Analysis of the Competitive Environment

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Chapter 5 Analysis of the Competitive Environment
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The structural Analysis of industries

• Objectives
• Identify the key structural features of
  industries that determine the strength of the
  competitive forces and hence profit industries
• Formulating competitive strategy
• Industry structure has a strong influence in
  determining the competitive rules of the game as
  well as the strategies potentially available to
  the firm.

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The structural Analysis of industries

• Knowledge of these underlying sources of
  competitive pressure in order to
• Highlights the critical strengths and weaknesses
  of the company
• Animates its positioning in its industry
• Clarifies the area where the strategic changes
  may yield the greatest payoff
• Highlights the areas where industry trends as
  either opportunities or threats

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The structural Analysis of industries

• The collective strength of these forces
  determines the ultimate profit potential in the
  industry, where profit potential is measured in
  term long run return on invested capital.
• Not all industries have the same potential
• They differ fundamentally in their ultimate
  profit potential as the collective strength of
  the forces differs

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Porters Five Forces Model

• The Five competitive forces
• Entry
• Threat of Substitution
• Bargaining Power of Buyer
• Bargaining Power of Suppliers
• Rivalry among current competitors

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Five Forces Determining Segment Structural
Attractiveness
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Rivalry among existing companies

• Where the competitors in the industry are roughly
  evenly balanced
• During periods of low market growth
• Where exit barriers are high
• Where product differentiation is low
• Where fixed costs are relatively high

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Threat of Rivalry
high rivalry means firms compete
vigorouslyand compete away above average profits
Industry conditions that facilitate rivalry
large numbers of competitors
slow or declining growth
high fixed costs and/or high storage costs
low product differentiation

• industry capacity can only be added in
• large increments
• diverse competition

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Threat of Rivalry

• high strategic stakes
• high exist barriers
• The major sources of exit barriers are
• Specialized assets
• Fixed cost of exit
• Strategic interrelationships
• Emotion Barriers
• Government and social restriction

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Five Forces
Evaluating the Five Forces
Current Rivalry among Existing Firms
Threat Opportunity

Numerous competitors Few competitors Equally
balanced competitors One or a few strong
competitors Industry sales growth
slowing Industry sales growth strong High fixed
or inventory storage costs Low fixed or inventory
storage costs No differentiation or no switching
costs Significant differentiation or switching
costs Large capacity increments required Minimal
capacity increments required Diverse
competitors Similar competitors High strategic
stakes Low strategic stakes High exit
barriers Minimal exit barriers
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The threat of market entry

• Costs of entry are low
• Existing or new distribution channels are open to
  use
• Little competitive retaliation is anticipated
• Differentiation is low
• There are gaps in the market

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Porters Five Forces Model

• Barriers and Profitability

Exit Barrier
Low
High
Low
Entry Barriers
High
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Five Forces
Evaluating the Five Forces
Potential Entrants
Threat Opportunity

No or low economies of scale Significant
economies of scale No other potential cost
disadvantages Cost disadvantages from other
aspects Weak product differentiation Strong
product differentiation Minimal capital
requirements Huge capital requirements Minimal
switching costs Significant switching costs Open
access to distribution channels Controlled access
to distribution channels No government policy
protection Government policy protection
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Threat of Substitutes

• A segment is unattractive there are actual or
  potential
• substitute product
• substitutes fill the same need but in a
  different way

- Coke and Pepsi are rivals, milk is
a substitute for both
substitutes create a price ceiling because
consumers switch to the substitute if prices rise
substitutes will likely come from outside
the industry
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The threat of substitutes

• By making existing technologies redundant
• By incremental product improvement

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Five Forces
Evaluating the Five Forces
Substitute Products
Threat Opportunity

There are few good substitutes There are several
not-so-good substitutes There are no good
substitutes
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Threat of Suppliers

• a segment is unattractive Suppliers are able to
  
• increase prices or reduce quantity supply
• powerful suppliers can squeeze (lower
  profits)
• the focal firm

Industry conditions that facilitate supplier
power
small number of firms in suppliers industry
highly differentiated product
lack of close substitutes for suppliers
products
supplier could integrate forward
focal firm is an insignificant customer of
supplier
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Bargaining power of suppliers

• Suppliers are more concentrated than buyers
• Costs of switching suppliers are high
• Suppliers offerings are highly differentiated

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Five Forces
Evaluating the Five Forces
Bargaining Power of Suppliers
Threat Opportunity

Supplying industry has few companies Supplying
industry has many companies and is more
concentrated and is fragmented Supplier's
products dont have substitutes Supplier's
products do have substitutes Industry isnt an
important customer Industry is an important
customer Supplier's product is an important
input Supplier's product isnt an important
input Supplier's products are differentiated Suppl
ier's products aren't differentiated Significant
switching costs Minimal switching costs in
supplier's products Supplier has ability to
do Supplier doesn't have ability to do what
buying industry does what buying industry does
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Threat of Buyers

• Industry conditions that facilitate buyer power
• - small number of buyers for focal firms output
• lack of a differentiated product
• the products is significant to the buyer
• buyers operate in a competitive marketthey are
  not earning above normal profits
• buyers can vertically integrate backwards
• buyer become more concentrated
• buyers switching costs are low
• buyers are price sensitive
• buyers can integrate upstream
• buyer has full information

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Bargaining power of buyers

• They are more concentrated than sellers
• There are readily available alternative sources
  of supply
• Buyer switching costs are low

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Five Forces
Evaluating the Five Forces
Bargaining Power of Buyers
Threat Opportunity

Buyer purchases large volumes Buyer purchases
small volumes Purchases are significant part
Purchases aren't significant part of buyer's
costs Purchases standard or undifferentiated Purch
ases highly differentiated and unique Buyer faces
few switching costs Buyer faces significant
switching costs Buyer's profits are low Buyer's
profits are strong Buyer can manufacture products
Buyer cant manufacture products Industry's
products aren't important Industry's products are
important to quality of buyer's products to
quality of buyer's products Buyers have full
information Buyers have limited information
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Competitiveness drivers

• There is little differentiation between markets
  offers
• Industry growth rate are low
• High fixed costs need to be recovered
• High suppliers switching costs
• Low entry barriers
• High exit barriers

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Industry Concept
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Industry Concept of Competition

• Industry
• Is a group of firms that offer a product or class
  of product that are close substitutes for one
  another.

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Industry Concept of Competition

• Number of sellers and degree of differentiation
• Entry, mobility, and exit barriers
• Cost structure
• Degree of vertical integration
• Degree of globalization

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Industry Concept of Competition

• Number of sellers and degree of differentiation
• Specify ?
• The number of sellers
• The product is homogeneous
• The product is highly differentiated

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Industry Concept of Competition
Pure Monopoly
Oligopoly
Monopolistic Competition
Pure Competition
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Industry Concept of Competition

• Only one firm provides a certain product or
  service in a certain country or area

Pure Monopoly
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Industry Concept of Competition

• A small number of large firm produce product that
  range from highly differentiated to standardized

Oligopoly
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Industry Concept of Competition

• Oligopoly
• Situations are special market situations that
  develop when a market has
• Essentially homogeneous products
• Relatively few sellers or a few large firms and
  many smaller ones who follow the lead of the
  larger ones

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Industry Concept of Competition

• Many competitors are able to differentiated their
  offers in whole or in part.
• Competitors focus on market segments

Monopolistic Competition
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Industry Concept of Competition

• Monopolistic Competition
• Is a market situation that develops when a market
  has
• Different product (Heterogeneous) in the eyes
  of some customers
• Seller who feel they do have some competition in
  the market

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Industry Concept of Competition

• Many competitors offer the same product and
  service
• No basis for differentiation
• Competitors price will be the same

Pure Competition
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Industry Concept of Competition

• Pure Competition
• Is a market situation that develops when a market
  has
• Homogeneous
• Many buyers and sellers who have full knowledge
  of the market
• Ease of entry for buyers and sellers that is ,
  new firms have little difficulty starting in
  business and new customers can easily come into
  the market

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Industry Concept of Competition
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Industry Concept of Competition

• Entry, Mobility and Exit Barriers
• Entry Barriers
• High capital requirement
• Economic of scale
• Patents and Licensing requirement
• Scare locations
• Raw materials
• Distributors
• Reputation Requirement

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Industry Concept of Competition

• Exit Barriers
• Legal or moral obligations to customers
• Creditors
• Employees
• Government Restriction
• Low asset-salvage value due to overspecialization
  or obsolescence
• Lack of alternative opportunities
• High vertical integration
• Emotion Barriers

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Industry Concept of Competition

• Cost Structure
• Each industry has a certain cost burden that
  shapes much of its strategic conduct

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Industry Concept of Competition

• Degree of Vertical Integration
• Companies find it advantageous to integrate
  backward or forward
• Characteristics
• Often lower costs
• Gain larger share of the value-added
• Manipulate prices and costs in different part of
  value chain

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Industry Concept of Competition

• Degree of Globalization
• Need to compete on a global basis if they are to
  achieve economic of scale

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Market concept of Competition

• Competitors are companies that satisfy the same
  customer need
• The market concept of competition reveals a
  broader set of actual and potential competitors