Strategic Management week 3 Discussion

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chapter 3 Evaluating a Company’s External Environment

Arthur A. Thompson The University of Alabama

An e-book published and distributed by McGraw Hill Education

Sixth Edition of Strategy: Core Concepts and Analytical Approaches (2020-2021). Arthur A. Thompson, The University of Alabama. Published and distributed by McGraw Hill Education. Image of globe comprised of puzzle pieces with several pieces dislodged and scattered below the globe. Title of Chapter 3 Evaluating a Company’s External Environment

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“Analysis is the critical starting point of strategic thinking.”

Kenichi Ohmae, consultant and author

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

Laszlo Birinyi, investments manager

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“In essence, the job of a strategist is to understand and cope with competition.”

Michael E. Porter, Professor, Harvard Business School

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“No matter what it takes, the goal of strategy is to beat the competition.”

Kenichi Ohmae, consultant and author

Learning Objectives

To gain command of the basic concepts and analytical tools widely used to diagnose a company’s industry and competitive conditions.

To become adept in recognizing the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak.

To learn how to determine whether an industry’s outlook presents a firm with sufficiently attractive opportunities for growth and profitability.

To understand why in-depth evaluation of specific industry and competitive conditions is a prerequisite to crafting a strategy well matched to a firm’s situation.

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Chapter 3 Roadmap

Assessing the Strategically Relevant Industry and Competitive Factors in a Firm’s External Environment

Question 1: What competitive forces do industry members face, and how strong are they?

Question 2: What forces are driving changes in the industry and what impacts will they have on competitive intensity and industry profitability?

Question 3: What market positions do rivals occupy—which is strongly positioned and who is not?

Question 4: What strategic moves are rivals likely to make next?

Question 5: What are key factors for future competitive success?

Question 6: Is the industry outlook conducive to good profitability?

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Actions to steer a firm in a different direction or alter its strategy must be predicated on deep understanding of two facets of its situation:

The industry and competitive environment in which the firm operates and the forces acting to reshape this environment

The firm’s own market position and competitiveness

Its resources and capabilities

Its strengths and weaknesses vis-à-vis rivals

Its windows of opportunity

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Understanding a Company’s Situation

Figure 3.1 From Thinking Strategically about the Company’s Situation to Choosing a Strategy

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External factors and influences in the “macro-environment” that influence a firm’s decisions about its direction, objectives, strategy, and business model include:

General economic conditions

Political, regulatory, and legal influences

Technological influences

Sociocultural forces (values, lifestyles, and shifting population demographics)

Considerations relating to the natural environment

The Strategically Relevant Factors Influencing a Firm’s External Environment

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Figure 3.2 The Components of a Company’s Macroenvironment

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There are six questions that must be asked and answered:

What competitive forces do industry members face, and how strong are they?

What forces are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?

What market positions do industry rivals occupy—who is strongly positioned and who is not?

What strategic moves are rivals likely to make next?

What are the key factors for future competitive success?

Is the industry outlook conducive to good profitability?

Assessing a Company’s Industry and Competitive Environment

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The state of competition in an industry is a composite of five competitive forces:

The market maneuvering and jockeying for buyer patronage among industry rivals.

The threat of new entrants into the market.

The attempts of firms in other industries to win buyers over to their own substitute products.

The exercise of supplier bargaining power.

The exercise of buyer (or customer) bargaining power.

Question 1: What Competitive Forces Do Industry Members Face and How Strong Are They?

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Figure 3.3 The Five-Forces Model of Competition: A Key Analytical Tool

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How to Analyze the Five Competitive Forces

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Step 1

Identify the specific competitive pressures associated with each of the five forces.

Step 2

Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak).

Step 3

Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.

Core Concept

Competitive maneuvering among industry rivals is ever-changing, as competing sellers initiate round after round of offensive and defensive moves, emphasizing first one mix of competitive weapons and then another in efforts to improve their market positions and profitability.

These ongoing maneuvers and jockeying for position create a continually evolving competitive landscape where the market battle ebbs and flows, sometimes takes unpredictable twists and turns, and produces winners and losers.

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Competitive Pressures Created by the Rivalry among Competing Sellers

A market is a competitive battlefield where the contest among industry rivals is ongoing and dynamic.

Each rival is motivated to use whatever “weapons” in its business arsenal will attract and retain buyers, strengthen its market position, and yield good profits.

The challenge is to craft a competitive strategy that at the very least allows a firm to hold its own against rivals and, more ideally, strengthens its ability to compete successfully enough to produce a competitive edge over rivals.

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When one competitor deploys a strategy or makes a new strategic move that produces good results, its rivals must respond with offensive or defensive countermoves calculated to preserve their market standing and avoid lower profitability.

This pattern of move and countermove, attack and defend, adjust and readjust makes the competitive battle among rivals dynamic and fluid, with firms gaining or losing ground in the marketplace according to whether their strategic maneuvers succeed or fail.

The winners—current market leaders—have no guarantees of continued leadership; their market success is only as durable as the power of their strategies to fend off the strategies of ambitious challengers.

All this constant maneuvering and jockeying quite often results in the competitive battle among industry rivals being the strongest of the five competitive forces.

Why Rivalry Is Usually the Strongest of the Five Competitive Forces

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Figure 3.4 The “Weapons” Used to Battle Rivals and the Factors Affecting the Strength of Rivalry

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Reducing prices; granting special discounts to win the business of particular buyers Introducing more or different features Innovating to improve product performance or quality Running ads to inform buyers of new or special features and/or to strengthen brand awareness or brand image Having periodic sales promotions, holding clearance sales, advertising items on sale Improving selection of models and styles

Building a bigger/better dealer network Offering low interest rate financing Offering coupons Improving customer service Allowing buyers to customize what they buy Improving warranties Providing quicker or cheaper delivery Developing competitively valuable capabilities rivals don’t have

Figure 3.4 The Factors Affecting the Strength of Rivalry

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What Causes Rivalry to Become Stronger?

Rivalry is more intense when:

Competing sellers are active in making fresh moves to improve their market standing and business performance.

Buyer demand is growing slowly.

Buyers incur low costs in switching to rival brands.

The products of rival sellers are essentially identical or else weakly differentiated, resulting in little or no buyer brand loyalty.

Sellers have idle capacity and/or excess inventory.

The industry’s product is costly to hold in inventory, perishable, or seasonal.

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Rivalry is more intense when:

The number of rivals increases and/or rivals are of roughly equal size and competitive capability.

One or more rivals are dissatisfied with their business performance and are making aggressive moves to attract more customers.

Outsiders have recently acquired weak competitors and are spending heavily to turn them into major contenders.

Rivals have diverse industry outlooks, objectives, or strategies and/or have production facilities in countries where production costs are materially different.

What Causes Rivalry to Become Stronger? (continued)

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What Causes Rivalry to Become Weaker?

Rivalry tends to be less intense when:

Industry members infrequently launch aggressive actions to take sales and market share away from rivals

Buyer demand is growing rapidly

The products of rival sellers are strongly differentiated and the loyalty of buyers to their preferred brand is high

Buyer costs to switch to rival brands are high

Industry rivals are so numerous that any one firm’s attempt to grow its business has little direct impact on rival businesses and thus provokes little need for retaliation

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Rivalry tends to be less intense when:

Sellers have small inventories and/or little idle capacity

Rivals have low fixed costs and low inventory storage costs

A few large sellers have the majority of sales and dominant market shares

Rivals have similar costs and similar industry outlooks—there are no industry mavericks to disrupt the status quo

What Causes Rivalry to Become Weaker? (continued)

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Characterizing Industry Rivalry

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Cutthroat or Brutal

When competitors engage in protracted price wars or habitually undertake other aggressive strategic moves that prove mutually destructive to profitability, causing many/most industry members to lose money

Fierce to Strong

When the battle for market share is so vigorous that the profit margins of most industry members are squeezed to sub-par or even bare-bones levels

Weak

When most industry firms are relatively well satisfied with their sales growth and market shares, rarely undertake offensives to steal customers away from one another, and—because of weak competitive forces—earn consistently good profits and returns on investment

Moderate

or Normal

When the maneuvering among industry members, while lively and healthy, still allows most industry members to earn acceptable profits

Competitive Pressures Associated with the Threat of Potential Entry

The increase in competitive pressures faced by industry members due to the threat of market entry of new firms depends on:

Whether the barriers to successfully entering the industry are high or low

The size of the pool of entry candidates and the resources at their command to hurdle the entry barriers

The expected reaction of existing industry members to the entry of newcomers

How attractive the industry’s growth and profit prospects are to potential entrants

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Cost advantages held by industry incumbents

Strong brand preferences and high degrees of customer loyalty to the brands they are currently purchasing

High capital requirements

The difficulties of building a network of distributors or retailers and securing space on retailers’ shelves

Restrictive or costly regulatory policies that limit/bar new entrants

Tariffs and international trade restrictions

The likelihood that industry incumbents will strongly resist entrants’ efforts to secure a profitable volume of sales

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Common Barriers to Entry

Current industry members may have cost advantages that a new entrant cannot easily overcome; these include:

Scale economies in production, distribution, or other activities

Learning-based costs savings that accrue from in-industry experience in performing certain activities such as manufacturing or new product development or inventory management

Cost-savings accruing from patents or proprietary technology

Partnerships with the best and cheapest suppliers of raw materials and components

Favorable locations

Low fixed costs (because incumbents have older facilities that have been mostly depreciated)

The Cost Advantages of Incumbents: An Important Entry Barrier

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Figure 3.5 Factors Affecting the Threat of Entry

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Entry threats are stronger when:

The pool of entry candidates is large and some have resources that make them strong market contenders

Entry barriers are low or easily hurdled by new entrants

Industry members can expand their presence into other product segments or geographic areas

Newcomers can expect to earn attractive profits

Buyer demand is growing rapidly

Industry members are unable (or unwilling) to strongly contest the entry of new firms

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Competitive Pressures Associated with the Threat of New Entrants

Core Concept

The threat of entry is stronger

when entry barriers are low,

when incumbent firms are unable or unwilling to vigorously contest a newcomer’s entry,

when there’s a sizable pool of entry candidates, and

when the industry’s outlook is highly attractive to outsiders.

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Entry threats are weaker when:

The pool of entry candidates is small

Entry barriers are high

Existing competitors are struggling to earn good profits

The industry’s outlook is risky or uncertain

Buyer demand is growing slowly or is stagnant

Industry members will strongly contest the efforts of new entrants to gain a market foothold

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When Is the Threat of Entry Weaker?

Are the industry’s growth and profit prospects strongly attractive to potential entry candidates?

A “Yes” answer = Threat of potential entry is a strong competitive force

A “No” answer = Threat of potential entry is a weak competitive force

The Best Test of Whether the Entry of New Competitors Is Likely

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Rapidly growing market demand and high potential profits act as magnets, growing the pool of entry candidates and motivating potential entrants (most usually including resource-rich firms capable of becoming formidable competitors!!!) to commit the resources needed to hurdle entry barriers—in which case the high probability of new entry qualifies as a strong competitive force.

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When the Threat of Entry Is Certain to Be High

Competitive Pressures from the Sellers of Substitute Products

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Firms in one industry come under competitive pressure from firms in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes

Examples of substitutes:

Attending movies at theaters versus subscribing to various streaming services

Cell phone cameras versus traditional digital cameras

Beer versus wine versus hard liquors

Contact lens versus prescription glasses versus corrective laser surgery

Figure 3.6 Factors Affecting Competition from Substitute Products

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When Are Substitute Products a Strong Competitive Force?

The strength of competitive pressures from substitute products depends on:

Whether substitutes are readily available and attractively priced

Whether buyers view substitutes as being comparable or better in term of attributes

How much it costs buyers to switch to substitutes

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Rule

The lower the price of substitutes, the higher their quality and performance, and the lower the user’s switching costs, the more intense the competitive pressures posed by substitute products.

Competitive pressures from substitutes are stronger when:

Substitutes are readily available and attractively priced

Substitutes are of comparable or better quality and have desirable performance features

Buyers incur low costs in switching to substitutes

Buyers are growing more comfortable with using substitutes

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When Is Competition from Substitutes Stronger?

Competitive pressures from substitutes are weaker when:

Good substitutes are not readily available or don’t exist

Substitutes are higher priced relative to the value they deliver to buyers

Substitutes lack comparable or better performance features

Buyers have high costs in switching to substitutes

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When Is Competition from Substitutes Weaker?

Sales of substitutes are growing faster than overall sales of the industry in question

An indication that the sellers of substitutes are stealing the industry’s customers away

The producers of substitute products are investing in added production capacity and expanding their market coverage

Profits of the producers of substitutes are rising

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Three Signs that Substitute Products Are a Strong Competitive Force

Competitive Pressures Stemming from the Bargaining Power of Suppliers

Whether the suppliers of industry members represent a strong, moderate, or weak competitive force depends on how much bargaining power suppliers have to influence the terms and conditions of supply in their favor.

Powerful or influential suppliers can be a source of strong competitive pressure when they have the ability to charge industry members higher prices and/or make it difficult or more costly for industry members to switch to other suppliers.

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Figure 3.7 Factors Affecting the Bargaining Power of Suppliers

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Whether the item that industry members are purchasing from suppliers is in short supply or whether ample quantities are readily available from any of several suppliers

Whether certain suppliers provide a differentiated input that enhances the performance or quality of the industry’s product

Whether certain suppliers provide equipment or services that deliver valuable cost-saving efficiencies to industry members in operating their production processes

Whether the item being supplied a standardized commodity readily available from many suppliers at the going market price

Whether industry members easily switch their purchases from one supplier to another or switch to substitute inputs

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Factors Affecting Whether the Bargaining Power of Suppliers Is Strong or Weak

Whether suppliers provide an item that accounts for a sizable fraction of the costs of the industry’s product

Whether industry members are major customers of suppliers

Whether a few large suppliers are regarded as the best and most reliable sources of a particular item

Whether it makes economic sense for industry members to integrate backward to self-manufacture items bought from suppliers

Whether suppliers have the resources and profit incentive to integrate forward into the businesses of customers they are supplying

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Factors Affecting Whether the Bargaining Power of Suppliers Is Strong or Weak (cont’d)

Supplier bargaining power is stronger when:

A needed input is in short supply

Certain suppliers either have a differentiated input that enhances the quality or performance of sellers’ products or provide equipment/services that deliver valuable cost-saving efficiencies

Industry members incur high costs in switching to alternative suppliers

There are no good substitutes for certain products/services being supplied

When Is Supplier Bargaining Power Stronger?

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Supplier bargaining power is stronger when:

Suppliers are not dependent on industry members for a large portion of their revenues

Suppliers provide an item that accounts for a small fraction of the costs of the industry’s product

There are only a few “preferred” suppliers of a particular input

Some suppliers are a threat to integrate forward into the business of industry members and perhaps become a powerful rival

When Is Supplier Bargaining Power Stronger? (continued)

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Supplier bargaining power is weaker when:

There are ample supplies of a needed input

The item being supplied is a “commodity” obtainable from many different suppliers at the going market price

Industry members incur low costs in switching to alternative suppliers

Good substitutes exist for the products/services of suppliers

When Is Supplier Bargaining Power Weaker?

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Supplier bargaining power is weaker when:

Suppliers are not dependent on industry members for a large portion of their revenues

Suppliers provide an item that accounts for a small fraction of the costs of the industry’s product

There are only a few “preferred” suppliers of a particular input

Some suppliers are a threat to integrate forward into the business of industry members and perhaps become a powerful rival

When Is Supplier Bargaining Power Weaker? (continued)

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Competitive Pressures Stemming from the Bargaining Power of Buyers

Buyers exert strong competitive pressures on industry members when:

Buyers have bargaining leverage to obtain price concessions and favorable terms and conditions of sale

Many buyers are price sensitive and can act in unison to limit prices that industry members can charge

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Important Point

Not all buyers of an industry’s product have equal degrees of bargaining power with sellers, and some are more or less sensitive than others to price, quality, or service differences.

Strategic Insight

Buyers’ bargaining power is stronger when they are few in number and purchase in large volumes. The larger buyers’ purchases, the more important their business is to sellers and the more likely that sellers will grant them concessions or special treatment to secure or retain their business.

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Figure 3.8 Factors Affecting the Bargaining Power of Buyers

Access the text alternative for slide image.

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The quantity that a buyer is purchasing

Whether buyer switching costs are high or low

Whether there are many or few buyers

Whether a buyer is particularly important to a seller

The strength or weakness of buyer demand in relation to the available supplies

How well buyers are informed about sellers’ products, prices, and costs

Whether buyers pose a credible threat of integrating backward into the business of sellers

Whether buyers have discretion to delay their purchases or not make a purchase at all

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Factors That Determine the Strength of Buyer Bargaining Power

Buyer bargaining power is stronger when:

Large-volume purchases by buyers enable them to gain special treatment

A buyer’s identity adds prestige to the seller’s list of customers

Supplies of the product are greater than buyer demand

There are only a few buyers, so each one’s business is important to sellers

Buyers have low costs in switching to competing brands or substitute products

When Is the Bargaining Power of Buyers Stronger?

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Buyer bargaining power is stronger when:

The products of industry members are “commodities” or else weakly differentiated.

Buyers are well informed about the product offerings of industry members.

Buyers can postpone purchases if they do not like the deals sellers are offering.

Some buyers are a threat to integrate backward into the business of sellers and become an important competitor.

Buyers are highly price sensitive.

When Is the Bargaining Power of Buyers Stronger? (cont’d)

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Buyer bargaining power is weaker when:

Buyer purchases are infrequent or in small quantities

Buyers have insufficient “prestige” to command special treatment

Strong buyer demand creates tight supply conditions or shortages

There are many buyers such that one buyer’s purchases account for a tiny fraction of total industry sales

Buyers have high costs in switching to competing brands or substitute products

When Is the Bargaining Power of Buyers Weaker?

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Buyer bargaining power is weaker when:

The products of industry members are strongly differentiated

Buyers have limited information about the product offerings of industry members

Buyers cannot easily postpone purchases

There is no credible threat of buyers integrating backward into the business of industry members

Buyer price sensitivity is relatively low

When Is the Bargaining Power of Buyers Weaker? (cont’d)

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Is the Collective Strength of the Five Competitive Forces Unfavorable to Profitability?

The stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants.

Worst case scenario (Perfect Storm of Competitive Forces)—an industry is very “competitively unattractive” and less profitable when:

Rivalry among industry members is vigorous

Entry barriers are low, making new entry likely

Competition from substitute products is strong

Both suppliers and customers have considerable bargaining power

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Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?

An industry is “competitively attractive” when industry members can reasonably expect to earn good profits and a good return on investment

Best case scenario—An industry is “competitively attractive” and more profitable when:

Internal rivalry in the industry is weak to moderate

High barriers block new entrants from the market

Good substitutes do not exist

Both suppliers and customers are in weak bargaining positions

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Strategic Insights

The stronger the forces of competition, the harder it becomes for industry members to earn attractive profits.

A firm’s strategy is increasingly effective the more insulation it provides from competitive pressures and the more it shifts the competitive battle in the firm’s favor.

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Working through the five-forces model step-by-step:

Aids strategy makers in assessing whether the intensity of competition allows good profitability

Promotes sound strategic thinking about how to better match the firm’s strategy to the competitive character of the marketplace

Effectively matching a firm’s strategy to competitive conditions requires:

Pursuing strategic avenues that shield the firm from as many different competitive pressures as possible

Initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in the company’s favor, putting added competitive pressure on rivals, and perhaps even defining the business model for the industry

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Matching Company Strategy to Competitive Conditions

Which one of the five competitive forces is strongest in your company’s industry?

Are the competitive pressures your company experiences likely to grow stronger, grow weaker, or remain about the same in the upcoming decision rounds? Why?

If competitive pressures change in the manner you anticipate, then what are the implications for the levels of competitive effort your company will need to employ in upcoming years in order to maintain (or better yet, improve) its competitive standing vis-à-vis rivals?

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Questions for Simulation Company Co-Managers

Industry conditions are often fluid because certain forces are enticing or pressuring industry rivals, their customers, or their suppliers to alter their actions in important ways.

These important change agents are called driving forces because they have the biggest influences in reshaping the industry landscape and altering competitive conditions.

Where do driving forces originate?

Outer ring of macroenvironment (Figure 3.2)

Inner ring of macroenvironment (Figure 3.2)

Question 2: What Forces Are Driving Industry Change and What Impact Will They Have?

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Core Concept

Industry conditions change because important forces are driving industry participants (competitors, customers, or suppliers) to alter their actions.

The driving forces in an industry are the major underlying causes of changing industry and competitive conditions—they have the biggest influence on how the industry landscape will be altered.

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Analyzing an Industry’s Driving Forces

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Driving-forces analysis has three steps:

Identifying what the driving forces are

Assessing whether the drivers of change are acting to make the industry more or less attractive

Determining what strategy changes are needed to prepare for the impacts of the driving forces

Identifying an Industry’s Driving Forces

Developments that can affect an industry enough to drive industry and competitive change include:

Changes in an industry’s long-term growth rate

Increasing globalization

Emerging new Internet capabilities and applications

Changes in who buys the product and how they use it

Product innovation

Technological change and manufacturing process innovation

Marketing innovation

Entry or exit of major firms

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Identifying an Industry’s Driving Forces (continued)

Additional forces that can affect an industry powerfully enough to drive industry and competitive change include:

Diffusion of technical know-how across more firms and more countries

Changes in cost and efficiency

Growing buyer preferences for differentiated products instead of a commodity product (or for a more standardized product instead of strongly differentiated products)

Reductions in uncertainty and business risk

Regulatory influences and government policy changes

Changing societal concerns, attitudes, and lifestyles

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Strategic Insight

The most important part of driving-forces analysis is to determine whether the collective impact of the driving forces will be to increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability.

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Assessing the Impact of the Driving Forces

Answers to three questions are needed:

Are the driving forces collectively acting to cause 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 answers to these three questions determine whether the drivers of change are acting to make the industry more or less attractive.

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Strategic Insight

The most important part of driving-forces analysis is to determine whether the collective impact of the driving forces will act to

Increase or decrease market demand

Make competition more or less intense

Lead to higher or lower industry profitability

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Adjusting Strategy to Prepare for the Impacts of Driving Forces

The third step of driving-forces analysis—the payoff for strategy-making—is for managers to decide on the strategy adjustments required to deal with the impacts of the driving forces.

If management’s diagnosis of the impact of the industry’s driving forces is muddled or flawed, the chance of making proper strategy adjustments is slim.

Insightful driving forces analysis leads to better managerial judgments about where the industry is headed and how to prepare for the changes ahead.

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Industry rivals can occupy stronger (or distinguishably different) market positions than other rivals because they have opted to

Incorporate product features appealing to different types of buyers

Charge widely differing prices for products of widely differing quality or performance

Emphasize different distribution channels

Compete in different geographic areas

Or otherwise stake out a different market position from rivals

The best technique for revealing the market positions of industry competitors is strategic group mapping

Question 3: What Market Positions Do Rivals Occupy—Who Is Strongly Positioned, Who Is Not?

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Core Concepts

A strategic group is a cluster of industry rivals that employ similar competitive approaches, have product offerings that appeal to similar types of buyers, and thus occupy similar market positions.

Strategic group mapping is a technique for displaying the different market positions that rival firms occupy in the industry.

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Defining a Strategic Group

Firms in the same strategic group can resemble one another in any of several ways:

Comparable product-line breadth

Sell in the same price/quality range

Emphasize same distribution channels

Use much the same product attributes to appeal to similar types of buyers

Use identical technological approaches

Offer buyers similar services and technical assistance

Compete in much the same geographic areas

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How to Construct a Strategic Group Map

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Step 1

Step 3

Step 2

Identify competitive characteristics that differentiate firms in an industry from one another.

Plot firms on a two-variable map using pairs of these differentiating characteristics.

Assign firms that fall in about the same strategy space to same strategic group.

Step 4

Draw circles around each group, making circles proportional to size of each group’s respective share of total industry sales.

Figure 3.9 Comparative Market Positions of Selected Retail Chains: An Example of a Strategic Group Map

Note: Circles are drawn roughly proportional to the combined total revenues of the retailers shown in each strategic group.

Access the alternative text for slide image.

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Guidelines for Constructing a Strategic Group Map

The variables used as axes must not be highly correlated

If they are, then all circles will fall along a diagonal and reveal nothing more about the relative positions of rivals than would be revealed by comparing the rivals on one of the variables

The chosen variables should reveal big differences in how rivals compete

When rivals differ on both variables, locations of the rivals will be scattered, showing how they are positioned differently

Drawing sizes of circles proportional to combined sales of firms in each strategic group allows the map to reflect relative market share sizes of each strategic group

If three or more good competitive variables can be used for the two axes of the map, it is best to draw several maps

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What Can Be Learned from Strategic Group Maps?

Strategic group maps identify:

Which industry members are close rivals and which are distant rivals. Firms in the same strategic group are the closest rivals; the next closest rivals are in the immediately adjacent groups

Firms in strategic groups that are far apart on the map may hardly compete with one another at all

Not all positions on the map are equally attractive:

Prevailing competitive pressures and driving forces often favor some strategic groups and hurt others

Profit potential of different strategic groups often varies due to strengths and weaknesses in each group’s market position

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Have you studied the strategic group maps for each geographic region shown in the Competitive Intelligence Report?

Based on these maps, which rival firms are your closest competitors in each geographic region?

Which rival firms are distant competitors?

Which of the four regional strategic group maps indicate that there are many rival firms grouped very close together, signaling they are members of an “overcrowded” strategic group?

Is the financial performance of firms in overcrowded strategic groups suffering because of the tough competitive battle taking place among similarly-positioned strategic group members?

Are there “open spaces” in the four regional group maps that present good opportunities because competition is weaker in the open spaces?

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Questions for Simulation Company Co-Managers

Core Concepts

Strategic group maps reveal which firms are close competitors and which are distant competitors.

Some strategic groups are more favorably positioned than others because they confront weaker competitive forces and/or because they stand to be favorably impacted by the industry’s driving forces.

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Knowledge of rivals’ strategies, financial performance, competitive strengths and weaknesses, actions and announced plans, and the thinking and leadership styles of their executives is valuable for:

Predicting or anticipating the likely strategic moves of competitors.

Crafting a firm’s strategy with confidence about what market maneuvers to expect from rivals

Being poised to capitalize on opportunities stemming from competitors’ missteps or strategy flaws.

Question 4: What Strategic Moves Are Rivals Likely to Make Next?

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Strategic Insights

Closely monitoring the actions of competitors and preparing a defense against their expected next moves reduces the risk of being caught napping and suffering a damaging loss of sales and profits.

Perhaps the most frequent reason why a firm gets outcompeted by what it considers the “surprising” actions of rivals goes directly to the failure of its management to do a competent job of studying rivals well enough to recognize their need to undertake certain actions to improve their sales and/or profitability and to then be prepared with defensive actions and countermoves of their own.

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Why Bother with Paying Attention to What Competitors Are Doing?

Unless a firm studies competitors’ strategies and situations and arrives at informed conclusions about moves they will be making, it ends up flying blind into competitive battle.

A firm cannot expect to outcompete rivals when its managers have little or no idea what rivals have been doing and are likely to do next.

Smart rivals will take sales, market share, and profits away from such a firm because its managers are clueless about what’s going on!

Closely monitoring competitors and preparing a defense against their expected next moves reduces the risk of being caught napping and suffering a damaging loss of sales and profits.

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Which competitors have strategies producing such good results that they are likely to make only minor strategic adjustments?

Which rivals are performing so poorly that they must begin now adjusting important strategy elements to move to a different competitive position on the strategic group map?

Which competitors seem poised to gain market share, and which ones seem destined to lose ground?

Which competitors will likely to rank among the industry leaders five years from now? Do any of them have strategies and sufficient resource capabilities to overtake the current industry leader?

Questions to Consider in Predicting the Likely Actions of Rivals

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Which rivals badly need to increase their unit sales and market share?

What strategic options are rivals most likely to pursue:

Lowering prices, adding new models and styles, expanding dealer networks, entering additional geographic markets, boosting advertising to build brand-name awareness, acquiring a weaker competitor, placing more emphasis on online sales, or ……?

Questions to Consider in Predicting the Likely Actions of Rivals (continued)

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Which rivals will likely enter new geographic markets or make major moves to increase their sales and market share in a particular geographic region?

Which rivals are candidates to expand their product offerings and enter new product segments where they currently have no presence?

Which rivals are candidates to be acquired? Which rivals want make an acquisition and are financially able to do so?

Scouting competitors to anticipate their next moves allows managers to launch countermoves and to take rivals’ probable moves into account in crafting a firm’s own best course of action.

Questions to Consider in Predicting the Likely Actions of Rivals (continued)

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Key Success Factors (KSFs)

Are competitive factors that most affect industry members’ ability to compete successfully and profitably

Are those particular strategy elements, product attributes, resources, capabilities, and/or market achievements with the greatest impact on a firm’s future competitive success

Why do industry KSFs matter?

Because how well a firm’s strategy elements, product attributes, resources, and capabilities measure up against the industry’s KSFs shape how financially and competitively successful it will be

Question 5: What Are the Key Factors for Future Competitive Success?

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Core Concept

Key success factors (KSFs) are the strategy elements, product attributes, resources, capabilities, and market achievements with the greatest impact on future competitive success in the marketplace.

KSFs are so important to competitive success that how well a firm measures up on each industry KSF can spell the difference between being a strong competitor and a weak competitor—and sometimes between profit and loss.

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Strategic Insight

To be a winner, a firm’s strategy must compare favorably with rivals on all industry KSFs and be competitively superior on one, maybe two, of the industry’s KSFs.

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Example: KSFs for Bottled Water Industry

Access to distribution to get a firm’s brand stocked and favorably displayed in retail outlets.

Image to induce consumers to buy a particular firm’s product (brand name and attractiveness of packaging are key deciding factors).

Low-cost production capabilities to keep selling prices competitive.

Sufficient sales volume to achieve scale economies in marketing expenditures.

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Appealing designs and color combinations to create buyer appeal

Low-cost manufacturing efficiency to keep selling prices competitive

Strong network of retailers/firm-owned stores to ensure stores keep best-selling items in stock

Clever image advertising to effectively induce consumers to purchase a particular label

Example: KSFs for the Ready-to-Wear Apparel Industry

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KSFs are specific to an industry, however they can vary over time within the industry as driving forces and competitive conditions change.

An industry rarely has more than five KSFs.

Questions that help identify industry’s KSFs:

On what basis do buyers choose between competing brands of rival sellers? That is, what product or service attributes are crucial?

Given an industry’s competitive rivalry and its prevailing competitive forces, what resources and capabilities must a firm have to be competitively successful?

What KSF shortcomings will put a firm at a significant competitive disadvantage in its industry?

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Identifying Industry Key Success Factors

Strategists seek to create a strategy that both allows the firm to compete favorably with rivals on the industry’s future KSFs and that aims at being distinctly better than rivals on one or more of the KSFs.

Firms that excel on a KSF enjoy a stronger market position—being distinctly better than rivals on one or two key success factors often translates into competitive advantage.

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Using KSFs in Crafting a Winning Strategy

Using the industry’s KSFs as cornerstones for the firm’s strategy and trying to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy approach.

Strategic Insight

To be a winner, a firm’s strategy must compare favorably with rivals on all industry KSFs and be competitively superior on one, maybe two, of the industry’s KSFs.

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Factors that determine an industry’s profitability prospects include:

Whether the industry and the firm are being favorably or unfavorably impacted by macro-environmental factors

The industry’s potential for future growth

Whether strengthening competitive forces could squeeze industry profitability to subpar levels or whether the firm can earn good profits despite the expected strengthening of competitive forces

Whether and to what degree industry profitability will be favorably or unfavorably affected by the industry’s driving forces

Whether the firm is strongly or weakly competitively positioned on the industry’s strategic group map

How well the firm’s strategy, product offering, and capabilities stack up against industry KSFs

The degrees of risk and uncertainty in the industry’s future

Question 6: Is the Industry Outlook Conducive to Good Profitability?

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Core Concept

The degree to which an industry’s outlook is attractive or unattractive is not the same for all industry participants and all potential entrants. Some firms may be strongly positioned with the strategies and competitive strengths to capture the opportunities an industry presents; others may not.

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Reasons why future industry conditions may be attractive to some industry participants and potential entrants, but not to others:.

Even if an industry’s outlook is unattractive, a favorably situated and competitively capable firm may see ample opportunity to outcompete weaker rivals and significantly grow its revenues and profits

Weak competitors in an attractive industry decide competing against stronger rivals holds no promise of future market success or even average profitability

Some entrants may conclude they have the resources to readily hurdle the entry barriers of an attractive industry while other outsiders view the same industry as unattractive because they face difficulties in challenging the current market leaders and because they see better opportunities elsewhere

An industry’s attractiveness depends in large part on whether a firm has sufficient competitively valuable resources and capabilities to be competitively successful and profitable in that environment.

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Factors to Consider in Assessing Industry Attractiveness

A strong competitor in an attractive industry should invest aggressively to capture opportunities to improve its long-term competitive position.

A strong competitor in an unattractive industry should try to protect its position by investing cautiously, striving to take sales and market share away from weaker rivals, while also looking for opportunities to enter other industries.

Often, a competitively weak firm in an unattractive industry will decide to find a buyer, (e.g., a rival), to acquire its business rather than struggling futilely to boost its financial and strategic performance.

What Should a Current Competitor Decide about Investing in Its Industry?

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Accessibility Content: Text Alternatives for Images

Figure 3.1 From Thinking Strategically about the Company’s Situation to Choosing a Strategy, Text Alternate

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The process for analyzing both a company’s external and internal environment begins with forming a strategic vision of where the company needs to head. Then identify promising strategic options for the company. Finally, select the best strategy and business model for the company.

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Figure 3.2 The Components of a Company’s Macroenvironment, Text Alternate

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A company’s immediate industry and competitive environment includes:

The industry’s profit outlook.

Industry growth rate.

Market demand-supply conditions.

Competitive pressures.

Forces driving changes in the industry.

The market position and likely actions of rival firms.

Factors affecting future competitive success.

The macro environment includes:

general economic conditions.

political, legal, and regulatory influences.

technological influences.

Social cultural forces (values, lifestyles, shifting population demographics).

and considerations relating to the natural environment.

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Figure 3.3 The Five-Forces Model of Competition: A Key Analytical Tool, Text Alternate

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The graphic shows that competitive pressures on companies within an industry come from five forces.

Competition from rival sellers. Competitive pressures created by the maneuvers of rival sellers to win increased sales and market share and build or strengthen competitive advantage.

Competition from potential new entrants to the industry. There is competitive pressures coming from the threat of entry of new rivals.

Competition from producers of substitute products. Firms in other industries offering substitute products. Competitive pressures coming from the market attempts of outsiders to win buyers over to their products.

Supplier bargaining power. Suppliers of raw materials, parts, components, or other resources input. Competitive pressures stemming from supplier bargaining power.

Customer bargaining power. There is competitive pressures stemming from buyer bargaining power.

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Figure 3.4 The Factors Affecting the Strength of Rivalry, Text Alternate

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Rivalry among Competing Sellers.

How strong are the competitive pressures stemming from the maneuvers of rivals to win higher sales and market shares and build and or strengthen competitive advantage?

Rivalry is generally stronger when:

Competing sellers are active in making fresh moves to improve their market standing and business performance.

Buyer demand is growing slowly.

Buyers incur low costs in switching to rival brands.

The products of rival sellers are essentially identical or else weakly differentiated, resulting in little or no buyer brand loyalty.

Sellers have idle capacity and or excess inventory.

The industry’s product is costly to hold in inventory, perishable, or seasonal.

The number of rivals increases and or rivals are of roughly equal size and competitive capability.

One or more rivals are dissatisfied with their business performance and are making aggressive moves to attract more customers.

Outsiders have recently acquired weak competitors and are spending heavily to turn them into major contenders.

Rivals have diverse industry outlooks, objectives, or strategies and or have production facilities in countries where production costs are materially different.

Rivalry is generally weaker when:

Industry members infrequently launch aggressive actions to take sales and market share away from rivals.

Buyer demand is growing rapidly.

Buyer costs to switch to rival brands are high.

The products of rival sellers are strongly differentiated and the loyalty of buyers to their preferred brand is high.

There are so many rivals that any one company’s actions have little direct impact on the businesses of rivals.

Sellers have small inventories and or little idle capacity.

Rivals have low fixed costs and low inventory storage costs.

A few large sellers have the majority of sales and dominant market shares.

Rivals have similar costs and similar industry outlooks—there are no industry mavericks to disrupt the status quo.

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Figure 3.5 Factors Affecting the Threat of Entry, Text Alternate

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How strong are the competitive pressures associated with the entry threat from new rivals?

Entry threats are stronger when:

Entry barriers are low or can be readily hurdled by entry candidates with adequate resources.

Potential entrants do not expect that industry members are likely or able to strongly contest the entry of newcomers.

The pool of entry candidates is large and some have adequate resources to overcome entry barriers and combat defensive actions of existing industry members.

Existing industry members are looking for expand their market reach by entering product segments or geographic areas where they currently do not have a presence.

Buyer demand is growing rapidly.

Newcomers can expect to earn attractive profits.

Entry threats are weaker when:

Entry barriers are high.

Entry candidates expect that industry members will strongly contest the efforts of newcomers to gain a market foothold.

The pool of entry candidates is small.

Buyer demand is growing slowly or is stagnant.

The industry’s outlook is risky or uncertain or offers limited profit opportunities for newcomers.

Industry conditions often cause existing competitors to struggle to earn a decent profit.

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Figure 3.6 Factors Affecting Competition from Substitute Products, Text Alternate

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How strong are the competitive pressures coming from the attempts of companies outside the industry to win buyers over to their products?

Competitive pressures from substitutes are stronger when:

Good substitutes are readily available or new ones are emerging.

Substitutes are attractively priced.

Substitutes have comparable or better performance features

Buyers have low costs in switching to substitutes.

Buyers are growing more comfortable with using substitutes.

Competitive pressures from substitutes are weaker when:

Good substitutes are not readily available or don’t exist.

Substitutes are higher priced relative to the value they deliver to buyers.

Substitutes lack comparable or better performance features.

Buyers have high costs in switching to substitutes.

Signs that Competition from Substitutes Is Strong:

Sales of substitutes are growing faster than sales of the industry being analyzed (an indication that the sellers of substitutes are stealing the industry’s customers away).

Producers of substitutes are investing in new capacity and expanding their market coverage.

Profits of the producers of substitutes are rising.

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Figure 3.7 Factors Affecting the Bargaining Power of Suppliers, Text Alternate

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How strong are the competitive pressures stemming from supplier bargaining power?

Supplier bargaining power is stronger when:

A needed input is in short supply.

Certain suppliers either have a differentiated input that enhances the quality or performance of seller’s products or provide equipment and or services that deliver valuable cost-saving efficiency.

Industry members incur high cots in switching to alternative suppliers

There are no good substitutes for certain products/services being supplied.

Suppliers are not dependent on industry members for a large portion of their revenues.

Suppliers provide an item that accounts for a small fraction of the costs of the industry’s product.

There are only a few “preferred” suppliers of a particular input.

Some suppliers are a threat to integrate forward into the business of industry members and perhaps become a powerful rival.

Supplier bargaining power is weaker when:

There are simple supplies of a needed input.

The item being supplied is a commodity obtainable from many different suppliers at the going market price.

Industry members incur low costs in switching to alternative suppliers.

Good substitutes exist for the products/services of suppliers.

Industry members are major customers and continuing to secure their business is important to suppliers’ well-being.

Suppliers provide an item that accounts for a sizable fraction of the costs of the industry’s product.

Industry members can purchase what they need from any of many different “good to acceptable” suppliers.

Industry members are a threat to integrate backward into the business of suppliers and to self-manufacture their own requirements.

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Figure 3.8 Factors Affecting the Bargaining Power of Buyers, Text Alternate

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How strong are the competitive pressures stemming from buyer bargaining power?

Buyer bargaining power is stronger when:

Large-volume purchases by buyers enable them to gain special treatment.

A buyer’s identity adds prestige to the seller’s list of customers.

Supplies of the product are greater than buyer demand.

There are only a few buyers, so each one’s business is important to sellers.

Buyers have low costs in switching to competing brands or substitute products.

The products of industry members are “commodities” or else weakly differentiated.

Buyers are well informed about the product offerings of industry members

Buyers can postponed purchases if the you not like the deals sellers are offering.

Some buyers are a threat to integrate backward into the business of sellers and become an important competitor.

Buyers are highly price sensitive.

Buyer bargaining power is weaker when:

Buyers purchase the time in small quantities.

Buyers have insufficient “prestige” to command special treatment.

Strong buyer demand creates tight supply conditions or shortages.

There are so many buyers that any one buyer’s purchases account for a tiny fraction of total industry sales.

Buyers have high costs in switching to competing brands or substitute products.

The products of industry members are strongly differentiated.

Buyers have limited information about the product offerings of industry members.

There is no credible threat of buyers integrating backward into the business of industry members.

Buyer price sensitivity is relatively low.

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Figure 3.9 Comparative Market Positions of Selected Retail Chains: An Example of a Strategic Group Map, Text Alternate

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The graphic is broken into nine segments, with the x axis being Geographic Coverage and the y axis being Price and or Quality. Geographic Coverage goes from Few Localities to Many Localities. Price and or Quantity axis goes from low to high.

In the low end of price and quality and few locations is T.J. Maxx.

In the low end, but with some in the medium price and quality range and with more locations are Kohl’s and Ross Stores. Target borders low and medium price and medium locations and many locations.

Kmart and Walmart have the largest amount of locations out of the lower end of price and quality stores.

In the medium range of price and quality is Macy’s, Nordstrom, Dillard’s, Bloomingdale’s, and Belk. They do not have many locations.

In the medium range of price and quality, and with a few more locations is Gap, Old Navy, Victoria’s Secret, and Sears.

Straddling the medium and high price and quality is Neiman Marcus and Saks Fifth Avenue, as well as Polo-Ralph Lauren, Barney’s New York, and Coach. They all have few localities.

On the high end of price and quality but with few locations are Gucci, Chanel, Prada, Hermes, Burberry, and Louis Vitton.

The only space with out any presence is high price and quality with many localities.

Strategic Management week 3 Discussion

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