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Industry Analysis

Competitive strategy
Nov. 2006
Competitive Strategy &
Environment
■ Competitive Strategy Is Based On Relating
A Firm To Its Environment

■ Though The Relevant Environment


Encompasses Social & Economic Forces,
The Key Aspect Of The Firm’s
Environment Is The Industry In Which It
Competes
Industry Attractiveness
■ Why Some Industries Are Highly
Profitable While Others Remain
Unattractive For Years?

■ Why Some Firms Do Better Than Others


In The Industry?
Industry Attractiveness
■ What Forces Shapes Competition In
Our Industry?

■ How Can We Position Our Firm To


Defend Against These Forces Or
Influence Them InOur Favour?
Porter’s Five Forces:
Threat of New Entry
Barriers to Entry Based on:

■ Economies Of Scale
■ Brand Identity
■ Product Differentiation
■ Capital Requirements
■ Access To Inputs
Threat of New Entry
■ Proprietary Technology (patents)
■ Cost Advantages Independent Of Size
(Learning Curve)
■ Access To Distribution Channels
■ Switching Costs
Threat of New Entry
■ Government policy
• Industrial license
• Location restrictions
• Environmental policies
Threat of New Entry
■ Retaliation by incubates
• History of vigorous retaliation
• Slow industry growth
• Established firms with large resources to
fight back
• Entry deterring price
– Price which just balances the potential returns
from entry with expected cost of overcoming
entry barriers & retaliation
Entry Barriers
■ Entry barriers change as conditions
change
■ Firm’s strategic decisions have major
impact in shaping entry barriers
■ Barriers can be negated by product or
process innovation, new technology or
experience curve
Bargaining Power of Suppliers
■ Power of suppliers is determined by
whether:
• It is dominated by a few companies and is
more concentrated than industry it sells to
• Its product is unique, differentiated, or has
built-in switching costs
Bargaining Power of Suppliers
• It poses a credible threat of integrating
forward
• Importance of volume to suppliers
• Threat of forward/backward integration
• No one customer is an important customer
of the supplier group
Bargaining Power of Buyers

■ A customer group is powerful if:


• It is concentrated and buys in large volume
• Products it buys are standard or
undifferentiated
Bargaining Power of Buyers
• The products it buys form a significant
fraction of its cost
• The products are unimportant to the quality
of its product or service
• Buyer information is high
• It earns low profit or margins
Threat of Substitutes
■ All products & services have
substitutes(products that can perform
the same function)
■ Substitutes deserve special attention
when:
• Have trends improving their
price/performance vis-a-vis industry's
products
• Are produced by industries earning high
profits
Threat of Substitutes
■ Substitutes set upper limit to prices
charged depending on cross elasticity
of demand
Rivalry
■ Rivalry takes form of jockeying for position
in the market
• Price competition
• Advertising battles
• Product introduction
• Increased customer service or warranty
■ SOME FORMS OF COMPETITION (price)
ARE UNSTABLE AND LOWER
PROFITABILTY OF ENTIRE INDUSTRY
Rivalry Amongst Incumbents
Intensity of competition depends on:
• Number of competitors and whether they
are roughly of equal size and power
• Whether industry growth is slow or high
• Fixed cost/value added are high or product
is perishable
Rivalry
• Whether product/service lacks
differentiation or switching costs ( fixed
costs buyers face in changing suppliers)
• Whether fixed costs are high or product is
perishable
• Whether exit barriers are high
• Whether rivals are diverse in strategies,
origins and culture
Competition
■ The Five Forces Together Determine The
Intensity Of Competition & Profitability

■ The Strongest Of These Becomes Critical For


Strategy Formulation

■ These Forces Are To Be Distinguished From


Many Short-term Factors That Affect Profits &
Competition In Transient Way
Industry Analysis & Strategy
■ Assessing strength of competitive
forces & relating them to our capabilities
and weaknesses crucial to positioning
the firm i n the industry
■ competitive strategy as the taking of
offensive or defensive actions to create
a defendable position in an industry to
cope successfully with the five
competitive forces and thereby yield a
superior return on investment for the
firm. - Porter
Industry Analysis & Strategy
■ Positioning to:
• To provide best defense against
competitive forces
• Influencing the balance of forces through
strategic moves
• Anticipating shifts in forces and responding
to them

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