UNIT – II

INDUSTRY AND
COMPETITIVE ANALYSIS
 Elements of SM
1. Strategic Analysis
2. Strategic Choice
3. Strategy Implementation
 Strategic Analysis
• Concerned with understanding the forces of
change and its impact on the choice of
strategy of an organisation.
• Internal and External environment could
pose major constraints and also provide
opportunities
• Competitive analysis helps the company to
deal with the uncertainty
Outcomes from External and Internal
Environmental Analyses

Examine opportunities Examine unique resources,

and threats capabilities, and
competencies
(sustainable competitive
advantage)
 The Context of Internal Analysis
• Effective analysis of a firm’s internal
environment (learning what the firm can do )
requires:
– Nurturing an organizational setting in which
experimentation and learning are expected and
promoted
– Using a global mind-set
– Thinking of the firm as a bundle of
heterogeneous resources and capabilities that
can be used to create an exclusive market
position
Components of Internal Analysis
 Creating Value
• By exploiting their core competencies or
competitive advantages, firms create value
• Value is measured by
– A product’s performance characteristics
– The product’s attributes for which customers are
willing to pay
• Firms create value by innovatively bundling
and leveraging their resources and
capabilities
 Creating Competitive Advantage
• Core competencies, in combination with
product-market positions, are the firm’s most
important sources of competitive advantage
• Core competencies of a firm, in addition to its
analysis of its general, industry, and
competitor environments, should drive its
selection of strategies
The Challenge of Internal Analysis
• To develop and use core competencies,
managers must have
– Courage
– Self-confidence
– Integrity
– The capacity to deal with uncertainty and
complexity
– A willingness to hold people (and themselves)
accountable for their work
Resources, Capabilities and Core Competencies

• Resources
– Are a firm’s assets,
including people and the
value of its brand name
– Represent inputs into a
firm’s production process,
such as:
• Capital equipment
• Skills of employees
• Brand names
• Financial resources
• Talented managers
Resources, Capabilities and Core Competencies

• Resources
– Tangible resources
• Financial resources
• Physical resources
• Technological resources
• Organizational resources
– Intangible resources
• Human resources
• innovation resources
• Reputation resources
Resources, Capabilities and Core Competencies

• Capabilities
– The foundation of many
capabilities lies in:
• The unique skills and
knowledge of a firm’s
employees
• The functional expertise of
those employees
– Capabilities are often
developed in specific
functional areas or as part
of a functional area
 Examples of
Firms’ Capabilities
Resources, Capabilities and Core Competencies

• Core Competencies
– Activities that a firm
performs especially well
compared to competitors
– Activities through which the
firm adds unique value to its
goods or services over a
long period of time
Building Sustainable Competitive
Advantage
• Four Criteria of
Sustainable
Competitive
Advantage
– Valuable
– Rare
– Costly to imitate
– Nonsubstituable
 The internal Environment
• It comprises of
– Value system
– Mission and Objectives
– Management Structure and nature
– Internal relationships
– Human Resource
– Company Image and Brand Equity
– R & D capability
– Financial Factors
– Marketing Factors
 The External Environment

2–17
Analysis of the External Environments
• General environment
 Focused on the future
• Industry environment
 Focused on factors and conditions influencing a
firm’s profitability within an industry
• Competitor environment
 Focused on predicting the dynamics of
competitors’ actions, responses and intentions
 Components of the External Environmental Analysis

Scanning • Identifying early signals of

environmental changes and trends
Monitoring • Detecting meaning through ongoing
observations of environmental changes and trends
Forecasting • Developing projections of anticipated
outcomes based on monitored changes and trends
Assessing • Determining the timing and
importance of environmental changes and trends for
firms’ strategies and their management
Opportunities and Threats
• Opportunity
 A condition in the general
environment that, if exploited,
helps a company achieve
strategic competitiveness.

• Threat
 A condition in the general
environment that may hinder
a company’s efforts to
achieve strategic
competitiveness.

2–23
Segments of the General Environment
• The Demographic Segment
 Population size
 Age structure
 Geographic distribution
 Ethnic mix
 Income distribution

2–24
Segments of the General Environment
(cont’d)
• The Economic Segment
 Inflation rates
 Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Gross domestic product

2–25
Segments of the General Environment
(cont’d)
• The Political/Legal Segment
 Antitrust laws
 Taxation laws
 Deregulation philosophies
 Labor training laws
 Educational philosophies and
policies

2–26
Segments of the General Environment
(cont’d)
• The Sociocultural 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
Segments of the General Environment
(cont’d)
• The Technological Segment
 Product innovations
 Applications of knowledge
 Focus on R&D
 New technologies

2–28
Segments of the General Environment
(cont’d)
• The Global Segment
 Important political events
 Critical global markets
 Newly industrialized countries
 Different cultural attributes

2–29
Industry Environment Analysis
• Industry Defined
 A group of firms producing products that are
close substitutes (ex: automotive, airline, grocery
retail)
• Firms that influence one another
• Includes a rich mix of competitive strategies
that companies use in achieving strategic
competitiveness and above-average returns

2–30
The Five Forces of Competition Model
Threat of New Entrants:
Barriers to Entry
• Economies of Scale
 Marginal improvements in efficiency that a firm
experiences as it incrementally increases its size
• Factors (advantages and disadvantages)
related to large- and small-scale entry
 Flexibility in pricing and market share
 Costs related to scale economies
 Competitor retaliation

2–33
Barriers to Entry
• Product differentiation
 Unique products
 Customer loyalty
 Products at competitive
prices
• Capital Requirements
 Physical facilities
 Inventories

Marketing activities
 Availability of capital
• Switching Costs
 One-time costs customers
incur when they buy from a
different supplier
• New equipment
• Retraining employees
• Psychic costs of ending
a relationship
• Access to Distribution
Channels
 Stocking or shelf space
 Price breaks
 Cooperative advertising
allowances
Barriers to Entry
• Cost Disadvantages • Expected retaliation
Independent of Scale  Responses by existing
 Proprietary product competitors may depend
technology on a firm’s present stake
 Favorable access to raw in the industry (available
materials business options)
 Desirable locations
• Government policy
 Licensing and permit
requirements
 Deregulation of
industries
Bargaining Power of Suppliers
• Supplier power increases when:
 Suppliers are large and few in number.
 Suitable substitute products are not available.
 Individual buyers are not large customers of
suppliers and there are many of them.
 Suppliers’ goods are critical to the buyers’
marketplace success.
 Suppliers’ products create high switching costs.
 Suppliers pose a threat to integrate forward into
buyers’ industry.
Bargaining Power of Buyers
• Buyer power increases when:
 Buyers are large and few in number.
 Buyers purchase a large portion of an industry’s
total output.
 Buyers’ purchases are a significant portion of a
supplier’s annual revenues.
 Buyers’ switching costs are low.
 Buyers can pose threat to integrate backward into
the sellers’ industry.
Threat of Substitute Products
• The threat of substitute products increases
when:
 Buyers face few switching costs.
 The substitute product’s price is lower.
 Substitute product’s quality and performance are
equal to or greater than the existing product.

• Differentiated industry products that are

valued by customers reduce this threat.
Intensity of Rivalry Among Competitors
• Industry rivalry increases when:
 There are numerous or equally balanced
competitors.
 Industry growth slows or declines.
 There are high fixed costs or high storage costs.
 There is a lack of differentiation opportunities or
low switching costs.
 When the strategic stakes are high.
 When high exit barriers prevent competitors from
leaving the industry.
Interpreting Industry Analyses

Low entry
barriers
Suppliers and
buyers have strong
positions Unattractive
Strong threats Industry
from substitute
products
Intense rivalry
Low profit potential
among
competitors
Interpreting Industry Analyses (cont’d)

High entry
barriers
Suppliers and
buyers have weak
positions Attractive
Few threats from Industry
substitute
products
Moderate rivalry
among High profit potential
competitors
Competitor Analysis
• Competitor Intelligence
 The ethical gathering of needed information and
data that provides insight into:
• A competitor’s direction (future objectives)
• A competitor’s capabilities and intentions
(current strategy)
• A competitor’s beliefs about the industry (its
assumptions)
• A competitor’s capabilities
Competitor Analysis (cont’d)

Future Objectives • How do our goals

compare with our
competitors’ goals?
• Where will the
emphasis be placed in
the future?
• What is the attitude
toward risk?
Competitor Analysis (cont’d)

Future Objectives
• How are we currently
competing?
Current Strategy • Does this strategy
support changes in the
competitive structure?
Competitor Analysis (cont’d)

Future Objectives

• Do we assume the
Current Strategy future will be volatile?
• Are we operating
Assumptions under a status quo?
• What assumptions do
our competitors hold
about the industry and
themselves?
Competitor Analysis (cont’d)

Future Objectives

Current Strategy

Assumptions
• What are our strengths
and weaknesses?
Capabilities • How do we rate
compared to our
competitors?
Competitor Analysis (cont’d)

Future Objectives Response

• What will our

Current Strategy competitors do in
the future?
Assumptions • Where do we hold an
advantage over our
competitors?
Capabilities • How will this change
our relationship with
our competitors?
Globalization
• Globalization refers to the strategy of approaching
worldwide markets with standardized products
• Awareness of the strategic opportunities faced by
global corporations and of the threats posed to
them is important to strategic planners
• Understanding the scope of competing in global
markets is rapidly becoming a required
competence of strategic managers
 49

Multidomestic and Global Industries

A
A multidomestic
multidomestic industry
industry
competition
competition isis essentially
essentially
segmented
segmented from
from country
country toto
country
country (food
(food retailing)
retailing)

A
A global
global industry
industry is
is one
one in
in
which
which competition
competition crosses
crosses
national
national borders
borders (tires,
(tires, athletic
athletic
shoes)
shoes)
Projected Economic Growth
Why Firms Globalize?
• Earning high returns from
transferring distinctive
competencies to foreign markets
• Realizing location economies by
using lower-cost locations
• The resulting lost opportunities,
reduced income, and limited
production
• Moving down the experience
curve
- Larger global markets = more
accumulated volume
• Question: Should firms be
 21st Century Competitive Landscape

The global economy is Traditional sources of

changing
• People, goods, services and
ideas move freely across
geographic boundaries
• New opportunities emerge
in multiple global markets
• Markets and industries
become more
internationalized
competitive advantage
no longer guarantee
success
New keys to success
include:
• Flexibility
• Innovation
• Speed
• Integration
At the Start of Globalization
• External and internal assessments are
conducted before a firm enters global
markets
• External assessment involves careful
examination of critical features of the
global environment
• Internal assessment involves identification
of the basic strengths of a firm’s operations
 Opportunities and Outcomes of International
Strategy
Complexity of the Global Environment

• Factors affecting the increasing complexity

of global strategic planning:
 Multiple political, economic, legal, social, and
cultural environments
 Interactions between the national and foreign
environments are complex
 Geographic separation, cultural and national
differences, and variations in business practices
all tend to make communication and control
efforts difficult
 Extreme competition
Differences Between Factors: Environmental Factors

U.S. Operations International Operations

Use of local language required in

Language English used almost universally
many situations
Quite diverse, both between
Culture Relatively homogenous
countries and within countries
Often volatile and of decisive
Politics Stable and relatively unimportant
importance
Wide variations among countries
Economy Relatively uniform and among regions within
countries
Government Minimal and reasonably Extensive and subject to rapid
interference predictable change
Skilled labor scarce, requiring
Labor Skilled labor available training or redesign of production
methods
Poorly developed markets; capital
Financing Well-developed financial markets flows subject to government
control
4 Strategic Choices Globally
1. International strategy
 Create value by transferring skills
and products abroad.
2. Multidomestic strategy
 Maximize local responsiveness by
customizing products and marketing
strategy for local markets.
3. Global strategy
 Pursue low-cost status, offer standardized global
products.
4. Transnational strategy
 Use global learning to achieve low-cost status,
differentiation, and local responsiveness simultaneously.
 The Advantages and Disadvantages of Different Strategies
for Competing Globally
Strategy Advantages Disadvantages
International • Transfer of distinctive competencies • Lack of local responsiveness
to foreign markets • Inability to realize location economies
• Failure to exploit experience-curve
effects

Multi • Ability to customize product offerings • Inability to realize location economies

and marketing in accordance with • Failure to exploit experience-curve
domestic local responsiveness effects
• Failure to transfer distinctive
competencies to foreign markets

Global • Ability to exploit experience-curve • Lack of local responsiveness

effects
• Ability to exploit location economies

Transnational • Ability to exploit experience-curve • Difficulties in implementation because

effects of organizational problems
• Ability to exploit location economies
• Ability to customize product offerings
and marketing in accordance with
local responsiveness
• Reaping benefits of global learning
Four Basic Strategies
Escalating Commitments to International Markets
Environmental Scanning
• The screening of large amounts of information to
anticipate and interpret change in the environment.
• Environmental scanning is the process of gathering
information about events and their relationships within
an organization's internal and external environments.
• Information has two primary strategic role - in objective
setting and in strategy formulation
• The basic purpose of environmental scanning is to
help management determine the future direction of the
organization.
• They scan in order to avoid surprises, identify threats
and opportunities, gain competitive advantage, and
improve long-term and short-term planning
Environmental Scanning
• Competitor Intelligence
 The process of gathering information about competitors—
who they are?; what are they doing?
• Is not spying but rather careful attention to readily
accessible information from employees, customers,
suppliers, the Internet, and competitors themselves.
 May involve reverse engineering of competing products to
discover technical innovations.
• Global Scanning
 Screening a broad scope of information on global forces
that might affect the organization.
 Important to firms with significant global interests.
Assessing the Environment
• Forecasting
 The part of organizational planning that involves
creating predictions of outcomes based on
information gathered by environmental scanning.
• Facilitates managerial
decision making.
• Is most accurate in
stable environments.
Assessing the Environment (cont’d)
• Types of Forecasting
 Quantitative forecasting
• Applying a set of mathematical rules to a series
of hard data to predict outcomes (e.g., units to
be produced).
 Qualitative forecasting
• Using expert judgments and opinions to
predict less than precise outcomes (e.g.,
direction of the economy).
Forecasting Techniques
Various techniques are used to forecast future:
• Extrapolation is extension of present trends into the future.
• Brainstorming is qualitative approach requiring simply the
presence of people with some knowledge if the situation to
be predicted.
• Expert opinion is qualitative technique in which experts in a
particular area attempt to forecast likely developments.
• Delphi technique in which separated experts independently
assess the like hoods of special events. These assessments
are combined and sent back to each expert for fine tuning
until an agreement is reached.
• Statistical modeling is a quantitative technique that attempts
to discover casual or at least explanatory factors that link
two or more time series together.
• Scenario writing is focused descriptions of different likely
future presented in a narrative fashion
Economic Environment Analysis
• This includes the countries
 Economic condition
 Economic policies
 Stages of development
 Per capita income
 Nature of economy
 Interest rate and inflation rate
 Labour Cost
 Business Cycle stage
 Efficiency of Financial Markets
Legal Environment Analysis
• Political/Legal segment seriously influence the
nature of competition and the profitability of the
industries.
- For Ex. Tax levied on electronic items.
- Permits and Permissions.
- Import and Export controls
- Confronting with Laws and Regulations (Health, Safety
etc…)
• Regulatory frameworks have played an enabling role
for globalisation.
• Governments are working together at international
level in imposing legislative controls (Ex. Global
Warming)
• The agreements between two countries at
international level and the union of the countries
producing one type of product affect notably
Analysis of Competitive Capabilities
• Competitive capability
 Strategic Capability/Competitive capability of an
organisation is its ability to survive in the
marketplace.
 The base for the strategic capability is the
organisation’s ability to differentiate itself from
others who are offering similar products.
• Why it is Important?
 The strategic capability is necessary to cope with
the changes in the environment and to gain
competitive advantage.
 The organisation should have the internal
capability of using its resources and core
competencies in overcoming the threats and
Analysis of Competitive Capabilities
• The Strategic Capability can be related to 3 main
factors
1. Whether the organisation has the necessary resources to
deliver a new strategy.
2. Identifying competencies in relevant areas i.e. availability
of the expertise and knowledge within the organisation
3. To have an understand whether or not the organisation
has the capacity to implement and manage the change.
• The Organisation capability could be its
- Financial Capability
- Marketing Capability
- Technological Capability
- Human Resource Capability
Difference between SWOT and TOWS
• TOWS analysis is very similar to the SWOT
method.
• It is the next level of SWOT.
• TOWS simply looks at the negative factors
first in order to turn them into positive
factors.
• It was propounded by Heinz Weihrich in 1982.
• Today this model has been used for research
and strategy formulation around the globe.

2–70
TOWS Matrix
Internal Strengths Weaknesses
Factors (list key (list key
External strengths) weaknesses)
Factors
Opportunities SO Strategies: WO Strategies:
(list key strategies that strategies that
opportunities) use strengths reduce
to take weaknesses &
advantage of take advantage
opportunities of opportunities
(Maxi – Maxi) (Mini – Maxi)
Threats ST Strategies: WT Strategies:
(list key strategies that strategies that
threats) use strengths reduce
to overcome weaknesses
threats and overcome
( Maxi – Mini) threats
( Mini – Mini)
TOWS Matrix
• SO Strategies
 Seeks to mass-up firm’s strengths to exploit the
opportunities. ( Ex. – HUL)
• ST Strategies
 Attempts use the firm’s strengths to deal with
environmental threats. ( Ex. – HUL)
• WO Strategies
 Aims at minimising the weakness and maximising
the opportunities. (Ex. – Raymond's dependence for
technology)
• WT Strategies
 Tries to minimise weaknesses and threats.
 For Ex. Managerial weakness can be minimised
by training & external threat can be met by 2–72
 Identifying the Competitive
Advantage
 Competitive Advantage
• A firm’s profitability is greater than the average profitability
for all firms in its industry.
 Sustained Competitive Advantage
• A firm maintains above average and superior profitability
and profit growth for a number of years.
The Primary Objective of Strategy
is to achieve a
Sustained Competitive Advantage
which in turn results in
Superior Profit and Profit Growth.
73
Strategy, Resources, Capabilities,
and Competencies

74
 Competitive Advantage, Value
Creation, and Profitability
How profitable a company becomes depends
on three basic factors:
1. VALUE or UTILITY the customer gets from owning
the product
2. PRICE that a company charges for its products
3. COSTS of creating those products
 Consumer surplus is the “excess” utility a
consumer captures beyond the price paid.

Basic Principle: the more utility that consumers get

from a company’s products or services, the more
pricing options the company has. 75
Comparing Toyota and
General Motors

Superior value creation requires that the gap between

perceived utility (U) and costs of production (C) be
greater than that obtained by competitors.
76
 The Value Chain
A company is a chain of activities for transforming inputs
into outputs that customers value – including the
primary and support activities.

77
 Building Blocks of
Competitive Advantage
The Generic Distinctive
Competencies 
Allow a company to:
• Differentiate product offering
• Offer more utility to customer
• Lower the cost structure
regardless of the industry,
its products, or its services

 

78
  Efficiency
 Measured by the quantity of inputs it takes to
produce a given output:
Efficiency = Outputs / Inputs
 Productivity leads to greater efficiency and
lower costs:
• Employee productivity
• Capital productivity
Superior efficiency helps a company
attain a competitive advantage
through a lower cost structure. 79
  Quality
Quality products are goods and services that are:
• Reliable and
• Differentiated by attributes that customers perceive to have
higher value

The impact of quality on competitive

advantage:
• High-quality products differentiate and increase the value
of the products in customers’ eyes.
• Greater efficiency and lower unit costs are associated with
reliable products.
Superior quality = customer perception of
greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design 80
A Quality Map for Automobiles

When customers
evaluate the quality of a
product, they commonly
measure it against two
kinds of attributes:

1. Quality as Excellence

2. Quality as Reliability

81
  Innovation
Innovation is the act of creating new
products or new processes
• Product innovation
» Creates products that customers perceive as
more valuable and
» Increases the company’s pricing options
• Process innovation
» Creates value by lowering production costs
Successful innovation can be a major
source of competitive advantage – by
giving a company something unique,
something its competitors lack. 82
  Responsiveness to Customers
Identifying and satisfying customers’ needs –
better than the competitors
 Superior quality and innovation are integral to superior
responsiveness to customers.
 Customizing goods and services to the unique demands of
individual customers or customer groups.
 Enhanced customer responsiveness
Customer response time, design, service, after-sales
service and support

Superior responsiveness to customers differentiates

a company’s products and services and leads to
brand loyalty and premium pricing. 83
 The Durability of Competitive
Advantage
The DURABILITY of a company’s competitive advantage over its
competitors depends on:
1. Barriers to Imitation
Making it difficult to copy a company’s distinctive competencies
 Imitating Resources
 Imitating Capabilities
2. Capability of Competitors
 Strategic commitment
Commitment to a particular way of doing business
 Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
3. Industry Dynamism
Ability of an industry to change rapidly

Competitors are also seeking to develop distinctive

competencies that will give them a competitive edge.
84
 Why Companies Fail
 Inertia
• Companies find it difficult to change their strategies and
structures
 Prior Strategic Commitments
• Limit a company’s ability to imitate and cause
competitive disadvantage
 The Icarus Paradox
• A company can become so specialized and inner directed based on past
success that it loses sight of market realities

When a company loses its competitive advantage, its

profitability falls below that of the industry.  It
loses the ability to attract and generate resources. 
Profit margins and invested capital shrink rapidly.
85