Analysis of The Competitive Environment
Analysis of The Competitive Environment
Analysis of The Competitive Environment
Chapter 7
Learning Objectives
Quick review of analysis of the external macroenvironment Key definitions Understand the significance of industry and market analysis Understand and be able to apply Porters 5 Forces model, and understand its limitations Define competitive vs. collaborative behavior in industries Understand and be able to apply the resource-based framework of analysis of the competitive environment Define strategic groups
Quick Review
External Environment
External macro or far environment External micro Internal Environment or near environment
NOTE: The ability to predict trends and changes in the macroenvironment that impact a business, and the ability to make changes based on the prediction, can be a source of competitive advantage
Identify opportunities for competence leveraging Understand customers and their needs Identify current and potential threats Understand resource markets
Examples: SIC (Standard Industrial Classification) and NACE (Nomenclature Generale des Activites Economiques dans les Communautes Europeenes)
SIC Examples
Link: UK SIC(92) Examples: D Manufacturing
DA Manufacture of food products, beverages and tobacco DB Manufacture of textiles DC Manufacture of leather and leather products
Philip Morris Headquarters: New York City. Chairman, chief executive: Geoffrey Bible. Major tobacco brands: Marlboro, Merit, Basic, Virginia Slims, Cambridge. U.S. cigarette market share: 47.5 percent in 1997, up from 46.3 percent in 1996. Cigarette division: Philip Morris USA. Financial highlights: Net income of $6.3 billion, or $7.68 a share, on sales of $68.9 billion. Other businesses: Kraft Foods, Inc., the largest U.S. food company (Oscar Mayer, Jell-O, Post cereals, Maxwell House); Miller Brewing Co., the No. 2 U.S. brewer (Miller, Red Dog, and Lowenbrau); financial services and real estate. Number of employees: 154,000.
According to Porter, businesses can use the model to identify how to position itself to take advantage of opportunities and overcome threats
Costs of capital investment needed to enter Regulatory and legal barriers Brand loyalty and customer switching costs Economies of scale utilized by existing competitors Access to suppliers and distributors Resistance from existing competitors
Extent to which price and performance of a substitute can match the industrys product Willingness of buyers to switch to the substitute
Number of customers and volume of their purchases Number and size of businesses supplying the product Switching costs
Uniqueness and scarcity of the supplied resource Switching costs How many industries require the resource Number and size of resource suppliers
Height of entry barriers and number and size of competitors Maturity of the industry Degree of brand loyalty Power of buyers and availability of substitutes
Intensity of Rivalry
Concentrated vs. Fragmented industries SIC classification is useful to assess this portion High concentration ratio means the majority of market share is held by a few firms Low concentration ratio means the industry has many rivals, none with significant market share Competitive strategies include:
Changing prices Improving product differentiation Creatively using channels of distribution Exploiting relationships with suppliers
Bargaining power of buyers Threat of new entrants Threat of substitutes Competitive rivalry
Weak buyers
Strong buyers
High entry barriers Low entry barriers Few possible substitutes Little rivalry Many possible substitutes Intense rivalry
Porters 5 Forces is designed to assess industry profitability. Other argue that company-specific factors (for example, competences) are more important Implies the five forces apply equally to all competitors in the industry No consideration of product and resource markets It cannot be applied without consideration of the macroenvironment Assumes relationships with competitors, buyers and suppliers is not cooperative, but competitive
Co-operative Environment
One of the criticisms of Porters 5 Forces Model is that it views all relationships as competitive, not cooperative BUT: Most organizations have formal and informal co-operative relationships with suppliers and distributors
Organization
Complementors
Co-operative Links
Informal co-operative links organizations link together for mutual or common purpose without legally binding contracts Formal co-operative links links bound by some sort of contract Complementors companies whose products add value to the organizations basic product Government links relationships with governments
Complementors
Examples: Software is a complementor of hardware Usually, complementors work with the organization to provide a joint offering Real world example: Microsoft
Government Links
Examples: negotiations with government on tax, investment and legal issues; organization lobbies Real world examples: For companies in the defense and pharmaceutical industries (Boeing, Smith Kline Beecham), strong government links are essential
Resource-based Framework
Complicated and comprehensive analysis Analysis of 5 inter-related areas:
Resource-based Framework
Competitive Rivalry Company Industry Buyer Power Resource Markets Product Markets New Markets Organizations Products
Supplier Power
Organization
Threat of Substitutes
Substitutes
Customer needs and satisfaction Unmet customer needs Market segments and profitability Number of competitors to the market and relative market share Number of customers and their purchasing power Access to distribution channels Ease of entry Potential for competence leveraging Need for new competence building
Resource requirements Number of actual and potential suppliers Size of suppliers Potential collaboration with suppliers (cooperation) Access by competitors to suppliers Nature of the resource and availability of substitutes
Potential threats Other industries in which the organization may be able to leverage their competences New markets
UK Outbound tour operations industry, pp.370 390 Consider analysis of the industry by Porters 5 Forces Analysis, Resource-based Framework Identify any parts of the value chain Identify an strategic groups Discuss the intensity of rivalry in the industry Identify SPENT influences Identify any cooperative links