bigger/better dealer network Low interest rate financing Higher levels of advertising Stronger product innovation capabilities Better customer service Stronger capabilities to provide buyers with custom-made products

What Causes Rivalry to be Stronger? Competitors engage in frequent and aggressive launches of new offensives to gain sales and market share Slow market growth Number of rivals increases and rivals are of equal size and competitive capability Buyer costs to switch brands are low Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume A successful strategic move carries a big payoff Diversity of rivals increases in terms of visions, objectives, strategies, resources, and countries of origin Strong rivals outside the industry acquire weak firms in the industry and use their resources to transform the new firms into major market contenders

5- Forces II. Threat of Potential Entry Threat depends on: Size & Available Resources of potential entry candidates Barriers to entry Reaction of existing firms

Common Barriers to Entry Sizable economies of scale Product differentiation Cost and resource disadvantages independent of size Brand preferences and customer loyalty Capital requirements and/or other resource requirements Access to distribution channels Regulatory policies Switching costs

Expected Retaliation Threat of Entry influenced by Potential entrant’s expectations about retaliation from existing players: History of retaliation Established firms with: substantial resources to fight back Great commitment to the industry Slow industry growth

Learning/Experience Effects Learning/experience effects exist when a company’s unit costs decline as its cumulative production volume increases because of Accumulating production know-how Growing mastery of the technology The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume

When Is the Threat of Entry Stronger? There’s a sizable pool of entry candidates Entry barriers are low Industry growth is rapid and profit potential is high Incumbents are unwilling or unable to contest a newcomer’s entry efforts When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence

When Is the Threat of Entry Weaker? There’s only a small pool of entry candidates Entry barriers are high Existing competitors are struggling to earn good profits Industry’s outlook is risky Industry growth is slow or stagnant

5 – Forces III. Threat of Substitute Products What is a substitute product? Other products (outside the industry) that can perform the same function(s) as the product of the industry

Substitute Products Eyeglasses and contact lens vs. laser surgery Sugar vs. artificial sweeteners Newspapers vs. TV vs. Internet Examples

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 How to Tell Whether Substitute Products Are a Strong Force

When Is the Competition From Substitutes Stronger? There are many good substitutes that are readily available The lower the price of substitutes The higher the quality and performance of substitutes The lower the user’s switching costs

5 – Forces IV. Supplier is powerful when…. Industry members incur high costs in switching their purchases to other suppliers; Needed inputs are in short supply; Seller has a differentiated input that enhances quality or performance of seller’s products, or, is a valuable or critical part of seller’s production process; There are only a few suppliers of a particular input; Suppliers’ threats to integrate forward

Bargaining Power of Suppliers Whether supplier-seller relationships represent a weak or strong competitive force depends on Whether suppliers can exercise sufficient bargaining leverage to influence terms of supply (price, quality) in their favor Nature and extent of supplier-seller collaboration in the industry

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 differentiated input that enhances the quality of performance of sellers’ products or is a valuable part of sellers’ production process There are only a few suppliers of a specific input Some suppliers threaten to integrate forward

Item being supplied is a commodity Seller switching costs to alternative suppliers are low Good substitutes exist or new ones emerge Surge in availability of supplies occurs Industry members account for a big fraction of suppliers’ total sales Industry members threaten to integrate backward Seller collaboration with selected suppliers provides attractive win-win opportunities When Is the Bargaining Power of Suppliers Weaker?

Competitive Pressures: Collaboration Between Sellers and Suppliers Strategic partnerships with select suppliers to: Reduce inventory and logistics costs Speed availability of next-generation components Enhance quality of parts being supplied Squeeze out cost savings for both parties

5 – Forces V. Bargaining power of Buyers Whether seller-buyer relationships represent a weak or strong competitive force depends on Whether buyers have sufficient bargaining leverage to influence terms of sale in their favor Extent and competitive importance of seller-buyer strategic partnerships in the industry

When Is the Bargaining Power of Buyers Stronger? Buyer switching costs to competing brands or substitutes are low Buyers are large and can demand concessions 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 seller’s list of customers Quantity and quality of information available to buyers improves Buyers have ability to postpone purchases until later Buyers threaten to integrate backward

When Is the Bargaining Power of Buyers Weaker? Buyers purchase item infrequently or in small quantities Buyer switching costs to competing brands are high Surge in buyer demand creates a “sellers’ market” Seller’s brand reputation is important to buyer A specific seller’s product delivers quality or performance that is very important to buyer Buyer collaboration with selected sellers provides attractive win-win opportunities

Competitive Pressures: Collaboration Between Sellers and Buyers Partnerships are an increasingly important competitive element in business-to-business relationships Collaboration may result in mutual benefits regarding Just-in-time deliveries Order processing Electronic invoice payments Data sharing Competitive advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships

Strategic Implications of the Five Competitive Forces Competitive environment is unattractive from the standpoint of earning good profits when Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power

Managing Competitive Forces Objective is to craft a strategy to Insulate firm from competitive pressures Initiate actions to produce sustainable competitive advantage Allow firm to develop “most powerful” strategy that defines the business model for the industry

#3: Factors Driving Industry Change and their Impacts Industries change because forces are driving industry participants to alter their actions Driving forces are the major underlying causes of changing industry and competitive conditions

Analyzing Driving Forces Identify forces likely to exert greatest influence over next 1 - 3 years Usually no more than 3 - 4 factors qualify as real drivers of change Assess impact Are the driving forces causing demand for product to increase or decrease? Are the driving forces acting to make competition more or less intense? Will the driving forces lead to higher or lower industry profitability?

Some typical Driving Forces Internet and e-commerce opportunities Increasing globalization of industry Changes in long-term industry growth rate Changes in product-buyers and usage Product innovation Technological change/process innovation Marketing innovation

Entry or exit of major firms Diffusion of technical knowledge Changes in cost and efficiency Consumer preferences shift from standardized to differentiated products Changes in degree of uncertainty and risk Regulatory policies / government legislation Changing societal concerns, attitudes, and lifestyles Some (more) typical Driving Forces

Strategic Group mapping Strategic group is a cluster of firms in an industry with similar competitive approaches and market positions

Strategic Group Mapping Firms in same strategic group have two or more competitive characteristics in common Have comparable product line breadth Sell in same price/quality range Emphasize same distribution channels Use same product attributes to appeal to similar types of buyers Use identical technological approaches Offer buyers similar services Cover same geographic areas

Interpreting Strategic Group Maps Driving forces and competitive pressures often favor some strategic groups and hurt others Profit potential of different strategic groups varies due to strengths and weaknesses in each group’s market position The closer that strategic groups are on the map, the stronger that competitive rivalry among the members of these groups tends to be

Likely Strategic Moves of Rivals A firm’s 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 and public announcements Resource strengths and weaknesses Efforts being made to improve their situation Thinking and leadership styles of top executives

4# Competitor Analysis Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing Which rival has the best strategy? Which rivals appear to have weak strategies? Which firms are poised to gain market share, and which ones seen destined to lose ground? Which rivals are likely to rank among the industry leaders five years from now? Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader?

Considerations Involved in Predicting Moves of Rivals Which rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue? Which rivals have a strong incentive, along with resources, to make major strategic changes? Which rivals are good candidates to be acquired? Which rivals have the resources to acquire others? Which rivals are likely to enter new geographic markets? Which rivals are likely to expand their product offerings and enter new product segments?

#5: Key Success Factors ? KSFs are those competitive factors most affecting every industry member’s ability to prosper. They concern Specific strategy elements Product attributes Resources Competencies Competitive capabilities that a company needs to have to be competitively successful

KSFs – Technology related Expertise in a particular technology or Scientific Research; Proven ability to improve Production Processes

KSFs – Manufacturing related Ability to achieve Scale Economies and/or capture Learning-Curve effects; Quality-control Know-how; High utilization of Fixed Assets; Access to attractive Supplies or Labour; High labour productivity; Low-cost Product design & engineering; Ability to manufacture customized products

KSFs – Distribution related A strong network of wholesale distributors / dealers; Strong direct-sale capabilities – Internet or Company outlets; Ability to secure valuable shelf-space at retailers’.

KSFs – Marketing related Breadth of Product line & product selection A well-known & well-respected Brand Fast, accurate technical assistance Courteous, personalized cust. Service Accurate filling of buyer orders Customer Guarantees & Warranties Clever advertising

Identifying Industry Key Success Factors Pinpointing KSFs involves determining 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 sellers to achieve a sustainable competitive advantage? KSFs consist of the 3 - 5 major determinants of financial and competitive success

Example: KSFs for Beer Industry Full utilization of brewing capacity – to keep manufacturing costs low Strong network of wholesale distributors – to gain access to retail outlets Clever advertising – to induce beer drinkers to buy a particular brand

Example: KSFs for Apparel Manufacturing Industry Appealing designs and color combinations – to create buyer appeal Low-cost manufacturing efficiency – to keep selling prices competitive

Example: KSFs for Tin and Aluminum Can Industry Locating plants close to end-use customers – to keep costs of shipping empty cans low Ability to market plant output within economical shipping distances

#6: Industry Attractiveness ? Involves assessing whether the industry and competitive environment is attractive or unattractive for earning good profits Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn unusually good profits Attractiveness is relative, not absolute Conclusions have to be drawn from the perspective of a particular company

Factors to Consider in Assessing Industry Attractiveness Industry’s market size and growth potential Whether competitive forces are conducive to rising/falling industry profitability Whether industry profitability will be favorably or unfavorably impacted by driving forces Degree of risk and uncertainty in industry’s future Severity of problems facing industry Firm’s competitive position in industry vis-à-vis rivals Firm’s potential to capitalize on vulnerabilities of weaker rivals Whether firm has sufficient resources to defend against unattractive industry factors

Core Concept: Assessing Industry Attractiveness The degree to which an industry is attractive or unattractive is often not the same for all industry participants or potential entrants. The opportunities an industry presents depend partly on a company’s ability to capture them.

INTERNAL ANALYSIS Analyzing Company’s Resources & Competitive Position

“ Before executives can chart a new strategy, they must reach common understanding of the company’s current position.”

Company Situation Analysis 1. How well is the company’s present strategy working? 2. S.W.O.T Analysis 3. Are Company’s prices and costs competitive? 4. Is company competitively stronger or weaker than key rivals? 5. What strategic issues merit priority managerial attention?

#1: How Well Is the Company’s Present Strategy Working? Identify competitive approach Low-cost leadership Differentiation Focus on a particular market niche Determine competitive scope Geographic market coverage Operating stages in industry’s production/distribution chain Examine recent strategic moves Identify functional strategies

Approaches to Assess How Well the Present Strategy Is Working Qualitative assessment – What is the strategy? Completeness Internal consistency Rationale Relevance Quantitative assessment – What are the results? Is company achieving its financial and strategic objectives? Is company an above-average industry performer?

Key Indicators of How Well the Strategy Is Working Trend in sales and market share Acquiring and/or retaining customers Trend in profit margins Trend in net profits, ROI, and EVA Overall financial strength and credit ranking Efforts at continuous improvement activities Trend in stock price and stockholder value Image and reputation with customers Leadership role(s) – Technology, quality, innovation, e-commerce, etc.

For a company’s strategy to be well-conceived, it must be Matched to its resource strengths and weaknesses Aimed at capturing its best market opportunities and erecting defenses against external threats to its well-being #2: Strengths, Weaknesses, Opportunities and Threats ? S W O T

Identifying Resource Strengths and Competitive Capabilities A strength is something a firm does well or an attribute that enhances its competitiveness Valuable competencies or know-how Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute that places a company in a position of market advantage Alliances or cooperative ventures with partners

Competencies vs. Core Competencies vs. Distinctive Competencies A competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity A core competence is a well-performed internal activity central (not peripheral or incidental) to a company’s competitiveness and profitability A distinctive competence is a competitively valuable activity a company performs better than its rivals

Company Competencies and Capabilities Stem from skills, expertise, and experience usually representing an Accumulation of learning over time and Gradual buildup of real proficiency in performing an activity Involve deliberate efforts to develop the ability to do something, often entailing Selecting people with requisite knowledge and skills Upgrading or expanding individual abilities Molding work products of individuals into a cooperative effort to create organizational ability A conscious effort to create intellectual capital

A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability Often, a core competence results from collaboration among different parts of a company Typically, core competencies reside in a company’s people, not in assets on a balance sheet A core competence gives a company a potentially valuable competitive capability and represents a definite competitive asset Core Competencies -- A Valuable Company Resource

Examples: Core Competencies Expertise in integrating multiple technologies to create families of new products Know-how in creating operating systems for cost efficient supply chain management Speeding new/next-generation products to market Better after-sale service capability Skills in manufacturing a high quality product System to fill customer orders accurately and swiftly

Distinctive Competence -- A Competitively Superior Resource A distinctive competence is a competitively significant activity that a company performs better than its competitors A distinctive competence Represents a competitively valuable capability rivals do not have Presents attractive potential for being a cornerstone of strategy Can provide a competitive edge in the marketplace —because it represents a competitively superior resource strength # 1

Examples: Distinctive Competencies Sharp Corporation Expertise in flat-panel display technology Toyota and Honda Low-cost, high-quality manufacturing capability and short design-to-market cycles Intel Ability to design and manufacture ever more powerful microprocessors for PCs Wal-Mart Low-cost distribution and use of state-of-the-art retail technology

To qualify as competitively valuable or to be the basis for sustainable competitive advantage, a “resource” must pass 4 tests: 1. Is the resource hard to copy? 2. Does the resource have staying power – is it durable? 3. Is the resource really competitively superior? 4. Can the resource be trumped by the different capabilities of rivals? Determining the Competitive Value of a Company Resource

A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage Resource weaknesses relate to Inferior or unproven skills, expertise, or intellectual capital Lack of important physical, organizational, or intangible assets Missing capabilities in key areas Identifying Resource Weaknesses and Competitive Deficiencies

Opportunities most relevant to a company are those offering Good match with its financial and organizational resource capabilities Best prospects for profitable long-term growth Potential for competitive advantage Identifying a Company’s Market Opportunities

Identifying External Threats Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Onerous regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a country

Role of SWOT Analysis in Crafting a Better Strategy The most important part of S W O T analysis is not developing the 4 lists of strengths, weaknesses, opportunities, and threats, but rather Using the 4 lists to draw conclusions about a company’s overall situation and Acting on the conclusions to Better match a company’s strategy to its resource strengths and market opportunities, Correct the important weaknesses, and Defend against external threats

#4: Are Company’s Prices & Costs Competitive? Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis Key analytical tools Value chain analysis Benchmarking

The Concept of a Company Value Chain A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service A company’s value chain consists of a linked set of value-creating activities performed internally The value chain contains two types of activities Primary activities – where most of the value for customers is created Support activities – facilitate performance of the primary activities

Characteristics of Value Chain Analysis Combined costs of all activities in a company’s value chain define the company’s internal cost structure Compares a firm’s costs activity by activity against costs of key rivals From raw materials purchase to Price paid by ultimate customer Pinpoints which internal activities are a source of cost advantage or disadvantage

Why Do Value Chains of Rivals Differ? Several factors can cause differences in value chains of rival companies Internal operations Strategy Approaches used in execution of the strategy Underlying economics of the activities Differences complicate task of assessing rivals’ relative cost positions

The Value Chain System for an Entire Industry Assessing a company’s cost competitiveness involves comparing costs all along the industry’s value chain Suppliers’ value chains are relevant because Costs, performance features, and quality of inputs provided by suppliers influence a firm’s own costs and product performance Forward channel allies’ value chains are relevant because Costs and margins are part of price paid by ultimate end-user Activities performed affect end-user satisfaction

Example: Value Chain Activities Timber farming Logging Pulp mills Papermaking Distribution Pulp & Paper Industry

Parts and components manufacture Assembly Wholesale distribution Retail sales Example: Value Chain Activities Home Appliance Industry

Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing Example: Value Chain Activities Soft Drink Industry Albertson’s

Programming Disk loading Marketing Distribution Example: Value Chain Activities Software Computer Industry

Developing Data to Measure a Company’s Cost Competitiveness After identifying key value chain activities, the next step involves breaking down departmental cost accounting data into costs of performing specific activities Appropriate degree of disaggregation depends on Economics of activities Value of comparing narrowly defined versus broadly defined activities Guideline – Develop separate cost estimates for activities Having different economics Representing a significant or growing proportion of costs

Activity-Based Costing: A Key Tool in Analyzing Costs Determining whether a company’s costs are in line with those of rivals requires Measuring how a company’s costs compare with those of rivals activity-by-activity Requires having accounting data to measure cost of each value chain activity Activity-based costing entails Defining expense categories according to specific activities performed and Assigning costs to the activity responsible for creating the cost

Benchmarking Costs of Key Value Chain Activities Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities Purchase of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls

Objectives of Benchmarking Identify best practices in performing an activity Understand the best practices in performing an activity – learn what is the “best” way to do a particular activity from those demonstrating they are “best-in-world” Learn how other firms achieve lower costs Take action to improve company’s cost competitiveness

What Determines if a Company Is Cost Competitive? Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains When costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. Company’s own internal activities 3. Forward channel activities Activities, Costs, & Margins of Forward Channel Allies Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains

Options to Correct Internal Cost Disadvantages Implement use of best practices throughout company Eliminate some cost-producing activities altogether by revamping value chain system Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed cheaper by outside vendors/suppliers Invest in cost-saving technology Innovate around troublesome cost components Simplify product design Make up difference by achieving savings in backward or forward portions of value chain system

Translating Performance of Value Chain Activities to Competitive Advantage A company can create competitive advantage by managing its value chain to Integrate knowledge and skills of employees in competitively valuable ways Leverage economies of learning / experience Coordinate related activities in ways that build valuable capabilities Build dominating expertise in a value chain activity critical to customer satisfaction or market success

#4: Company Stronger or Weaker than Key Rivals? Overall competitive position involves answering two questions How does a company rank relative to competitors on each important factor that determines market success? Does a company have a net competitive advantage or disadvantage vis-à-vis major competitors?

Why Do a Competitive Strength Assessment ? Reveals strength of firm’s competitive position vis-à-vis key rivals Shows how firm stacks up against rivals, measure-by-measure – pinpoints firm’s competitive strengths and competitive weaknesses Indicates whether firm is at a competitive advantage / disadvantage against each rival Identifies possible offensive attacks (pit company strengths against rivals’ weaknesses) Identifies possible defensive actions (a need to correct competitive weaknesses)

Identifying the Strategic Issues How to stave off market challenges from new foreign competitors? How to combat price discounting of rivals? How to reduce a company’s high costs? How to sustain a company’s present growth in light of slowing buyer demand? Whether to expand a company’s product line? Whether to acquire a rival firm? Whether to expand into foreign markets rapidly or cautiously? What to do about aging demographics of a company’s customer base?

Topic2 Str Analysis

More Related Content

What's hot (20)

Viewers also liked (9)

Similar to Topic2 Str Analysis (20)

More from guest8fdbdd (20)

Recently uploaded (20)

Topic2 Str Analysis