Topic 3. Competitive Analysis PDF

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Topic 3. Competitive Analysis Strategic Management Framework

1. EXTERNAL ENVIRONMENT: LEVELS

first level: general enviroment second level: structural forces

1.1. Industry analysis: the drivers of the attractiveness of a market and an industry We will discuss… - What an industry is and why it is important to a company. (definició i analitzar la importància de l’entorn competitiu) - How an industry should be defined and how a market and an industry can be different. Industry: és la part dels proveïdors de la compañía Market: és la demanda - What attractiveness means. - Drivers of industry attractiveness

1.2. Six reasons why companies need to analyze their Industry 1. Identification of threats and opportunities in the industry. Critical for the strategy of a company. No totes les threats and oportunitats tenen el mateix impacte en les companyies, depèn de cada companyia i les seves capacitats. 2. Better understanding of the strategic territory in which the company has to compete. Territory: market, country, town, area,... quan vols entrar en un nou territori has d’analitzar l’area. Perquè les companyies són diferents segons on estan. 3. Evaluation of expansion opportunities. Dos maneres d’expandir-se: creant nous productes/serveis, o globalitzar vendre el mateix a altres països. La manera de fer això pot ser orgànic o external. 4. Fit between chosen strategy and the conditions in the industry. Identification of Key success factors (KSF). 5. Capabilities and resources required to compete successfully in industry. (t opic 4)

2. INDUSTRY 2.1. What’s the Industry Environment? - The industry environment has a more direct effect on the firm ’s strategic competitiveness and above-average returns than the general environment - Industry: a market containing a group of firms producing products/services that are similar The industry’s attractiveness (e.g., it’s profit potential) is a function of the five forces of competition

2.2. Definition of an industry - Identify the relevant business system (often the term value chain is used although this concept should be reserved for activities within the firm, see later in this course). Buisness System: (ex nespresso) cadena de valor divideixo en diferents passos la companyia i a cada pas afegeixo valor. - Determine the international scope of the industry: (tenim dos tipus d’industria) Local industry Global industry Examples: - Food industry, depen de la companyia, una coca-cola no és igual aquí que a frança, la mida és diferent, el marketing és diferent, el llenguatge és diferent, els habits dels consumidors, els ingredients (més o menys sucre, el gas),… - Roba: depen de la companyia, ex: Zara, és global perquè la roba no canvia gaire segons on es ven. És semblant a la coca-cola però és local. - Tecnologia: és local - Farmacèutic: és local, depen de les lleis dels paisos. - Educació: local. - Interrelationships with other industries. (a causa de la globalització). Ex: roba i tecnología...

2.3. Industry A group of companies that makes products that are close substitutes for each other. Industry features: Industry features: elements que hem de tenir en compte al entrar en una industria - Market size (millor big market) - Scope of competitive rivalry (millor pocs competidors tot i que depen del cicle de vida del producte) - Market growth rate (depen del cicle de vida del mercat) - Number of rivals and relative size (millor pocs competidors i petits)

- Customer Number and relative size - Degree of Vertical Integration (ex integració vertical: roba, INDITEX, mango, gap, H&M,… no es bo entrar en una industria on els competidors tenen integració vertical, perquè tu has de fer el mateix.) - Easy / difficulty of entry and exit of the industry - Technological innovations - Product Features - There are economies of scale in prod / mark / dist - Capital requirements Cada industria les té diferent. - Profitability (beneficis que pots aconseguir) Ex: petroli, farmacèutic, industria del luxe,… Els emprenedors han de tenir molta capacitat de sobreposar-se als problemes. Els emprenedors han d’analitzar tots aquests punts i més.

2.4. Industry is a product technology combination

Industries can converge as products and technologies become similar. For example: Televisions and computers, PDA’s and GSM’s, camera’s and GSM’s, MP3’s and GSM, banking and insurance Els productes evolucionen amb la tecnologia i l’ambient.

2.5. Convergency Examples - PC as a TV? - Insurance that provides financial product (bank that sells insurance) - Mobile and internet. Ex: un mòbil, que és un smartphone i el pots fer servir de clau, de targeta de crèdit… - La Caixa distributes Apple products

An example : The industry of LCD screens

2.6. Industries are different from markets

An industry typically serves many markets. A market can be served by several industries. Ex: una industria pot vendre a diferents mercats (França, Espanya i Itàlia) i un mercat pot ser satisfet per diferents indústries.

2.7. The business system (cadena de valor d’una industria)

Cada pas pot ser una industria diferent. Ex: si vols comprar-te un cotxe necessites tots els passos. És important per entendre com una indústria afegeix valor. Ex automoció: - Raw matirials: és molt difícil de saber quines són aquestes companyies, perquè estan molt al començament de la cadena de valor. - Components or subsystems: Michelin (França), Firestone (USA)  neumàtics, - Ficosa (mollet el vallès)  fan retrovisors / sony  fan coses x ford. / recaro  un tipus de seient molt esportiu. - Menufacturing: Opel, Ford, Seat, Mercedes, Audi,... - Distribution: es diferent segons els països, a Espanya, són concessionaris. Poden ser de la companyia o independents. - Retailing: la indústria de l’automòbil no té integració cap enrere. Ex: integració cap enrere, nespresso tenen acords amb els distribuïdors de cafè / a la indústria farmacèutica tenen acords amb empreses que fan fàrmacs,... * Sometimes refered to as Value Chain, although that term should be reserved for activities within companies, see later and see Michael E. Porter; Competitive Advantage An example from the PVC window industry

An example from the travel industry

An example from the PC An example from the Computer industry

2.7.1. Some of the strategic implications of the business System - Strategic moves by which companies acquire or control businesses closer to end user of the products or services are called forward integration. Moves in the other direction are called backward integration. Ex: inditex, nespresso, apple, dell,… produeixen i venen per ells mateixos. Historical evidence suggests that moves forward in the business system, forward integration, have been more popular and successful than backward integration. (see Alfred D. Chandler: Scale and Scope) - Business systems are continuously changing. They develop more intermediate steps or the steps become integrated. (Ex: technologic, globalization…) Some of the most important strategic moves by companies involve redesigning the business system. Dell redesigned the selling of PCs and peripherals. Perquè els seu business model de del produeix ordinadors, els fan a mida pel client i la distribució és per e-mail, Dell no té botigues, és tot online. Van ser els primers, i això va fer que els competidors canviessin el seu model de negoci. Amazon first redesigned the selling of books and some of other products The Ipod from Apple was designed to reorganize the selling of music - Profit pools are those activities in the business system where most profits are being made An interesting example is the PC business where historically most profit has been earned by the chip manufacturers such as Intel and the software companies such as Microsoft. Actualment els xips són diferents, Ex: apple, que produeix els seus propis xips.

2.8. Porter’s Five Forces Model

The results of our Porter’s Five Forces analysis tell us if the industry is attractive (e.g., how likely it is that firms competing within the industry will capture long-term profitability). Firms should pursue strategies that lessen the effects of negative forces.

2.8.1. Five forces of competitive intensity: what drives the return in an industry? Això és un anàlisis estàtic, si el volem fer dinàmic l’hem de fer més d’un cop.

This analysis should be done at the level of the industry not at the level of the business or company !!! EN AQUEST ANÀLISI NO HI POT HAVER LES BARRERES D’ENTRADA, ELS CLIENTS,... DE LA COMPANYIA AIXÒ VA A L’ANÀLISI INTERN. EN AQUEST CAS ES DE TOTA LA INDÚSTRIA, DE TOTES LES COMPANYIES. Si anem amunt de suppliers a buyers és Forward Integration Si anem cap avall, de buyers a suppliers és Backward Integration Why is a sector profitable? How and why does the industry change its profitability?

1- Porter’s Five Forces: The Power of Suppliers Determined by five factors: - Suppliers’ industry dominated by a small number of firms - Suppliers sell unique or highly differentiated products (ex: gold, diamonds..) - Suppliers are not threatened by substitutes (no hi ha substitut de l’or) - Suppliers threaten with forward integration - Firms are not important customers for suppliers The higher the power of suppliers, the more/less attractive the industry? If the suppliers has a lot of power that’s less attractive for the industry

2- Porter’s Five Forces: The Power of Buyers Determined by four factors: - Number of buyers is small (si hi ha poc clients tenen molt poder) Because there are few buyers, they can have more power over those providing the goods. Large-volume buyers are also powerful. - Products sold to buyers are undifferentiated and standard (milk, sugar, coffee…) els clients tenen poder perquè es poden canviar si no els hi agrada. Aquests productes són molt comuns i tenen alguns substituts. If the goods are commodities, buyers can find alternative products - Buyers are not earning significant economic profits If buyers are not earning high economic profits, they are 1) likely to be price sensitive, and 2) their simple ability to afford higher-priced goods is low. - Buyers threaten backward (vertical) integration If buyers can easily backward integrate (e.g., produce the goods or perform the service themselves) this gives them power The higher the power of buyers, the more/less attractive the industry?

3- Porter’s Five Forces: Threat of Substitutes - Substitutes are products/services from other industries that viably serve the same function as products/services in the focal industry - Determined by: The availability of substitutes from other industries (e.g., in the auto manufacturing industry, substitutes come in the form of public transportation, bicycles, flying, walking, etc.). Substituts del cotxe, no poden ser de la mateixa indústria. - What are substitutes for the USPS (United States Postal service)? Substitute: e-mail, Competitor: MRB (transports de paquets) What’s its purpose (e.g., what need does it serve or problem does it solve)? - What are substitutes for libraries? eBook, Internet, second hand market, a friend… What’s its purpose? The higher the threat of substitutes, the more/less attractive the industry? Less si tenim més substituds la industria és menys atractiva perquè pots trobar un alter producte o servei que cobreix la mateixa necessitat o servei.

4- Pressure from substitute products Firms in an industry are also affected by competition from related markets. The availability of substitutes influences the ability of a firm to raise prices, or to change the attributes of its products - Identify possible substitute products by asking: “What set of products constrains the ability of firms in this industry to substantially increase prices ?“ - Substitute products become particularly important in times of rapidly increasing demand, and in industries with few competitors (making it difficult to increase supply quickly)

5- Porter’s Five Forces: Threat of New Entrants Determined by: 1. Barriers to entry: - Economies of scale (tot el que es produeix en massa) - Product differentiation (marca, qualitat, tecnologia) - Capital requirements (petrol, energy, financial, airlines) - Switching costs faced by customers if they were to switch to another supplier of the good (ex: imagina que estas fent server el software SAP i vols canviar de supplier, llavors tens un cost, això és una barrera d’entrada)

- Access to distribution channels (e.g., if the entrant cannot secure a way to distribute it’s product, it is a barrier to their entry) ex: ZARA, tenia molts problemes fa 10 anys per entrar a Italia ja que ja hi havia la majoria dels locals plens. - Cost advantages independent of scale (e.g., other cost advantages other than capturing economies of scale) (relacionat amb coneixement, patents…) Proprietary technology: secret or patented technology (airlines) Managerial know-how: tacit knowledge (ex: agencia europea del medicamento) Favorable access to raw materials: low cost access to critical raw materials - Government regulation of entry The higher the threat of new entrants, the more/less attractive the industry? Less, si tens moltes barreres d’entrada, la indústria és més atractiva.

6- Porter’s Five Forces: Intensity of Rivalry (COMPETIDORS, NO SUBSTITUTS) Determined by five factors: - Large number of competing firms that are roughly the same size (Ex: automobils, PEUGEOT, RENAULT…) This leads to price competition - Slow industry growth (no invertirem en una industria que creixi lent, està en un moment madur, ex: electrodomestics, construcció a Espanya, roba, banca, assegurances…) - Lack of product differentiation - High exit barriers (és impossible sortir del mercat) Specialized assets (petrol, nuclear, minerals…) Fixed costs of exit (e.g., labor agreements) Strategic interrelationships (fer un accord amb alguna altra empresa) Governmental and social restrictions (ex: SEAT, si decideix tancar el govern Català i Espanyol no els hi agrada i van a Alemanya a mirar si es pot solucionar, tenen molts llocs de treball) - Large production capacities (relacionat amb assets especials) In a sector where scale economies are required, if the demand decreases, companies can’t stop producing big amounts and they must cut prices… The higher the intensity of rivalry, the more/less attractive the industry? Less 2.8.2. Five Forces Analysis: Key Questions and Implications - What are the key forces at work in the competitive environment? - Are there underlying forces driving competitive forces? - Will competitive forces change? - What are the strengths and weaknesses of competitors in relation to the competitive forces? - Can competitive strategy influence competitive forces (eg by building barriers to entry or reducing competitive rivalry)? 2.8.3. The importance of the five force model - In each of its businesses, the firm faces an industry structure that shapes the rules of competition it must respond to or try to influence, and that is the basis and motivation for a unique strategy. - One way to organize information about an industry is the FIVE FORCES model that helps to explain why one industry is profitable while another is not - The strategist‘s goal is to find a place in the industry where the firm can best defend itself against the forces, and influence them in its favor.

what to do …? 1. Positioning : accept competive structure as given and match yourself to it:

.. build defenses against competitive forces .. identify positions where forces are weakest 2. Take the offensive: Influencing the Balance .. identify key factors driving competition that you can control .. influence those costs that yield the greatest payoff 3. Exploiting Change .. understand which trends affect the sources of competition, and forecast the magnitude of each trend and underlaying cause .. construct a picture of the likely profit potential of the industry 4. Set and evaluate diversification potential 2.8.4. Porter’s Five Forces: Conclusion/Outcome Analysis Based on your analysis, rate each force from -5 (really bad, poor profit potential to +5 (great, excellent profit potential)

Five Forces Overall Analysis Intensity of Rivalry Rating: Power of Suppliers Rating: Power of Buyers Rating: Threat of New Entrants Rating: Threat of Substitutes Rating: Sum of Ratings: Scores between +10 to +25  Generally Attractive and High Profit Potential Scores between -6 to +9  Generally Moderately Attractive and Moderate Profit Potential Scores less than -6  Generally Unattractive and Low Profit Potential

Porter’s Five Forces: Conclusion/Outcome Analysis Example Based on your analysis, rate each force from -5 (really bad, poor profit potential to +5 (great, excellent profit potential)

Five Forces Overall Analysis Intensity of Rivalry Rating: Power of Suppliers Rating: Power of Buyers Rating: Threat of New Entrants Rating: Threat of Substitutes Rating: Sum of Ratings:

-4 to -5 -3 to -5 -1 to -3 0 to -2 +1 to -3 -7 to -18

Scores between +10 to +25  Generally Attractive and High Profit Potential Scores between -6 to +9  Generally Moderately Attractive and Moderate Profit Potential Scores less than -6  Generally Unattractive and Low Profit Potential These results would suggest that the industry is not attractive and prospects for long-term profitability for the industry are low.

1- Barriers to entry/exit and profitability Barriers and Profits

Low BARRIERS TO EXIT High

BARRIERS TO ENTRY Low High Profitability Profitability Low stable Low with risk Dressmarker, electrician

Big distribuition

Profitability High stable

Profitability High with risk

Concessions, beach and snack bar

Aerospace, petrol, pharmaceutical

En quina d’aquestes quatre opcions volem tenir l’empresa: Al quadrant amb High barriers to entry and Low barriers to exit. 2- Rivality tools

Reaction time competitors Impact on the income statement and Benefits Services increasing Price Competition, normalment disminuim el preu. Advertising war, sucs de taronja (Don Simon vs Granini), pepsi i Coca-cola a USA. Introduction of news products, ex: INDITEX incrementa la marca, More tools: Accords amb altres empreses (associacions) Redes sociales. E- commerce Barriers to entry Supplier Customer Substitutes Rivalry Expected level of performance (probability)

Moderate

Pharmaceutical Industry

Moderate or above normal

Car Industry

Above normal

3- Rivalry or Internal Competition: What are the drivers? Determinants of rivalry or internal competition Impact on rivalry Concentration High concentration can reduce competition Product differentiation Creates customer loyalty and less competition Market growth Increases company sales without changes in market shares

Costs structure Capacity adjustments Overcapacity Exit barriers Competition policy

High fixed costs can lead to price competition Disturbs market equilibrium Puts pressure on market behavior Slows down restructuring of industry increases competition

4- Some definitions Concentration - C4 is the combined market share of the largest 4 players in the industry - Is influenced by the number of players and their relative importance in the industry - Depends on economies of scale and on differences in efficiency and strategies Product differentiation - Perceived and/or real differences between products create customer loyalty and switching costs. Cost structures - The share of fixed costs in total costs Exit barriers - The costs for the business or company to leave the industry 5- Overcapacity : causes and consequences CAUSES Changes in technology Errors in market forecasts Investments require minimal commitment Avoidance of taxes Strategic moves - Deter potential competitors - exploit competitive advantag e competition in the future - Close gap with bigger competitors Irrational behavior Exit barriers