499 assignment 2

McDonald’s is the largest restaurant chain in the world. It has 14,155 restaurants in the United States, and 36,899 restaurants worldwide—in more than 100 countries. It employs 1.5 million people and serves approximately 69 million customers daily. It sells 9 million pounds of french fries daily and sells 550 million Big Macs annually. Over the years, McDonald’s was a leader, not only in market share, but also with the introduction of new menu items to the fast food market. For example, it first introduced breakfast items to this market, and its breakfast menu now accounts for about 25 percent of its sales. It successfully introduced Chicken McNuggets to this market, and also successfully introduced gourmet coffee products and began to compete against Starbucks. With all this success, what is the problem?

The problems revolve around competition and changing consumer tastes. Consumers have become more health-conscious, and competitors have been more attuned to customer desires. As a result, McDonald’s suffered a decline in its total sales revenue of 18.9 percent from its high point in 2013 of $28.1 billion to $22.8 billion in 2017. It seems that McDonald’s did a poor job of analyzing its environment and especially its customers and competitors. During this same time, some of McDonald’s competitors flourished. For example, Sonic and Chipotle recorded significant increases in their annual sales. Other specialty burger restaurants, such as Smashburger, have stolen business from McDonald’s even though their burgers are priced higher. The quality of these competitors’ products is perceived to be higher, and many are “made to order” and thus customized to the customer’s desires. And, partly because the volume and complexity of the McDonald’s menu items have grown, the time required to provide service has also increased.

Healthier choice options now available at McDonald’s to satisfy the more health-conscious consumer.

Ruaridh Stewart/ZUMA Press/Newscom

Failing to understand the changing market and competitive landscape, McDonald’s was unable to be proactive and thus tried to be reactive but without much success. Because of these problems, McDonald’s hired a new CEO in 2015, hoping to overcome its woes. With a thorough analysis of its customers and competition and its products and services, McDonald’s developed a strategy to achieve a multi-year turnaround. It is adding new products to its menu and has enhanced the healthiness of those products along with enhancing their quality. For example, McDonald’s announced that it will now use only chickens raised without antibiotics to be sensitive to human health concerns. Changing vegetables in Happy Meals (e.g., adding baby carrots) and implementing new wraps that require additional (new) vegetables (such as cucumbers) are meant to enhance the healthiness of the McDonald’s menu. It has also introduced signature sandwiches, Quarter Pounders cooked with fresh meat only (not frozen), new espresso-based drinks, and other quality items.

As suggested in the Opening Case and by research, the external environment (which includes the industry in which a firm competes as well as those against whom it competes) affects the competitive actions and responses firms take to outperform competitors and earn above-average returns. For example, McDonald’s has been experiencing a reduction in returns in recent times because of changing consumer tastes and enhanced competition. McDonald’s is attempting to respond to the threats from its environment by changing its menu, revising the types of supplies it purchases, remodeling its restaurants, and implementing digital sales and home delivery of food orders. The sociocultural segment of the general environment (discussed in this chapter) is the driver of some of the changing values in society that are now placing greater emphasis on healthy food choices. As the Opening Case describes, McDonald’s is responding to these changing values by, for example, using only antibiotic-free chicken and making its Happy Meals healthier.

2-1The General, Industry, and Competitor Environments

Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already under way. Scanning activities must be aligned with the organizational context; a scanning system designed for a volatile environment is inappropriate for a firm in a stable environment. Scanning often reveals ambiguous, incomplete, or unconnected data and information that require careful analysis.

Many firms use special software to help them identify events that are taking place in the environment and that are announced in public sources. For example, news event detection uses information-based systems to categorize text and reduce the trade-off between an important missed event and false alarm rates. Increasingly, these systems are used to study social media outlets as sources of information.

2-2bMonitoring

When monitoring, analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning. Critical to successful monitoring is the firm’s ability to detect meaning in environmental events and trends. For example, those monitoring retirement trends in the United States learned that the median retirement savings of U.S. workers was only $5000. And for those who are aged 56-61, the median savings for retirement was only $17,000. For a reasonable retirement, Fidelity estimates that people should have saved 10 times their annual salary. Firms seeking to serve retirees’ financial needs will continue monitoring workers’ savings and investment patterns to see if a trend is developing. If, say, they identify that saving less for retirement (or other needs) is indeed a trend, these firms will seek to understand its competitive implications.

Forecasting events and outcomes accurately is challenging. Forecasting demand for new technological products is difficult because technology trends are continually shortening product life cycles. This is particularly difficult for a firm such as Intel, whose products go into many customers’ technological products, which are frequently updated. Thus, having access to tools that allow better forecasting of electronic product demand is of value to Intel as the firm studies conditions in its external environment.

2-2dAssessing

When assessing, the objective is to determine the timing and significance of the effects of environmental changes and trends that have been identified. Through scanning, monitoring, and forecasting, analysts are able to understand the general environment. Additionally, the intent of assessment is to specify the implications of that understanding. Without assessment, the firm has data that may be interesting but of unknown competitive relevance. Even if formal assessment is inadequate, the appropriate interpretation of that information is important.

Accurately assessing the trends expected to take place in the segments of a firm’s general environment is important. However, accurately interpreting the meaning of those trends is even more important. In slightly different words, although gathering and organizing information is important, appropriately interpreting that information to determine if an identified trend in the general environment is an opportunity or threat is critical.

2-3Segments of the General Environment

Age Structure

The most noteworthy aspect of this element of the demographic segment is that the world’s population is rapidly aging, as noted above. For example, predictions are that the number of centenarians worldwide will double by 2023 and double again by 2035. Projections suggest life expectancy will surpass 100 in some industrialized countries by the second half of this century—roughly triple the lifespan of the population in earlier years. In the 1950s, Japan’s population was one of the youngest in the world. However, 45 is now the median age in Japan, with the projection that it will be 55 by 2040. With a fertility rate that is below replacement value, another prediction is that by 2040 there will be almost as many Japanese people 100 years old or older as there are newborns. By 2050, almost 25 percent of the world’s population will be aged 65 or older. These changes in the age of the population have significant implications for availability of qualified labor, health care, retirement policies, and business opportunities among others.

This aging of the population threatens the ability of firms to hire and retain a workforce that meets their needs. Thus, firms are challenged to increase the productivity of their workers and/or to establish additional operations in other nations in order to access the potential working age population. A potential opportunity is represented by delayed retirements; older workers with extended life expectancies may need to work longer in order to eventually afford retirement. Delayed retirements may help companies to retain experienced and knowledgeable workers. In this sense, “organizations now have a fresh opportunity to address the talent gap created by a shortage of critical skills in the marketplace as well as the experience gap created by multiple waves of downsizing over the past decade.” Firms can also use their older, more experienced workers to transfer their knowledge to younger employees, helping them to quickly gain valuable skills. There is also an opportunity for firms to more effectively use the talent available in the workforce. For example, moving women into higher level professional and managerial jobs could offset the challenges created by decline in overall talent availability. And, based on research, it may even enhance overall outcomes.

Geographic Distribution

How a population is distributed within countries and regions is subject to change over time. For example, over the last few decades, the U.S. population has shifted from states in the Northeast and Great Lakes region to states in the West (California), South (Florida), and Southwest (Texas). Based on data in 2018, California’s population has grown by approximately 2.3 million since 2010, while Texas’s population has grown by 3.2 million in the same time period. These changes are characterized as moving from the “Frost Belt” to the “Sun Belt.” Outcomes from these shifts include the fact that the gross domestic product (GDP) of California in 2017 was slightly more than $2.75 trillion, an amount that makes California the sixth-largest economy in the world. In this same year, at a value of $1.6 trillion, Texas’ GDP was second to that of California.

Firms want to carefully study the patterns of population distributions in countries and regions to identify opportunities and threats. Thus, in the United States, current patterns suggest the possibility of opportunities in states on the West Coast and some in the South and Southwest. In contrast, firms competing in the Northeast and Great Lakes areas may concentrate on identifying threats to their ability to operate profitably in those areas.

Of course, geographic distribution patterns differ throughout the world. For example, in past years, the majority of the population in China lived in rural areas; however, growth patterns have been shifting to urban communities such as Shanghai and Beijing. In fact, in 2006, there were 148.7 million more people living in rural areas than in urban areas in China. However, by 2016, 203.2 million more people lived in urban than in rural areas within China, a substantial shift in a only ten-year period. Recent shifts in Europe show small population gains for countries such as France, Germany, and the United Kingdom, while Greece experienced a small population decline. Overall, the geographic distribution patterns in Europe have been reasonably stable.

Ethnic Mix

The ethnic mix of countries’ populations continues to change, creating opportunities and threats for many companies as a result. For example, Hispanics have become the largest ethnic minority in the United States. In fact, the U.S. Hispanic market is the third largest “Latin American” economy behind Brazil and Mexico. Spanish is now the dominant language in parts of the United States such as Texas, California, Florida, and New Mexico. Given these facts, some firms might want to assess how their goods or services could be adapted to serve the unique needs of Hispanic consumers. Interestingly, by 2020, more than 50 percent of children in the United States will be a member of a minority ethnic group, and the population in the United States is projected to have a majority of minority ethnic members by 2044. And, by 2060, whites are projected to compose approximately 44 percent of the U.S. population. The ethnic diversity of the population is important not only because of consumer needs but also because of the labor force composition. Interestingly, research has shown that firms with greater ethnic diversity in their managerial team are likely to enjoy higher performance.

Additional evidence is of interest to firms when examining this segment. For example, African countries are the most ethnically diverse in the world, with Uganda having the highest ethnic diversity rating and Liberia having the second highest. In contrast, Japan and the Koreas are the least ethnically diversified in their populations. European countries are largely ethnically homogeneous while the Americas are more diverse. “From the United States through Central America down to Brazil, the ‘new world’ countries, maybe in part because of their histories of relatively open immigration (and, in some cases, intermingling between natives and new arrivals) tend to be pretty diverse.”

Income Distribution

The growth of the economy in China has drawn many firms, not only for the low-cost production, but also because of the large potential demand for products, given its large population base. However, in recent times, the amount of China’s gross domestic product that makes up domestic consumption is the lowest of any major economy at less than one-third. In comparison, India’s domestic consumption of consumer goods accounts for two-thirds of its economy, or twice China’s level. For this reason, many western multinationals are interested in India as a consumption market as its middle class grows extensively; although India has poor infrastructure, its consumers are in a better position to spend. Because of situations such as this, paying attention to the differences between markets based on income distribution can be very important. These differences across nations suggest it is important for most firms to identify the economic systems that are most likely to produce the most income growth and market opportunities. Thus, the economic segment is a critically important focus of firms’ environmental analysis.

2-3bThe Economic Segment

A marijuana Budtender sorts strands of marijuana for sale at a retail and medical cannabis dispensary in Boulder, Colorado.

AP Images/Brennan Linsley

2-3cThe Political/Legal Segment

Greater diversity in the workforce creates challenges and opportunities, including combining the best of both men’s and women’s traditional leadership styles. Although diversity in the workforce has the potential to improve performance, research indicates that diversity initiatives must be successfully managed to reap these organizational benefits.

Although the lifestyle and workforce changes referenced previously reflect the attitudes and values of the U.S. population, each country is unique with respect to these sociocultural indicators. National cultural values affect behavior in organizations and thus also influence organizational outcomes such as differences in managerial styles. Likewise, the national culture influences a large portion of the internationalization strategy that firms pursue relative to one’s home country. Knowledge sharing is important for dispersing new knowledge in organizations and increasing the speed in implementing innovations. Personal relationships are especially important in China; the concept of guanxi (personal relationships or good connections) is important in doing business within the country and for individuals to advance their careers in what is becoming a more open market society. Understanding the importance of guanxi is critical for foreign firms doing business in China.

2-3eThe Technological Segment

2-3fThe Global Segment

Increasingly, the informal economy as it exists throughout the world is another aspect of the global segment requiring analysis. Growing in size, this economy has implications for firms’ competitive actions and responses in that increasingly, firms competing in the formal economy will find that they are competing against informal economy companies as well.

2-3gThe Sustainable Physical Environment Segment

Target (Tar-zhey) Is Trying to Navigate in a New and Rapidly Changing Competitive Landscape

Target became known by consumers as Tar-zhey, the retailer of cheaper but ‘chic’ products. The firm offered a step up in quality goods at a slightly higher price than discount retailers such as Walmart, but was targeted below major, first line retailers such Macy’s and Nordstrom. Additionally, it promoted its stores to offer one-stop shopping with clothing, toys, health products, and food goods, among other products. For many years, Tar-zhey “hit the bullseye” and performed well serving this large niche in the market. But the company took its eye off the target and began losing market share (along with other poor strategic actions).

Target’s marketing chief stated that “it’s not that we became insular. We were insular.” This suggests that the firm was not analyzing its environment. By allowing rivals, and especially Internet competitors, to woo the company’s customers, it lost sales, market share, and profits. It obviously did not predict and prepare for the significant competition from Internet rivals that is now reshaping most all retail industries. Competitors were offering better value to customers (perhaps more variety and convenience through online sales). Thus, Target’s reputation and market share were simultaneously harmed.

Because of all the problems experienced, Target hired a new CEO, Brian Cornell, in 2014. Cornell has made a number of changes, but the continued revolution in the industry, largely driven by Amazon, continued to gnaw away Target’s annual sales. Target’s annual sales declined by approximately 5 percent in 2017 and its stock price suffered as a result. Target was forced to develop a new strategy, which involves a major rebranding. It launched four new brands late in 2017, including A New Day, a fashionable line of women’s clothes, and Goodfellow & Co, a modern line of menswear, with the intent to make an emotional connection with customers. It also plans to remodel 100 of its stores and change in-store displays to improve customer experiences. It will add 30 small stores that offer innovative designs and, to compete with Amazon, is emphasizing its digital sales and delivery of products. Up to now its digital strategy has not been highly successful, so it is narrowing its focus to increase its effectiveness.

Goodfellow & Co menswear, a new line introduced by Target in late 2017.

Glen Stubbe/ZUMA Press/Minneapolis/Minnesota/USA

Target plans to discontinue several major brands by 2019 and will continue to introduce new brands (12 in total are planned). The intent is to increase the appeal of Target and its products to millennials. These actions alone suggest the importance of gathering and analyzing data on the market and competitors’ actions. The next few years will show the fruits of all of Target’s changes. If they are successful, Target will still face substantial competition from Amazon and Walmart; if they are not successful, Target suffer the same fate of of many other large and formerly successful retailers that no exist.

2-4Industry Environment Analysis

Next, we examine the five forces the firm needs to analyze in order to understand the profitability potential within an industry (or a segment of an industry) in which it competes or may choose to compete.

Becoming more flexible in terms of being able to meet shifts in customer demand is another benefit for an industry incumbent and a possible entry barrier for the firms considering entering the industry. For example, a firm may choose to reduce its price with the intention of capturing a larger share of the market. Alternatively, it may keep its price constant to increase profits. In so doing, it likely will increase its free cash flow, which is very helpful during financially challenging times.

Some competitive conditions reduce the ability of economies of scale to create an entry barrier such as the use of scale free resources. Also, many companies now customize their products for large numbers of small customer groups. In these cases, customized products are not manufactured in the volumes necessary to achieve economies of scale. Customization is made possible by several factors, including flexible manufacturing systems. In fact, the new manufacturing technology facilitated by advanced information systems has allowed the development of mass customization in an increasing number of industries. Online ordering has enhanced customers’ ability to buy customized products. Companies manufacturing customized products can respond quickly to customers’ needs in lieu of developing scale economies.

Product Differentiation Over time, customers may come to believe that a firm’s product is unique. This belief can result from the firm’s service to the customer, effective advertising campaigns, or being the first to market a good or service. Greater levels of perceived product uniqueness create customers who consistently purchase a firm’s products. To combat the perception of uniqueness, new entrants frequently offer products at lower prices. This decision, however, may result in lower profits or even losses.

The Coca-Cola Company and PepsiCo have established strong brands in the markets in which they compete, and these companies compete against each other in countries throughout the world. Because each of these competitors has allocated a significant amount of resources over many decades to build its brands, customer loyalty is strong for each firm. When considering entry into the soft drink market, a potential entrant would be well advised to pause and determine actions it would take to try to overcome the brand image and consumer loyalty each of these giants possesses.

Capital Requirements Competing in a new industry requires a firm to have resources to invest. In addition to physical facilities, capital is needed for inventories, marketing activities, and other critical business functions. Even when a new industry is attractive, the capital required for successful market entry may not be available to pursue the market opportunity. For example, defense industries are difficult to enter because of the substantial resource investments required to be competitive. In addition, because of the high knowledge requirements of the defense industry, a firm might acquire an existing company as a means of entering this industry, but it must have access to the capital necessary to do this.

Switching Costs Switching costs are the one-time costs customers incur when they buy from a different supplier. The costs of buying new ancillary equipment and of retraining employees, and even the psychological costs of ending a relationship, may be incurred in switching to a new supplier. In some cases, switching costs are low, such as when the consumer switches to a different brand of soft drink. Switching costs can vary as a function of time, as shown by the fact that in terms of credit hours toward graduation, the cost to a student to transfer from one university to another as a freshman is much lower than it is when the student is entering the senior year.

Access to Distribution Channels Over time, industry participants commonly learn how to effectively distribute their products. After building a relationship with its distributors, a firm will nurture it, thus creating switching costs for the distributors. Access to distribution channels can be a strong entry barrier for new entrants, particularly in consumer nondurable goods industries (e.g., in grocery stores where shelf space is limited) and in international markets. New entrants have to persuade distributors to carry their products, either in addition to or in place of those currently distributed. Price breaks and cooperative advertising allowances may be used for this purpose; however, those practices reduce the new entrant’s profit potential. Interestingly, access to distribution is less of a barrier for products that can be sold on the Internet.

Cost Disadvantages Independent of Scale Sometimes, established competitors have cost advantages that new entrants cannot duplicate. Proprietary product technology, favorable access to raw materials, desirable locations, and government subsidies are examples. Successful competition requires new entrants to reduce the strategic relevance of these factors. For example, delivering purchases directly to the buyer can counter the advantage of a desirable location; new food establishments in an undesirable location often follow this practice. Spanish clothing company Zara is owned by Inditex, the largest fashion clothing retailer in the world. From the time of its launching, Zara relied on classy, well-tailored, and relatively inexpensive items that were produced and sold by adhering to ethical practices to successfully enter the highly competitive global clothing market and overcome that market’s entry barriers. It is successful because it has used a novel business model in the industry. It also sells quality merchandise for less, offers good stores and store locations, and is well positioned in the industry. Business model innovation may be the key to survival and success in current retail industries.

Government Policy Through their decisions about issues such as the granting of licenses and permits, governments can also control entry into an industry. Liquor retailing, radio and TV broadcasting, banking, and trucking are examples of industries in which government decisions and actions affect entry possibilities. Also, governments often restrict entry into some industries because of the need to provide quality service or the desire to protect jobs. Alternatively, deregulating industries, such as the airline and utilities industries in the United States, generally results in additional firms choosing to enter and compete within an industry. It is not uncommon for governments to attempt to regulate the entry of foreign firms, especially in industries considered critical to the country’s economy or important markets within it. Governmental decisions and policies regarding antitrust issues also affect entry barriers. For example, in the United States, the Antitrust Division of the Justice Department or the Federal Trade Commission will sometimes disallow a proposed merger because officials conclude that approving it would create a firm that is too dominant in an industry and would thus create unfair competition. For example, the U.S. Department of Justice filed a suit in 2017 to block the merger of AT&T and Time Warner with the trial initiated in March 2018. The actions of the Department of Justice were unsuccessful and in June 2018, the merger was approved and completed. Such a negative ruling would obviously be an entry barrier for an acquiring firm.

Companies seeking to enter an industry also anticipate the reactions of firms in the industry. An expectation of swift and vigorous competitive responses reduces the likelihood of entry. Vigorous retaliation can be expected when the existing firm has a major stake in the industry (e.g., it has fixed assets with few, if any, alternative uses), when it has substantial resources, and when industry growth is slow or constrained. For example, any firm attempting to enter the airline industry can expect significant retaliation from existing competitors due to overcapacity.

Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers. Small entrepreneurial firms are generally best suited for identifying and serving neglected market segments. When Honda first entered the U.S. motorcycle market, it concentrated on small-engine motorcycles, a market that firms such as Harley-Davidson ignored. By targeting this neglected niche, Honda initially avoided a significant amount of head-to-head competition with well-established competitors. After consolidating its position, Honda used its strength to attack rivals by introducing larger motorcycles and competing in the broader market.

2-4bBargaining Power of Suppliers

Increasing prices and reducing the quality of their products are potential means suppliers use to exert power over firms competing within an industry. If a firm is unable to recover cost increases by its suppliers through its own pricing structure, its profitability is reduced by its suppliers’ actions. A supplier group is powerful when:

· It is dominated by a few large companies and is more concentrated than the industry to which it sells.

· Satisfactory substitute products are not available to industry firms.

· Industry firms are not a significant customer for the supplier group.

· Suppliers’ goods are critical to buyers’ marketplace success.

· The effectiveness of suppliers’ products has created high switching costs for industry firms.

· It poses a credible threat to integrate forward into the buyers’ industry. Credibility is enhanced when suppliers have substantial resources and provide a highly differentiated product.

DWImages Northern Ireland/Alamy Stock Photo

Some buyers attempt to manage or reduce suppliers’ power by developing a long-term relationship with them. Although long-term arrangements reduce buyer power, they also increase the suppliers’ incentive to be helpful and cooperative in appreciation of the longer-term relationship (guaranteed sales). This is especially true when the partners develop trust in one another.

The airline industry is one in which suppliers’ bargaining power is changing. Though the number of suppliers is low, the demand for major aircraft is also relatively low. Boeing and Airbus aggressively compete for orders of major aircraft, creating more power for buyers in the process. When a large airline signals that it might place a “significant” order for wide-body airliners that either Airbus or Boeing might produce, both companies are likely to battle for the business and include a financing arrangement, highlighting the buyer’s power in the potential transaction. And, with China’s entry into the large commercial airliner industry, buyer power has increased.

2-4cBargaining Power of Buyers

Firms seek to maximize the return on their invested capital. Alternatively, buyers (customers of an industry or a firm) want to buy products at the lowest possible price—the point at which the industry earns the lowest acceptable rate of return on its invested capital. To reduce their costs, buyers bargain for higher quality, greater levels of service, and lower prices. These outcomes are achieved by encouraging competitive battles among the industry’s firms. Customers (buyer groups) are powerful when:

· They purchase a large portion of an industry’s total output.

· The sales of the product being purchased account for a significant portion of the seller’s annual revenues.

· They could switch to another product at little, if any, cost.

· The industry’s products are undifferentiated or standardized, and the buyers pose a credible threat if they were to integrate backward into the sellers’ industry.

Consumers armed with greater amounts of information about the manufacturer’s costs and the power of the Internet as a shopping and distribution alternative have increased bargaining power in many industries. 2-4dThreat of Substitute Products

Substitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces. For example, as a sugar substitute, NutraSweet (and other sugar substitutes) places an upper limit on sugar manufacturers’ prices—NutraSweet and sugar perform the same function, though with different characteristics. Other product substitutes include e-mail and fax machines instead of overnight deliveries, plastic containers rather than glass jars, and tea instead of coffee.

Newspaper firms have experienced significant circulation declines over the past 20 years. The declines are a result of the ready availability of substitute outlets for news including Internet sources and cable television news channels, along with e-mail and cell phone alerts. Likewise, satellite TV and cable and telecommunication companies provide substitute services for basic media services such as television, Internet, and phone. The many electronic devices that provide services overlapping with the personal computer (e.g., laptops) such as tablets, watches (iWatch), etc. are changing markets for PCs, with multiple niches in the market.

2-4eIntensity of Rivalry among Competitors

Because an industry’s firms are mutually dependent, actions taken by one company usually invite responses. Competitive rivalry intensifies when a firm is challenged by a competitor’s actions or when a company recognizes an opportunity to improve its market position.

Firms within industries are rarely homogeneous; they differ in resources and capabilities and seek to differentiate themselves from competitors. Typically, firms seek to differentiate their products from competitors’ offerings in ways that customers value and in which the firms have a competitive advantage. Common dimensions on which rivalry is based include price, service after the sale, and innovation. More recently, firms have begun to act quickly (speed a new product to the market) in order to gain a competitive advantage.

Next, we discuss the most prominent factors that experience shows affect the intensity of rivalries among firms.

Numerous or Equally Balanced Competitors

Intense rivalries are common in industries with many companies. With multiple competitors, it is common for a few firms to believe they can act without eliciting a response. However, evidence suggests that other firms generally are aware of competitors’ actions, often choosing to respond to them. At the other extreme, industries with only a few firms of equivalent size and power also tend to have strong rivalries. The large and often similar-sized resource bases of these firms permit vigorous actions and responses. The competitive battles between Airbus and Boeing and between Coca-Cola and PepsiCo exemplify intense rivalry between relatively equal competitors.

Slow Industry Growth

When a market is growing, firms try to effectively use resources to serve an expanding customer base. Markets increasing in size reduce the pressure to take customers from competitors. However, rivalry in no-growth or slow-growth markets becomes more intense as firms battle to increase their market shares by attracting competitors’ customers. Certainly, this has been the case in the fast-food industry as explained in the Opening Case about McDonald’s. McDonald’s, Wendy’s, and Burger King use their resources, capabilities, and core competencies to try to win each other’s customers. The instability in the market that results from these competitive engagements may reduce the profitability for all firms engaging in such battles. As noted in the Opening Case, McDonald’s has suffered from this competitive rivalry but is taking actions to rebuild its customer base and achieve a competitive advantage or at least competitive parity.

When fixed costs account for a large part of total costs, companies try to maximize the use of their productive capacity. Doing so allows the firm to spread costs across a larger volume of output. However, when many firms attempt to maximize their productive capacity, excess capacity is created on an industry-wide basis. To then reduce inventories, individual companies typically cut the price of their product and offer rebates and other special discounts to customers. However, doing this often intensifies competition. The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is frequently observed in industries with high storage costs. Perishable products, for example, lose their value rapidly with the passage of time. As their inventories grow, producers of perishable goods often use pricing strategies to sell products quickly.

Lack of Differentiation or Low Switching Costs

When buyers find a differentiated product that satisfies their needs, they frequently purchase the product loyally over time. Industries with many companies that have successfully differentiated their products have less rivalry, resulting in lower competition for individual firms. Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns. However, when buyers view products as commodities (i.e., as products with few differentiated features or capabilities), rivalry intensifies. In these instances, buyers’ purchasing decisions are based primarily on price and, to a lesser degree, service. Personal computers are a commodity product, and the cost to switch from a computer manufactured by one firm to another is low. Thus, the rivalry among Dell, Hewlett-Packard, Lenovo, and other computer manufacturers is strong as these companies consistently seek to find ways to differentiate their offerings.

High Strategic Stakes

Competitive rivalry is likely to be high when it is important for several of the competitors to perform well in the market. Competing in diverse businesses (such as petrochemicals, fashion, medicine, and plant construction, among others), Samsung is a formidable foe for Apple in the global smartphone market. Samsung has committed a significant amount of resources to develop innovative products as the foundation for its efforts to try to outperform Apple in selling this particular product. Only a few years ago, Samsung held a sizable lead in market share. But in 2017, in the U.S. market, it was estimated that the iPhone achieved a holiday period market share of 31.3 percent while Samsung’s Galaxy held 28.9 percent. Overall, these firms are in a virtual dead heat in the smartphone market. Because this market is extremely important to both firms, the smart-phone rivalry between them (and others) will likely remain quite intense.

High strategic stakes can also exist in terms of geographic locations. For example, several automobile manufacturers have established manufacturing facilities in China, which has been the world’s largest car market since 2009. Because of the high stakes involved in China for General Motors and other firms (including domestic Chinese automobile manufacturers) producing luxury cars (including Audi, BMW, and Mercedes-Benz), rivalry among them in this market is quite intense.

High Exit Barriers

Sometimes companies continue competing in an industry even though the returns on their invested capital are low or even negative. Firms making this choice likely face high exit barriers, which include economic, strategic, and emotional factors causing them to remain in an industry when the profitability of doing so is questionable.

· Specialized assets (assets with values linked to a business or location)

· Fixed costs of exit (such as labor agreements)

· Strategic interrelationships (relationships of mutual dependence, such as those between one business and other parts of a company’s operations, including shared facilities and access to financial markets)

· Emotional barriers (aversion to economically justified business decisions because of fear for one’s own career, loyalty to employees, and so forth)

· Government and social restrictions (often based on government concerns for job losses and regional economic effects; more common outside the United States)

Exit barriers are especially high in the airline industry. Fortunately, profitability has returned to the industry following the global financial crisis and is expected to reach its highest level in 2018. Industry consolidation and efficiency enhancements regarding airline alliances helped reduce airline companies’ costs. This, combined with improving economic conditions in several countries, resulted in a greater demand for travel. This has helped eased the pressures on several firms that may have been contemplating leaving the airline travel industry.

2-5Interpreting Industry Analyses

Effective industry analyses are products of careful study and interpretation of data and information from multiple sources. A wealth of industry-specific data is available for firms to analyze to better understand an industry’s competitive realities. Because of globalization, international markets and rivalries must be included in the firm’s analyses. And, because of the development of global markets, a country’s borders no longer restrict industry structures. In fact, in general, entering international markets enhances the chances of success for new ventures as well as more established firms.

Analysis of the five forces within a given industry allows the firm to determine the industry’s attractiveness in terms of the potential to earn average or above-average returns. In general, the stronger the competitive forces, the lower the potential for firms to generate profits by implementing their strategies. An unattractive industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong competitive threats from product substitutes, and intense rivalry among competitors. These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns. Alternatively, an attractive industry has high entry barriers, suppliers and buyers with little bargaining power, few competitive threats from product substitutes, and relatively moderate rivalry. Next, we explain strategic groups as an aspect of industry competition.

2-6Strategic Groups

The notion of strategic groups can be useful for analyzing an industry’s competitive structure. Such analyses can be helpful in diagnosing competition, positioning, and the profitability of firms competing within an industry. High mobility barriers, high rivalry, and low resources among the firms within an industry limit the formation of strategic groups. However, after strategic groups are formed, their membership remains relatively stable over time. Using strategic groups to understand an industry’s competitive structure requires the firm to plot companies’ competitive actions and responses along strategic dimensions, such as pricing decisions, product quality, distribution channels, and so forth. This type of analysis shows the firm how certain companies are competing similarly in terms of how they use similar strategic dimensions.

Strategic Focus

Toys ‘R’ Us Exemplifies the Apocalypse in the Retail Industries

More than 10,000 stores closed in the United States in 2017. The companies that have gone bankrupt or are in serious financial trouble read like a list of Who’s Who in retailing, The ones that could default in the near term include Sears, Neiman Marcus, Payless, J. Crew, PetSmart, and Steak ‘n Shake, among others. But, perhaps the bankruptcy of Toys ‘R’ Us in 2018 caused the most angst among consumers because they remember what it used to be and know what it could have been.

Toys ‘R’ Us was a dominant retailer of toys that had devoted customers and toy manufacturers. The stores had every conceivable toy and became a ‘one-stop-shopping destination’ for most parents. It also reached out to and fostered the development of many small and medium sized toy manufacturers who largely owed their existence to Toys ‘R’ Us. At one time it was perhaps the most significant toy retailer in the world. As it grew, many of its competitors went out of business. Yet, after the founder stepped down from the CEO position, a succession of CEOs became complacent. Toys ‘R’ Us stopped analyzing its competitors, didn’t invest in and update its stores, and began to lose the devotion of its customers. This made it vulnerable to new competition. Essentially, by ignoring competition and maintaining the status quo, it let competitors take advantage by better serving its customer base.

Large retailers such as Walmart and Target began to grow their toy sales and take market share away from Toys ‘R’ Us. And then Internet sales began to take market share. To respond, Toys ‘R’ Us signed an exclusive agreement to sell its toys over the Internet with Amazon. The contract was expensive (about $50 million annually), and Amazon did not only sell the toys from Toys ‘R’ Us. In fact, Amazon created an Internet marketplace selling multiple brands’ and companies’ toys. As such, Toy ‘R’ Us paid Amazon to become a substantial competitor.

Toys ‘R’ Us filed for bankruptcy in 2018, closing all of its stores.

Andrew Harrer/Bloomberg/Getty Images

At the height of these problems, Toys ‘R’ Us was sold to private equity investors who completed a leveraged buyout that saddled the company with substantial debt. With large debt payments, fewer resources were available to invest in the stores and to respond to competitors. Thus, in 2018 it filed for bankruptcy, closing all of its stores.

The exit of Toys ‘R’ Us leaves its two biggest competitors, Walmart and Amazon, now locked in a rivalry of their own.

As explained in the Strategic Focus, there is a massive ‘train wreck’ occurring in the retail industries. Former stalwarts such as Sears, Macy’s, JCPenney, and Toys ‘R’ Us are all failing, largely because they ignored competition and it eventually caught up to them. Although other rivals began to erode their market share, the current problem revolves around the formidable Amazon. Amazon has been winning competitive battles against these weakened retailers, and even against other more formidable rivals Google and Walmart. Toys ‘R’ Us sowed the seeds of its demise a number of years ago by ignoring its competition. It was dominant in its industry, and then focused on growing its store base while paying little or no attention to what new competitors were doing. In fact, unknowingly it helped Amazon become a major competitor. The lesson in this for Amazon is that even highly successful firms must continuously analyze and understand their competitors if they are to maintain their current market leading positions. If Amazon continues to effectively analyze its competition across industries, the question becomes, can any of its rivals beat it?

2-7Competitor Analysis

The competitor environment is the final part of the external environment requiring study. Competitor analysis focuses on each company against which a firm competes directly. The Coca-Cola Company and PepsiCo, Home Depot and Lowe’s, Carrefour SA and Tesco PLC, and Amazon and Google are examples of competitors that are keenly interested in understanding each other’s objectives, strategies, assumptions, and capabilities. Indeed, intense rivalry creates a strong need to understand competitors. In a competitor analysis, 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.

Mini-Case Questions

1. Can any firm beat Amazon in the marketplace? If not, why not? If so, how can they best do so?

2. How formidable a competitor is Google for Amazon? Please explain.

3. What are Amazon’s major strengths? Does it have any weaknesses? Please explain.