Starting a Home Craft Business

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					     EXTERNAL ANALYSIS
(INDUSTRY AND COMPETITION)
           Payne
            (3)
                   “Analysis is the
                    critical starting
                   point of strategic
                      thinking.”
                          Kenichi Ohmae
                                    1
               Environmental Analysis Levels
                                                                     EXTERNAL or
                       Macro Level                                     MACRO-
                                                                    ENVIRONMENT
   Economic
                    Industry Level                  Demographic         Industry  and
                                                                    competitive conditions
                              Firm
                                             Suppliers                (opportunities and
         Competitors          Connect

Social
                              Connect
                                                         Global            threats)
                                                                  INTERNAL or
                                                                            MICRO-
                Substitutes             Customers                   ENVIRONMENT
          Political/Legal                Technological                Its competencies,
                                                                    capabilities, resources,
                                                                     and competitiveness
                                                                        (strengths and
                                                                         weaknesses)
                                                                                        2
            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
                                                    3
            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 R&D
        expenditures
       New communication technologies
                                                        4
                 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
                                                              5
        Impact of General Environmental Trends on
                    Various Industries
Segment/Trends/Events      Industry                                         Positive   Neutral   Negative
Demographic
 Aging population          Health Care                                           
                           Baby products                                                               
 Rising affluence                                                                
                           Brokerage services                                                          
                           Fast foods                                            
                           Upscale pets and supplies
Sociocultural
 More women in the         Clothing                                              
 workforce                 Baking Products (staples)                                                   
 Greater concern for                                                             
 health & fitness          Home exercise equipment                                                     
                           Meat products
Political/legal
 Tort reform               Legal Services                                                              
                           Auto Manufacturing                                    
 ADA (Americans with                                                                                   
  Disabilities Act)        Retail                                                
                           Manufacturers of elevators, escalators & ramps

Technological
 Genetic engineering       Pharmaceutical                                        
                           Publishing                                                       
 Pollution/global                                                                
 warming                   Engineering Services                                                        
                           Petroleum
Economic
 Interest Rate Increases   Residential construction                                                    
                           Most common grocery products                                     

Global
 Increasing Global Trade   Shipping                                              
                           Personal service                                                 
 Emergence of China as                                                           
 an economic power         Soft drinks                                                                 
                           Defense

                                                                                                            6
          Five Forces Model of Competition
                         Substitute
                         Products
                           (of firms in
                        other industries)
                     Threat of Substitutes




                                             Bargaining Power of Buyers
                     Rivalry Intensity
Suppliers of             Among
                                                                          Buyers
 Key Inputs            Competing
                         Sellers



                   Threat of New Entrants
                         Potential
                           New
                         Entrants
                                                                                   7
    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
                                                  8
 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
                                                  9
    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

                                                           10
         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

                                                       11
       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

                                                       12
        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
                                                           13
   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


                                                   14
             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
                                                                      15
               Competitive Force of Buyers
   Buyers are a strong competitive force when:
        They are large and purchase a sizable percentage of
         industry’s product
        They buy in volume quantities
        They can integrate backward
        Industry’s 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
                                                                 16
       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             17
  Stakeholder Analysis

                Stakeholder A




                 Focal Firm




Stakeholder B                   Stakeholder C




                                                18
                   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 firm’s 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.



                                                                  19
    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




                                                   20
Stakeholder Analysis




                       21
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                 22
        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

                                                       23
                  Key Success Factors
    KSFs or CSFs are competitive elements that most
     affect every strategic group member’s 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 ___________?
                                                        24
                      Key Success Factors
                              KSF 1



 Optimize
Performance




              KSF 3                         KSF 2


  A sound strategy incorporates efforts to be
    competent on all industry key success
  factors and to excel on at least one factor!
                                                    25
          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?)
                                                           26
         Common Types of Key Success Factors
                Scientific research expertise; Product innovation capability; Expertise in a
 Technology-
                given technology; Capability to use Internet to conduct various business
   related      activities
Manufacturing Low-cost production efficiency; Quality of manufacture; High use of
                fixed assets; Low-cost plant locations; High labor productivity; Low-cost
    -related    product design; Flexibility to make a range of products
 Distribution- Strong network of wholesale distributors/dealers; Gaining ample space on
                retailer shelves; Having company-owned retail outlets; Low distribution
     related    costs; Fast delivery
                Fast, accurate technical assistance; Courteous customer service; Accurate
  Marketing-
                filling of orders; Breadth of product line; Merchandising skills; Attractive
     related    styling; Customer guarantees; Clever advertising
                Superior workforce talent; Quality control know-how; Design expertise;
 Skills-related Expertise in a particular technology; Ability to develop innovative
                products; Ability to get new products to market quickly
Organizational Superior information systems; Ability to respond quickly to shifting
                market conditions; Superior ability to employ Internet to conduct
   capability   business; More experience & managerial know-how
                Favorable image/reputation with buyers; Overall low-cost; Convenient
  Other types   locations; Pleasant, courteous employees; Access to financial capital;
                Patent protection
                                                                                      27
    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



                                                  28
          Example: KSFs for Beer Industry

   Utilization of brewing capacity -- to keep
    manufacturing costs low
   Strong network of wholesale distributors -
    - to gain access to retail outlets
   Clever advertising -- to induce beer
    drinkers to buy a particular brand



                                                 29
               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




                                                              30
              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

                                                     31
   A Framework of Competitor Analysis


                             High
               Market                        II I
             Commonality                    III IV
                               Low
KEY
  The shaded area represents         Low                High
degree of market commonality               Resource
      between two firms                    Similarity
      Resource endowment A

      Resource endowment B
                                                               32
                Market Commonality

   Market Commonality is concerned with
        the number of markets with which a firm and a
         competitor are jointly involved
        the degree of importance of the individual markets to
         each competitor
   Most industries’ markets are somewhat related in
    terms of
        technologies
        core competencies
   Multi-market competition
        Firms competing in several markets

                                                                 33
                 Resource Similarity

   Resource similarity
        the extent to which the firm’s tangible and intangible
         resources are comparable to a competitor’s in terms of
         both type and amount
   Firms with similar types and amounts of resources
    are likely to
        have similar strengths and weaknesses
        use similar broad strategies
   Assessing resource similarity can be difficult if
    critical resources are intangible rather than
    tangible
                                                                  34
    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 group’s
         respective share of total industry sales
                                                    35
                                     Example: Strategic Group Map of
                                         Retail Jewelry Industry
                           High
                                        Small
                                     Independent
Price / Quality / Image




                                    Guild Jewelers     National, Regional, &
                                                        Local Guild - “Fine
                                                         Jewelry” Stores          Prestige
                                                                                  Departmentalized    Upscale
                                                                                  Retailers           Department
                                                                                                      Stores
                          Medium
                                               National
                                            Jewelry Chains
                                                                                                     Chains
                                             Local Jewelers       Credit
                                                                 Jewelers       Catalog
                                                                               Showrooms

                                                                               Off-Price
                                   Outlet Mall Retailers                                               Discounters
                                                                               Retailers
                           Low

                                                                               Limited-category      Broad-category
                              Specialty Jewelers     Full-line Jewelers
                                                                                  Retailers             Retailers
                                                     Product Line / Merchandise Mix
                                                                                                                   36
      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

                                                     37
       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 group’s
    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.”)
                                                           38
                                     Within or Between Strategic Groups
                           High
Price / Quality / Image




                          Medium




                           Low

                                                 Full-line    Limited-category   Broad-category
                                   Specialty
                                                 Providers       Retailers          Retailers
                                               Product Line / Merchandise Mix
                                                                                            39
          The World Automobile Industry
  High
             Ferrari
           Lamborghini
                          Mercedes*
             Porsche
                           BMW          Toyota
                                         Ford
                                        General
Price                                   Motors
                                       Chrysler*
                                        Honda
                                        Nissan
               Hyundai
                 Kia
                                                   High
  Low
         Low      Breadth of Product Line

                                                          40
                      Strategic Groups Within the World Petroleum Industry

                                                                INTERNATIONAL
                                                                  UPSTREAM Premier               INTEGRATED OIL
                                                         Apache
                                                                  COMPANIES Oil                  MAJORS
                       2.0



                                                                                                 INTERNATIONAL
                                                                 Dana Petroleum
                                      Kuwait Petroleum                                           UPSTREAM,
                                                                                                 REGIONALLY
                                 PDVSA                      INTEGRATED                           FOCUSED
                       1.5




                                         NATIONAL
                                                            DOMESTIC                             DOWNSTREAM
                                  Iran PRODUCTION
   Vertical Balance




                                                            OIL COMPANIES
                                  NOC    COMPANIES

                                      Statoil                                          BP-Amoco      Exxon
                       1.0




                                                                             Chevron                 -Mobil
                                          Pemex     Petronas
                                   Lukoil                                    Texaco     INTEGRATED    Royal Dutch
                                              PetroChina                              INTERNATIONAL -Shell Gp.
                             Indian Oil                      Conoco Phillips
                                                                Phillips
                                        Petrobras                 ENI                     MAJORS
                       0.5




                                                             Elf-Fina-Total
                                                                   ENI
                                  Nippon                      Repsol YPF                       INTERNATIONAL
                                                                 Repsol
                             Valero                                           Neste            DOWNSTREAM
                                  Sunoco                                      Ashland          OIL COMPANIES
                       0




                             0           10        20     30         40           50        60        70          80
NATIONALLY-FOCUSED
                                                                Geographical Scope
DOWNSTREAM COMPANIES

                                                                                                                       41
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
                                                                 42
         Predicting Strategic Moves of Rivals
   A firm’s 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
                                                                 43
                    Categorizing the Objectives and
                       Strategies of Competitors
  Competitive     Strategic Intent    Market Share        Competitive         Strategic        Competitive
    Scope                              Objective           Position            Posture          Strategy
                                     • Aggressive       •Getting                             •Striving for
                  • Be dominant                                            •Mostly
• Local                              expansion via      stronger; on the                     low-cost
                  leader                                                   offensive
                                     acquisition &      move                                 leadership
                                     internal growth                                         •Mostly
                  • Overtake                            •Well-             •Mostly
• Regional                                                                                   focusing on a
                  industry leader                       entrenched         defensive
                                                                                             market niche
                                                        •Stuck in the      •Combination of   •Pursuing
                  • Be among         • Expansion via
• National                                              middle of the      offensive &       differentiation
                  industry leaders   internal growth
                                                        pack               defensive         based on
                                                        •Going after a                       – Quality
                                     • Expansion via                       •Aggressive       – Service
• Multi-country   • Move to top 10                      different
                                     acquisition
                                                        position
                                                                           risk-taker        – Technology
                                                                                             superiority
                  • Move up a                                                                – Breadth of
                                     • Hold on to       •Struggling;       •Conservative
• Global          notch in                                                                   product line
                                     present share      losing ground      follower
                  rankings                                                                   – Image &
                                     •Give up                                                reputation
                  • Maintain                                                                 – More value
                                     present share to
                  current position                      •Retrenching to                      for the money
                                     achieve short-
                                     term profits       a position that                      – Other
                                                        can be defended                      attributes
                  • Just survive

                                                                                                        44
      Assessing a Company’s 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
                                                      45
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
                                                                                        46
A Weighted Competitive Strength Assessment
  KSF/Strength Measure             Weight   ABC Co.     Rival 1    Rival 2   Rival 3   Rival 4

Quality/product performance         0.10      8/0.80     5/0.50    10/1.00   1/0.10    6/0.60
     Reputation/image               0.10      8/0.80     7/0.70    10/1.00   1/0.10    6/0.60
 Manufacturing capability           0.10      2/0.20    10/1.00     4/0.40   5/0.50    1/0.10
    Technological skills            0.05     10/0.50     1/0.05     7/0.35   3/0.15    8/0.40
Dealer network/distribution         0.05      9/0.45     4/0.20    10/0.50   5/0.25    1/0.05
  New product innovation            0.05      9/0.45     4/0.20    10/0.50   5/0.25    1/0.05
    Financial resources             0.10      5/0.50    10/1.00     7/0.70   3/0.30    1/0.10
   Relative cost position           0.35      5/1.75    10/3.50     3/1.05   1/0.35    4/1.40
Customer service capability         0.15      5/0.75     7/1.05    10/1.50   1/0.15    4/1.60
      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
                                                                                         47

				
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