How Competitive Forces Shape Strategy

1
How Competitive Forces Shape Strategy

• Learning Objectives
• To understand the importance of environmental
  analysis and to become familiar with several
  tools to evaluate threats and opportunities

2
Evaluating Environmental Threatsand Opportunities

• Origins of the Structure Conduct Performance
  Model
• Tools to evaluate environmental threats and
  opportunities
• Industry characteristics analysis
• Stakeholder analysis
• Porters Five Forces Model
• Competitor analysis
• not covered here, but any experience?

3
The Structure Conduct Performance Model
Number of competing firms, homogeneity of
products, cost of entry and exit
Industry Structure
Price taking, product differentiation, tacit
collusion, exploit market power
FirmConduct
Firm above, normal, belowSociety social
welfare implications
Performance
4
Type of Industry Perfect Competition
Large number of firms, homogeneous products,low
cost of entry and exit
Industry Structure
Price taking
FirmConduct
Firm normalSocial welfare maximized
Performance
Industry Examples?
5
Type of Industry Monopolistic Competition
Large number of firms,heterogeneous
products,low cost of entry and exit
Industry Structure
Cost leadership,Product differentiation
FirmConduct
Firm above normalSocial welfare less than
perfect competition
Performance
Industry Examples?
6
Type of Industry Oligopoly
Small number of firms,costly entry and exit
Industry Structure
FirmConduct
Many options, including collusion
Firm above normalSocial welfare less than
monopolistic competition
Performance
Industry Examples?
7
Type of Industry Monopoly
Only one competing firm,costly entry
Industry Structure
FirmConduct
Uses market power to set prices
Firm above normalSocial welfare less than
oligopoly
Performance
Industry Examples?
8
Industry Characteristics Analysis

• Market size
• Market growth rate
• Number and size of rivals
• Scope of rivalry
• Number and size of buyers
• Number and size of suppliers
• Substitute products
• Ease of entry / exit

• Stage of industry evolution
• Distribution channels
• Economies of scale
• Learning curve
• Capacity utilization
• Average industry profitability
• Pace of technological change

What are the characteristics of your industry?
9
Stakeholder Analysis

• People or groups who have an interest, claim, or
  stake in how well the firm performs
• shareholders managers
• employees customers
• suppliers government
• unions community
• general public
• Does your firms strategy address any specific
  stakeholders?

10
Evaluating Environmental ThreatsPorters Five
Forces Model
What determines the degree of industry
competitionand profitability?
Threat ofentry
Threat of rivalry
Threat ofsuppliers
Threat of buyers
Industry profitability
Threat of substitutes
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Porters Five Forces Model Barriers to Entry

• Economies of scale
• Product differentiation
• Capital requirements
• Cost advantages independent of size
• (Technology, know-how, access to raw
  materials, geographic locations, learning curve)
• Access to distribution channels
• Government policy
• Switching costs
• Some disagreement among scholars

12
Porters Five Forces Model Intensity of Rivalry

• Many competitors
• Similar in size
• Slow rate of industry growth
• Product lacks differentiation
• Capacity added in large increments
• High level of fixed costs
• Exit barriers are high
• Reputation or past history

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Porters Five Forces Model Substitute Products

• Products that appear to be different but satisfy
  the same need
• Customer switching costs are low
• good examples butter vs. margarine
• calculators vs. slide rules
• tape b/u vs. CD burner
• bad examples Coke vs. Pepsi
• Honda vs. Toyota

14
Porters Five Forces Model Bargaining Power of
Buyers/Customers

• Small number of buyers
• Purchase products that are standard or
  undifferentiated
• Industry products represent a large share of
  buyers total cost
• Unimportant to final quality of product
• Product does not save the buyer money
• Buyer may integrate backward

15
Porters Five Forces Model Bargaining Power of
Suppliers

• Supplier has few competitors
• Supplier offers a unique product
• Substitutes not readily available
• Supplier can integrate forward
• Firm or industry purchases represent small share
  of suppliers total sales

16
Formulating Strategy Following a 5-Forces Analysis

• According to Porter, once a 5-Forces analysis of
  the industry is complete, a strategist is ready
  to formulate strategy by
• Positioning the company
• Influencing the industry
• Exploiting industry change
• How does these approaches differ?
• When might one be more successful than another?