THE COMPETITIVE ENVIRONMENT

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THE COMPETITIVE ENVIRONMENT
OUTLINE

• A FRAMEWORK FOR ANALYZING THE ENVIRONMENT

• UNDERTAKING THIS ANALYSIS AT DIFFERENT LEVELS

• UNDERSTAND CHANGING INDUSTRY STRUCTURE

• RECOGNIZE THAT DECISIONS ARE MADE IN
• THE PRESENT, BUT REALIZED IN THE FUTURE

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ENVIRONMENTAL ANALYSIS
SELECT KEY VARIABLES
FORECAST CHANGES
ESTIMATE IMPACT
STRATEGY
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ENVIRONMENTALASSESSMENT
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LEVELS OF ENVIRONMENTAL ANALYSIS
CORPORATE
REMOTE AND INDUSTRY ANALYSIS TO IDENTIFY
OPPORTUNITIES AND ALLOCATE RESOURCES
BUSINESS UNIT
REMOTE, INDUSTRY AND PRODUCT/MARKET TO DEVELOP
COMPETITIVE STRATEGY AND ADVANTAGE
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THE REMOTEENVIRONMENT
POLITICAL
ENVIRONMENTAL
SOCIAL
SBU 1
Multi-business firm
SBU 3
SBU 2
ECONOMIC
LEGAL
TECHNOLOGICAL
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DRIVERS OFCHANGE

• POLITICAL
• TARIFFS
• COMPETITION POLICY
• TRADING BLOCKS
• DE-REGULATION

ECONOMIC INTEREST RATES EXCHANGE RATES
GDP GROWTH
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DRIVERS OFCHANGE

• SOCIAL
• POPULATION GROWTH
• LIFE STYLE CHANGES
• ETHNIC COMPOSITION
• TECHNOLOGICAL
• NEW PRODUCTS, PROCESSES
• DISRUPTIVE TECHNOLOGIES
• INFORMATION TECHNOLOGY

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IT INVESTMENT BYUS FIRMS
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TRANSACTION COSTS IN RETAIL BANKING
MODE
COST / TRANSACTION (AU)
IN BRANCH TELLER
5.4
TELEPHONE (CSO)
5.2
ATM
0.6
TELEPHONE VOICE RESPONSE
0.16
INTERNET
0.06
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DRIVERS OFCHANGE
LEGAL ANTI TRUST RULE OF LAW ENVIRONMENTAL LEGISL
ATION PRESSURE GROUPS
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DRIVERS OFCHANGE
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INDUSTRY ANALYSIS
SUPPLIERS
INDIRECT COMPETITORS
ENTRANTS
COMPETITIVE RIVALRY
BUYERS
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PURPOSE OF INDUSTRY ANALYSIS
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PROFITABILITY (ROE)OF US INDUSTRIES
RETAIL TRADE
GROCERY
18.4
HARDWARE
4.1
SERVICES
LEGAL
101.5
ACCOUNTING
66.5
HOTELS
9.8
MEDICAL LABS
-12.9
MANUFACTURING
SOAP
33.7
COMPUTERS
26.4
METAL CANS
4.2
FINANCE
INSURANCE AGENTS
18.3
INSURANCE COs
8.5
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INDUSTRY RIVALRY
RIVALRY
THE IMPACT OF AGGRESSIVE PRICE COMPETITION ON
PROFITABILITY
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INDUSTRY RIVALRY
IMPACT OF CAPACITY INCREMENTS
Price instability
units
INDUSTRY CAPACITY
INDUSTRY DEMAND
time
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INDUSTRY RIVALRY
IMPACT OF RIVALRY ON MARGINS
high
Margin - ROS
low
low
high
Rivalry
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THE THREAT OF ENTRY
THE THREAT TO FIRMS IN THE INDUSTRY DEPENDS ON
THE NATURE AND MAGNITUDE OF ENTRY BARRIERS
CAPITAL REQUIREMENTS
ECONOMIES OF SCALE
ENTRY
ACCESS TO DISTRIBUTION
RETALIATION BY INCUMBENTS
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SUBSTITUTES
MAGNITUDE OF COMPETITIVE INTENSITY DEPENDS ON
RELATIVE PRICE / PERFORMANCE
SWITCHING COSTS
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COMPETITION FROM SUBSTITUTES
Digital Camera
YEN
PIXELS
1995
1,980,000
1.3
1998
1.980,000
2.0
2000
358,000
3.25
2002
358,000
6.3
2003
164,000
6.3
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POWER OF BUYERS AND SUPPLIERS
BUYER POWER
SUPPLIER POWER
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INDUSTRY ANALYSIS
High from weak rivalry
INDUSTRY PROFITABILITY
Low from powerful suppliers
High from weak buyers
Low due to substitutes
Low from easy entry
Rivalry
Substitutes
Entrants
Buyers
Suppliers
INDUSTRY FACTORS
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DEFINING ANINDUSTRY
INDUSTRY
A COLLECTION OF FIRMS WITH SIMILAR PRODUCTION
PROCESSES
COMPETITION FOR CUSTOMERS FROM INDUSTRIES WITH
DIFFERENT PRODUCTION PROCESSES - SUBSTITUTES
NOT ALWAYS EASY TO DEFINE
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INDUSTRY VALUE CHAIN
Crude Oil
Bauxite
Ethylene
Alumina
Poly ethylene
Aluminium
Coil
Can
Bottle
CONSUMER
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LIMITATIONS OF THE INDUSTRY MODEL
APPLIES TO A WELL DEFINED BUSINESS UNIT
ASSUMES THAT THE INDUSTRY IS WELL DEFINED AND
STABLE
ASSUMES THAT INDUSTRY STRUCTURE INFLUENCES
BUSINESS UNIT PROFITABILITY
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LIMITATIONS OF THE INDUSTRY MODEL
INDUSTRY BOUNDARIES ARE NOT STABLE BUT CHANGE
OVER TIME DUE TO
TECHNOLOGY
DE-REGULATION
THE MORE DYNAMIC AN INDUSTRY THE LESS VALUE IS
INDUSTRY ANALYSIS
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UTILIZING INDUSTRYANALYSIS
DEFINE THE RELEVANT INDUSTRY
IDENTIFY THE STRUCTURAL VARIABLES ENHANCING OR
DEPRESSING PROFITABILITY
WHAT ARE THE LIKELY FUTURE CHANGES IN INDUSTRY
STRUCTURE
HOW ARE THESE LIKELY TO IMPACT ON PROFITABILITY
HOW CAN MANAGEMENT INFLUENCE INDUSTRY STRUCTURE
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ENVIRONMENTAL ASSESSMENT
Think broadly about the environment facing your
business.
Political
Suppliers
Environment
Social
Allies
Unions
Indirect Competitors
Direct Competitors
Virtual Organi- zations
Trade Bodies
Legal
Economic
Technological
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BUSINESS UNITENVIRONMENT
COMPETITORS
SHIFTS IN STRATEGY?
CHANGES IN SCOPE?
ENTRY, EXIT?
NEW BASES OF COMPETITIVE ADVANTAGE
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SEGMENTATION
CAN WE FIND GROUPS OF CUSTOMERS WITH SIMILAR
NEEDS AND WANTS WHO SEEK SIMILAR BENEFITS AND
VALUE THESE BENEFITS IN SIMILAR WAYS
? Examples Business travelers vs. Leisure
travelers OEM vs. Replacement tire
markets
QUESTION HOW WILL THESE CHANGE?
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SEGMENTATION
Segment desirability depends on inherent
attractiveness of segment (size,
profitability,competitive intensity,etc.) and our
competitive capabilities (our resources vs.
competitors).
Hi
Desirable Targets
Segment Attractiveness
Less Desirable Targets
Lo
Lo
Hi
Competitive Capability
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CUSTOMER BENEFITS
FUNCTIONAL
ECONOMIC
PSYCHOLOGICAL
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CUSTOMER VALUE
Key to insight is understanding what the customer
values
Values (Why what it does is important)
Benefits (What it does for the
customer)
Features (Characteristics of the
product or service)
HOW WILL CUSTOMER NEEDS CHANGE OVER TIME?
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COMPETITORS
Who are they?
Definition Anybody whose products or
services could satisfy the same needs or
wants of your customers.

• Implications
• Consider potential as well as current competitors
• Think broadly not narrowly
• Always take the customer view

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PROCESS OF COMPETITOR ANALYSIS
IDENTIFICATION
TARGETING
PROFILING
ANALYSIS
ACTION
PROJECTION
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COMPETITORS
Types of Competitors
Indirect
Direct
(Today)
Current
Potential
(Tomorrow)
(Easier to Spot)
(Danger of Blind-Siding)
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CONCLUSIONS

• Purpose
• What are major environment-al forces today
  compared with 3 years ago?
• What are major environment-al forces that will be
  evident over the next 3 years?
• Basis for contingency or scenario planning

• Question
• How is todays environment different from
  yesterdays?
• How will tomorrows environ-ment differ from
  todays?
• Where are the major unknowns?

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TYPES OF COMPETITIVE INFORMATION
Market performance
Financial Performance
Management capabilities
Vertical integration
Marketing mix
Functional strength
Business system
Positioning
Portfolio
Level of analysis

Corporate

Business Unit

Product-Market
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FORECASTINGENVIRONMENTAL CHANGE

• SELECT CRITICAL VARIABLES
• WILL A CHANGE OCCUR?
• WHEN WILL IT OCCUR?
• WHAT WILL BE THE IMPACT?

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FORECASTINGENVIRONMENTAL CHANGE

• REASONABLY CERTAIN
• POPULATION
• CONSTRAINED CHOICE
• SATELLITE OR CABLE TV
• UNCERTAIN
• RUSSIA, CHINA

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FORECASTINGENVIRONMENTAL CHANGE

• FORECASTING METHODS
• QUANTITATIVE
• QUALITATIVE

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INTER-FIRMSTRUCTURE
Ericsson
Nokia
IBM
Toshiba
BLUETOOTH
Microsoft
Agere
Other Associates
Motorola
Intel