Analysis of the Competitive Environment

1
Analysis of the Competitive Environment
7
2
Strategic Groups

• Strategic groups are organisations within an
  industry with similar strategic characteristics,
  following similar strategies or competing on
  similar bases

3
Uses of Strategic Group Analysis

• To understand who are the most direct competitors
  of an organisation
• To establish the different bases of competitive
  rivalry within and between the strategic groups
• To assess if an organisation could move from one
  group to another
• Depends on barriers to entry
• To identify opportunities and threats
• Changes in the macro-environment may create
  strategic space

4
Figure 5.2 Map of strategic groups in the US
automobile market
The Faded Champions VW Audi, Rover Group
The Big Three GM, Ford, Chrysler
Broad line
The Samurai Toyota, Nissan, Honda, Mazda
Degree of Specialisation
Luxury cars Mercedes, BMW, Volvo, Saab Jaguar
Specialists Rolls-Royce, Ferrari, Aston
Martin, Lamborghini, Lotus, Morgan, McLaren
Narrow line
High
Low
Local Content
(brands now owned by large-scale American or
European manufacturers)
5
Industry evolution and forecasting

• The evolution of industries through three main
  stages
• - Emergence
• - Transformation to maturity
• - Decline

6
Emerging Industry Structure

• Stages in Market evolution
• Emergence stage
• Latent market people who share a similar need
  or want for sth. that does not yet exist.
• Diffused-preference market buyer preferences
  scatter evenly in a
  market.

7
Emerging Industry Structure

• Stages in Industry evolution
• Emergence stage
• Diffused-preference market buyer preferences
  scatter evenly in a market.

8
Emerging Industry Structure

• Emergence stage
• Strategies
• 1. A single-niche strategy
• 2. A multiple-niche strategy
• 3. A mass-market strategy

Emergence Stage
Large
Medium
Small
4
9
5
6
7
8
9
Emerging Industry Structure

• Emergence stage
• Strategies
• 1. A single-niche strategy new product to meet
  preferences of one of the corners of the market.
  (best suited for small firm)
• 2. A multiple-niche strategy two or more
  products simultaneously launched to capture two
  or more parts of the market.
• 3. A mass-market strategy new product designed
  for the middle of the market. (for large firm)

10
Mature Industry Structure
Opportunities
Industry Characteristics
refine current products
slowing growth in demand
technology standard exists
improve service
increasing international competition
process innovation
industry-wide profits declining
industry exit is beginning
11
Mature Industry Structure

• Market Fragmentation
• Market Consolidation

12
Mature Industry Structure
(a) Market-fragmentation stage
C

• Market growth slows down
• Market splits into smaller segments

AB
H
DE
J
XYZ
FG
K
L
M
13
Competitive Strategy

• Industry Structure
• Fragmented Industry
• Many small and medium-sized local companies
  compete for small shares of total market
• Focus strategies predominate

14
Fragmented Industry Structure
Opportunity
Industry Characteristics
Consolidation
large number of small firms
buy competitors
no dominant firms
build market power
no dominant technology
exploit economies of scale
commodity type products
low barriers to entry
few, if any, economies of scale
15
Fragmented Industries

• Low Overall Entry Barriers
• Absence of Economies of Scale or Experience Curve
• High Transportation Costs
• High Inventory Costs or Erratic Sales
  Fluctuations
• No Advantages of Size in Dealing with Buyer or
  suppliers
• Diseconomies of Scale in Some Important
• Diverse Market Needs
• High Product Differentiation
• Exit Barriers
• Local Regulation
• Government Prohibition of Concentration
• Newness

16
Industry Evolution
(b) Market consolidation stage
(a) Market-fragmentation stage
C
C
H
AB
H
AB
DE
DE
YZ
J
JK
X
XYZ
FG
K
FG
L
M
M
L

• Emerge the new attribute with
• Strong appeal

17
Competitive Strategy

• Industry Structure
• Consolidated industry
• Mature industry dominated by a few large
  companies
• Cost Leadership or Differentiation predominate

18
Overcoming Fragmentation

• Common approaches to consolidation
• Create Economies of Scale or Experience Curve
• Standardize Diverse Market Needs
• Neutralize or Split Off Aspects Most Responsible
  for Fragmentation
• Make Acquisition for a Critical Mass
• Recognize Industry Trends Early

19
Overcoming Fragmentation

• Common approaches to consolidation
• Create Economies of Scale or Experience Curve
• Technology change leads to economies of scale or
  experience curve , then consolidation can occur

Standardize Diverse Market Needs Product or
Marketing innovation can standardize heretofore
diverse market needs
20
Overcoming Fragmentation

• Common approaches to consolidation
• Neutralize or Split Off Aspects Most Responsible
  for Fragmentation
• Separate aspects from the rest of business
• Make Acquisition for a Critical Mass
• Ultimate some advantages to holding a significant
  share

21
Overcoming Fragmentation

• Common approaches to consolidation
• Recognize Industry Trends Early
• The primary source of fragmentation
• The newness of the industry
• Exogenous industry trends

22
Coping with Fragmentation

• Tightly Managed Decentralization
• Formula Facilities
• Increased Value Added
• Specialization by Product Type or Product Segment
• Specialization by Customer Types
• Specialization by Type of Order
• A Focused Geographic Area
• Bare Bones/ No Frills
• Backward Integration

23
Coping with Fragmentation

• Tightly Managed Decentralization
• Intense coordination
• Local management orientation
• High personal service
• Close control
• Formula Facilities
• View the key strategic variable in the business
  as the building of efficient, low cost facilities
  at multiple location

24
Coping with Fragmentation

• Increased Value Added
• Enhanced by forward integration from
  manufacturing into distribution
• Specialization by Product Type or Product Segment
• Specialize on a tightly constrain group of
  products.
• Specialization by Customer Types
• Specialization on a particular category of
  customer in the industry
• Customers has least bargaining leverage

25
Coping with Fragmentation

• Specialization by Type of Order
• Specialize in a particular type of order to cope
  with intense competitive pressure
• A Focused Geographic Area
• Blanketing a given geographic area by
  concentrating facilities, marketing attention and
  sales activity.

26
Coping with Fragmentation

• Bare Bones/ No Frills
• Maintaining a bare bones and no frills
  competitive posture
• Low overhead
• Low skilled employees
• Tight cost control
• Attention to detail
• Backward Integration
• Lower costs and put pressure on competitors who
  cannot afford such integration

27
Potential Strategic Traps

• Seeking Dominance
• Trying to be all things to all people generally
  maximizes vulnerability to the competitive forces
• Lack of Strategic Discipline
• Undisciplined or opportunistic strategy may work
  in the short run
• Over centralization
• Counterproductive
• Slow response time
• Lower the incentives
• Drive away skilled individuals necessary to
  perform many personal service
• Assumption that Competitors Have the Same
  Overhead and Objectives
• Overreactions to New Products
• Risk of overreacting to new products in ways that
  raise costs and overhead

28
Declining Industry Structure
Opportunities
Industry Characteristics
industry sales have sustained pattern of
decline
market leadership
niche
some well-established firms have exited
harvest
firms have stopped investing in maintenance
divest
29
Market Strategy in a Declining Industry
30
Leadership Strategy

• Aggressive behavior
• Acquire more market share
• Buying retiring competitor capacity
• Reduce competitor exit barriers take over
  long term contracts, private labels
• Signal staying intentions publicly
• Demonstrate clear superior strengths

31
Harvest

• Reduce models
• Shrink channels used
• Eliminate small customers
• Erode service
• Repair speed
• Sales service
• Deliveries

32
Niche

• Focus strategy
• Select a large pocket of demand within the
  declining industry

33
Industry Evolution
Source Adapted from OShaughnessy (1988)
34
Environment stability

• Determinants of environmental turbulence
• Association of high marketing turbulence
• - high of sales spent on marketing
• - novel market entrant
• - very aggressive leading competitor
• - threatening pressure by customer
• - demand outstripping industry capacity
• - emergence, decline or shifting stage of PLC
• - low profitability
• - high product differentiation
• - identification of latent needs a critical
  success factor

35
Environment stability

• Determinants of environmental turbulence
• Association of high innovative turbulence
• - high of sales spent on RD
• - frequent new products in the industry
• - short PLC
• - novel technologies emerging
• - many competing technologies
• - emergence, decline or shifting stage of PLC
• - low profitability
• - creativity is a critical success factor

36
SPACE Analysis

• Analysis extends environmental analysis
  beyond the consolidation of turbulence to look at
  industry strength and related this to the
  competitive advantage and financial strength of a
  company

37
Strategic Posturing Action Evaluation (SPACE)

• A very methodological tool for aiding in
  understanding the internal and external
  environments.
• Assign scores to the factors on a 0
  (unfavorable) to 6 (favorable) Scale
• Internal
• Financial strength (average)
• Competitive advantage (average - 6)
• External
• Industry attractiveness (average)
• Environmental stability (average - 6)

38
Scaling for SPACE Matrix-External

• Environmental Stability
• Technological changes
• Rate of inflation
• Demand variability
• Price range of competition
• Barriers to entry
• Competitive pressure
• Price elasticity
• Other

• Industry Attractiveness
• Growth potential
• Profit potential
• Financial stability
• Technological know-how
• Resource utilization
• Capital intensity
• Ease of market entry
• Productivity, capacity utilization
• Other

39
Scaling for SPACE Matrix-Internal

• Competitive Advantage
• Market share
• Product quality
• Product life cycle
• Product replacement cycle
• Customer loyalty
• Competition's capacity utilization
• Technological know-how
• Other

• Financial Strength
• ROI
• Leverage
• Liquidity
• Capital required/available
• Cash flow
• Ease of market exit
• Risk involved in business
• Other

40
Strategic Posturing Action Evaluation (SPACE)
Financial Strength
6
Competitive Advantage
Industry Attractiveness
(6)
6
Less of a competitive advantage
More environmental turbulence
(6)
Environmental Stability
41
Ex of Factors Determining Competitive Advantage
Average 6 -2.4
42
Strategic Posturing Action Evaluation (SPACE)
Financial Strength
6
AGGRESSIVE
CONSERVATIVE
-2.4
Competitive Advantage
Industry Attractiveness
(6)
6
DEFENSIVE
COMPETITIVE
(6)
Environmental Stability
43
Figure 5.5 SPACE analysis map
Financial Strength
COMPANY DIMENSIONS
Conservative
Aggressive
b
Competitive Disadvantage
a
A
Industry Strength
Strategic postures
B
INDUSTRY DIMENSIONS
Competitive
Defensive
Environmental Stability
Source Based on Rowe et al (1989) Exhibit 6.10,
p145
44
SPACE

• Aggressive quadrant
• - enjoying significant advantages yet are likely
  to face threats from new competition.
• Conservative posture
• - is the typically of companies in mature
  markets where the lack of need for investment has
  generate financial surpluses.

45
SPACE

• Competitive posture
• - typically of a company with a competitive
  advantage in an attractive industry
• Defensive posture
• - having little residual strength to combat
  competition, they need to foster resources by
  operating efficiently in order to concentrate on
  ones they have a chance of defending

46
The advantage matrix

• The quadrants of the advantage matrix show how
  relationships between relative size and return on
  assets for companies can differ

47
The Advantage Matrix
Specialised
. . . . .. . .. . .. . . .
Fragmented
. . . .. . ..
ROA
ROA
Many
RS
RS
Number of ways to achieve advantage
Volume
Stalemate
ROA
. . .. .. .. . . . .
Few
ROA
. . .. .. .. . . . .
ROA Return on Assets RS Relative Size
RS
RS
Small
Large
Potential size advantage
Source Based on unpublished material from the
Boston Consulting Group,
48
The advantage matrix

• The stalemate quadrant
• represents markets with few ways of achieving
  advantage and where the potential size advantage
  is small.
• The volume quadrant
• represents markets where the opportunities for
  differentiation remain few yet where potential
  size advantages remain great.

49
The advantage matrix

• Specialized
• companies within the same market have differing
  return on scale
• Fragmented
• the markets requirement are less well defined
  than the stalemate, volume or specialized cases.