What you will learn in this Section ?

• Envisioning Strategy
– Definition
– Framework
– Visual Models
• External Analysis
– PEST
– PEST Impact Analysis
• Industry and Competitive Analysis
– Industry Structure
– Evolution of Industries
– Industry Supply Chain
– Potential Industry Earnings
– Porter’s 5 Forces Analysis
– Competitive Intensity
– Strategies for minimizing competitive forces
– Perceptual Map
– Barriers to Entry/Incumbency advantages
– DSIR effect
• Company Resources and Capabilities
– ARC Analysis/HR
– SWOT Analysis
– Value Creating Processes/Core Competencies
– Strategic Gameboard
– Balanced Scorecard
– Change Management © Sunil Mehrotra
 Industry Analysis
Why are some industries more profitable than
others?
Industry Ranking
% ROE
90

80

70

60

50
% ROE

40

30

20

10

0
Foreign Regional Banks Management Services Telecom Services - Foreign Jew elry Stores Discount, Variety Stores
Tobacco Products, Other Application Softw are Gas Utilities Oil & Gas Drilling & Exploration Personal Products

Industry

Fortune's ranking of Industries by profits

 Industry Analysis:
Porter's Insight
• Porter’s insight recognizes that the
following characteristics are important to
profitability of the incumbent:
nt The intensity of competition
ntra 

e The ability of suppliers or buyers of

w
Ne


industry products to restrain

industry profits
Suppliers
 The behavior of firms producing
Competitive rivalry closely related goods not included in
the industry
The incumbent  Potential for entry into the market
firms by new firms

Substitutes Customers

© Sunil Mehrotra
Porter's 5 Forces impact on
profitability
Bargaining power of Threat of
New Entrants
t
tr an
en
w
Ne

Suppliers Competitive rivalry

Bargaining power of
The incumbent
firms

Customers
Substitutes Threat from
Substitutes
 Root causes that put pressure on industry
profitability
Few large suppliers
No substitutes
Customers are fragmented Low barriers to entry
Switching costs to another supplier are high
Supplier integrating forward Threat of
Economies of scale
Downstream more profitable New Entrants
t
Low barriers to entry downstream
r an
Bargaining power of en
t
w Concentration of buyers
Ne Incumbents are fragmented
Product is undifferentiated
Switching to another supplier is simple
Product is not strategic to the customer
Customers can produce the product
themselves
Competitive rivalry Customer knows the production costs
Customers can integrate back-words
Suppliers
Bargaining power of
The incumbent
Many small players firms
High cost to exit
Undifferentiated products compete on price
Low brand loyalty
Low switching costs
Slow/no growth market
Customers
Substitutes Threat from
Better prices
Substitutes Better performance
Similar functionality
www.themanager.org
© Sunil Mehrotra
 Impact on Profitability
Threat/Power
Discount Stores Tobacco Industry
High Moderate Low

Competitive
Intensity

Bargaining power
of Suppliers

Bargaining power of
Customers

Threat of New Entrants

Threat from Substitutes

Profits © Sunil Mehrotra

Porter's 5 Forces impact on
profitability
Bargaining power of Threat of
New Entrants
t
tr an
en
w
Ne

Suppliers Competitive rivalry

Bargaining power of
The incumbent
firms

Customers
Substitutes Threat from
Substitutes
 Competitive Intensity impacts
Industry profitability
Low http://www.usdoj.gov/atr/public/testimony/hhi.htm High
HHI
1000-1800

Perfect Competition
•Many firms
Niche Market •No product differentiation
•Product Differentiation •Price based competition
Oligopoly •Localized competition
•Few Firms Commodities
Clothing Stores
•Strategic Interdependence Gas Stations
•Profitability determined by behavior
Dominant Firm
•Few large firms Automobiles
•More small firms Commercial Aircrafts
•Pricing leadership
Monopoly •Protected Niches
Single Firm
Computer OS
Utilities

Industry Profitability

Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001 © Sunil Mehrotra
 Strategies for minimizing the power of
competitive forces

Competitive rivalry
Reducing competitive rivalry within
Differentiate your product The incumbent
Avoid price competition
Reduce industry over capacity
firms
Focus on different customer segments

Adapted from: www.themanager.org

 Product Differentiation minimizes
competitive intensity

• Perceptual Maps are a visual display

(usually on two dimensions) of how
brands are perceived by customers.
• The closer the brands are positioned in
this space the more competitive they are
to each other.
• Perceptual Maps identify “open spaces”
or unmet customer needs.
• Perceptual Maps identify salient
attributes of the products on which
consumers differentiate brands.

Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping

 Perceptual Map for Travel Agency
Industry
Online self-service

Guided tours Extreme Adventure

In person, concierge service

Perceptual Map of the Auto Industry
Prestige

Sporty
Conservative

Basic
 Perceptual Map Example:
Contemporary

Zara

Discount Expensive

Classic

Nina Tooley, April 2008 MBA,

Graziadio School of Business and Management Pepperdine University
 Perceptual Map Example:
Contemporary

Zara

Young Mature

Classic
Nina Tooley, April 2008 MBA,
Graziadio School of Business and Management Pepperdine University
 Perceptual Map of the Beer Market
Heavy Popular
Full Bodied Heavy with Men
Old Milwaukee
•
Budweiser
• Beck’s •
Meister Brau Special • Heineken
• Miller • Occasions
Premium
Blue Collar
Good Value • Dining Out
• Coors
Budget Stroh’s Premium
• Michelob
• Coors Popular
Pale Color
Miller
Lite
• Light with

On a
• Women
Old
Budget Milwaukee Light Light Light Less Filling
Adapted from: Prof. Ganesh Iyer, UC Berkeley
Perceptual Map of 2000 Presidential Candidates

Leader

Colin Powell
John McCain

George W. Bush
Religious
Traditional
Bill Bradley Conservative
Liberal
Alan Keyes

Elizabeth Dole
Steve Forbes
Al Gore
Pat Buchanan
Donald Trump
Jesse Jackson

Republican
Opportunistic
Democrat
Source: 12Americans.com, 2000
www.populus.com
Independent
 Why Differentiation is an effective
strategy
Differentiation

Brand loyalty to
Competitive keep customers
Intensity from switching

Bargaining power Better able to pass on

of Suppliers supplier price increases
to customers

Bargaining power Fewer alternatives

of Customers available to switch to

Threat of New Customer loyalty can

Entrants deter new entrants

Customers less willing

Threat from to accept substitutes
Substitutes

Example:
www.studymarketing.org
 Effective differentiation is when a
product/brand occupies a piece of the
customer’s mind

That is the hook !

 Strategies for minimizing the power of competitive forces
Reducing the threat of New Entrants
Increasing minimum efficient scales of operations
Reducing the Bargaining Power of Suppliers Creating brand image/loyalty
Partnering Protection of intellectual property
Supply Chain Management Alliances with linked products/services
Increase mutual dependency Tie up with suppliers
Build knowledge of supplier costs/methods
Take-over supplier
Tie up with distributors Threat of
Retaliation tactics
Bargaining power Cut out intermediaries
t
New Entrants
tr an
of Suppliers en
w
Ne Reducing the Bargaining Power of Customers
Partnering
Increase loyalty
Increase incentives and value added
Competitive rivalry Increase switching costs
Cut out intermediaries
Suppliers The incumbent Bargaining power of
firms
Reducing competitive rivalry within
Differentiate your product
Avoid price competition
Reduce industry over capacity
Focus on different customer segments
Customers
Reducing threat of substitutes
Substitutes Threat from Increase switching costs
Substitutes Form alliances
Enter substitute market
Accentuate differences Adapted from: www.themanager.org
 Porter's 5 Forces
impact on profitability
Threat of
Bargaining power New Entrants
of Suppliers tr an
t
en
w
Ne

Suppliers Competitive rivalry

Bargaining power of
The incumbent
firms

Customers
Substitutes Threat from
Substitutes
 Nappies 14-16?
Porter's 5 forces insight
-Intensity of competition amongst incumbents
-Bargaining power of suppliers and buyers
- Threat from substitutes and new entrants

Spectrum of competition-monopoly to perfect competition

-Herfindahl-Hirschman index measure of intensity
-strategies for minimizing intensity of competition

Product and brand differentiation is a key strategy

-Perceptual mapping technique
-Using perceptual maps for positioning products and brands
Mnemonic 5
Mnemonic 6

Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping