COMM 401 Strategy _ Competition

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					COMM 401
Strategy & Competition

The External Environment: (Ch 3)
Opportunities, Threats, Industry
Competition, and Competitor Analysis

                                  Noor Shawwa
        Chapter 3: Key Themes
   The four activities of the external environmental analysis
   The general environment & its 6 segments
   The industry environment & how the five competitive forces
    determine an industry’s profit potential
   Strategic groups & how they influence a firm’s competitive
   What firms need to know about their competitors & different
    methods used to collect competitive intelligence

                                                           Noor Shawwa
        External Environment

  It is essential to understand what is happening outside
  of the firm itself (i.e. external environment) and how
  that can affect the firm’s ability to achieve strategic
  competitiveness and earn above average returns.

      Global Competition, Technological change, Socio-cultural
       changes affecting product demands and labour practices,
       Government practices and laws.

 Identify Opportunities and Threats that are relevant for the firm

                                                                  Noor Shawwa
      External Environment

Three components of external environment:
 General Environment: Demographic, Political/legal, socio-
  cultural, economic, technological, global
 Industry Environment: Threat of new entrants, Threat of
  product substitutes, Power of buyers, Power of suppliers,
  Intensity of rivalry
 Competitive Environment: understanding of firm’s current

                                                       Noor Shawwa
    General Environment Components

Demographic                    Political/Legal
                (5 Forces)
   Global                      Economic


                                         Noor Shawwa
       External Analysis
Should be done on a continuous basis (4 activities):
 Scanning: Identifying early signals of environmental changes
  and trends
 Monitoring: Detect meaning by ongoing observations of
  environmental changes and trends
 Forecasting: Developing projections of anticipated outcomes
  based on monitored changes and trends
 Assessing: Determining the timing & importance of
  environmental changes and trends for firms' strategies & their
                                                   Table 3-2 (p74)

                                                             Noor Shawwa
         General Environment Components

                   Population size                  Geographical Distribution
Demographic        Age structure                    Income distribution
                   Ethnic Mix                       Immigration

                     Women in the workforce         Concerns about the environment
Socio-cultural       Workforce diversity            Shifts in 2 career preferences
  Segment            Environmental Concerns         Shifts in preferences regarding product
                     Work life quality attitudes     / service characteristics

                   Competition Laws                 Education philosophies & policy
Political/Legal                                      Government econ. involvement /
  Segment          Labour Laws                       ownership Philosophies
                   Taxation laws
                                                     De-/ Regulation philosophy

                                                                                   Noor Shawwa
        General Environment Components

                 Inflation & interest rates    Trade deficits or surpluses
  Economic       Personal savings rate          Budget deficits or surpluses
                 Business savings rates        Gross domestic product

               Product innovations             Focus of private & government-
Technological  Process Innovations              supported R&D expenditures
  Segment                                       New communication
               Applications of knowledge        technologies

                 Important political events    Newly industrialized countries
                                                Different cultural and institutional
  Segment        Critical global markets        attributes

                                                                              Noor Shawwa
       Porter’s 5-Forces Model
Competitive Forces   Substitutes

        Suppliers     Rivalry      Buyers


                                            Noor Shawwa
     Porter’s 5-Forces Model
      Threat of New Entrants

An attractive industry (e.g. high profits & growth) attracts new
players to enter and thus increases competition.
Barriers to Entry reduce the threat of new entrants:
     Economies of Scale
     Product Differentiation
     Capital Requirements
     Switching costs
     Access to Distribution Channels
     Cost Disadvantages Independent of Scale
     Government Policy
     Expected Retaliation

                                                           Noor Shawwa
        Porter’s 5-Forces Model
         Bargaining Power of Suppliers
Supplier groups are likely to be powerful if:
    Supplier industry is dominated by a few firms
    Suppliers’ products have few substitutes
    Buyer is not an important customer to supplier
    Suppliers’ product is an important input to buyers’ product
    Suppliers’ products are differentiated
    Suppliers’ products have high switching costs
    Supplier poses credible threat of forward integration

  Suppliers exert power in the industry by threatening to raise prices,
  reduce quality, and/or impose terms/conditions on their buyers.
  Powerful suppliers can squeeze industry profitability if firms are
  unable to recover cost increases

                                                                  Noor Shawwa
         Porter’s 5-Forces Model
         Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
    Buyers are concentrated or purchases are large relative to
     seller’s sales
    Purchase accounts for a significant fraction of supplier’s sales
    Products are undifferentiated
    Buyers face few switching costs
    Buyers’ industry earns low profits
    Buyer presents a credible threat of backward integration
    Product unimportant to quality
    Buyer has full information

  Buyers compete with supplying industry by: Bargaining down prices,
  forcing higher quality, and playing firms off against each other.

                                                               Noor Shawwa
        Porter’s 5-Forces Model
         Threat of Substitute Products

Keys to evaluating substitute products:

   Products with improving price / performance tradeoffs
    relative to present industry products
    Example: Surface travel in place of air travel

Products with similar function limit the prices firms can charge

                                                            Noor Shawwa
          Porter’s 5-Forces Model
            Rivalry Among Existing Competitors

   Intense rivalry often plays out in the following ways
       Jockeying for strategic position
       Using price competition
       Staging advertising battles
       Increasing consumer warranties or service
       Making new product introductions
   Occurs when a firm is pressured or sees an opportunity
       Price competition often leaves entire industry worse off
       Advertising battles may increase total industry demand, but
        may be costly to smaller competitors

                                                                Noor Shawwa
       Porter’s 5-Forces Model
        Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when
 Numerous or equally balanced competitors
 Slow growth in the industry
 High fixed costs
 High storage costs
 Lack of differentiation or switching costs
 Capacity added in large increments
 Diverse competitors
 High strategic stakes
 High exit barriers

                                                     Noor Shawwa
      Porter’s 5-Forces Model
        Rivalry Among Existing Competitors

High Exit Barriers are economic, strategic and emotional
factors which cause companies to remain in an industry
even when future profitability is questionable
     Specialized assets
     Fixed cost of exit (e.g., labour agreements)
     Strategic interrelationships
     Emotional barriers
     Government and social restrictions

                                                           Noor Shawwa

   An industry is a group of firms producing products that
    are close substitutes.
   “A group of firms whose products have so many of the
    same attributes that they compete for the same buyers”
   Most large firms operate in multiple industries – we will
    deal with that issue in the class on diversification and
    portfolio analysis (corporate strategy)

                                                           Noor Shawwa
   Strategic Groups

A strategic group is a group of firms in an industry
following the same or a similar strategy along the same
strategic dimensions.

Requires answering two questions:

1. What industry (or business) are you in?
2. What are the dimensions which are relevant to the firms’
   performance within the industry?” (“what is important to
   the customer?”)

                                                       Noor Shawwa
                      Shaftebury (BC)  Big Rock (AB)
                      McAuslan (QC)   Unibroue (QC)          Sleeman (ON)
                      Premium (ON) Brick’s Formosa (ON)
                    Kawartha Lakes
                        Yukon Red
                          & Gold
                                        Island (BC)
                                                            Moosehead (NB)
                                                        Sleeman’s Okanagan (BC)
                                                          & Upper Canada (ON)
                           (YT)          Brick (ON)
                                                                   Labatt’s Oland
                                                                    (Keith) (NS)
                Agassiz (MB)
               Great Lakes (ON)
                                    Whistler (BC)
                                   Creemore (ON)
            Peak (AB) Bear (BC)    Fort Garry (MB.)                                                in the
           TreeMid-range (BC)
               (BC) Nelson         Mid-range
                                  Hart Robinson (ON)
               Tin Whistle (BC)                                                                Canadian
                  Micro             Regional
                                 Granville Island (BC)
              Niagara Falls (ON)    Les Brasseurs                                               Brewing
               Wellington (ON)       du Nord (QC)
               Quidi Vidi (NF)                           Pacific
                                                      Western (BC)      Labatt
                                                      Lakeport (ON)
                                                   Great Western (SK)    Regular
           They have similar RegularLaker (ON)          Regional

                                                      Northern (ON)     Molson
                                                    Labatt’s Columbia    National
           strategies, but      Yukon’s
                                Chilkoot             (Kokanee) (BC)
           distance prevents      (YT)

           them from being head-
           to-head competitors.
           Micro                                 Regional                           National
                           Brewery Size / Geographic Coverage                                   Circle Size
                                                                                               not Scaled to
                                                                                               sales Volume
       Strategic Groups

1.   Defining what the industry is can be problematic
2.   The dimensions along which to map the industry
     members may be subjective
3.   The strengths of the 5 competitive forces differ across
     strategic groups. Thus firms within various strategic
     groups have different pricing policies
4.   The closer groups are in terms of their strategies &
     dimensions emphasized, the greater the chance
     competitive rivalry between groups

                                                          Noor Shawwa
      Key Success Factors

An industry’s key success factors (KSFs) are those things that most
  affect the ability of industry members to prosper in the
  marketplace. KSFs concern what every industry member must
  be competent at doing or concentrate on achieving in order to be
  competitively and financially successful
   They are the prerequisites for industry success

The following three questions help identify an industry’s KSF’s:
   1) On what bases do customers choose between competing
      brands of sellers?
   2) What must a seller do to be competitively successful – what
      resources and competitive capabilities does it need?
   3) What does it take for sellers to achieve a sustainable
      competitive advantage?

                                                               Noor Shawwa
      Key Success Factors
Technology related
    Scientific research expertise
    Technical ability to make innovative improvements (products,
     service, process)
    Expertise in a given technology

Manufacturing related
    Low cost production efficiency (scale economies)
    Quality of manufacturing
    High utilization of fixed costs
    Access to labor and materials
    Labor productivity
    Low-cost engineering and design
    Ability to customize – meet various needs of clients

                                                              Noor Shawwa
        Key Success Factors
Marketing related
     Fast, accurate technical assistance
     Courteous customer service
     Accurate filling of buyer orders (few back-orders)
     Breadth of product line and product selection
     Merchandising skills
     Attractive styling/packaging
     Customer guarantees and warranties
Distribution related
     Gaining ample space on retailers shelves
     A strong network of wholesale distributors/dealers
     Having company-owned retail outlets
     Low distribution costs
     Fast Delivery

                                                           Noor Shawwa
       Key Success Factors
Skills related
     Superior workforce talent (accounting, lawyer etc.)
     Quality control know-how
     Design expertise (fashion industry)
     Expertise in a particular technology
     Ability to innovate
     Ability to move through the R&D, design and manufacturing
        phases quickly
Other related
     Favorable image/reputation with buyers
     Overall low cost
     Convenient locations
     Effective customer service
     Access to financial capital
     Patent protection

                                                             Noor Shawwa
        Competitor Analysis

Future Objectives:                        Response
How do our goals compare to our
competitors’ goals?                       What will our
                                          competitors do
Current Strategies:                       in the future?
Does our current strategy support
                                           Where do
changes in the competitive environment?    we have a
Assumptions:                               advantage?
What assumptions do our competitors
hold about the industry & themselves?     How will this
                                          change our
Capabilities:                             relationship
How do our capabilities compare to        with our
our competitors?

                                                  Noor Shawwa

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