Situation Analysis

SITATION ANALYSIS OUTLINE
Role of Situation Analysis in Strategy-Making

Methods of Industry & Competitive Analysis
Profiling Industrys Dominant Economic Traits
Analyzing Industrys Competitive Forces
Analyzing Drivers of Industry Change
Assessing Competitive Positions of Rivals
Predicting Competitive Moves of Rivals
Pinpointing Key Success Factors
Drawing Conclusions About Overall Industry
Attractiveness
Conducting an Industry & Competitive Analysis
WHY DO A SITUATION ANALYSIS?
Identify features in a firms external & internal
environment which frame its window of
STRATEGIC OPTIONS
OPPORTUNITIES
Focuses on two considerations:
EXTERNAL factors: MACRO environment
(industry & competitive conditions)
INTERNAL factors: MICRO environment
(firms internal situation & competitive position)
Figure 3-1: How Strategic Thinking and
Analysis Lead to Good Choices
Thinking Strategically
About Industry
and Competitive
Conditions
Identifying
Choice of
Strategic Options
The Best
Open to the
Strategy
Company
Thinking Strategically
About a Companys
Own Situation
KEY QUESTIONS REGARDING
EXTERNAL ENVIRONMENT
1. Industrys dominant economic traits
2. Competitive forces at work in industry &
strength
3. Drivers of change in industry
4. Firms in strongest/weakest competitive
positions
5. Competitive moves of rivals
6. Key factors determining competitive
success or failure in industry
7. Attractiveness of industry
IDENTIFYING AN INDUSTRYS
DOMINANT ECONOMIC TRAITS
Market size & growth rate/stage in life cycle
Scope of competitive rivalry
Number of competitors & relative sizes
Prevalence of backward/forward integration
Entry/exit barriers
Nature & pace of technological change
Product & customer characteristics
Scale economies & experience curve effects
Capacity utilization & capital requirements
Industry profitability
EXPERIENCE CURVE EFFECTS
An experience curve exists when unit costs

decline as cumulative production volume
increases due to
Increased KNOWLEDGE about or
FAMILIARITY with the process
The bigger the experience curve effect, the

bigger the cost advantage of the firm with
Largest CUMULATIVE production volume
Figure 3-2: Comparison of Experience
Curve Effects
$1
$1 90
Cost per Unit
80 81
72.9 10% Cost
70 64 Reduction
51.2
20% Cost
49
34.3 Reduction
30% Cost
Reduction
1 2 4 8
Million Million Million Million
Units Units Units Units
EXPERIENCE CURVE EFFECTS
Basic Concept
When a strong learning/experience curve
effect causes unit costs to decline
substantially as cumulative production
volume builds, a strategy to become the
largest volume manufacturer can offer the
COMPETITIVE ADVANTAGE of being the
industrys LOWEST-COST producer!
ANALYSIS OF COMPETITIVE FORCES
Objective
To identify
Main SOURCES of competitive forces and
STRENGTH of these pressures
COMPETITIVE FORCES MATTER BECAUSE:

To be successful, strategy must be designed
to cope effectively with competitive pressures -
objective must be to build a strong, market
position based on competitive advantage!
THE FIVE COMPETITIVE FORCES
1. RIVALRY among competing sellers in

an industry
2. SUBSTITUTE PRODUCTS offered by
firms in OTHER industries
3. Potential ENTRY of new competitors
4. Bargaining power of SUPPLIERS
5. Bargaining power of BUYERS
PROCEDURE: ANALYZING THE FIVE
COMPETITIVE FORCES
Identify main sources of competitive pressures
Rivalry among competitors
Substitute products
Potential entry
Bargaining power of suppliers
Bargaining power of buyers
Assess strength of each competitive force
Strong? Moderate? Weak?
Scale of 1 - 5: 1 = weak; 5 = strong
Explain how each competitive force works & its
role in overall competitive picture
RIVALRY AMONG
COMPETING SELLERS
Usually the MOST POWERFUL of the five
competitive forces
Weapons of COMPETITIVE RIVALRY
Price
Quality
Performance features offered
Customer service
Warranties and guarantees
Advertising & special promotions
Dealer networks
Product innovation
PRINCIPLES OF
COMPETITIVE RIVALRY
A powerful competitive strategy

launched by one firm INTENSIFIES
competitive pressures on rivals!
Use of various competitive weapons by

rivals to out maneuver one another shapes
Rules of competition &
Requirements for competitive success
PRINCIPLE OF
COMPETITIVE MARKETS
Competitive jockeying among rival

firms is a dynamic process as
Firms initiate new offensive &
defensive moves
Emphasis swings from one mix of
competitive weapons to another
WHAT CAUSES RIVALRY
TO BE STRONGER?
Lots of firms, equal in size and capability, exit
Demand for product growing slowly
Industry conditions tempt firms to use competitive
weapons to boost volume
Switching costs incurred by customers are low
A firm initiates moves to bolster its standing at
expense of rivals
A successful strategic move carries a big payoff
Costs more to get out of business than to stay in
Firms have diverse strategies, corporate priorities,
resources, & countries of origin
COMPETITIVE FORCE
OF POTENTIAL ENTRY
New entrants boost competitive pressures
By bringing new production capacity into play
Through actions to build market share
Seriousness of threat of entry depends on
BARRIERS to entry
Expected REACTION of existing firms to entry
Barriers to entry exist WHEN
It is difficult for newcomers to enter market
A new entrants small sales volume puts it a
price/cost disadvantage
COMMON BARRIERS TO ENTRY
Economies of scale
Inability to gain access to specialized
technology
Existence of learning/experience curve effects
Brand preferences and customer loyalty
Capital requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies
Tariffs & international trade restrictions
REACTION OF EXISTING FIRMS
CAN BE AN ENTRY BARRIER
WHEN existing firms
Indicate theyll aggressively defend their
position
Have substantial resources to wage defense
Can use leverage with customers to keep their
business
THEN potential entrants likely to be discouraged
by
Prospects of a costly struggle
Strong threat of competitive retaliation
WHICH makes entry barriers HIGHER
WHEN IS POTENTIAL ENTRY A
STRONG COMPETITIVE FORCE?
Competitive threat of outsiders entering

a market is stronger when
Entry barriers are low
Incumbent firms do not vigorously
fight newcomer
Newcomer can expect to earn
attractive profits
COMPETITIVE FORCE OF
SUBSTITUTE PRODUCTS
Concept
SUBSTITUTES matter when products of firms in
another industry enter the market picture
Examples
Eyeglasses vs. Contact Lens
Sugar vs. Artificial Sweeteners
Plastic Containers vs. Glass vs. Tin vs. Aluminum
Aspirin vs. Other Types of Pain Relievers
WHY SUBSTITUTE
PRODUCTS MATTER
Competitively priced substitutes can place
CEILING on PRICES industry can charge for
its product
Price ceiling can place LID on PROFITS
industry members can earn
Availability of substitutes invites customers to
make QUALITY & PERFORMANCE
comparisons as well as PRICE comparisons
The lower the SWITCHING COSTS, easier it is
for customers to shift to substitute products
INDICATORS OF STRENGTH
OF SUBSTITUTE PRODUCTS
Growth rate of sales of substitutes

Market inroads of substitutes
Plan of manufacturers of substitutes to
expand capacity
Profits of firms producing substitutes

Situation Analysis

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SITATION ANALYSIS OUTLINE

Role of Situation Analysis in Strategy-Making

An experience curve exists when unit costs

The bigger the experience curve effect, the

COMPETITIVE FORCES MATTER BECAUSE:

1. RIVALRY among competing sellers in

A powerful competitive strategy

Use of various competitive weapons by

Competitive jockeying among rival

Competitive threat of outsiders entering

Growth rate of sales of substitutes

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