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EXTERNAL ANALYSIS

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Title: EXTERNAL ANALYSIS


1
Analysis is the critical starting point of
strategic thinking.
  • EXTERNAL ANALYSIS
  • (INDUSTRY AND COMPETITION)

Payne (4)
Key Text Readings Chapter 2, Chapter 3, Appendix
A
Kenichi Ohmae
2
Assessing
Environmental Scanning
Formulation Planning
Environmental Monitoring
Forecasts
projections
Forecasting Involves the development of
plausible projections about the direction, scope,
speed and intensity of environmental change.
Competitive Intelligence
3
Environmental Analysis Levels
  • EXTERNAL or MACRO-ENVIRONMENT
  • Industry and competitive conditions
    (opportunities and threats)
  • INTERNAL or MICRO-ENVIRONMENT
  • Its competencies, capabilities, resources, and
    competitiveness (strengths and weaknesses)

4
Environmental Analysis Levels (of a Health Care
Organization)
  • General Environment
  • Government Institutions
  • Educational Institutions
  • Religious Institutions
  • Research Organizations
  • Consumers
  • Health Care Environment
  • Planning / Regulatory
  • Primary Providers
  • Secondary Providers
  • Provider Representative
  • Consumers/Patients
  • Service Area
  • Competitors
  • Government Services
  • Businesses
  • Non-profits
  • Other Locals
  • Educational Institutions
  • Individuals/Consumers

Organization
5
Macro Environment (1)
  • Socio-cultural segment
  • Women in the workplace
  • Workforce diversity
  • Attitudes about quality of worklife
  • Concerns about environment
  • Shifts in work and career preferences
  • Shifts in product and service preferences
  • Political/Legal Segment
  • Antitrust laws
  • Taxation laws
  • Deregulation philosophies
  • Labor training laws
  • Educational philosophies and policies

6
Macro Environment (2)
  • Economic segment
  • Inflation rates
  • Interest rates
  • Trade deficits or surpluses
  • Budget deficits or surpluses
  • Personal savings rate
  • Business savings rates
  • Gross domestic product
  • Technological Segment
  • Product innovations
  • Applications of knowledge
  • Focus of private and government-supported RD
    expenditures
  • New communication technologies

7
Macro Environment (3)
  • Global Segment
  • Important political events
  • Critical global markets
  • Newly industrialize countries
  • Different cultural and institutional attributes
  • Demographic
  • Population size
  • Age structure
  • Geographic distribution
  • Ethnic mix
  • Income distribution

8
Impact of General Environmental Trends on Various
Industries
Segment/Trends/Events Industry Positive Neutral Negative
Demographic Aging population Rising affluence Health Care Baby products Brokerage services Fast foods Upscale pets and supplies ? ? ? ? ?
Sociocultural More women in the workforce Greater concern for health fitness Clothing Baking Products (staples) Home exercise equipment Meat products ? ? ? ?
Political/legal Tort reform ADA (Americans with Disabilities Act) Legal Services Auto Manufacturing Retail Manufacturers of elevators, escalators ramps ? ? ? ?
Technological Genetic engineering Pollution/global warming Pharmaceutical Publishing Engineering Services Petroleum ? ? ? ?
Economic Interest Rate Increases Residential construction Most common grocery products ? ?
Global Increasing Global Trade Emergence of China as an economic power Shipping Personal service Soft drinks Defense ? ? ? ?
9
Five Forces Model of Competition
Substitute Products (of firms in other industries)
Threat of Substitutes
Rivalry Intensity Among Competing Sellers
Suppliers of Key Inputs
Buyers
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Potential New Entrants
10
Analyzing the Five Competitive Forces How to Do
It
  • Assess strength of each competitive force
    (Strong? Moderate? Weak? )
  • Rivalry among competitors
  • Substitute products
  • Potential entry
  • Bargaining power of suppliers
  • Bargaining power of buyers
  • Explain how each force acts to create competitive
    pressure
  • Decide whether overall competition is brutal,
    fierce, strong, normal/moderate, or weak

11
Rivalry Among Competing Sellers
  • Usually the most powerful of the five forces
  • Check which weapons of competitive rivalry are
    most actively used by rivals in jockeying for
    position
  • Price
  • Quality
  • Performance features offered
  • Customer service
  • Warranties/guarantees
  • Advertising/promotions
  • Dealer networks
  • Product innovation

12
What Causes Rivalry to Be Stronger?
  • Lots of firms, more equal in size and capability
  • Slow market growth
  • Industry conditions tempt some firms to go on the
    offensive to boost volume and market share
  • Customers have low costs in switching brands
  • One or more firms initiates moves to bolster
    their standing at expense of rivals
  • A successful strategic move carries a big payoff
  • Costs more to get out of business than to stay in
  • Firms have diverse strategies, corporate
    priorities, resources, and countries of origin

13
Competitive Force of Threat of New Entry
  • Seriousness of threat depends primarily on
  • Barriers to entry
  • Reaction of existing firms to entry
  • Barriers exist when
  • Newcomers confront obstacles
  • Economic factors put potential entrant at a
    disadvantage relative to incumbent firms

14
Common Barriers to Entry
  • Economies of scale
  • Inability to gain access to specialized
    technology
  • Existence of learning/experience curve effects
  • Strong brand preferences and customer loyalty
  • Capital requirements and/or other specialized
    resource requirements
  • Cost disadvantages independent of size
  • Access to distribution channels
  • Regulatory policies, tariffs, trade restrictions

15
How to Tell Whether Substitute Products Are a
Strong Force
  • Sales of substitutes are growing rapidly
  • Producers of substitutes are planning to add new
    capacity
  • Substitutes profits are up
  • The competitive threat of substitutes is stronger
    when they are
  • Readily available
  • Attractively priced
  • Believed to have comparable or better performance
    features
  • Customer switching costs are low

16
Competitive Force of Substitute Products
Concept
  • Substitutes matter when customers are attracted
    to the products or services of firms in other
    industries

Examples
  • Eyeglasses vs. Contact Lens
  • MD vs. DPM vs. DC
  • Plastic vs. Glass vs. Metal

17
Competitive Force of Suppliers
  • Suppliers are a strong competitive force when
  • Item makes up large portion of product costs, is
    crucial to production process, and/or
    significantly affects product quality
  • It is costly for buyers to switch suppliers
  • They have good reputations and growing demand
  • They can supply a component cheaper than industry
    members can make it themselves
  • They do not have to contend with substitutes
  • Buying firms are not important customers
  • Suppliers are a stronger force the more they can
    exercise power over
  • Prices charged
  • Quality/performance of items supplied
  • Amounts and delivery times

18
Competitive Force of Buyers
  • Buyers are a strong competitive force when
  • They are large and purchase a sizable percentage
    of industrys product
  • They buy in volume quantities
  • They can integrate backward
  • Industrys product is standardized
  • Their costs in switching to substitutes or other
    brands are low
  • They can purchase from several sellers
  • Product purchased does not save buyer money
  • Buyers are a stronger competitive force the more
    they have leverage to bargain over
  • Price or Quality or Service
  • Other terms and conditions of sale

19
Strategic Implications of the Five Forces
  • Competitive environment is unattractive when
  • Rivalry is strong
  • Entry barriers are low
  • Competition from substitutes is strong
  • Suppliers and customers have considerable
    bargaining power
  • Competitive environment is ideal when
  • Rivalry is moderate
  • Entry barriers are high
  • Good substitutes do not exist
  • Suppliers and customers are in a weak bargaining
    position
  • Objective is to craft a strategy that will
  • Insulate firm from competitive forces
  • Influence competitive pressures in ways that
    favor firm
  • Build a sustainable competitive advantage

20
Stakeholder Analysis
21
Who are Stakeholders?
  • Identifying stakeholders is one way of sizing up
    the internal and external constituents that
    influence the firm.
  • Stakeholders are individuals and groups who can
    affect and are affected by a firms strategic
    outcomes and who have enforceable claims on its
    performance
  • Stakeholders include individuals, groups, and
    other organizations who have an interest in the
    actions of an organization and who have the
    ability to influence it
  • Stakeholders may be categorized as internal,
    interface and external.

22
Building Stakeholder Relationships
  • Managing down
  • Relationships with subordinates
  • Managing up
  • Relationships with bosses and corporate staff
  • Managing out
  • Relationships with customers and suppliers
  • Managing across
  • Relationships with peers

23
Stakeholder Analysis
24
Examples of Stakeholder Groups
  • Internal stakeholders
  • Management
  • Professionals
  • Support Personnel
  • Interface stakeholders
  • Shareholders
  • Board of Directors
  • Medical Staff
  • External stakeholders
  • Suppliers
  • Competitors
  • Government Agencies
  • Patients

25
Relationships with Stakeholders
  • Organizations have dependency relationships with
    stakeholders
  • Firms are not equally dependent on all
    stakeholders and not every stakeholder has the
    same level of influence
  • An effective organization strategy requires
    consensus from a plurality of key stakeholders
    about what it should be doing and how these
    things should be done

26
Key Success Factors
  • KSFs or CSFs are competitive elements that most
    affect every strategic group members ability to
    prosper in the marketplace
  • Specific strategy elements
  • Product attributes
  • Resources or Competencies
  • Competitive capabilities
  • KSFs spell difference between
  • Profit and loss
  • Competitive success or failure

Ask For our organization to be successful, we
MUST be especially good at ___________?
27
Key Success Factors
Optimize Performance
A sound strategy incorporates efforts to be
competent on all industry key success factors and
to excel on at least one factor!
28
Identifying Key Success Factors
  • Answers to three questions pinpoint KSFs
  • On what basis do customers choose between
    competing brands or offerings of sellers?
  • What must a seller/provider do to be
    competitively successful -- what resources and
    competitive capabilities does it need?
  • What does it take for sellers/providers to
    achieve a sustainable competitive advantage?
  • KSFs consist of the 3 - 5 really major
    determinants of financial and competitive success
    in a strategic group.
  • (Recall our discussion on developing
    objectives?)

29
Common Types of Key Success Factors
30
Example KSFs for the Refractive Eye Surgery
Industry
  • High numbers of procedures, which is a component
    of price, experience, and service.
  • Low rate of complications and high rate of
    success (20/20)
  • Positive word-of-mouth and reputation

31
Strategic Group Mapping
  • One technique for revealing the different
    competitive positions of industry rivals is
    strategic group mapping
  • A strategic group consists of those rivals with
    similar competitive approaches in an industry

32
Strategic Group Mapping
  • Firms in same strategic group have two or more
    competitive characteristics in common . . .
  • Sell in same price/quality range
  • Cover same geographic areas
  • Be vertically integrated to same degree
  • Have comparable product line breadth
  • Emphasize same types of distribution channels
  • Offer buyers similar services
  • Use identical technological approaches

33
Procedure Constructing a Strategic Group Map
  • STEP 1 Identify competitive characteristics
    that differentiate firms in an industry from one
    another
  • STEP 2 Plot firms on a two-variable map using
    pairs of these differentiating characteristics
  • STEP 3 Assign firms that fall in about the same
    strategy space to same strategic group
  • STEP 4 Draw circles around each group, making
    circles proportional to size of groups
    respective share of total industry sales

34
Example Strategic Group Map of Retail Jewelry
Industry
High
Small Independent Guild Jewelers
National, Regional, Local Guild - Fine
Jewelry Stores
Prestige Departmentalized Retailers
Upscale Department Stores
Price / Quality / Image
National Jewelry Chains Local Jewelers
Medium
Chains
Credit Jewelers
Catalog Showrooms Off-Price Retailers
Discounters
Outlet Mall Retailers
Low
Broad-category Retailers
Specialty Jewelers
Full-line Jewelers
Limited-category Retailers
Product Line / Merchandise Mix
35
Guidelines Strategic Group Maps
  • Variables selected as axes should not be highly
    correlated
  • Variables chosen as axes should expose big
    differences in how rivals compete
  • Variables do not have to be either quantitative
    or continuous
  • Drawing sizes of circles proportional to combined
    sales of firms in each strategic group allows map
    to reflect relative sizes of each strategic group
  • If more than two good competitive variables can
    be used, several maps can be drawn

36
Interpreting Strategic Group Maps(i.e.,
Implications of the Strategic Groups Concept)
  • Driving forces and competitive pressures often
    favor some strategic groups and hurt others
    such recognition may be the key to developing a
    competitive advantage.
  • Profit potential of different strategic groups
    varies due to strengths and weaknesses in each
    groups market position. Important niches may be
    identified that are not currently being filled by
    competitors.
  • The closer strategic groups are on map, the
    stronger the competitive rivalry among member
    firms tends to be (Organizations most like yours
    are the most dangerous.)

37
Within or Between Strategic Groups
High
Price / Quality / Image
Medium
Low
Broad-category Retailers
Specialty
Full-line Providers
Limited-category Retailers
Product Line / Merchandise Mix
38
The World Automobile Industry
High
Ferrari Lamborghini Porsche
Mercedes BMW
Toyota Ford General Motors Chrysler Honda Nissan
Price
Hyundai Kia
High
Low
Breadth of Product Line
Low
39
Strategic Groups Within the World Petroleum
Industry
INTERNATIONAL UPSTREAM COMPANIES
INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGI
ONALLY FOCUSED DOWNSTREAM
Premier Oil
Apache
Dana Petroleum
Kuwait Petroleum
PDVSA
INTEGRATED DOMESTIC OIL COMPANIES
NATIONAL PRODUCTION COMPANIES
Iran NOC
0 0.5 1.0 1.5 2.0
Exxon -Mobil
Statoil
BP-Amoco
Vertical Balance
Chevron Texaco
Petronas
Pemex
INTEGRATED INTERNATIONAL MAJORS
Royal Dutch -Shell Gp.
Conoco Phillips ENI Elf-Fina-Total Repsol YPF
Lukoil
PetroChina
Indian Oil
Phillips
Petrobras
ENI
Nippon
INTERNATIONAL DOWNSTREAM OIL COMPANIES
Repsol
Neste Ashland
Valero
Sunoco
0 10 20 30 40 50 60 70 80
NATIONALLY-FOCUSED DOWNSTREAM COMPANIES
Geographical Scope
40
Competitor Analysis and Strength Assessment
  • Successful strategists take great pains in
    scouting competitors
  • Understanding their strategies
  • Watching their actions
  • Evaluating their vulnerability to driving forces
    and competitive pressures
  • Sizing up their resource strengths and weaknesses
    and their capabilities
  • Trying to anticipate rivals next moves

41
Predicting Strategic Moves of Rivals
  • A firms own best strategic moves are affected
    by
  • Current strategies of competitors
  • Actions competitors are likely to take next
  • Predicting rivals next moves involves
  • Analyzing their current competitive positions
  • Examining public pronouncements about what it
    will take to be successful in industry
  • Gathering information from grapevine about
    current activities and potential changes
  • Studying past actions and leadership
  • Determining who has flexibility to make major
    strategic changes and who is locked into pursuing
    same basic strategy

42
Categorizing the Objectives and Strategies of
Competitors
  • Local
  • Be dominant leader
  • Aggressive expansion via acquisition internal
    growth
  • Getting stronger on the move
  • Mostly offensive
  • Striving for low-cost leadership
  • Regional
  • Overtake industry leader
  • Well-entrenched
  • Mostly defensive
  • Mostly focusing on a market niche
  • National
  • Be among industry leaders
  • Expansion via internal growth
  • Stuck in the middle of the pack
  • Combination of offensive defensive
  • Pursuing differentiation based on
  • Quality
  • Service
  • Technology superiority
  • Breadth of product line
  • Image reputation
  • More value for the money
  • Other attributes
  • Multi-country
  • Move to top 10
  • Expansion via acquisition
  • Going after a different position
  • Aggressive risk-taker
  • Global
  • Move up a notch in rankings
  • Hold on to present share
  • Struggling losing ground
  • Conservative follower
  • Maintain current position
  • Give up present share to achieve short-term
    profits
  • Retrenching to a position that can be defended
  • Just survive

43
Assessing a Companys Competitive Strength
versus Key Rivals
  • 1. List industry key success factors and other
    relevant measures of competitive strength
  • 2. Rate firm and key rivals on each factor using
    rating scale of 1 - 10 (1 weak 10 strong)
  • 3. Decide whether to use a weighted or
    unweighted rating system
  • 4. Sum individual ratings to get overall measure
    of competitive strength for each rival
  • 5. Determine whether the firm enjoys a
    competitive advantage or suffers from competitive
    disadvantage

44
Unweighted Competitive Strength Assessment
KSF/Strength Measure
ABC Co.
Rival 1
Rival 2
Rival 3
Rival 4
Quality/product performance
8
5
10
1
6
Reputation/image
8
7
10
1
6
Manufacturing capability
2
10
4
5
1
Technological skills
10
1
7
3
8
Dealer network/distribution
9
4
10
5
1
New product innovation
9
4
10
5
1
Financial resources
5
10
7
3
1
Relative cost position
5
10
3
1
4
Customer service capability
5
7
10
1
4
Overall strength rating
61
58
71
25
32
Rating Scale 1 Very weak 10 Very strong
45
A Weighted Competitive Strength Assessment
KSF/Strength Measure
Rival 1
Rival 2
ABC Co.
Rival 3
Rival 4
Weight
Quality/product performance
5/0.50
10/1.00
8/0.80
1/0.10
6/0.60
0.10
Reputation/image
7/0.70
10/1.00
8/0.80
1/0.10
6/0.60
0.10
Manufacturing capability
10/1.00
4/0.40
2/0.20
5/0.50
1/0.10
0.10
Technological skills
1/0.05
7/0.35
10/0.50
3/0.15
8/0.40
0.05
Dealer network/distribution
4/0.20
10/0.50
9/0.45
5/0.25
1/0.05
0.05
New product innovation
4/0.20
10/0.50
9/0.45
5/0.25
1/0.05
0.05
Financial resources
10/1.00
7/0.70
5/0.50
3/0.30
1/0.10
0.10
Relative cost position
10/3.50
3/1.05
5/1.75
1/0.35
4/1.40
0.35
Customer service capability
7/1.05
10/1.50
5/0.75
1/0.15
4/1.60
0.15
Sum of weights
1.00
Overall strength rating
6.20
8.20
7.00
2.10
2.90
Rating Scale 1 Very weak 10 Very strong
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