THEME 4: EXTERNAL ANALYSIS (II). PARTICULAR ENVIRONMENT: COMPETITIVE STRUCTURE OF THE INDUSTRY. Alfonso VARGAS SÁNCHEZ

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1 THEME 4: EXTERNAL ANALYSIS (II). PARTICULAR ENVIRONMENT: COMPETITIVE STRUCTURE OF THE INDUSTRY Alfonso VARGAS SÁNCHEZ 1

2 Strengths & Weaknesses INTERNAL FACTORS Company s own values COMPETITIVE STRATEGY Opportunities & Threats EXTERNAL FACTORS Society s expectations 2

3 ANALYSIS of the PARTICULAR ENVIRONMENT DIMENSIONS: Political & legal. Economic. Social & cultural. Technological. COMPETITIVE FORCES: Current competitors. Potential entrants. Agents at the boundaries. Consumers (users). SECTOR / INDUSTRY OPPORTUNITIES & THREATS 3

4 COMPETITIVE FORCES: COMPETITIVE STRUCTURE of the INDUSTRY POTENTIAL COMPETITORS (threat of new entrants) SUPPLIERS (bargaining power) EXISTING COMPETITORS (rivalry) BUYERS (bargaining power) SUBSTITUTE PRODUCTS (threat) GOVERMENT ACTION 4

5 POTENTIAL RIVALRY (competitive threats) NEW COMPETITORS NEW PRODUCTS NEW COMPANIES RIVALS IN OTHER COUNTRIES RIVALS IN OTHER SECTORS SUBSTITUTE PRODUCTS 6 BARGAINING POWER OF SUPPLIERS 9 GOVERNMENTS 1 CURRENT RIVALRY (existing competitors) 8 ECONOMIC POWER OF OWNERS BARGAINING POWER OF BOUNDARY AGENTS 7 BARGAINING POWER OF BUYERS 10 SOCIAL POWER (social agents) 5

6 INDUSTRY STAKEHOLDERS AS DETERMINANTS OF BUSINESS ATTRACTIVENESS Stakeholders whose actions influence the company in a direct and permanent manner Stakeholders whose actions influence the company in an indirect and periodic manner Existing and potential competitors. Suppliers. Distribution channels. Consumers. Governments. Unions. Political parties. Universities. Consumers Associations. Commercial and Industrial Associations. Ecological Movements. Mass Media. Etc. 6

7 THE THREAT OF NEW ENTRANTS DEPENDS ON: ENTRY BARRIERS EXPECTED RETALIATION FROM EXISTING COMPETITORS ECONOMIES OF SCALE OTHER DISADVANTAGES IN COSTS DIFFERENTIATION CAPITAL/INVESTMENT REQUIREMENTS SWITCHING COSTS ACCESS TO DISTRIBUTION CHANNELS GOVERMENT REGULATIONS 7

8 History of tendency to retaliate fiercely? Resources available to companies for defending themselves? Degree of commitment (big investments)? Slow industry growth? 8

9 Many small or several equal-sized competitors. Slow industry growth. High fixed or storage costs. Lack of differentiation. Overcapacity situation. Strong strategic interests. High exit barriers. 9

10 1. Highly specialized assets. 2. Fixed costs for exiting. 3. Strategic inter-dependencies with other important businesses of the company. 4. Emotional barriers. 5. Social and governmental restrictions. 10

11 BARRIERS EXIT LOW HIGH ENTRY LOW HIGH Low & stable returns High & stable returns Low returns & high-risk activity High returns & high-risk activity 11

12 Those that can perform the same function or meet the same need as the product of the sector under study Defense against possible substitutes can be fortified by means of collective actions Watch out for: -Trends improving the position and price of substitutes. -Substitutes coming from highly profitable sectors. 12

13 fi Degree to which sales are concentrated in few buyers. fi Importance of product for the buyer (cost, quality). fi Product differentiation. fi Switching costs. fi Buyers profitability. fi Threat of buyers backward integration. fi Availability of substitutes. fi Information held by buyers. 13

14 Concentration of supply among few suppliers Availability of substitute inputs Bargaining power of suppliers depends on: Is the industry a key market sector for supplier? Relative importance of inputs supplied Differentiation & switching costs Threat of forward integration 14

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16 KEYS TO POSSIBLE ACTIONS ON COMPETITIVE FORCES fiproduct-market segmentation: Current and potential growth. Margins. Fewer competitors. fi Establishing entry barriers: Distribution channels. Patents. Economies of scale. fi Collaborating with suppliers: Working together to get cheaper, better quality supplies; and better service. Concentrating the operations in those suppliers for which your company is important. Not dealing with suppliers unwilling to collaborate. fi Concentrating on solvent buyers: Reward their loyalty. Make cost of switching unacceptable. fi Remain alert to emergence of substitutes; try to offer them before the competitors. 16

17 CASE STUDY: COMPETITIVE PROFILE OF THE AUTOMOBILE COMPONENTS SECTOR IN SPAIN RIVALRY FACTORS DESCRIPTION ATTRACTIVENESS Market growth Slow market growth, less than GDP growth rate Low Number of competitors Many competitors Very low Product differentiation Exit barriers Product designed to specifications provided by client Relatively lows, particularly for medium-sized companies able to reorientate their operations Very low Intermediate 17

18 CASE STUDY: COMPETITIVE PROFILE OF THE AUTOMOBILE COMPONENTS SECTOR IN SPAIN ENTRY BARRIERS FACTORS DESCRIPTION ATTRACTIVENESS Capital requirements Moderately high Intermediate Access to technology Moderately high Intermediate Government limitations Do not exist Very low The likelihood of retaliation from existing industry players Quite small Low 18

19 CASE STUDY: COMPETITIVE PROFILE OF THE AUTOMOBILE COMPONENTS SECTOR IN SPAIN BARGAINING POWER OF SUPPLIERS FACTORS DESCRIPTION ATTRACTIVENESS Number of suppliers Enough suppliers Intermediate Supplier switching costs Low High Possibility of forward integration Low High Importance of the sector for suppliers Medium Intermediate 19

20 CASE STUDY: COMPETITIVE PROFILE OF THE AUTOMOBILE COMPONENTS SECTOR IN SPAIN BARGAINING POWER OF BUYERS FACTORS DESCRIPTION ATTRACTIVENESS Number of buyers Few Low Possibility of backward integration Quite high Low Buyers profitability Normally good, but cyclical Intermediate Supplier switching costs for buyers Quite high Intermediate 20

21 CASE STUDY: COMPETITIVE PROFILE OF THE AUTOMOBILE COMPONENTS SECTOR IN SPAIN SUBSTITUTES FACTORS DESCRIPTION ATTRACTIVENESS Availability of substitutes Quite small until the client radically changes the design and the materials used Intermediate 21

22 CASE STUDY: COMPETITIVE PROFILE OF THE AUTOMOBILE AUXILIARY SECTOR IN SPAIN COMPETITIVE ATRACTIVENESS LEVEL Rivalry Entry barriers Suppliers bargaining power Buyers bargaining power Substitutes 7/4 = 1'75 9/4 = 2'25 14/4 = 3'50 10/4 = 2'50 3/1 = 3'00 Quite low Between low and intermediate Intermediate-High Between low and intermediate Intermediate Score 43/17 = 2'53 Between low and intermediate Watch out for: Very low = 1. Low = 2. Intermediate = 3. High = 4. 22

23 Because the companies operating in the same sector pursue out different strategies and obtain different market shares and different returns on their investments. 23

24 ZARA VS BENETTON Advertising. Only in-store and with conventional display: almost pure information. The group has always preferred discretion. Design: The Zara motto is to copy trend setters. They visit the fashion shows and they offer their customers the sort of clothes worn by top-models at a reasonable price. Franchising. Only when this formula is strictly necessary to enter a selected country market. In this case they choose partners who can justify their leadership in the market. Only first brands. Advertising. Aggressive, creative, bold, controversial. The image of Benetton has always been linked to provocative advertising campaigns. Design. Original, like a good Italian company. The Benetton approach has always been casual and sporty clothes made well, to its own designs. Franchising. This is the formula preferred by the group for growth in any new country market. There are more than 2,000 partners around the world and strict norms, even for the design of the stores. 24

25 ZARA VS BENETTON Diversification. None at all. The Inditex group manufactures and sells fashion, and that is all. As an exception, it runs its own logistics. Diversification. Very high. The group is not just in fashion: sport, cinema, telecommunications, catering or transport are other activities. Culture. Inbred, following the purest El Corte Inglés style. From management to product design, the policy on hiring is strictly closed, as its shareholding was until its entry on the Stock market. Culture. Open and imaginative. It has taken risks more than once by hiring innovators and has created around its leader a public image of versatility and commitment to social and human values that it transfers to the company as a whole. Source: Dinero, September 2002, nº

26 Relations with Government Specialization Brand identification Relationship with parent company Distribution channel Leverage Quality Price Technological leadership Service Costs Vertical integration 26

27 Characterization of the strategy of all the competitors of importance on the basis of a series of explanatory dimensions of their competitive behavior. Set of companies in a particular industry pursuing the same or similar strategies. A unique group Several groups Each company is a group -Different strengths and weaknesses. -Different moments of market entry. -Historical accidents. 27

28 -Entry barriers do not affect all strategic groups with the same intensity. -Factors which impede the movement from one strategic group to another within an industry. Mobility barriers: Protect against a key change in the strategy of other competitors. Explain why certain companies are persistently more profitable than others and why different strategies coexist. 28

29 Changes in the environment Strategic choices made by companies 29

30 METHODOLOGY 1.-Why some industries are persistently more profitable than others? 2.-Within a particular industry, why do some companies are persistently more profitable than others? 3.-And why do different strategies coexist? 4.-Methodology for strategic groups identification. 30

31 METHODOLOGY Identification of all competitors of importance. Characterization of their strategies: strategic dimensions. Graphic representations: strategic maps (symbols, arrows, ). 31

32 DIMENSIONS SPECIALI- ZATION VERTICAL INTEGRATION COSTS SERVICE QUALITY PRICE DISTRIBUTION CHANNEL FIRM A Low High Low Low Low Low Own (partially) FIRM B High Low High (1) High High High Specialized FIRM C High High Low Intermediate Low (2) Low (1) Generic FIRM D Intermediate Low Intermediate (1) High Intermediate Intermediate Generic (mainly) (1) These data are not contained explicitly in the text, but it is possible to deduce them. (2) A direct correlation between cost-price and quality is observed. 32

33 Full line (Low) A SPECIALIZATION D Reduced line (High) B C Low VERTICAL INTEGRATION High 33

34 Full line (Low) A SPECIALIZATION D Reduced line (High) C B Low COSTS-PRICE-QUALITY POSITION High 34

35 Full line (Low) A SPECIALIZATION D Reduced line (High) C B Low LEVEL OF SERVICE High 35

36 Full line (Low) A SPECIALIZATION D Reduced line (High) C B Generic Specialized DISTRIBUTION CHANNEL Own 36

37 37

38 Coming together is a beginning. Keeping together is progress. Working together is success. (Henry Ford, , American founder of the Ford Motor Company and father of modern assembly lines used in mass production) 38

THE EXTERNAL ENVIRONMENT Chapter 2

THE EXTERNAL ENVIRONMENT Chapter 2 The Broad (or General) Environment Sociocultural Forces The Task Environment Technological Forces Competitors Unions Suppliers Gov t agencies The Organization Owners