Chapter 4 Industry and competitor analysis Industry analysis Competitor analysis.
Industry Competitor Analysis
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Transcript of Industry Competitor Analysis
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Industry & Competitor Analysis
GET 2001 Strategy Notes Series
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Industry Analysis
• The first set of notes – Described the use of supply chains to map
industry-market connections and to identify and begin to analyze likely industries and markets.
– Introduced the value chain as the more or less integrated collection of activities firms do to transform inputs into outputs -- and value.
– And outlined some techniques for describing and analyzing markets.
• This set of notes focuses on industries and theories and tools for describing and analyzing them.
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The Supply Chain
Raw Primary Product Marketer/
Material Manufacturer Fabricator Producer Distributor RetailerExtractor
Manufacturing Supply Chain
Rainmaker Practitioner Contractor
Service Supply Chain
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Value Chain
• The value chain is really a cross-linked network of distinct activities that affect the cost or performance of the others.
• Optimizing the links as well as the functions or activities so that the entire chain supports a strategy can yield a powerful, durable, hard-to-duplicate strategic advantage.
Human Resource Management
InboundLogistics
Operations OutboundLogistics
Marketing/Sales
After SalesService
MarginTechnology Development
Procurement
Infrastructure
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Market Analysis: Perceptual Map
• Map the key products or services along the dimensions that are most important to the buyers and influencers.
Quality
Cost
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Market/Industry Analysis:Competitors Table
• Chart the competitors, noting how they compete.
Market Share
Quality CostTimeli-ness
Notes
Competitor1 15% H H MCompetitor2 25% L L H v. aggressiveCompetitor3 5% M M HCompetitor4 20% L L H quality slipping Competitor5 15% M M H
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Industry Analysis
• Industries are the circles in the supply chain diagram.
• Each industry is a set of firms that operate in the same space in a supply chain, competing to control some of the space and so capture value.
• Industries have structure, history/ trajectories and competitive dynamics that set the context for new entrants.
• Industries also operate within the macro environment -- where most analysis starts.
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Scan the Environment
• In business terminology, the environment consists of all the external forces that impinge on the industry, its markets and its firms.
• Needless to say, there are a lot of potentially relevant factors.
• The following picture summarizes common forces; the following tables list some indicators of these forces.
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Environmental Forces
Firm/Organization:
StructureCulture
Competencies Resources
Industry
Trade Association
Government
Union/employees
Competitors
Creditors Suppliers
Customers
Communities
Stockholders
Sociocultural Forces
Political/Legal Forces
Technological Forces
EconomicForces
Macroenvironment
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Environmental Forces Indicators ECONOMIC TECHNOLOGICAL
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment levels
Wage/price controls
Devaluation/revaluation
Energy availability & cost
Disposable & discretionary income
Total federal spending for R&D
Total industry spending for R&D
Focus of technological efforts
Patent protection
New products
New technologies
New developments in technologytransfer from lab to marketplace
Productivity improvementsthrough automation
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POLITICAL-LEGAL SOCIOCULTURAL
Antitrust regulations
Environmental protection laws
Tax laws
Special incentives
Foreign trade regulations
Attitudes toward foreign companies
Laws on hiring and promotion
Stability of government
Lifestyle changes
Career expectations
Consumer activism
Rate of family formation
Growth rate of population
Age distribution of population
Regional shifts in population
Life expectancies
Birth rates
Environmental Forces Indicators
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Scan the Environment
• The challenge is to sort through the noise to find the key strategic factors for your organization or industry or market.
• This requires a constant process of scanning, which is both art and science.
• As you conduct various analyses of your industry or markets, keep track of the outside forces that affect them, and especially the trends and discontinuities -- the opportunities and threats -- driven by these forces.
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Environmental AnalysisEconomic, Sociocultural, Technological, Political-Legal Factors
Interest Group
Analysis
Market/Buyer Analysis
CompetitorAnalysis
SupplierAnalysis
Governmental Analysis
Resource Analysis
SelectSTRATEGIC FACTORS
ieOpportunities
Threats
Environmental Analysis Informs All Other Analyses
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Env.Forces
Communities
Creditors
Customers
Employees
Stockholders
Suppliers
Etc.
Economic
1.2.
1.2.
Stake-holders
1.2.
1.2.
Tool: Matrix for Tracking Environmental Forces
Technological Political-Legal Sociocultural
Note how each force or set of forces affects each stakeholder group...
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Tool: Force Field Analysis
Organization
Can be done for an organization or an industry.
Each arrow is a force, with the lengths indicating relative strength.
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Tool: External Strategic Factor Analysis Summary
Opportunities:
Threats:
Total Weighed Score: 1.00
1 2 3
WeightedFactors Weights Rating Score Comments
4 5
Notes: 1. List opportunities and threats (5-10 each) in column 1.2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor.4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4.5. Use Column 5 (Comments) for rationale used for each factor.6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment.
c
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Tool: Industry ScenariosTool: Industry Scenarios
A tool for exploring the impact of major shifts in the underlying context:1. Examine possible shifts in environmental forces.2. Identify uncertainties in each of the forces.3. Identify causal factors behind the uncertainties.4. Make range of assumptions about each causal factor.5. Combine assumption into internally consistent scenarios.6. Analyze the industry situation under each scenario.7. Determine sources of competitive advantage under each scenario.8. Predict competitor’s behavior under each scenario.
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Industry Structure
• Once you understand some of the forces affecting your industry, it is useful to look at the structure of the industry, and especially the power relations that define the interactions within the industry.
• Actually, it often works best to start with this industry analysis and then examine how larger trends might shape or change the picture.
• The key tool for defining industry structure is Porter’s Five Forces Model -- the one Hamilton presented in detail (see notes in course materials).
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Tool: Porter’s Five Forces Model (adjusted)
Threat from Substitutes
Suppliers’ Power
Threat from New
Entrants
Buyers’ Power
Rivalryof
Firms
Power of other Stakeholders
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Tool: Porter’s Five Forces Model, (adjusted)
• Applying microeconomic theory, Porter highlights the forces that affect a firms ability to raise prices and earn profits.
• The stronger a force, the more it limits the industry firms’ ability to set prices.
• Thus, strong forces are threats because they are likely to reduce profits; weak forces are opportunities because they may allow firms a chance to earn greater profits.
• The pattern of forces shape an industry and constrain firms within the industry -- but industry structure is subject to change as the environment, each force, and each participant’s strategy change.
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Tool: Porter’s Five Forces Model, Threat of Entry
• Industries that are hard to enter are cozy for insiders, but also often attractive to outsiders longing for the value being shared by so few.
• Barriers to entry make it harder for newcomers to play.– Fierce reaction by incumbents.– Size of payoff/relation of supply to demand.– Economies of scale:
• minimum efficient scale of production• distribution or sales networks
– Pioneering brand advantages.– Experience curve.– Licenses or patents. – Cost of exit.
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Tool: Porter’s Five Forces Model, Threat of Substitution
• Industries with few substitute products are more attractive than those with many substitutes.
• Effective substitutes can often provide ways in for upstarts.
• The threat of substitutes is often the weakest of the forces -- except during times of high demand or fast change, when interlopers may see opportunities.
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Tool: Porter’s Five Forces Model, Buyer Power
• Attractive industries feature disorganized, small customers, with little purchasing and negotiating power.
• Buyers gain power when:– They are large, relative to the seller
(superstores).– They are organized (eg., a coop).– It is easy to switch to another supplier (eg.,
when products are standard).– They could integrate backwards and so take
over a supplier.
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Tool: Porter’s Five Forces Model, Supplier Power
• Attractive industries feature small and disorganized suppliers.
• Suppliers gain power when:– They are large, relative to the buyers. (Alcoa).– It is difficult for buyers to switch to competing
suppliers. (Custom products, proprietary information).
– They pose a credible threat of integrating forward and taking over the buyers’ functions.
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Tool: Porter’s Five Forces Model, Industry Rivalry
• Attractive industries are controlled by monopolies or gentlemanly oligopolies. – On the other hand, the more the players, and the
more equally matched, the closer the industry approximates “perfect competition” and minimum profits.
• Rivalry is reduced when:– Power is concentrated (C4 Index )– Competitors can truly differentiate.– It is easy to exit.– Demand is stable and predictable.– Regulation takes the edge off.
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Tool: Porter’s Five Forces Model, Other Stakeholders’ Power
• Governments (if not in the environmental scan), unions, creditors (if not a supplier), advocacy groups (eg., environmentalists) can all constrain industries.– Regulated industries– Teamsters– Institutional investors – Bottle bills
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Industry Dynamics
• The weakness of Porter’s model is its static nature. It provides a great snapshot of power relations and is a great tool for focusing research, but may not capture the direction of change in an industry.
• Because most industries are dynamic, it is critically important to stay alert to trends -- and more importantly sudden changes of patterns or context (such as new technologies or regulations) -- that might change everything.
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Industry Dynamics
• At the simplest level, it is important to remember that industries have life cycles.– Newer industries are often fragmented, sellers’
domains with many niches and relatively few constraints.
– More mature markets tend to be more consolidated, with more homogenous products, fewer niches, and more intense competition amongst the remaining firms.
– Declining industries can be fiercely competitive -- if exit barriers are high -- or more relaxed, if attention is elsewhere.
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Industry Dynamics
• But increasing numbers of industries evolve and change so quickly, that a life cycle analysis can be misleading.
• Theorists like D’Aveni have labeled fast-moving industries with unstable technological foundations hypercompetitive.– In hypercompetitive industries, everything
speeds up, companies compete on many fronts at once and leapfrog each other in a breathless race towards an ever-receding goal.
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Industry Dynamics
• In hypercompetitive environments:– Advantages erode constantly.– Driving firms to risk huge new investments --
eg., betting the firm on a new information technology or chip design.
– Or pushing firms to shift competition from competitive arena to competitive arena -- first trying to improve quality, then trying to build deep pockets, to buy experience, etc.
• In the end, as the such industries descend into the world of perfect competition, only deep pockets survive....
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Tool: Four Arena Analysis
• One tool for studying trends and looking for discontinuities is D’Aveni’s Four-Arena Analysis.
• He argues that firms can compete in four arenas -- cost/quality; timing/know-how; barriers to entry; and deep pockets --
• And that competition in each arena escalates up a ladder of intensity until competitors fall out, or shift arenas.
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Tool: Four Arena Analysis
• Thus the analysis consists of:– identifying which arenas are hot;– tracing the ladder of escalation;– trying to predict when the competition
might shift into a new arena;– trying to predict the next hot arena.
• An obvious strategy for a new entrant is to stake out a new arena of competition before the established players move.
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Tool: Four Arena Analysis
• Cost & Quality– Cost leadership vs
differentiation
• Timing & Know-how– First mover
advantages vs fast-follower advantages
– Experience Curve
• Barriers to Entry– Knowledge, capital barriers,
etc (often built with timing & know-how)
– Patents & other legal walls.– Distribution agreements or
patterns.– The competitive landscape.
• Deep Pockets– Brawn often overcomes
position and brains and speed.
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Case: Four-Arena Analysis of the Uniform Services Industry
• Rental of uniforms, rags, mats.• Blue collar origins.
– From auto repair shops to corporate logos.
• Dispersed but consolidating.– Due to government regulation and
technological change.
• Players: – Cintas, Aramark, Unitog, Unifirst, G&K,
many others.
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Some high points: 1977 - Splash! Aramark EntersAnd shakes up a sleepy industry.
1986 - Slosh! Uncle Sam Wades InWith the Clean Water Act, making Deep Pockets essential.
1992 - Gasp! Recession & the Clean Air ActAccelerate consolidation.
Whewie! 30 Years of High MarginsFor the survivors.
Case: Four-Arena Analysis of the Uniform Services Industry
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Case: Four-Arena Analysis of the Uniform Services Industry
• Each color is a strategic move (purchases, new plants, new routing systems...) in a given arena.
• Cintas’ 50 moves, mostly in Cost-Quality & Timing-Know-how, set the pace; Aramark’s 25 moves provided the drama; G&K was surprisingly aggressive.
C in ta s A ra m a rk U n ifirs t U n ito g G & K0
5
1 0
1 5
2 0
2 5
C in ta s A ra m a rk U n ifirs t U n ito g G & K
C /Q T /K S H D P
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• This tracks change in the Timing-Know-how arena.• Each color is an type of innovation, in logistics or
plant design or service.• Note the decreasing amount of time it takes for
imitation or replication. It’s time to shift arenas.
Case: Four-Arena Analysis of the Uniform Services Industry
1970 1975 1980 1985 1990 1995 2000
G&K
Unifirst
Unitog
Aramark
Cintas
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• This tracks change in the deep-pockets arena. For a variety of reasons, the industry was consolidating.
• Despite its lead in other arenas, and its 55 small purchases, Cintas was being outclassed by Aramark’s 7 huge purchases of market share and know-how. Who will be bought next?
- 50,000100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000
Cintas55
Aramark7
Unitog15
Unifirst8
G&K2
1991 1992 1993 1994 1995 1996
Case: Four-Arena Analysis of the Uniform Services Industry
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• Conclusions:– There were some geographical, market-segment and
service-based strongholds– But all were eroding as the industry consolidated and
know-how was developed or bought.– Still, the strongest three or four had built formidable
barriers to entry, mostly in the form of layers of advantage in know-how and service and operations.
– Which meant very high stakes -- $70 million per year in capital expenditures just to stay in the game.
– Forcing new entrants to partner with one of the big few, or shift the rules of the game dramatically.
Case: Four-Arena Analysis of the Uniform Services Industry
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• The competitor table introduced in the last set of notes is a good place to start a competitor analysis.
• The table simply summarizes the main players and their central modes of competing (or their strengths and weaknesses, or other important dimensions).
Competitor Analysis
Market Share
Quality CostTimeli-ness
Notes
Competitor1 15% H H MCompetitor2 25% L L H v. aggressiveCompetitor3 5% M M HCompetitor4 20% L L H quality slipping Competitor5 15% M M H
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• Sometimes it is useful to subdivide industries into strategic groups -- ie., groups of firms that pursue similar strategies with similar resources.
Competitor Analysis: Strategic Groups
Price
Selection
Arby’s, Burger King, Domino’s, Hardees,
McDonalds, Taco Bell, Wendy’s
ChiChi’s, Olive Garden, Red Lobster
Country Kitchen, Denny’s, Diners,
Shoney’s
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• While useful, the competitor table and the strategic groups are, like Porter’s Analysis, essentially static.
• Just as the Four-Arena Analysis is useful for using history to make guesses about the future -- especially about how trends might stop and the ground might shift --
• Hamilton et al’s Core Competency Strategic Intent matrix is useful for tracing -- and predicting -- shifts in competitors’ relative power.
Dynamic Competitor Analysis
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Tool: CCSI Matrix
• The CCSI matrix works like a flip-book to bring inter-firm dynamics alive.
• Matrices are made at regular intervals– Yearly or quarterly depending on how fast things are
changing
• The two dimensions of the matrix are:– Core Competency: firms’ relative capacity -- as
measured by Tobin’s Q or market/book value or defect rates or as rated by industry experts.
– Strategic Intent: firms’ relative aggressiveness -- as measured by R&D expenditures or capital investments or analysis of press releases.
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Strategic IntentPassiv
eAverag
eAggressiv
e
Low
Avera
ge
Hig
h
Core
C
ap
ab
ilit
ies
Tool: CCSI Matrix
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• Each competitor is mapped as a circle:– the size of which
reflects sales or capitalization or assets
– and the pie slice in which reflects free cash or other available resources
Tool: CCSI Matrix
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Case: CCSI Analysis of the early 90s Automobile Industry
• Flip the through the following three slides fast, noting:– The decline of Honda & Toyota– The ascendancy of Ford – General Motors unsucessful run at
leadership– Chrysler’s repositioning as an up and
coming star.
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Passive
AggressiveStrategic Intent
Core
C
ap
ab
ilit
ies
Automobile Industry 1990
Honda
General Motors
Ford
Toyota
Chrysler
1.0
.5
1.5
(1.0)
(1.5)
(.50)
1.04 1.08 1.12.88 .92 .96
Figure 5
Low
Hig
h
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Strategic IntentPassiv
eAggressiv
e
Core
C
ap
ab
ilit
ies
Automobile Industry 1991
1.0
.5
1.5
(1.0)
(1.5)
(.50)
1.04 1.08 1.12.88 .92 .96
General Motors
Toyota
Chrysler
Honda
Ford
Figure 6
Low
Hig
h
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Passive
Aggressive
Core
C
ap
ab
ilit
ies
Automobile Industry 1992
1.0
.5
1.5
(1.0)
(1.5)
(.50)
1.04 1.08 1.12.88 .92 .96
General Motors
Ford
Toyota
Chrysler
Honda
Strategic IntentFigure 7
Low
Hig
h
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From Analysis to Strategy
• Most of these analytic tools support different approaches to strategy.
• The next set of notes will begin to discuss strategy: The process of pursuing the organization’s mission -- while managing the relationship of the organization to its environment.
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The Strategy Process
Environmental Scanning
Evaluation &Control
StrategyImplementation
StrategyFormulationMission
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Bibliography
• Richard D’Aveni, Hypercompetition (Free Press: 1994).• Pankaj Ghemawat, Strategy and the Business Landscape (Prentice
Hall, 2001).• Robert Hamilton lecture notes, 1998.• Robert Hamilton, E. Eskin, M. Michael, "Assessing Competitors: The
Gap between Strategic Intent and Core Capability", International Journal of Strategic Management-Long Range Planning, Vol. 31, No. 3, pp. 406-417, 1998
• TL Hill lecture notes, 1999, 2001.• J. D. Hunger & T.L. Wheelan, Essentials of Strategic Management (Prentice
Hall, 2001).• Sharon Oster, Modern Competitive Analysis, 2nd Edition (Oxford
University Press, 1994), for Porter and other economics-based strategy.
• Henry Mintzberg & James Brian Quinn, Readings in the Strategy Process, 3rd Edition (Prentice Hall, 1998).
• Michael Porter, Competitive Advantage (Free Press, 1985).