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ANALYZING COMPANY’S
EXTERNAL ENVIRONMENT
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Strategy formulation begin with an analysis of the
forces that shape competition in the industry in
which a company is operate or based
The purposes are to identify opportunities and
threats and then to be base for formulating
strategies
Opportunities are when a company can take advantage of its environment –
profitable
Threats are the situation endanger the integrity and profitability of the
company’s business
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INDUSTRY
“a group of companies offering products
or services that are close substitutes
for each other-products that satisfy
the same basic customer needs.”
(Hill & Jones, p:43, 2009)
Sector is a group of closely related industries
Industries boundaries can change-computer and
telecommunication3
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SECTOR AND INDUSTRY
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COMPETITION IN AN INDUSTRIES: HOW
STRONG ARE COMPETITIVE FORCES?
In general, competition within an industry
is driven by five basic competition forces
The Forces are:
Buyers, Rivalries, Suppliers, New
Entrants, and Product Substitutes
(as the collective strength of the forces) of
that industry5
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STRUCTURAL DETERMINANTS OF
THE INTENSITY OF COMPETITION
The strongest force or forces are governing
and become crucial from the point ofview of strategy formulation
An example: a company with a very strong position in
an industry would have no guarantee in gaining
expected profitability, if the company faces a
superior, lower-cost product substitution6
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THE FIVE FORCES MODEL OF
COMPETITION
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COMPETITIVE PRESSURES AMONG
RIVAL SELLERS
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Lower pricesMore or differentperformance features
Better productperformance
Stronger brand imageand appeal
Wider selection ofmodels and styles
Bigger/better dealernetwork
Higher levels of
advertisingStronger productinnovation capabilities
Better customer service
Stronger capabilities toprovide buyers withcustom-made products
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SOME FACTORS WOULD CAUSE DEGREE OF
COMPETITION AMONG RIVALRY
Industry rivals move to draw sales from rivals
(frequently or infrequently)
Market growth (rapid or slow)
Products Differentiation of Rivals (High or
Low)
Customer loyalty of Rivals (High or Low)
Buyer costs to switch brands (High or Low)
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COMPETITIVE PRESSURES
ASSOCIATED WITH POTENTIAL
ENTRY
Seriousness of threat depends onSize of pool of entry candidatesand available resources
Barriers to entry Reaction of existing firms
Evaluating threat of entry involvesassessing
How formidable entry barriers are for eachtype of potential entrant and
Attractiveness of growth and profit prospects
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COMMON BARRIERS TO ENTRY
Sizable economies of scaleBrand preferences and customer loyaltyCapital requirements and/or otherspecialized resource requirements
Access to distribution channelsRegulatory policiesTariffs and international trade restrictions
Ability of industry incumbents to launchvigorous initiatives to block a newcomer’sentry
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THREATS OF ENTRY: COST DISADVANTAGES INDEPENDENT OF SCALE (FOR THE ESTABLISHED PLAYERS)
Proprietary product technology Airplane-maker or aerospace, mining, machine for racing
cars, handwritten batik
Favorable access to raw materialsOil, gas, gold
Favorable locations Asia region: China, Vietnam, Indonesia
Government subsidiesNational companies: PT KAI
Learning or experience curveElectronic, automotive product,
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LEARNING/EXPERIENCE EFFECTS
Learning/experience effectsexist whena company’s unit costs decline as itscumulativeproduction volume increasesbecause of
Accumulating production of know-how
Growing mastery of the technology
The bigger thelearning or experiencecurve effect, the bigger the costadvantage of the firm with the largestcumulative production volume
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LEARNING/EXPERIENCE EFFECTS
Tendency for unit costs to decline as the firm gainsmore cumulative experience in producing a product(more efficient, more specialized)
Cost declines with experience do not relate to the entire
firm but arise from the individual operations orfunctions that make up the firm
In comparison with economies of scale, experience curverelates with cumulative volume, while economies ofscale are dependent on volume per period;
The decline in cost from experience can be augmented ifthere are diversified firms in the industry who shareoperations or functions subject to such a decline withother units in the company 14
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COMPETITIVE PRESSURES FROM
SUBSTITUTE PRODUCTS
Substitutes matter when customers are
attracted to the products of firms inother
industriesSugar versus artificial sweeteners
Eyeglasses and contact lens
versus laser surgery
Newspapers versus InternetNewsNotebook versus Smartphone
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FACTORS LEADING WHETHER SUBSTITUTE
PRODUCTS ARE ASTRONG FORCE
Whether substitutes are readily available and
attractively priced
Whether buyers view substitutes as beingcomparable or better
How much it costs end users to switch to
substitutes
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WHEN IS THE BARGAINING
POWER OF SUPPLIERSSTRONGER?
Industry members incur high costs inswitching their purchases to alternativesuppliers
Needed inputs are in short supplySupplier provides a (better) quality ordifferentiated input
There are only a few suppliers of a specificinput
Some suppliers threaten to integrateforward
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WHEN IS THE BARGAINING POWER OF
BUYERSSTRONGER?
Buyer switching costs to competing brands orsubstitutes are low
Large-volume purchases by buyers are important tosellers
Buyer demand is weak or decliningOnly a few buyers existsIdentity of buyer adds prestige to seller’s list ofcustomers
Quantity and quality of information available to
buyersBuyers have ability to postpone purchases until later
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STRATEGIC IMPLICATIONS OF
THE FIVE COMPETITIVE FORCES
Competitive environment is
unattractive from
the standpoint of earning good profits
whenRivalry is vigorous
Entry barriers are low and entry is likely
Competition from substitutes is strongSuppliers and customers have considerable
bargaining power19
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STRATEGIC IMPLICATIONS OF
THE FIVE COMPETITIVE FORCES
Competitive environment isideal from
a profit-making standpointwhen
Rivalry is moderate
Entry barriers are high and no firm is likely to
enter
Good substitutes do not exist
Suppliers and customers are in a weakbargaining position
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(3) WHAT FORCES ARE
DRIVING INDUSTRY CHANGE
AND WHAT IMPACTS WILLTHEY HAVE?
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FACTORS DRIVING INDUSTRY
CHANGE
Industries change because forces
aredriving industry participants
toalter their actions Driving forces are themajor
underlying causesof changing industry
and competitive conditions
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SOME FORCES DRIVING CHANGES
Emerging new Internet capabilities andapplications
Increasing globalization of industryChanges in long-term industry growth rate
Product innovationTechnological change/process innovationMarketing innovation
Regulatory policies / government legislationChanging societal concerns, attitudes, andlifestyle
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(4) WHAT MARKET
POSITIONS DO RIVALSOCCUPY?
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STRATEGIC GROUP
Astrategic group is a cluster of firms in anindustry with similar competitive approachesand market positions
Strategic group mapping is one technique torevealdifferent competitive positionsofindustry rivals
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STRATEGIC GROUP MAPPING
Firms insame strategic group have two ormorecompetitive characteristics in commonHave comparable product line breadthHave similarity in price/quality rangeEmphasize similar distribution channelsUse similar product attributes to appealto similar types of buyers
Use identical technological approachesOffer buyers similar services
Cover same geographic areas
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EXAMPLE: STRATEGIC GROUP MAP OF SELECTED RETAIL CHAINS
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INTERPRETING STRATEGIC
GROUP MAPS
The closer strategic groups are
on the map, the stronger the cross-group
competitive rivalry tends to be
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(5)WHAT STRATEGIC MOVES
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(5) WHAT STRATEGIC MOVES
ARE RIVALS LIKELY TO MAKE
NEXT?
A firm’sbest strategic movesare affected byCurrent strategies of competitorsFuture actions of competitors
Profiling key rivals involves gathering
competitive intelligence aboutCurrent strategies
Most recent actionsResource strengths and weaknesses
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(6) WHAT ARE THE KEY
FACTORS FOR COMPETITIVE
SUCCESS?
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THE KEY FACTORS FOR
COMPETITIVE SUCCESS
KSFs are those competitive factors most affecting every industry member’s ability to compete withsuccessfully
Key factors as request for companies to competewith in an industry
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IDENTIFYING INDUSTRY KEY SUCCESS
FACTORS
On what basis do customers choosebetween competing brands of sellers?
What resources and competitive capabilities does a
seller need to have to be competitively successful?
What does it take for companies (competitor) to achievea sustainable competitive advantage?
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(7) FACTORS TO BE THE INDUSTRY
OUTLOOK:
A GOOD OPPORTUNITY TO PROFITABILITY
Industry’s market size and growth potentialCompetitive forces influencing industry profitabilityThe driving forces affect the industry profitability
Degree of risk and uncertainty in industry’s futureSeverity of potential problems facing industryFirm’s competitive position in industry vis-à-vis
rivals
Firm’s potential to capitalize on vulnerabilities ofweaker rivals
Whether firm has sufficient resources to
defend against unattractive industry factors 33
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CORE CONCEPT: ASSESSING
INDUSTRY ATTRACTIVENESS
Thedegree to which anindustry
isattractive orunattractive is not the same
for all industry participants
or potential entrants.
Theopportunities an industry
presentsdepend partly on a
company’s ability tocapture them
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