STRATEGY Chapter 3 Core Concepts and Analytical Approaches ... · PDF fileCore Concepts and...

STRATEGYCore Concepts and Analytical Approaches

Chapter 3PowerPoint Slides

Copyright © 2012 GLO-BUS Software, Inc.

2nd Edition

Chapter 3 Learning ObjectivesChapter 3 Learning Objectives

1.1. To gain command of the basic concepts and analytical To gain command of the basic concepts and analytical

tools widely used to diagnose a company’s industry tools widely used to diagnose a company’s industry and competitive conditions.and competitive conditions.

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

normal, or relatively weak.normal, or relatively weak.

3.3. To learn how to determine whether an industry’s To learn how to determine whether an industry’s

outlook presents a outlook presents a firm firm with sufficiently attractive with sufficiently attractive opportunities for growth and profitability.opportunities for growth and profitability.

4.4. To understand why inTo understand why in--depth evaluation of specific depth evaluation of specific

industry and competitive conditions is a prerequisite to industry and competitive conditions is a prerequisite to crafting a strategy well matched to a crafting a strategy well matched to a firm’s firm’s situation.situation.

3–4Copyright © 2012 Glo-Bus Software, Inc.

Chapter 3 RoadmapChapter 3 Roadmap

�� The Strategically Relevant Components The Strategically Relevant Components in the External in the External EnvironmentEnvironment

�� Thinking Strategically About Thinking Strategically About An An Industry and Industry and Its Competitive Its Competitive

EnvironmentEnvironment

►► Question 1Question 1:: What What Kinds of Competitive Forces Are Industry Members Kinds of Competitive Forces Are Industry Members FacingFacing, and How Strong Is Each Force?, and How Strong Is Each Force?

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

►► Question 3Question 3:: What What Market Positions Do Rivals OccupyMarket Positions Do Rivals Occupy——Who Is Strongly Who Is Strongly

Positioned Positioned and Who Is Not?and Who Is Not?

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

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

►► Question 6Question 6:: Does Does the Outlook for the Industry Present the Company the Outlook for the Industry Present the Company

with with Sufficiently Attractive Prospects for Profitability?Sufficiently Attractive Prospects for Profitability?


Understanding a Company’s SituationUnderstanding a Company’s Situation

�� Actions to steer Actions to steer a company in a different a company in a different direction or direction or alter alter its strategy its strategy should always be should always be predicated on deep predicated on deep understanding of two understanding of two facets facets of a company’s situation:of a company’s situation:

►► The industry and competitive The industry and competitive environment in environment in which which the company operates and the company operates and the forces the forces acting to acting to reshape this environmentreshape this environment

►► The company’s own market position and The company’s own market position and competitivenesscompetitiveness——its resources its resources and capabilitiesand capabilities, its , its strengths and strengths and weaknesses visweaknesses vis--àà--vis vis rivals, and its rivals, and its windows of opportunity.windows of opportunity.



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

Figure The Strategically Relevant Components The Strategically Relevant Components of of a Firm’s a Firm’s External EnvironmentExternal Environment

�� All companies operate in a “macroAll companies operate in a “macro--environment” that is environment” that is

shaped by an assortment of external factors and shaped by an assortment of external factors and influences that are important enough to have a bearing influences that are important enough to have a bearing

on a firm’s decisions about its direction, objectives, on a firm’s decisions about its direction, objectives, strategy, and business model. strategy, and business model.

�� These forces and influences include:These forces and influences include:►► General economic conditions and global factorsGeneral economic conditions and global factors►► Population demographics Population demographics ►► Societal values and lifestylesSocietal values and lifestyles

►► Political, regulatory, and legal factorsPolitical, regulatory, and legal factors►► Technology and environmental factorsTechnology and environmental factors►► The immediate industry and competitive arena in which the The immediate industry and competitive arena in which the

firm operatesfirm operates






3.2 The Components of a Company’s MacroenvironmentFigure Thinking Strategically about a Thinking Strategically about a Firm’s Firm’s Industry and Industry and Competitive EnvironmentCompetitive Environment

�� Thinking strategically about a firm’s industry and Thinking strategically about a firm’s industry and

competitive environment entails getting competitive environment entails getting clear answers clear answers to to 6 questions:6 questions:

1.1. What What kinds of competitive forces are industry members facing, kinds of competitive forces are industry members facing,

and how strong is each force?and how strong is each force?

2.2. What What forces are driving changes in the industry, and what impact forces are driving changes in the industry, and what impact

will these changes have on will these changes have on competitive intensity competitive intensity and industry and industry

profitabilityprofitability??

3.3. What What market positions do industry rivals occupymarket positions do industry rivals occupy——who is strongly who is strongly

positioned and who is not?positioned and who is not?

4.4. What What strategic moves are rivals likely to make next?strategic moves are rivals likely to make next?

5.5. What What are the key factors for future competitive success?are the key factors for future competitive success?

6.6. Is Is the industry outlook conducive to good the industry outlook conducive to good profitabilityprofitability??


Question Question 11:: What What Kinds of Competitive Forces Kinds of Competitive Forces

Are Industry Members FacingAre Industry Members Facing??

The The strength or weakness of strength or weakness of competition in an competition in an industry is industry is a function of five types of competitive a function of five types of competitive pressures:pressures:

1.1. The market The market maneuvering and jockeying for maneuvering and jockeying for buyer buyer patronage patronage that goes on among that goes on among rival sellersrival sellers..

2.2. The The threat of threat of new entrants new entrants into the market.into the market.

3.3. The actions of firms in other The actions of firms in other industries industries to to win buyers win buyers

over to their over to their substitute substitute productsproducts..

4.4. The The bargaining bargaining power exercised by suppliers power exercised by suppliers

5.5. The bargaining power exercised by The bargaining power exercised by buyersbuyers

3–11Copyright © 2012 Glo-Bus Software, Inc. 3–12Copyright © 2012 Glo-Bus Software, Inc.

3.3Figure

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

y


How to Analyze the Five Competitive ForcesHow to Analyze the Five Competitive Forces

Step 1Step 1Step 1Step 1Identify the specific competitive pressures associated with each of the five forces.

Step 2Step 2Step 2Step 2Evaluate how strong the pressures comprising each of the five forces are (fierce, strong, moderate to normal, or weak).

Step 3Step 3Step 3Step 3Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.

Core ConceptCore Concept

Competitive maneuvering among industry Competitive maneuvering among industry rivals is rivals is everever--changing, as competing sellers changing, as competing sellers initiate round initiate round

after round of offensive and after round of offensive and defensive moves, defensive moves, emphasizing first emphasizing first one mix of one mix of competitive weapons competitive weapons

and then another in efforts to and then another in efforts to improve their improve their market market positions.positions.

33––1414Copyright © 2012 GloCopyright © 2012 Glo--Bus Software, Inc.Bus Software, Inc.




Competitive Pressures Created by the Competitive Pressures Created by the Rivalry among Competing SellersRivalry among Competing Sellers

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

dynamic. dynamic.

►► Each Each competing company is motivated to employ competing company is motivated to employ whatever whatever “weapons” “weapons” in its in its business arsenal business arsenal it believes it believes

will attract and retain will attract and retain buyers, strengthen its buyers, strengthen its market market position, and yield good profits.position, and yield good profits.

►► The challenge is to craft a competitive strategy that, at The challenge is to craft a competitive strategy that, at

the very least, allows a company to hold its own against the very least, allows a company to hold its own against rivals and that, more ideally, will produce a competitive rivals and that, more ideally, will produce a competitive

edge over rivals.edge over rivals.


Why Rivalry Is Usually the Strongest Why Rivalry Is Usually the Strongest of the Five Competitive Forcesof the Five Competitive Forces

�� When one competitor deploys When one competitor deploys a strategy or makes a new a strategy or makes a new strategic move that produces good results, its rivals typically strategic move that produces good results, its rivals typically have little choice but to respond with offensive or defensive have little choice but to respond with offensive or defensive countermoves of their own. countermoves of their own.

�� This pattern of action and reaction, move and countermove, This pattern of action and reaction, move and countermove, adjust and readjust produces an always evolving competitive adjust and readjust produces an always evolving competitive landscape, with companies gaining or losing momentum in landscape, with companies gaining or losing momentum in the marketplace according to whether their latest strategic the marketplace according to whether their latest strategic maneuvers succeed or maneuvers succeed or fail.fail.

�� But the winnersBut the winners——the current market leadersthe current market leaders——have no have no guarantees of continued leadership; their market success is guarantees of continued leadership; their market success is no more durable than the power of their latest strategies to no more durable than the power of their latest strategies to fend off the latest strategies of ambitious challengers.fend off the latest strategies of ambitious challengers.



3.4 The Typical “Weapons” That Companies Can Use to Attract Buyers and Outmaneuver Rivals

Figure

• Lower prices

• More or different features

• Better product performance

• Higher quality

• Stronger brand name and image

• Wider selection of models and styles

• Bigger/better dealer network

• Low interest rate financing

• Higher levels of advertising

• Stronger product innovation capabilities

• Better customer-service capabilities

• Stronger capabilities to provide buyers with custom-made products

• Better warranty coverage

• Quicker or cheaper delivery


3.4 (cont’d)Figure

The Factors Affecting the Strength of Rivalry

What Causes Rivalry to Become Stronger?What Causes Rivalry to Become Stronger?

�� Rivalry Rivalry intensifies when:intensifies when:

►► CCompeting sellers are active in launching fresh actions to boost their ompeting sellers are active in launching fresh actions to boost their

market standing and business market standing and business performance. performance.

►► Indicators of active rivalry include:Indicators of active rivalry include:

•• Lively price competition Lively price competition

•• Rapid introduction of nextRapid introduction of next--generation productsgeneration products

•• A race among industry A race among industry members members to more strongly differentiate to more strongly differentiate their products their products

from from those of rivals those of rivals

•• Frequent use of such Frequent use of such marketing tactics as special sales promotions, marketing tactics as special sales promotions, bursts bursts

of of advertisingadvertising, rebates, rebates, or low, or low--interestinterest--rate rate financing financing to to spur sales.spur sales.

•• Active efforts on the part of industry Active efforts on the part of industry members members to to build stronger dealer build stronger dealer

networks or networks or expand their expand their presence in foreign markets or otherwise expand presence in foreign markets or otherwise expand their distribution their distribution capabilitiescapabilities

•• Active efforts by many industry members to Active efforts by many industry members to gain a market edge gain a market edge by by

developing valuable developing valuable expertise and expertise and capabilities that capabilities that their rivals would be their rivals would be

hardhard--pressed pressed to to match.match.


What Causes Rivalry to Become Stronger?What Causes Rivalry to Become Stronger?

�� Rivalry Rivalry tends to be more intense whentends to be more intense when::

►► Buyer costs to switch brands are low.Buyer costs to switch brands are low.

►► Rivals Rivals are dissatisfied are dissatisfied with their position and market share with their position and market share make make moves to attract more customers.moves to attract more customers.

►► Rivals have diverse objectives and strategies and/or are Rivals have diverse objectives and strategies and/or are located in different countries.located in different countries.

►► Outsiders acquire weak competitors and try to turn them Outsiders acquire weak competitors and try to turn them into major contenders.into major contenders.

►► One or more rivals have particularly powerful One or more rivals have particularly powerful strategies strategies that are forcing that are forcing other rivals to scramble to stay in the other rivals to scramble to stay in the

gamegame..

►► Buyer demand is growing slowly (or even declining)Buyer demand is growing slowly (or even declining)





What Causes Rivalry to Become Weaker?What Causes Rivalry to Become Weaker?

�� Rivalry Rivalry tends to be less intense tends to be less intense when:when:►► Industry members move infrequently or in a nonIndustry members move infrequently or in a non--aggressive aggressive

manner to draw sales and market share away from rivals.manner to draw sales and market share away from rivals.

►► Buyer demand is growing rapidly.Buyer demand is growing rapidly.

►► The products of rival sellers The products of rival sellers are strongly are strongly differentiated differentiated and and

customer customer loyalty loyalty to their preferred brand is to their preferred brand is highhigh..

►► Buyer costs to switch brands are highBuyer costs to switch brands are high..

►► There There are are so so many many industry members industry members that that any one company’s any one company’s

initiatives to grow its business have little initiatives to grow its business have little direct impact on direct impact on rival rival businesses and thus provoke little need for retaliation.businesses and thus provoke little need for retaliation.


Characterizing Industry RivalryCharacterizing Industry Rivalry

Cutthroat Cutthroat or Brutalor BrutalCutthroat Cutthroat or Brutalor Brutal

When competitors engage in protracted price wars or habitually undertake other aggressive strategic moves that prove mutually destructive to profitability.

Fierce Fierce to to StrongStrong

Fierce Fierce to to StrongStrong

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

WeakWeakWeakWeak

When most companies in the industry 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.

ModerateModerateor Normalor NormalModerateModerateor Normalor Normal

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

Competitive Competitive Pressures Pressures Associated Associated With With the Threat the Threat of of Potential EntryPotential Entry

The impact of the The impact of the threat of threat of the entry of new firms the entry of new firms into a market on increasing competitive into a market on increasing competitive pressures pressures faced by industry faced by industry members depends on: members depends on:

�� The size of the pool of The size of the pool of likely entry likely entry candidates and candidates and the the

resources resources at their commandat their command

�� Whether the likely entry Whether the likely entry candidates face candidates face high or low high or low

entry barriersentry barriers

�� How attractive the growth and profit prospects are for How attractive the growth and profit prospects are for new entrantsnew entrants


Common Barriers to EntryCommon Barriers to Entry

�� Cost Cost advantages enjoyed by industry incumbentsadvantages enjoyed by industry incumbents

�� Strong brand preferences and Strong brand preferences and high degrees of high degrees of customer customer loyaltyloyalty

�� High capital High capital requirements for market entryrequirements for market entry

�� The difficulties of building The difficulties of building a network of a network of distributors or distributors or

retailers retailers and and securing space securing space on retailers’ shelves.on retailers’ shelves.

�� Restrictive regulatory Restrictive regulatory policies that limit/bar new entrantspolicies that limit/bar new entrants

�� Tariffs and international trade restrictionsTariffs and international trade restrictions

�� The ability and willingness of The ability and willingness of industry incumbents industry incumbents to to

launch strong launch strong maneuvers to combat a newcomer’s efforts maneuvers to combat a newcomer’s efforts

to secure a profitable volume of salesto secure a profitable volume of sales


The Cost Advantages of Incumbents: The Cost Advantages of Incumbents: An Important Entry BarrierAn Important Entry Barrier

Existing industry members frequently have cost advantages that a Existing industry members frequently have cost advantages that a

newcomer cannot easily overcome:newcomer cannot easily overcome:

1.1. Scale economies Scale economies in production, distribution, or other in production, distribution, or other activitiesactivities

2.2. LearningLearning--based based costs savings that costs savings that accrue from inaccrue from in--industry industry experience experience in performing certain activities such as manufacturing in performing certain activities such as manufacturing or new product development or new product development or inventory managementor inventory management

3.3. CostCost--savings savings accruing from patents or proprietary accruing from patents or proprietary technologytechnology

4.4. Partnerships with the best and cheapest suppliers of raw materials Partnerships with the best and cheapest suppliers of raw materials and and componentscomponents

5.5. Favorable locationsFavorable locations

6.6. Low fixed Low fixed costs (because costs (because incumbents have incumbents have older facilities that older facilities that

have been mostly depreciatedhave been mostly depreciated))


3.5 Factors Affecting the Threat of EntryFigure




Competitive Pressures Associated Competitive Pressures Associated with the Threat with the Threat of New Entrantsof New Entrants

�� Entry threats are stronger when:Entry threats are stronger when:

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

►► Entry barriers are low or can be readily hurdled by the likely Entry barriers are low or can be readily hurdled by the likely

entry candidates.entry candidates.

►► Industry members Industry members can expand can expand their presence into other product their presence into other product

segments or geographic areas.segments or geographic areas.

►► Newcomers can expect to earn attractive profits.Newcomers can expect to earn attractive profits.

►► Buyer demand is growing rapidly.Buyer demand is growing rapidly.

►► Industry members are unable (or unwilling) to strongly contest Industry members are unable (or unwilling) to strongly contest

the entry of newcomersthe entry of newcomers..


When Is the Threat of Entry Weaker?When Is the Threat of Entry Weaker?

�� Entry threats are weaker when:Entry threats are weaker when:

►► The pool of entry candidates is small.The pool of entry candidates is small.

►► Entry barriers are high.Entry barriers are high.

►► Existing competitors are struggling to earn good profits.Existing competitors are struggling to earn good profits.

►► The industry’s outlook is risky or uncertain.The industry’s outlook is risky or uncertain.

►► Buyer demand is growing slowly or is stagnant.Buyer demand is growing slowly or is stagnant.

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


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

Are the Are the industry’s growth and industry’s growth and profit profit

prospects prospects strongly strongly attractive to potential attractive to potential entry entry candidates?candidates?

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

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


Competitive Pressures from the Sellers Competitive Pressures from the Sellers of Substitute Productsof Substitute Products

�� ConceptConcept

►► Substitutes matter when customers are attracted Substitutes matter when customers are attracted

to the products of firms in other industries.to the products of firms in other industries.

�� Examples of Examples of SubstitutesSubstitutes

►► GasolineGasoline--powered vehicles versus batterypowered vehicles versus battery--powered vehiclespowered vehicles

►► Cell phones versus phones that use land linesCell phones versus phones that use land lines

►► Movie theaters versus NetflixMovie theaters versus Netflix

►► Music CDs versus digital music players (Music CDs versus digital music players (iPods)iPods)



3.6 Factors Affecting Competition from Substitute ProductsFigure

buyers

When Are Substitute Products When Are Substitute Products a Strong Competitive Force?a Strong Competitive Force?

�� The strength of competitive The strength of competitive pressures from pressures from substitute substitute products depends on:products depends on:

►► Whether substitutes are Whether substitutes are readily available readily available and and

attractively attractively priced.priced.

►► Whether buyers view Whether buyers view substitutes as substitutes as being being

comparable or comparable or better in term of attributes.better in term of attributes.

►► How much it costs How much it costs buyers to buyers to switch to switch to substitutes.substitutes.


RuleRuleRuleRuleThe 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.




When Is Competition from When Is Competition from Substitutes Stronger?Substitutes Stronger?

�� Competitive pressures from substitutes are Competitive pressures from substitutes are stronger when:stronger when:

►► They are readily available or new ones are emerging.They are readily available or new ones are emerging.

►► They are attractively priced. They are attractively priced.

►► They have comparable or better performance They have comparable or better performance features.features.

►► They come with low switching costs for end users. They come with low switching costs for end users.

►► Users are comfortable with their use.Users are comfortable with their use.


When Is Competition from When Is Competition from Substitutes Weaker?Substitutes Weaker?

�� Competitive pressures from substitutes are Competitive pressures from substitutes are weaker when:weaker when:

►► Good substitutes are not readily available or don’t Good substitutes are not readily available or don’t

exist.exist.

►► Substitutes are higher priced relative to the Substitutes are higher priced relative to the

performance they deliver.performance they deliver.

►► End users have high costs in switching to substitutes. End users have high costs in switching to substitutes.


Three Signs that Substitute Products Three Signs that Substitute Products Are a Strong Competitive ForceAre a Strong Competitive Force

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

►► (an indication that the sellers of substitutes are (an indication that the sellers of substitutes are stealing the industry’s customers away)stealing the industry’s customers away)

2.2. The producers of substitute products are The producers of substitute products are adding new production capacity.adding new production capacity.

3.3. Profits of the producers of substitutes are Profits of the producers of substitutes are rising.rising.


Competitive Pressures Stemming from Competitive Pressures Stemming from the Bargaining Power of Suppliersthe Bargaining Power of Suppliers

�� Whether the relationships between industry Whether the relationships between industry members and their suppliers represent a members and their suppliers represent a weak, weak, moderate, or moderate, or strong strong competitive force competitive force depends depends on the degree to which suppliers can influence on the degree to which suppliers can influence the terms and conditions of supply in their favor.the terms and conditions of supply in their favor.

Powerful or influential suppliers can Powerful or influential suppliers can create create

competitive pressures competitive pressures because of their because of their ability ability to to chargecharge industry members higher prices industry members higher prices

and/or make and/or make it difficult it difficult or or costly forcostly for industry industry members to members to switch switch to other suppliers.to other suppliers.



3.7 Factors Affecting the Bargaining Power of SuppliersFigure Factors That Determine the Strength Factors That Determine the Strength

of Supplier Bargaining Power of Supplier Bargaining Power

�� Whether certain needed inputs are in short supply.Whether certain needed inputs are in short supply.

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

�� Whether certain suppliers provide equipment or services that Whether certain suppliers provide equipment or services that deliver valuable costdeliver valuable cost--saving efficiencies to industry members saving efficiencies to industry members

in operating their production processes.in operating their production processes.

�� Whether the item being supplied is a standard item or Whether the item being supplied is a standard item or commodity that is readily available from a host of suppliers at commodity that is readily available from a host of suppliers at the going market price.the going market price.

�� Whether it is difficult or costly for industry members to switch Whether it is difficult or costly for industry members to switch their purchases from one supplier to another or to switch to their purchases from one supplier to another or to switch to attractive substitute inputs.attractive substitute inputs.





Factors That Determine the Strength Factors That Determine the Strength

of Supplier Bargaining Power of Supplier Bargaining Power (cont’d)(cont’d)

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

�� Whether Whether industry members are major customers of suppliersindustry members are major customers of suppliers..

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

�� Whether it makes good economic sense for industry members Whether it makes good economic sense for industry members to integrate backward and to integrate backward and selfself--manufacture items manufacture items they have they have been buying from suppliersbeen buying from suppliers..

�� Whether suppliers have the resources and Whether suppliers have the resources and profit profit incentive to incentive to integrate forward into the business of integrate forward into the business of the customers the customers they are they are supplyingsupplying..


When Is the Bargaining Power When Is the Bargaining Power of Suppliers Stronger?of Suppliers Stronger?

�� Supplier bargaining power is stronger when:Supplier bargaining power is stronger when:

►► Industry members Industry members incur high costs in switching incur high costs in switching

supplierssuppliers. .

►► Needed inputs are in short Needed inputs are in short supply, giving suppliers supply, giving suppliers more leverage in setting more leverage in setting prices.prices.

►► A supplier has a differentiated input that enhances A supplier has a differentiated input that enhances the quality or performance of sellers’ products or is a the quality or performance of sellers’ products or is a

critical critical part of sellers’ production processes.part of sellers’ production processes.

►► There are There are few few suppliers suppliers of of a particular input. a particular input.

►► A supplier can A supplier can integrate forward into the business of integrate forward into the business of

industry members industry members and become and become a powerful rival.a powerful rival.


When Is Supplier Bargaining Power Weaker?When Is Supplier Bargaining Power Weaker?

�� Supplier bargaining power is weaker when:Supplier bargaining power is weaker when:

►► The item being supplied is a “commodity” that is readily available The item being supplied is a “commodity” that is readily available from many suppliers at the going market pricefrom many suppliers at the going market price

►► Seller Seller switching costs to alternative suppliers are low.switching costs to alternative suppliers are low.

►► Good substitute inputs exist or new ones emerge.Good substitute inputs exist or new ones emerge.

►► Supplies are plentiful or there is a surge in the availability Supplies are plentiful or there is a surge in the availability of of

supplies, thus weakening supplier pricing power.supplies, thus weakening supplier pricing power.

►► Industry Industry members members are are a big fraction of suppliers’ total sales and a big fraction of suppliers’ total sales and

continued high volume purchases are important to continued high volume purchases are important to supplierssuppliers. .

►► Industry members Industry members can integrate can integrate backward into the backward into the suppliers’ suppliers’

business to business to selfself--manufacture their own requirements. manufacture their own requirements.


Competitive Pressures Stemming Competitive Pressures Stemming

from the Bargaining Power of Buyersfrom the Bargaining Power of Buyers

�� Buyers Buyers can exert can exert strong competitive pressures strong competitive pressures on industry members when:on industry members when:

►► Some Some or many buyers have sufficient bargaining or many buyers have sufficient bargaining leverage to obtain price concessions and other leverage to obtain price concessions and other favorable terms favorable terms and and conditions of conditions of sale.sale.

►► Many buyers are price sensitive and have the power, Many buyers are price sensitive and have the power, if they act in unison, to place limits on the prices that if they act in unison, to place limits on the prices that

industry members can charge. industry members can charge.


Important Important PointPoint

Important Important PointPoint

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


3.8 Factors Affecting the Bargaining Power of BuyersFigure Factors That Determine the Strength Factors That Determine the Strength of Buyer of Buyer Bargaining PowerBargaining Power

�� The quantity that a buyer is purchasingThe quantity that a buyer is purchasing

�� Whether buyer switching costs are high or lowWhether buyer switching costs are high or low

�� Whether there are many or few buyersWhether there are many or few buyers

�� Whether a buyer is particularly Whether a buyer is particularly important to a sellerimportant to a seller..

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

�� How well buyers How well buyers are are informed informed about sellers’ products, prices, about sellers’ products, prices,

and costsand costs..

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

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





When Is the Bargaining Power When Is the Bargaining Power of Buyers Stronger?of Buyers Stronger?

�� Buyer bargaining power is stronger when:Buyer bargaining power is stronger when:

►► Large buyers can demand concessions for purchasing large quantities.Large buyers can demand concessions for purchasing large quantities.

►► The buyer adds prestige to the seller’s list of customers.The buyer adds prestige to the seller’s list of customers.

►► Switching costs to competing brands or substitutes are low.Switching costs to competing brands or substitutes are low.

►► Large volume purchases by buyers are important to sellers.Large volume purchases by buyers are important to sellers.

►► Buyer demand is weak or declining.Buyer demand is weak or declining.

►► There are few buyersThere are few buyers——so that each one is important to sellers.so that each one is important to sellers.

►► Quantity and quality of information available to buyers improves.Quantity and quality of information available to buyers improves.

►► Buyers can postpone purchases if they do not like the present deals Buyers can postpone purchases if they do not like the present deals being offered by sellers.being offered by sellers.

►► A buyer can integrate backward into the business of sellers.A buyer can integrate backward into the business of sellers.


When Is the Bargaining Power When Is the Bargaining Power of Buyers Weaker?of Buyers Weaker?

�� Buyer bargaining power is weaker when:Buyer bargaining power is weaker when:

►► Buyers purchase the item infrequently or in small Buyers purchase the item infrequently or in small

quantities. quantities.

►► Buyer switching costs to competing brands are high.Buyer switching costs to competing brands are high.

►► There is a surge in buyer demand that creates a There is a surge in buyer demand that creates a “sellers’ market.”“sellers’ market.”

►► A seller’s brand reputation is important to the buyer.A seller’s brand reputation is important to the buyer.

►► A particular seller’s product delivers quality or A particular seller’s product delivers quality or

performance that is very important to buyers and not performance that is very important to buyers and not

matched in other brands.matched in other brands.


Is the Collective Strength of the Five Competitive Is the Collective Strength of the Five Competitive Forces Not Conducive to Good Profitability?Forces Not Conducive to Good Profitability?

�� As a rule, the stronger the collective impact of the five As a rule, the stronger the collective impact of the five

competitive forces, the lower the combined profitability competitive forces, the lower the combined profitability of industry participants. of industry participants.

�� Worst case scenarioWorst case scenario——An industry is very An industry is very “competitively unattractive” and less profitable when:“competitively unattractive” and less profitable when:

►► Rivalry among industry members is vigorous.Rivalry among industry members is vigorous.

►► Entry barriers are low, making entry likely.Entry barriers are low, making entry likely.

►► Competition from the producers of substitute products is strong.Competition from the producers of substitute products is strong.

►► Both suppliers and customers have considerable bargaining Both suppliers and customers have considerable bargaining power.power.


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

�� An industry is “competitively attractive” when industry An industry is “competitively attractive” when industry

members can reasonably expect to earn good profits members can reasonably expect to earn good profits and a good return on investmentand a good return on investment

�� Best Best case case scenarioscenario——An An industry is industry is ““competitively competitively attractiveattractive” and ” and more more profitable profitable when:when:

►► Internal rivalry in the industry is weak to moderateInternal rivalry in the industry is weak to moderate

►► High barriers block new entrants from the marketHigh barriers block new entrants from the market

►► Good substitutes do not existGood substitutes do not exist

►► Both suppliers and customers are in weak bargaining Both suppliers and customers are in weak bargaining

positionspositions


Matching Company Strategy Matching Company Strategy to Competitive Conditionsto Competitive Conditions

�� Working through the fiveWorking through the five--forces model stepforces model step--byby--step:step:

►► Aids strategy makers in assessing whether the intensity of Aids strategy makers in assessing whether the intensity of

competition allows good profitability.competition allows good profitability.

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

�� Effectively matching a firm’s strategy to competitive Effectively matching a firm’s strategy to competitive

conditions requires:conditions requires:

►► Pursuing strategic avenues that shield the firm from as many Pursuing strategic avenues that shield the firm from as many

different competitive pressures as possible.different competitive pressures as possible.

►► Initiating actions calculated to produce sustainable competitive Initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in the firm’s favor, advantage, thereby shifting competition in the firm’s favor,

putting more competitive pressure on rivals, and maybe even putting more competitive pressure on rivals, and maybe even

defining the optimal business model for the industry.defining the optimal business model for the industry.


Question for Simulation Company Question for Simulation Company CoCo--ManagersManagers

��Which one of the five competitive forces is Which one of the five competitive forces is

strongest in your company’s industry?strongest in your company’s industry?

��Are the competitive pressures your Are the competitive pressures your

company experiences likely to grow company experiences likely to grow

stronger, grow weaker, or remain about stronger, grow weaker, or remain about

the same in the upcoming decision the same in the upcoming decision

rounds? Why?rounds? Why?





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

�� Industry conditions Industry conditions are often fluid are often fluid because because certain certain forces forces

are are enticing or pressuring industry members, their enticing or pressuring industry members, their customers, customers, or their suppliersor their suppliers) to alter their ) to alter their actions in actions in

important ways. important ways.

�� The most important of these change agents are called The most important of these change agents are called driving driving forcesforces because they because they have the biggest have the biggest influences influences in reshaping the industry landscape and altering in reshaping the industry landscape and altering

competitive conditions. competitive conditions.

�� Where do driving forces originate?Where do driving forces originate?

►► Outer ring of Outer ring of macroenvironmentmacroenvironment (Figure 3.2)(Figure 3.2)

►► Inner ring of Inner ring of macroenvironmentmacroenvironment ((Figure 3.2)Figure 3.2)



Industry conditions change because Industry conditions change because important important forces forces are are drivingdriving industry industry participants participants

(competitors(competitors, customers, or suppliers) , customers, or suppliers) to alter to alter their their actions. The actions. The driving forces driving forces in in an industry an industry are the are the

major underlying causes major underlying causes of changing of changing industry and industry and competitive competitive conditionsconditions——they they have the biggest have the biggest

influence influence on how on how the industry the industry landscape will landscape will be be alteredaltered. .


Analyzing an Industry’s Driving Forces Analyzing an Industry’s Driving Forces

��DrivingDriving--forces analysis has three steps: forces analysis has three steps:

1.1. Identifying what the driving forces areIdentifying what the driving forces are

2.2. Assessing whether the drivers of change Assessing whether the drivers of change are, on the whole, acting to make the are, on the whole, acting to make the industry more or less attractiveindustry more or less attractive

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


Identifying an Industry’s Driving ForcesIdentifying an Industry’s Driving Forces

�� Typical developments that can affect an industry Typical developments that can affect an industry

powerfully enough to drive powerfully enough to drive industry and competitive industry and competitive change:change:

►► Changes in an industry’s longChanges in an industry’s long--term growth rateterm growth rate..

►► Increasing Increasing globalizationglobalization

►► Emerging new Emerging new Internet capabilities Internet capabilities and applicationsand applications

►► Changes in who buys Changes in who buys the product the product and how they use itand how they use it

►► Product innovationProduct innovation

►► Technological change and manufacturing process innovationTechnological change and manufacturing process innovation

►► Marketing Marketing innovationinnovation

►► Entry or exit of major Entry or exit of major firmsfirms


Identifying an Industry’s Identifying an Industry’s Driving Forces (cont’d)Driving Forces (cont’d)

�� Typical developments that can affect an industry Typical developments that can affect an industry

powerfully enough to drive industry and competitive powerfully enough to drive industry and competitive change:change:

►► Diffusion of technical knowDiffusion of technical know--how across more companies and how across more companies and

more countriesmore countries

►► Changes in cost and efficiencyChanges in cost and efficiency

►► Growing buyer preferences for differentiated products instead of Growing buyer preferences for differentiated products instead of

a commodity product (or for a a commodity product (or for a more standardized more standardized product instead product instead of strongly differentiated productsof strongly differentiated products).).

►► Reductions in uncertainty and business riskReductions in uncertainty and business risk

►► Regulatory influences and government policy changesRegulatory influences and government policy changes

►► Changing societal concerns, attitudes, and lifestylesChanging societal concerns, attitudes, and lifestyles


Assessing the Impact of the Driving ForcesAssessing the Impact of the Driving Forces

��Answers to three questions are needed:Answers to three questions are needed:

1.1. Are the driving forces collectively acting to Are the driving forces collectively acting to

cause demand for the industry’s product to cause demand for the industry’s product to increase or decrease?increase or decrease?

2.2. Is the collective impact of the driving forces Is the collective impact of the driving forces making competition more or less intense?making competition more or less intense?

3.3. Will the combined impacts of the driving Will the combined impacts of the driving

forces lead to higher or lower industry forces lead to higher or lower industry profitability?profitability?





Key PointKey Point

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

the the driving forces will be to increase or driving forces will be to increase or decrease decrease market market demand, make competition more or demand, make competition more or less less

intenseintense, and lead to higher or lower , and lead to higher or lower industry industry profitabilityprofitability..


Adjusting Strategy to Prepare for Adjusting Strategy to Prepare for the Impacts of Driving Forcesthe Impacts of Driving Forces

�� The third step of drivingThe third step of driving--forces analysisforces analysis——where where the real payoff for strategythe real payoff for strategy--making comesmaking comes——is for is for

managers to draw some conclusions about managers to draw some conclusions about what what strategy adjustments will be needed to deal with strategy adjustments will be needed to deal with

the impacts of the driving forces.the impacts of the driving forces.

►► If understanding of the drivers’ impact is unclear, the If understanding of the drivers’ impact is unclear, the chance of making proper strategy adjustments is slim.chance of making proper strategy adjustments is slim.

►► Driving forces analysis Driving forces analysis is not something to take is not something to take lightly; it has practical value and is basic to the task of lightly; it has practical value and is basic to the task of

thinking strategically thinking strategically about where the industry is about where the industry is

headed and how to prepare for the changes ahead.headed and how to prepare for the changes ahead.


Question 3: Question 3: What Market Positions Do Rivals What Market Positions Do Rivals

OccupyOccupy——Who Is Strongly Who Is Strongly Positioned and Who Is Not?Positioned and Who Is Not?

�� Some industry rivals occupy stronger (or at least Some industry rivals occupy stronger (or at least

distinguishably different) market positions than distinguishably different) market positions than others others because they have opted to because they have opted to ►► Incorporate Incorporate product features that appeal to different types of product features that appeal to different types of

buyersbuyers

►► Charge Charge widely differing widely differing prices for prices for products of widely differing products of widely differing

quality or performancequality or performance

►► Emphasize Emphasize different distribution different distribution channels channels

►► Compete Compete in in different geographic different geographic areas, and so on. areas, and so on.

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



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


Defining a Strategic GroupDefining a Strategic Group

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

►► Comparable productComparable product--line breadthline breadth

►► Sell in the same price/quality rangeSell in the same price/quality range

►► Emphasize same distribution channelsEmphasize same distribution channels

►► Use same product attributes to appeal Use same product attributes to appeal

to similar types of buyersto similar types of buyers

►► Use identical technological approachesUse identical technological approaches

►► Offer buyers similar servicesOffer buyers similar services

►► Cover same geographic areasCover same geographic areas


How to Construct a Strategic Group How to Construct a Strategic Group MapMap

Step 1Step 1Step 1Step 1



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 4Step 4Step 4Step 4Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales.





3.9 Comparative Market Positions of Selected Retail Chains:

An Example of a Strategic Group Map

Figure

Note: Circles are drawn

roughly proportional to

the total revenues of the retailers shown in each

strategic group.

Guidelines for Constructing Guidelines for Constructing a Strategic Group Mapa Strategic Group Map

�� Variables used as axes should not be highly correlatedVariables used as axes should not be highly correlated

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

�� Variables should reveal big differences in how rivals competeVariables should reveal big differences in how rivals compete

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

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

sizes of each strategic group.sizes of each strategic group.

�� If three or more good competitive variables can be used, If three or more good competitive variables can be used, several maps can be drawn.several maps can be drawn.


What Can Be Learned from What Can Be Learned from Strategic Strategic Group Maps?Group Maps?

�� Group maps identify:Group maps identify:

►► Which industry members Which industry members are close rivals and which are distant are close rivals and which are distant rivals. Firms rivals. Firms in the in the same strategic group are the closest rivals; same strategic group are the closest rivals;

the next the next closest rivals closest rivals are in the immediately adjacent are in the immediately adjacent groups.groups.

►► Firms Firms in strategic groups that are far apart on the map may in strategic groups that are far apart on the map may hardly compete at all.hardly compete at all.

�� Not all positions on the Not all positions on the map are map are equally equally attractive:attractive:

►► Prevailing competitive pressures and driving forces often favor Prevailing competitive pressures and driving forces often favor

some strategic groups and hurt some strategic groups and hurt others.others.

►► Profit potential of different Profit potential of different strategic groups strategic groups varies due to varies due to

strengths strengths and weaknesses and weaknesses in each group’s market in each group’s market position.position.


Questions for Simulation Company Questions for Simulation Company CoCo--ManagersManagers

�� Have you studied the strategic group maps for each geographic Have you studied the strategic group maps for each geographic

region that are shown in the Competitive Intelligence Report?region that are shown in the Competitive Intelligence Report?

�� Based on these maps, which rival companies are your closest Based on these maps, which rival companies are your closest

competitors in each geographic region?competitors in each geographic region?

�� Which rival companies are distant competitors?Which rival companies are distant competitors?

�� Do any of the four regional strategic group maps indicate that there Do any of the four regional strategic group maps indicate that there are many rival companies grouped are many rival companies grouped very close together, signaling they very close together, signaling they

are members of an “overcrowded” strategic group? are members of an “overcrowded” strategic group?

�� Is the financial performance of companies in overcrowded strategic Is the financial performance of companies in overcrowded strategic

groups suffering because of the tough competitive battle taking place groups suffering because of the tough competitive battle taking place

among similarlyamong similarly--positioned strategic group members? positioned strategic group members?

�� Are there “open spaces” in any of the four regional strategic group Are there “open spaces” in any of the four regional strategic group maps that present good opportunities (because competition is weak)? maps that present good opportunities (because competition is weak)?


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

�� Knowledge of rivals’ strategies, their financial Knowledge of rivals’ strategies, their financial

performance, their resource strengths and weaknesses, performance, their resource strengths and weaknesses, the actions and plans they have announced, and the the actions and plans they have announced, and the

thinking and leadership styles of their executives is thinking and leadership styles of their executives is valuable forvaluable for

►► Predicting or anticipating the strategic moves Predicting or anticipating the strategic moves

competitors are likely to make next. competitors are likely to make next.

►► Crafting a company’s own strategy with some Crafting a company’s own strategy with some

confidence confidence about what market maneuvers to expect about what market maneuvers to expect from from rivalsrivals

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


What Kind of Competitive Intelligence What Kind of Competitive Intelligence Is Needed?Is Needed?

�� To predict what rival To predict what rival firms firms are likely to do next, are likely to do next, one needs one needs to look at: to look at:

►► Rivals’ strategies and how well these strategies are working Rivals’ strategies and how well these strategies are working

(firms (firms with weak or flawed strategies are certain to with weak or flawed strategies are certain to change change some or many elements of their strategies)some or many elements of their strategies)

►► Which Which rivals are under pressure to improve their financial rivals are under pressure to improve their financial performance (pressures for better performance nearly always performance (pressures for better performance nearly always trigger trigger fresh fresh strategic strategic moves)moves)

►► Which Which rivals have important problems/issues they need to rivals have important problems/issues they need to

addressaddress—— the need for corrective adjustments is a reliable sign the need for corrective adjustments is a reliable sign

that new that new initiatives initiatives are comingare coming

►► The actions and plans The actions and plans rivals have announcedrivals have announced

►► The thinking and leadership styles of The thinking and leadership styles of their their executivesexecutives





Questions to Consider in Predicting Questions to Consider in Predicting the Likely Actions of Rivalsthe Likely Actions of Rivals

�� Which competitors have strategies that are producing Which competitors have strategies that are producing

good resultsgood results——and thus are likely to make and thus are likely to make only minor only minor strategic adjustments?strategic adjustments?

�� Which Which competitors are losing ground in the marketplace competitors are losing ground in the marketplace or or struggling struggling to come up with a to come up with a good strategygood strategy——and and thus thus

are strong candidates for altering their prices, improving are strong candidates for altering their prices, improving the appeal of their the appeal of their product offeringsproduct offerings, moving to a , moving to a

different part of the strategic group map, and otherwise different part of the strategic group map, and otherwise

adjusting adjusting important elements important elements of their strategy?of their strategy?

�� Which Which competitors are poised to gain market share, and competitors are poised to gain market share, and

which ones seem destined to lose groundwhich ones seem destined to lose ground??


Questions to Consider in Predicting Questions to Consider in Predicting the Likely Actions of Rivals (cont’d)the Likely Actions of Rivals (cont’d)

�� Which Which competitors are likely to rank among the industry competitors are likely to rank among the industry

leaders leaders five five years from now? Do one or years from now? Do one or more upmore up--andand--coming coming competitors have powerful strategies and competitors have powerful strategies and

sufficient sufficient resource capabilities to overtake resource capabilities to overtake the current the current industry leader?industry leader?

�� Which Which rivals badly need to increase their unit sales and rivals badly need to increase their unit sales and market share? What strategic options are market share? What strategic options are they most they most

likely to pursue: lowering prices, adding new models and likely to pursue: lowering prices, adding new models and

styles, expanding styles, expanding dealer dealer networksnetworks, entering , entering additional additional geographic markets, boosting advertising to build geographic markets, boosting advertising to build brandbrand--

name name awarenessawareness, acquiring , acquiring a weaker competitor, or a weaker competitor, or placing more emphasis on direct sales via placing more emphasis on direct sales via the Web?the Web?


Questions to Consider in Predicting Questions to Consider in Predicting the Likely Actions of Rivals (cont’d)the Likely Actions of Rivals (cont’d)

�� Which rivals are likely to enter new geographic markets or make Which rivals are likely to enter new geographic markets or make

major moves to substantially major moves to substantially increase their increase their sales and market share sales and market share

in a particular geographic region?in a particular geographic region?

�� Which Which rivals are strong candidates to expand their product offerings rivals are strong candidates to expand their product offerings and enter new product and enter new product segments where segments where they do not currently have a they do not currently have a

presence?presence?

�� Which Which rivals are good candidates to be acquired? Which rivals may rivals are good candidates to be acquired? Which rivals may

be looking to make an be looking to make an acquisition and acquisition and are are financially financially able to do soable to do so??

Scouting Scouting competitors well enough to anticipate competitors well enough to anticipate their next their next moves moves allows managers to prepare allows managers to prepare and launch effective countermoves and launch effective countermoves

and take rivals’ probable moves into account in crafting a and take rivals’ probable moves into account in crafting a company’s own best course of action.company’s own best course of action.


Question 5:Question 5: What Are the Key Factors for What Are the Key Factors for

Future Competitive Success?Future Competitive Success?

�� Key Success Factors (Key Success Factors (KSFs) are those competitive factors KSFs) are those competitive factors

that that most affect industry membersmost affect industry members’ ability ’ ability to to compete compete successfully and profitably.successfully and profitably.

�� KSFs can relate to particular strategy elements, product KSFs can relate to particular strategy elements, product attributes, resource strengths, competencies or attributes, resource strengths, competencies or

competitive capabilities, and/or market achievements.competitive capabilities, and/or market achievements.

�� Why do industry KSFs matter?Why do industry KSFs matter?

Because how Because how well well a firm’s strategy elements, product a firm’s strategy elements, product attributes, attributes, resources, and resources, and capabilities measure capabilities measure up against up against

the industry’s the industry’s KSFs KSFs is a big determinant of just how is a big determinant of just how

financially financially and competitively successful and competitively successful it will it will be.be.



Key success factors Key success factors are the strategy elementsare the strategy elements, , product product attributes, resource strengthsattributes, resource strengths, competitive , competitive

capabilities, and market capabilities, and market achievements with achievements with the the greatest impact on greatest impact on future competitive future competitive success in success in

the marketplacethe marketplace..

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

between profit and loss.between profit and loss.


Example: Example: KSFs for Bottled Water IndustryKSFs for Bottled Water Industry

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

�� ImageImage to induce consumers to induce consumers to buy to buy a particular a particular firm’s firm’s

product (product (brand name and attractiveness of packaging brand name and attractiveness of packaging are key deciding factorsare key deciding factors).).

�� LowLow--cost production cost production capabilities capabilities to to keep selling prices keep selling prices competitive.competitive.

�� Sufficient sales Sufficient sales volumevolume to to achieve scale achieve scale economies in economies in marketing marketing expenditures.expenditures.





Example:Example: KSFs for the ReadyKSFs for the Ready--toto--Wear Wear

Apparel IndustryApparel Industry

�� Appealing designs and color Appealing designs and color combinations combinations to create to create

buyer appealbuyer appeal

�� LowLow--cost manufacturing cost manufacturing efficiencyefficiency to keep selling to keep selling

prices competitiveprices competitive

�� Strong network of retailers/companyStrong network of retailers/company--owned owned storesstoresto allow to allow stores to stores to keep bestkeep best--selling items in stockselling items in stock

�� Clever Clever advertising advertising to effectively convey to effectively convey a specific a specific

image to induce consumers to purchase a particular image to induce consumers to purchase a particular label.label.


Identifying Industry Key Success FactorsIdentifying Industry Key Success Factors

�� KSFs vary KSFs vary from industry to industry, and from industry to industry, and from from time to time to

time within the same industry, as driving forces and time within the same industry, as driving forces and competitive conditions changecompetitive conditions change..

�� Rarely does an industry have more than five KSFsRarely does an industry have more than five KSFs

�� Answers to three questions help identify industry’s Answers to three questions help identify industry’s KSFsKSFs►► On what basis do buyers of the industry’s product or service choose On what basis do buyers of the industry’s product or service choose

between the competing brands between the competing brands of sellersof sellers? That is, what product or ? That is, what product or service attributes are crucial?service attributes are crucial?

►► Given Given the nature of competitive rivalry and the competitive forces the nature of competitive rivalry and the competitive forces prevailing in the marketplace, prevailing in the marketplace, what resources what resources and competitive and competitive capabilities must a company have to be competitively successful?capabilities must a company have to be competitively successful?

►► What What shortcomings are almost certain to put a company at a shortcomings are almost certain to put a company at a significant significant competitive disadvantage?competitive disadvantage?


Using KSFs in Crafting Using KSFs in Crafting Company StrategyCompany Strategy

�� The The goal of strategists goal of strategists should be to design a strategy that allows should be to design a strategy that allows the the

company company to compare favorably visto compare favorably vis--àà--vis rivals vis rivals on each on each and every and every

one of the industry’s future KSFs and that aims at one of the industry’s future KSFs and that aims at being distinctly being distinctly better better than rivals on than rivals on one (one (or possibly two) of the KSFs. or possibly two) of the KSFs.

�� Firms Firms that stand out or excel on a particular KSF are likely that stand out or excel on a particular KSF are likely to enjoy to enjoy a a

stronger market positionstronger market position——being distinctly better than rivals on one being distinctly better than rivals on one or two key success factors or two key success factors often translates often translates into competitive into competitive

advantageadvantage..

Using Using the industry’s KSFs as cornerstones for the the industry’s KSFs as cornerstones for the firm’s firm’s strategy strategy and trying to gain sustainable competitive and trying to gain sustainable competitive

advantage advantage by excelling at one particular KSF by excelling at one particular KSF is is a a fruitful competitive fruitful competitive strategy strategy approach.approach.


Question 6:Question 6: Is the Industry Outlook Conducive Is the Industry Outlook Conducive

to Good Profitabilityto Good Profitability

�� Factors that determine an industry’s prospects for attractive profitability:Factors that determine an industry’s prospects for attractive profitability:

►► The The industry’s growth potential.industry’s growth potential.

►► Whether Whether and to what degree industry and to what degree industry profitability profitability will be favorably or unfavorably will be favorably or unfavorably

affected by affected by the prevailing the prevailing driving forces.driving forces.

►► The The anticipated strength of competitive forcesanticipated strength of competitive forces——the overriding issue here is the overriding issue here is

whether competitive whether competitive forces seem forces seem likely to intensify and squeeze industry likely to intensify and squeeze industry

profitability profitability to subpar levels or whether the to subpar levels or whether the company should company should be able to earn good be able to earn good

profits profits despite the expected strength of competitive forces.despite the expected strength of competitive forces.

►► Whether Whether the company is strongly or weakly positioned on the industry’s strategic the company is strongly or weakly positioned on the industry’s strategic

group map.group map.

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

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

industry confronts industry confronts severe problems severe problems relating to regulatory or environmental relating to regulatory or environmental issues, stagnating buyer demand, industry overcapacityissues, stagnating buyer demand, industry overcapacity, and , and so on.so on.



The The anticipated industry anticipated industry environment environment is fundamentally is fundamentally attractive if it attractive if it presents a presents a company with good opportunity for company with good opportunity for aboveabove--average average profitability.profitability.

The The industry outlook is industry outlook is fundamentally unattractive fundamentally unattractive if a if a

firm’s profit firm’s profit prospects are unappealingly lowprospects are unappealingly low..


Factors to Consider in Assessing Factors to Consider in Assessing

Industry AttractivenessIndustry Attractiveness

�� Future conditions in a particular industry are not equally attractive or Future conditions in a particular industry are not equally attractive or

unattractive unattractive to all industry participants and all potential to all industry participants and all potential entrants. entrants.

►► Even if a particular industry’s outlook is deemed unattractive, a favorably Even if a particular industry’s outlook is deemed unattractive, a favorably

situated and competitively capable company may see ample opportunity to situated and competitively capable company may see ample opportunity to

outcompete weaker rivals and significantly grow its revenues and profits.outcompete weaker rivals and significantly grow its revenues and profits.

►► A weak competitor A weak competitor in an attractive industry may in an attractive industry may conclude that conclude that fighting a fighting a steep steep

uphill battle against much stronger rivals holds little promise of eventual market uphill battle against much stronger rivals holds little promise of eventual market

success or even average profitability. success or even average profitability.

►► Industry outsiders may conclude that they Industry outsiders may conclude that they have the resources to easily have the resources to easily hurdle hurdle

the barriers to entering an attractive industry while the barriers to entering an attractive industry while other outsiders other outsiders may find the may find the

same industry same industry unattractive because unattractive because they they do not want to challenge market do not want to challenge market

leaders and leaders and have have better opportunities elsewherebetter opportunities elsewhere..

A A particular particular industry’s attractiveness depends in large part on whether a industry’s attractiveness depends in large part on whether a company company has the resource strengths and competitive capabilities to be has the resource strengths and competitive capabilities to be

competitively successful and profitable in that environment.competitively successful and profitable in that environment.





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

�� When a competitor decides an industry is attractive, it When a competitor decides an industry is attractive, it

should invest aggressively to capture the opportunities it should invest aggressively to capture the opportunities it sees and to improve its longsees and to improve its long--term competitive position in term competitive position in

the business.the business.

�� When a strong competitor concludes its industry is When a strong competitor concludes its industry is

relatively unattractive and lacking in opportunity, it may relatively unattractive and lacking in opportunity, it may elect to protect its present position, investing cautiously if elect to protect its present position, investing cautiously if

at all and looking for opportunities in other industries.at all and looking for opportunities in other industries.

�� A competitively weak company in an unattractive A competitively weak company in an unattractive

industry may see its best option as finding a buyer, industry may see its best option as finding a buyer,

perhaps a rival, to acquire its business.perhaps a rival, to acquire its business.


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