Chapter 3

STRATEGY Chapter 3
Core Concepts and Analytical Approaches PowerPoint Slides
Chapter 3 Learning Objectives

2nd Edition
1. To gain command of the basic concepts and analytical
tools widely used to diagnose a company’s industry
and competitive conditions.
2. To become adept in recognizing the factors that cause
competition in an industry to be fierce, more or less
normal, or relatively weak.
3. To learn how to determine whether an industry’s
outlook presents a firm with sufficiently attractive
opportunities for growth and profitability.
4. To understand why in in--depth evaluation of specific
industry and competitive conditions is a prerequisite to
crafting a strategy well matched to a firm’s situation.
Copyright © 2012 Glo-Bus Software, Inc. 3–4
Chapter 3 Roadmap Understanding a Company’s Situation
The Strategically Relevant Components in the External Environment

Actions to steer a company in a different
Thinking Strategically About An Industry and Its Competitive
Environment direction or alter its strategy should always be
► Question 1:
1: What Kinds of Competitive Forces Are Industry Members predicated on deep understanding of two facets
Facing
Facing,, and How Strong Is Each Force? of a company’s situation:
► Question 2:
2: What Forces Are Driving Industry Change and What
Impacts Will They Have? ► The industry and competitive environment in which
► Question 3:
3: What Market Positions Do Rivals Occupy
Occupy—
—Who Is Strongly the company operates and the forces acting to
Positioned and Who Is Not? reshape this environment
► Question 4:
4: What Strategic Moves Are Rivals Likely to Make Next?
► The company’s own market position and
► Question 5:
5: What Are the Key Factors for Future Competitive Success?
competitiveness—
competitiveness —its resources and capabilities
capabilities,, its
► Question 6:
6: Does the Outlook for the Industry Present the Company strengths and weaknesses vis
vis--à-vis rivals, and its
with Sufficiently Attractive Prospects for Profitability?
windows of opportunity.
Copyright © 2012 Glo-Bus Software, Inc. 3–5 Copyright © 2012 Glo-Bus Software, Inc. 3–6
Figure 3.1 From Thinking Strategically about the Company’s The Strategically Relevant Components
Situation to Choosing a Strategy
of a Firm’s External Environment
All companies operate in a “macro-
“macro-environment” that is
shaped by an assortment of external factors and
influences that are important enough to have a bearing
on a firm’s decisions about its direction, objectives,
strategy, and business model.
These forces and influences include:
► General economic conditions and global factors
► Population demographics
► Societal values and lifestyles
► Political, regulatory, and legal factors
► Technology and environmental factors
► The immediate industry and competitive arena in which the
firm operates
Copyright © 2012 GLO-BUS Software, Inc. Page 1

STRATEGY Chapter 3
Figure 3.2 The Components of a Company’s Macroenvironment Thinking Strategically about a Firm’s
Industry and Competitive Environment
Thinking strategically about a firm’s industry and
competitive environment entails getting clear answers to
6 questions:
1. What kinds of competitive forces are industry members facing,
and how strong is each force?
2. What forces are driving changes in the industry, and what impact
will these changes have on competitive intensity and industry
profitability?
profitability?
3. What market positions do industry rivals occupy—
occupy—who is strongly
positioned and who is not?
4. What strategic moves are rivals likely to make next?
5. What are the key factors for future competitive success?
6. Is the industry outlook conducive to good profitability?
profitability?
Question 1: What Kinds of Competitive Forces Figure 3.3

The Five-Forces Model
Are Industry Members Facing?
Facing? of Competition:
A Key Analytical Tool
The strength or weakness of competition in an

industry is a function of five types of competitive
pressures:
1. The market maneuvering and jockeying for buyer
patronage that goes on among rival sellers.
sellers.
2. The threat of new entrants into the market.
3. The actions of firms in other industries to win buyers
over to their substitute products
products.. y
4. The bargaining power exercised by suppliers

5. The bargaining power exercised by buyers
How to Analyze the Five Competitive Forces Core Concept
Competitive maneuvering among industry rivals is

Identify the specific competitive pressures
Step 1 associated with each of the five forces. ever-
ever-changing, as competing sellers initiate round
after round of offensive and defensive moves,
Evaluate how strong the pressures comprising emphasizing first one mix of competitive weapons
Step 2 each of the five forces are (fierce, strong,
moderate to normal, or weak).
and then another in efforts to improve their market
positions.
Determine whether the collective strength of
Step 3 the five competitive forces is conducive to
earning attractive profits.
Copyright © 2012 Glo-Bus Software, Inc. 3–13 Copyright © 2012 Glo-

Glo-Bus Software, Inc. 3–14

STRATEGY Chapter 3
Competitive Pressures Created by the Why Rivalry Is Usually the Strongest

Rivalry among Competing Sellers of the Five Competitive Forces
A market is a competitive battlefield where the When one competitor deploys a strategy or makes a new
strategic move that produces good results, its rivals typically
contest among industry rivals is ongoing and have little choice but to respond with offensive or defensive
dynamic. countermoves of their own.
► Each competing company is motivated to employ This pattern of action and reaction, move and countermove,
whatever “weapons” in its business arsenal it believes adjust and readjust produces an always evolving competitive
will attract and retain buyers, strengthen its market landscape, with companies gaining or losing momentum in
position, and yield good profits. the marketplace according to whether their latest strategic
maneuvers succeed or fail.
► The challenge is to craft a competitive strategy that, at
But the winners—
winners—the current market leaders
leaders—
—have no
the very least, allows a company to hold its own against
guarantees of continued leadership; their market success is
rivals and that, more ideally, will produce a competitive no more durable than the power of their latest strategies to
edge over rivals. fend off the latest strategies of ambitious challengers.
Figure 3.4 The Typical “Weapons” That Companies Can Use to Figure 3.4 (cont’d)
Attract Buyers and Outmaneuver Rivals The Factors Affecting
the Strength of Rivalry
• Lower prices • Low interest rate financing

• More or different features • Higher levels of advertising
• Better product performance • Stronger product innovation
• Higher quality capabilities
• Stronger brand name and image • Better customer-service
capabilities
• Wider selection of models and
styles • Stronger capabilities to provide
buyers with custom-made
• Bigger/better dealer network
products
• Better warranty coverage
• Quicker or cheaper delivery
What Causes Rivalry to Become Stronger? What Causes Rivalry to Become Stronger?
Rivalry intensifies when:

Rivalry tends to be more intense when
when::
► Competing sellers are active in launching fresh actions to boost their
market standing and business performance. ► Buyer costs to switch brands are low.
► Indicators of active rivalry include: ► Rivals are dissatisfied with their position and market share
• Lively price competition make moves to attract more customers.
• Rapid introduction of next-
next-generation products
► Rivals have diverse objectives and strategies and/or are
• A race among industry members to more strongly differentiate their products
from those of rivals
located in different countries.
• Frequent use of such marketing tactics as special sales promotions, bursts ► Outsiders acquire weak competitors and try to turn them
of advertising
advertising,, rebates,
rebates, or low
low--interest
interest--rate financing to spur sales. into major contenders.
• Active efforts on the part of industry members to build stronger dealer
networks or expand their presence in foreign markets or otherwise expand ► One or more rivals have particularly powerful strategies
their distribution capabilities that are forcing other rivals to scramble to stay in the
• Active efforts by many industry members to gain a market edge by game.
game.
developing valuable expertise and capabilities that their rivals would be
hard
hard--pressed to match. ► Buyer demand is growing slowly (or even declining)

STRATEGY Chapter 3
What Causes Rivalry to Become Weaker? Characterizing Industry Rivalry
When competitors engage in protracted price wars or

Rivalry tends to be less intense when: Cutthroat
habitually undertake other aggressive strategic moves
► Industry members move infrequently or in a non-
non-aggressive or Brutal that prove mutually destructive to profitability.
manner to draw sales and market share away from rivals.
When the battle for market share is so vigorous that the
► Buyer demand is growing rapidly. Fierce to
profit margins of most industry members are squeezed to
Strong bare-bones levels.
► The products of rival sellers are strongly differentiated and
customer loyalty to their preferred brand is high
high..
When the maneuvering among industry members, while
► Buyer costs to switch brands are high.
high. Moderate
lively and healthy, still allows most industry members to
or Normal earn acceptable profits.
► There are so many industry members that any one company’s
initiatives to grow its business have little direct impact on rival
When most companies in the industry are relatively well
businesses and thus provoke little need for retaliation. satisfied with their sales growth and market shares, rarely
Weak undertake offensives to steal customers away from one
another, and—because of weak competitive forces—earn
consistently good profits and returns on investment.
Competitive Pressures Associated With Common Barriers to Entry

the Threat of Potential Entry
Cost advantages enjoyed by industry incumbents
The impact of the threat of the entry of new firms
Strong brand preferences and high degrees of customer
into a market on increasing competitive pressures loyalty
faced by industry members depends on: High capital requirements for market entry
The size of the pool of likely entry candidates and the The difficulties of building a network of distributors or
resources at their command retailers and securing space on retailers’ shelves.
Whether the likely entry candidates face high or low Restrictive regulatory policies that limit/bar new entrants
entry barriers Tariffs and international trade restrictions
How attractive the growth and profit prospects are for The ability and willingness of industry incumbents to
new entrants launch strong maneuvers to combat a newcomer’s efforts
to secure a profitable volume of sales
The Cost Advantages of Incumbents: Figure 3.5 Factors Affecting the Threat of Entry
An Important Entry Barrier

Existing industry members frequently have cost advantages that a
newcomer cannot easily overcome:
1. Scale economies in production, distribution, or other activities
2. Learning-
Learning-based costs savings that accrue from in-in-industry
experience in performing certain activities such as manufacturing
or new product development or inventory management
3. Cost
Cost--savings accruing from patents or proprietary technology
4. Partnerships with the best and cheapest suppliers of raw materials
and components
5. Favorable locations
6. Low fixed costs (because incumbents have older facilities that
have been mostly depreciated)
depreciated)

STRATEGY Chapter 3
Competitive Pressures Associated When Is the Threat of Entry Weaker?

with the Threat of New Entrants
Entry threats are stronger when: Entry threats are weaker when:
► The pool of entry candidates is large and some have resources ► The pool of entry candidates is small.
that make them strong market contenders.
► Entry barriers are high.
► Entry barriers are low or can be readily hurdled by the likely
entry candidates. ► Existing competitors are struggling to earn good profits.
► Industry members can expand their presence into other product ► The industry’s outlook is risky or uncertain.
segments or geographic areas.
► Buyer demand is growing slowly or is stagnant.
► Newcomers can expect to earn attractive profits.
► Buyer demand is growing rapidly.
► Industry members will strongly contest the efforts of
new entrants to gain a market foothold.
► Industry members are unable (or unwilling) to strongly contest
the entry of newcomers.
newcomers.
The Best Test of Whether the Entry of Competitive Pressures from the Sellers
New Competitors Is Likely of Substitute Products
Concept
Are the industry’s growth and profit
► Substitutes matter when customers are attracted
prospects strongly attractive to potential to the products of firms in other industries.
entry candidates?
Examples of Substitutes
A “Yes” answer = Threat of potential entry is a ► Gasoline-powered vehicles versus battery
Gasoline- battery--
strong competitive force powered vehicles
► Cell phones versus phones that use land lines
A “No” answer = Threat of potential entry is a
weak competitive force ► Movie theaters versus Netflix
► Music CDs versus digital music players (iPods)
(iPods)
Figure 3.6 Factors Affecting Competition from Substitute Products When Are Substitute Products
a Strong Competitive Force?
The strength of competitive pressures from
substitute products depends on:
► Whether substitutes are readily available and
attractively priced.
buyers ► Whether buyers view substitutes as being
comparable or better in term of attributes.
► How much it costs buyers to switch to substitutes.
The lower the price of substitutes, the higher their

quality and performance—and the lower the user’s
Rule switching costs, the more intense the competitive
pressures posed by substitute products.

STRATEGY Chapter 3
When Is Competition from When Is Competition from

Substitutes Stronger? Substitutes Weaker?
Competitive pressures from substitutes are Competitive pressures from substitutes are
stronger when: weaker when:
► They are readily available or new ones are emerging. ► Good substitutes are not readily available or don’t
► They are attractively priced. exist.
► Substitutes are higher priced relative to the
► They have comparable or better performance
features. performance they deliver.
► End users have high costs in switching to substitutes.
► They come with low switching costs for end users.
► Users are comfortable with their use.
Three Signs that Substitute Products Competitive Pressures Stemming from

Are a Strong Competitive Force the Bargaining Power of Suppliers
1. Sales of substitutes are growing faster than Whether the relationships between industry
overall sales of the industry in question. members and their suppliers represent a weak,
► (an indication that the sellers of substitutes are moderate, or strong competitive force depends
stealing the industry’s customers away) on the degree to which suppliers can influence
the terms and conditions of supply in their favor.
2. The producers of substitute products are
adding new production capacity. Powerful or influential suppliers can create
3. Profits of the producers of substitutes are competitive pressures because of their ability
rising. to charge industry members higher prices
and/or make it difficult or costly for industry
members to switch to other suppliers.
Figure 3.7 Factors Affecting the Bargaining Power of Suppliers Factors That Determine the Strength
of Supplier Bargaining Power
Whether certain needed inputs are in short supply.

Whether certain suppliers provide a differentiated input that
enhances the performance or quality of the industry’s product.
Whether certain suppliers provide equipment or services that
deliver valuable cost-
cost-saving efficiencies to industry members
in operating their production processes.
Whether the item being supplied is a standard item or
commodity that is readily available from a host of suppliers at
the going market price.
Whether it is difficult or costly for industry members to switch
their purchases from one supplier to another or to switch to
attractive substitute inputs.

STRATEGY Chapter 3
Factors That Determine the Strength When Is the Bargaining Power

of Supplier Bargaining Power (cont’d) of Suppliers Stronger?
Whether suppliers provide an item that accounts for a sizable Supplier bargaining power is stronger when:
fraction of the costs of the industry’s product.
► Industry members incur high costs in switching
Whether industry members are major customers of suppliers
suppliers.. suppliers..
suppliers
Whether a few large suppliers are regarded as the best and ► Needed inputs are in short supply, giving suppliers
most reliable sources of a particular item.
item. more leverage in setting prices.
Whether it makes good economic sense for industry members ► A supplier has a differentiated input that enhances
to integrate backward and self-
self-manufacture items they have the quality or performance of sellers’ products or is a
been buying from suppliers.
suppliers. critical part of sellers’ production processes.
Whether suppliers have the resources and profit incentive to ► There are few suppliers of a particular input.
integrate forward into the business of the customers they are ► A supplier can integrate forward into the business of
supplying..
supplying
industry members and become a powerful rival.
When Is Supplier Bargaining Power Weaker? Competitive Pressures Stemming

from the Bargaining Power of Buyers
Supplier bargaining power is weaker when: Buyers can exert strong competitive pressures
► The item being supplied is a “commodity” that is readily available on industry members when:
from many suppliers at the going market price
► Seller switching costs to alternative suppliers are low.
► Some or many buyers have sufficient bargaining
leverage to obtain price concessions and other
► Good substitute inputs exist or new ones emerge.
favorable terms and conditions of sale.
► Supplies are plentiful or there is a surge in the availability of
supplies, thus weakening supplier pricing power. ► Many buyers are price sensitive and have the power,
if they act in unison, to place limits on the prices that
► Industry members are a big fraction of suppliers’ total sales and
continued high volume purchases are important to suppliers
suppliers..
industry members can charge.
► Industry members can integrate backward into the suppliers’ Not all buyers of an industry’s product have equal degrees of
Important
business to self
self--manufacture their own requirements. bargaining power with sellers, and some may be less sensitive
Point than others to price, quality, or service differences.
Figure 3.8 Factors Affecting the Bargaining Power of Buyers Factors That Determine the Strength
of Buyer Bargaining Power
The quantity that a buyer is purchasing
Whether buyer switching costs are high or low
Whether there are many or few buyers
Whether a buyer is particularly important to a seller
seller..
The strength or weakness of buyer demand in relation to the
available supplies
How well buyers are informed about sellers’ products, prices,
and costs.
costs.
Whether buyers pose a credible threat of integrating
backward into the business of sellers.
Whether buyers have discretion to delay their purchases or
not make a purchase at all.

STRATEGY Chapter 3
When Is the Bargaining Power When Is the Bargaining Power

of Buyers Stronger? of Buyers Weaker?
Buyer bargaining power is stronger when: Buyer bargaining power is weaker when:
► Large buyers can demand concessions for purchasing large quantities.
► Buyers purchase the item infrequently or in small
► The buyer adds prestige to the seller’s list of customers.
quantities.
► Switching costs to competing brands or substitutes are low.
► Buyer switching costs to competing brands are high.
► Large volume purchases by buyers are important to sellers.
► Buyer demand is weak or declining. ► There is a surge in buyer demand that creates a
“sellers’ market.”
► There are few buyers—
buyers—so that each one is important to sellers.
► Quantity and quality of information available to buyers improves. ► A seller’s brand reputation is important to the buyer.
► Buyers can postpone purchases if they do not like the present deals ► A particular seller’s product delivers quality or
being offered by sellers. performance that is very important to buyers and not
► A buyer can integrate backward into the business of sellers. 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 Conducive to Good Profitability?
As a rule, the stronger the collective impact of the five An industry is “competitively attractive” when industry
competitive forces, the lower the combined profitability members can reasonably expect to earn good profits
of industry participants. and a good return on investment
Worst case scenario—
scenario—An industry is very Best case scenario
scenario—
—An industry is “competitively
“competitively unattractive” and less profitable when: attractive”” and more profitable when:
attractive
► Rivalry among industry members is vigorous. ► Internal rivalry in the industry is weak to moderate
► Entry barriers are low, making entry likely. ► High barriers block new entrants from the market
► Competition from the producers of substitute products is strong.
► Good substitutes do not exist
► Both suppliers and customers have considerable bargaining
power. ► Both suppliers and customers are in weak bargaining
positions
Matching Company Strategy Question for Simulation Company

to Competitive Conditions Co
Co--Managers
Working through the five-
five-forces model step
step--by-
by-step: Which one of the five competitive forces is
► Aids strategy makers in assessing whether the intensity of
competition allows good profitability. strongest in your company’s industry?
Promotes sound strategic thinking about how to better match the
►
firm’s strategy to the competitive character of the marketplace.
Are the competitive pressures your
Effectively matching a firm’s strategy to competitive company experiences likely to grow
conditions requires: stronger, grow weaker, or remain about
► Pursuing strategic avenues that shield the firm from as many the same in the upcoming decision
different competitive pressures as possible.
► Initiating actions calculated to produce sustainable competitive rounds? Why?
advantage, thereby shifting competition in the firm’s favor,
putting more competitive pressure on rivals, and maybe even
defining the optimal business model for the industry.

STRATEGY Chapter 3
Question 2: What Forces Are Driving Industry Change

Core Concept
and What Impact Will They Have?
Industry conditions are often fluid because certain forces Industry conditions change because important
are enticing or pressuring industry members, their forces are driving industry participants
customers, or their suppliers
suppliers)) to alter their actions in (competitors,, customers, or suppliers) to alter their
(competitors
important ways. actions. The driving forces in an industry are the
The most important of these change agents are called major underlying causes of changing industry and
driving forces because they have the biggest influences competitive conditions—
conditions—they have the biggest
in reshaping the industry landscape and altering
influence on how the industry landscape will be
competitive conditions.
altered..
altered
Where do driving forces originate?
► Outer ring of macroenvironment (Figure 3.2)
► Inner ring of macroenvironment (Figure 3.2)
Analyzing an Industry’s Driving Forces Identifying an Industry’s Driving Forces
Driving--forces analysis has three steps:

Driving Typical developments that can affect an industry
powerfully enough to drive industry and competitive
1. Identifying what the driving forces are change:
► Changes in an industry’s long-
long-term growth rate.
rate.
2. Assessing whether the drivers of change
► Increasing globalization
are, on the whole, acting to make the
► Emerging new Internet capabilities and applications
industry more or less attractive ► Changes in who buys the product and how they use it
3. Determining what strategy changes are ► Product innovation
needed to prepare for the impacts of the ► Technological change and manufacturing process innovation
► Marketing innovation
driving forces.
► Entry or exit of major firms
Identifying an Industry’s Assessing the Impact of the Driving Forces

Driving Forces (cont’d)
Typical developments that can affect an industry Answers to three questions are needed:
powerfully enough to drive industry and competitive
change: 1. Are the driving forces collectively acting to
► Diffusion of technical know-
know-how across more companies and cause demand for the industry’s product to
more countries increase or decrease?
► Changes in cost and efficiency
► Growing buyer preferences for differentiated products instead of
2. Is the collective impact of the driving forces
a commodity product (or for a more standardized product instead making competition more or less intense?
of strongly differentiated products).
products).
► Reductions in uncertainty and business risk
3. Will the combined impacts of the driving
► Regulatory influences and government policy changes forces lead to higher or lower industry
► Changing societal concerns, attitudes, and lifestyles profitability?

STRATEGY Chapter 3
Key Point Adjusting Strategy to Prepare for

the Impacts of Driving Forces
The most important part of driving-
driving-forces analysis The third step of driving-
driving-forces analysis—
analysis—where
is to determine whether the collective impact of the real payoff for strategy- comes—is for
strategy-making comes—
the driving forces will be to increase or decrease managers to draw some conclusions about what
market demand, make competition more or less strategy adjustments will be needed to deal with
intense,, and lead to higher or lower industry
intense the impacts of the driving forces.
profitability..
profitability ► If understanding of the drivers’ impact is unclear, the
chance of making proper strategy adjustments is slim.
► Driving forces analysis is not something to take
lightly; it has practical value and is basic to the task of
thinking strategically about where the industry is
headed and how to prepare for the changes ahead.
Copyright © 2012 Glo-
Glo-Bus Software, Inc. 3–57 Copyright © 2012 Glo-Bus Software, Inc. 3–58
Question 3: What Market Positions Do Rivals Core Concept

Occupy—
Occupy —Who Is Strongly
Positioned and Who Is Not?
A strategic group is a cluster of industry rivals that
employ similar competitive approaches, have
Some industry rivals occupy stronger (or at least
product offerings that appeal to similar types of
distinguishably different) market positions than others
because they have opted to buyers,, and thus occupy similar market positions.
buyers
► Incorporate product features that appeal to different types of
buyers
► Charge widely differing prices for products of widely differing
quality or performance
► Emphasize different distribution channels
► Compete in different geographic areas, and so on.
The best technique for revealing the market positions of
industry competitors is strategic group mapping
Defining a Strategic Group How to Construct a Strategic Group Map
Firms in the same strategic group can resemble Identify competitive characteristics that
one another in any of several ways: Step 1 differentiate firms in an industry from one
another.
► Comparable product-
product-line breadth
► Sell in the same price/quality range Plot firms on a two-variable map using pairs
Step 2 of these differentiating characteristics.
► Emphasize same distribution channels
► Use same product attributes to appeal
to similar types of buyers Assign firms that fall in about the same
Step 3 strategy space to same strategic group.
► Use identical technological approaches
► Offer buyers similar services Draw circles around each group, making
Step 4 circles proportional to size of group’s
► Cover same geographic areas respective share of total industry sales.

STRATEGY Chapter 3
Figure 3.9 Comparative Market Positions of Selected Retail Chains:

An Example of a Strategic Group Map
Guidelines for Constructing
a Strategic Group Map
Variables used as axes should not be highly correlated
► 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
Note: Circles are drawn comparing the rivals on one of the variables.
roughly proportional to
the total revenues of the
retailers shown in each
Variables should reveal big differences in how rivals compete
strategic group.
► When rivals differ on both variables, locations of the rivals will be
scattered, showing how they are positioned differently.
Drawing sizes of circles proportional to combined sales of firms in
each strategic group allows the map to reflect relative market share
sizes of each strategic group.
If three or more good competitive variables can be used,
several maps can be drawn.
What Can Be Learned from Questions for Simulation Company

Strategic Group Maps? Co
Co--Managers
Group maps identify: Have you studied the strategic group maps for each geographic
region that are shown in the Competitive Intelligence Report?
► Which industry members are close rivals and which are distant
Based on these maps, which rival companies are your closest
rivals. Firms in the same strategic group are the closest rivals;
competitors in each geographic region?
the next closest rivals are in the immediately adjacent groups.
Which rival companies are distant competitors?
► Firms in strategic groups that are far apart on the map may
hardly compete at all. Do any of the four regional strategic group maps indicate that there
are many rival companies grouped very close together, signaling they
Not all positions on the map are equally attractive: are members of an “overcrowded” strategic group?
► Prevailing competitive pressures and driving forces often favor Is the financial performance of companies in overcrowded strategic
some strategic groups and hurt others. groups suffering because of the tough competitive battle taking place
among similarly-
similarly-positioned strategic group members?
► Profit potential of different strategic groups varies due to
strengths and weaknesses in each group’s market position. Are there “open spaces” in any of the four regional strategic group
maps that present good opportunities (because competition is weak)?
Question 4:
4: What Strategic Moves Are What Kind of Competitive Intelligence
Rivals Likely to Make Next? Is Needed?
Knowledge of rivals’ strategies, their financial To predict what rival firms are likely to do next,
performance, their resource strengths and weaknesses, one needs to look at:
the actions and plans they have announced, and the
► Rivals’ strategies and how well these strategies are working
thinking and leadership styles of their executives is (firms with weak or flawed strategies are certain to change
valuable for some or many elements of their strategies)
► Predicting or anticipating the strategic moves ► Which rivals are under pressure to improve their financial
competitors are likely to make next. performance (pressures for better performance nearly always
trigger fresh strategic moves)
► Crafting a company’s own strategy with some ► Which rivals have important problems/issues they need to
confidence about what market maneuvers to expect address—
address — the need for corrective adjustments is a reliable sign
from rivals that new initiatives are coming
► Being poised to capitalize on opportunities stemming
► The actions and plans rivals have announced
► The thinking and leadership styles of their executives
from competitors’ missteps or strategy flaws.

STRATEGY Chapter 3
Questions to Consider in Predicting Questions to Consider in Predicting

the Likely Actions of Rivals the Likely Actions of Rivals (cont’d)
Which competitors have strategies that are producing Which competitors are likely to rank among the industry
good results—
results—and thus are likely to make only minor leaders five years from now? Do one or more up up--and
and--
strategic adjustments? coming competitors have powerful strategies and
sufficient resource capabilities to overtake the current
Which competitors are losing ground in the marketplace
industry leader?
or struggling to come up with a good strategy
strategy—
—and thus
are strong candidates for altering their prices, improving Which rivals badly need to increase their unit sales and
the appeal of their product offerings
offerings,, moving to a market share? What strategic options are they most
different part of the strategic group map, and otherwise likely to pursue: lowering prices, adding new models and
adjusting important elements of their strategy? styles, expanding dealer networks
networks,, entering additional
geographic markets, boosting advertising to build brand
brand--
Which competitors are poised to gain market share, and
name awareness
awareness,, acquiring a weaker competitor, or
which ones seem destined to lose ground?
ground?
placing more emphasis on direct sales via the Web?
Questions to Consider in Predicting Question 5: What Are the Key Factors for
the Likely Actions of Rivals (cont’d) Future Competitive Success?
Which rivals are likely to enter new geographic markets or make Key Success Factors (KSFs)
(KSFs) are those competitive factors
major moves to substantially increase their sales and market share that most affect industry members
members’’ ability to compete
in a particular geographic region?
successfully and profitably.
Which rivals are strong candidates to expand their product offerings
and enter new product segments where they do not currently have a KSFs can relate to particular strategy elements, product
presence? attributes, resource strengths, competencies or
Which rivals are good candidates to be acquired? Which rivals may competitive capabilities, and/or market achievements.
be looking to make an acquisition and are financially able to do so?
so? Why do industry KSFs matter?
Scouting competitors well enough to anticipate their next moves Because how well a firm’s strategy elements, product
allows managers to prepare and launch effective countermoves attributes, resources, and capabilities measure up against
and take rivals’ probable moves into account in crafting a
the industry’s KSFs is a big determinant of just how
company’s own best course of action.
financially and competitively successful it will be.
Core Concept Example: KSFs for Bottled Water Industry
Key success factors are the strategy elements,

elements, Access to distribution to get a firm’s brand stocked
product attributes, resource strengths,
strengths, competitive and favorably displayed in retail outlets.
capabilities, and market achievements with the Image to induce consumers to buy a particular firm’s
greatest impact on future competitive success in product (brand
(brand name and attractiveness of packaging
the marketplace.
marketplace. are key deciding factors).
factors).
Low
Low--cost production capabilities to keep selling prices
KSFs are so important to competitive success that competitive.
how well a company measures up on each industry
KSF can spell the difference between being a strong Sufficient sales volume to achieve scale economies in
marketing expenditures.
competitor and a weak competitor—
competitor—and sometimes
between profit and loss.


STRATEGY Chapter 3
Example: KSFs for the Ready-

Ready-to-
to-Wear Identifying Industry Key Success Factors
Apparel Industry
KSFs vary from industry to industry, and from time to
Appealing designs and color combinations to create
time within the same industry, as driving forces and
buyer appeal
competitive conditions change.
change.
Low
Low--cost manufacturing efficiency to keep selling Rarely does an industry have more than five KSFs
prices competitive
Answers to three questions help identify industry’s KSFs
Strong network of retailers/company-
retailers/company-owned stores ► On what basis do buyers of the industry’s product or service choose
to allow stores to keep best
best--selling items in stock between the competing brands of sellers
sellers?
? That is, what product or
service attributes are crucial?
Clever advertising to effectively convey a specific ► Given the nature of competitive rivalry and the competitive forces
image to induce consumers to purchase a particular prevailing in the marketplace, what resources and competitive
capabilities must a company have to be competitively successful?
label.
► What shortcomings are almost certain to put a company at a significant
competitive disadvantage?
Using KSFs in Crafting Question 6: Is the Industry Outlook Conducive

Company Strategy to Good Profitability
The goal of strategists should be to design a strategy that allows the Factors that determine an industry’s prospects for attractive profitability:
company to compare favorably vis- vis-à-vis rivals on each and every ► The industry’s growth potential.
one of the industry’s future KSFs and that aims at being distinctly ► Whether and to what degree industry profitability will be favorably or unfavorably
better than rivals on one ((or
or possibly two) of the KSFs. affected by the prevailing driving forces.
► The anticipated strength of competitive forces—
forces—the overriding issue here is
Firms that stand out or excel on a particular KSF are likely to enjoy a whether competitive forces seem likely to intensify and squeeze industry
stronger market position—
position—being distinctly better than rivals on one profitability to subpar levels or whether the company should be able to earn good
or two key success factors often translates into competitive profits despite the expected strength of competitive forces.
advantage..
advantage ► Whether the company is strongly or weakly positioned on the industry’s strategic
group map.
Using the industry’s KSFs as cornerstones for the firm’s ► How well the company’s strategy, product offering, and capabilities stack up
against industry KSFs.
strategy and trying to gain sustainable competitive
► The degrees of risk and uncertainty in the industry’s future and whether the
advantage by excelling at one particular KSF industry confronts severe problems relating to regulatory or environmental
is a fruitful competitive strategy approach. issues, stagnating buyer demand, industry overcapacity,
overcapacity, and so on.
Core Concept Factors to Consider in Assessing

Industry Attractiveness
The anticipated industry environment is fundamentally
Future conditions in a particular industry are not equally attractive or
attractive if it presents a company with good opportunity for unattractive to all industry participants and all potential entrants.
above-
above-average profitability. ► Even if a particular industry’s outlook is deemed unattractive, a favorably
situated and competitively capable company may see ample opportunity to
outcompete weaker rivals and significantly grow its revenues and profits.
The industry outlook is fundamentally unattractive if a ► A weak competitor in an attractive industry may conclude that fighting a steep
firm’s profit prospects are unappealingly low
low.. uphill battle against much stronger rivals holds little promise of eventual market
success or even average profitability.
► Industry outsiders may conclude that they have the resources to easily hurdle
the barriers to entering an attractive industry while other outsiders may find the
same industry unattractive because they do not want to challenge market
leaders and have better opportunities elsewhere
elsewhere..
A particular industry’s attractiveness depends in large part on whether a
company has the resource strengths and competitive capabilities to be
competitively successful and profitable in that environment.


STRATEGY Chapter 3
What Should a Current Competitor

Decide about Its Industry?
When a competitor decides an industry is attractive, it
should invest aggressively to capture the opportunities it
sees and to improve its long-
long-term competitive position in
the business.
When a strong competitor concludes its industry is
relatively unattractive and lacking in opportunity, it may
elect to protect its present position, investing cautiously if
at all and looking for opportunities in other industries.
A competitively weak company in an unattractive
industry may see its best option as finding a buyer,
perhaps a rival, to acquire its business.
Copyright © 2012 Glo-Bus Software, Inc. 3–81

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STRATEGY Chapter 3

Core Concepts and Analytical Approaches PowerPoint Slides

Chapter 3 Learning Objectives

Chapter 3 Roadmap Understanding a Company’s Situation

The Strategically Relevant Components in the External Environment

Copyright © 2012 GLO-BUS Software, Inc. Page 1

Question 1: What Kinds of Competitive Forces Figure 3.3

The strength or weakness of competition in an

4. The bargaining power exercised by suppliers

How to Analyze the Five Competitive Forces Core Concept

Competitive maneuvering among industry rivals is

Copyright © 2012 Glo-Bus Software, Inc. 3–13 Copyright © 2012 Glo-

Copyright © 2012 GLO-BUS Software, Inc. Page 2

Competitive Pressures Created by the Why Rivalry Is Usually the Strongest

• Lower prices • Low interest rate financing

Rivalry intensifies when:

Copyright © 2012 GLO-BUS Software, Inc. Page 3

What Causes Rivalry to Become Weaker? Characterizing Industry Rivalry

When competitors engage in protracted price wars or

Competitive Pressures Associated With Common Barriers to Entry

An Important Entry Barrier

Copyright © 2012 GLO-BUS Software, Inc. Page 4

Competitive Pressures Associated When Is the Threat of Entry Weaker?

The lower the price of substitutes, the higher their

Copyright © 2012 GLO-BUS Software, Inc. Page 5

When Is Competition from When Is Competition from

Three Signs that Substitute Products Competitive Pressures Stemming from

Whether certain needed inputs are in short supply.

Copyright © 2012 GLO-BUS Software, Inc. Page 6

Factors That Determine the Strength When Is the Bargaining Power

When Is Supplier Bargaining Power Weaker? Competitive Pressures Stemming

Copyright © 2012 GLO-BUS Software, Inc. Page 7

When Is the Bargaining Power When Is the Bargaining Power

Matching Company Strategy Question for Simulation Company

Copyright © 2012 GLO-BUS Software, Inc. Page 8

Question 2: What Forces Are Driving Industry Change

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

Driving--forces analysis has three steps:

Identifying an Industry’s Assessing the Impact of the Driving Forces

Copyright © 2012 GLO-BUS Software, Inc. Page 9

Key Point Adjusting Strategy to Prepare for

Question 3: What Market Positions Do Rivals Core Concept

Defining a Strategic Group How to Construct a Strategic Group Map

Copyright © 2012 GLO-BUS Software, Inc. Page 10

Figure 3.9 Comparative Market Positions of Selected Retail Chains:

What Can Be Learned from Questions for Simulation Company

Copyright © 2012 GLO-BUS Software, Inc. Page 11

Questions to Consider in Predicting Questions to Consider in Predicting

Core Concept Example: KSFs for Bottled Water Industry

Key success factors are the strategy elements,

Copyright © 2012 Glo-

Copyright © 2012 GLO-BUS Software, Inc. Page 12

Example: KSFs for the Ready-

Using KSFs in Crafting Question 6: Is the Industry Outlook Conducive

Core Concept Factors to Consider in Assessing

Copyright © 2012 Glo-

Copyright © 2012 GLO-BUS Software, Inc. Page 13

What Should a Current Competitor

Copyright © 2012 Glo-Bus Software, Inc. 3–81

Copyright © 2012 GLO-BUS Software, Inc. Page 14

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