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... e industry's viability fades, more conservative firms are usually enticed to enter the industry. Often, the entrants are larger, financially-strong firms hunting for attractive growth industries. In international markets, conservatism is prevalent in the early stages of globalization. Firms tend to minimize their risk by relying initially on exporting, licensing, and joint ventures. Then, as their experience accumulates and as perceived risk levels decline, companies move more quickly and aggressively to form wholly owned subsidiaries and to pursue full-scale, multi country competitive strategies.
While many forces of change may be at work in an industry, no more than three or four are likely to be driving forces in the sense that they act as the major determinants of how the industry evolves and operates. Strategic analysts must resist the temptation to label everything they see changing as driving forces; the analytical task is to evaluate the forces of industry change carefully enough to separate major factors from minor ones. Analyzing driving forces has practical strategy-making value. First, the driving forces in an industry indicate to managers what external factors will have the greatest effect on the company's business over the next one to three years. Second, to position the company to deal with these forces, managers must assess the implications and consequences of each driving force -- that is, they must project what impact the driving forces will have on the industry.
Third, strategy-makers need to craft a strategy that is responsive to the driving forces and their effects on the industry. Analyzing the Strength of Competitive Forces One of the big cornerstones of industry and competitive analysis involves carefully studying the industry's competitive process to discover the main sources of competitive pressure and how strong they are. This analytical step is essential because managers cannot devise a successful strategy without understanding the industry's special competitive character. Even though competitive pressures differ in different industries, competition itself works similarly enough to use a common framework in gauging its nature and intensity. As demonstrated by Michael Porter's model, competition in an industry is a composite of five competitive forces: 1. The rivalry among competing sellers in the industry. 2.
The market attempts of companies in other industries to win customers to their own substitute products. 3. The potential entry of new competitors. 4. The bargaining power and leverage exercisable by suppliers of key raw materials and components. 5. The bargaining power and leverage exercisable by buyers of the product. The five-forces model is extremely helpful in systematically diagnosing the principal competitive pressures in a market and assessing how strong and important each one is. This straightforward approach is the most widely used technique of competition analysis.
The Rivalry among Competing Sellers. The most powerful of the five competitive forces is usually the competitive battle among rival firms. How vigorously sellers use the competitive weapons at their disposal to jockey for a stronger market position and win a competitive edge over rivals shows the strength of this competitive force. Competitive strategy is the narrower portion of business strategy dealing with a company's competitive approaches for achieving market success, its offensive moves to secure a competitive edge over rival firms, and its defensive moves to protect its competitive position. The challenge in crafting a winning competitive strategy, of course, is how to gain an edge over rivals. The big complication is that the success of any one firm's strategy hinges on what strategies its rivals employ and the resources rivals are willing and able to put behind their strategies.
The "best" strategy for one firm in maneuvering for competitive advantage depends on the competitive strength and strategies of its rivals. Whenever one firm makes a strategic move, rivals often retaliate with offensive or defensive countermoves. Thus, competitive rivalry turns into a game of strategy, of move and countermove, played under "warlike" conditions according to the rules of business competition -- in effect, competitive markets are economic battlefields. Once an industry's rules of competition are understood, then judgments can be made regarding whether competitive rivalry is cutthroat, intense, normal to moderate, or attractively weak. Several factors that influence the strength of rivalry among competing sellers: 1. Rivalry tends to intensify as the number of competitors increases and as they become more equal in size and capability. 2.
Rivalry is usually stronger when demand for the product is growing slowly. 3. Rivalry is more intense when industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volume. 4. Rivalry is stronger when the costs incurred by customers to switch their purchases from one brand to another are low. 5. Rivalry is stronger when one or more competitors is dissatisfied with its market position and moves to bolster its standing at the expense of rivals. 6. Rivalry increases in proportion to the payoff from a successful move. 7. Rivalry tends to be more vigorous when it costs more to get out of a business than to stay in and compete. 8.
Rivalry becomes more volatile and unpredictable the more diverse competitors are in terms of their strategies, personalities, corporate priorities, resources, and countries of origin. 9. Rivalry increases when strong companies outside the industry acquire weak firms in the industry and launch aggressive, well-funded moves to transform their newly-acquired firms into major market contenders. The Competitive Force of Potential Entry. New entrants to a market bring new production capacity, the desire to establish a secure place in the market, and sometimes substantial resources with which to compete. How serious the threat of entry is in a particular market depends on two factors: barriers to entry and the expected reaction of incumbent firms to new entry. A barrier to entry exists whenever it is hard for a newcomer to break into a market and / or economic factors put a potential entrant at a disadvantage relative to its competitors.
There are several types of entry barriers: Economies of scale Inability to gain access to technology and specialized know-how Learning and experience curve effects Brand preferences and customer loyalty Capital requirements Cost disadvantages independent of size Access to distribution channels Regulatory policies Tariffs and international trade restrictions Even if a potential entrant is willing to tackle the problems of entry barriers, it still faces the issue of how existing firms will react. Will incumbent firms react passively, or will they aggressively defend their market positions with price cuts, increased advertising, product improvements, and whatever else will give a new entrant (as well as other rivals) a hard time? A potential entrant often has second thoughts when incumbents send strong signals that they will stoutly defend their market positions against entry and when they have the financial resources to do so. A potential entrant may also turn away when incumbent firms can use leverage with distributors and customers to keep their business. The best test of whether potential entry is a strong or weak competitive force is to ask if the industry's growth and profit prospects are attractive enough to induce additional entry. When the answer is no, potential entry is not a source of competitive pressure.
When the answer is yes (as in industries where lower-cost foreign competitors are seeking new markets), then potential entry is a strong force. The stronger the threat of entry, the greater the motivation of incumbent firms to fortify their positions against newcomers to make entry more costly or difficult. One additional point: the threat of entry changes as industry prospects grow brighter or dimmer and as entry barriers rise or fall. For example, the expiration of a key patent can greatly increase the threat of entry.
A technological discovery can create an economy of scale and advantage where none existed before. New actions by incumbent firms to increase advertising, strengthen distributor-dealer relations, step up R& D, or improve product quality can erect higher roadblocks to entry. In international markets, entry barriers for foreign-based firms ease when tariffs are lowered, domestic wholesalers and dealers seek out lower-cost foreign-made goods, and domestic buyers become more willing to purchase foreign brands. The Competitive Force of Substitute Products. Firms in one industry are, quite often, in close competition with firms in another industry because their respective products are good substitutes.
The competitive force of substitute products comes into play in several ways. First, the presence of readily available and competitively priced substitutes places a ceiling on the prices companies in an industry can afford to charge without giving customers an incentive to switch to substitutes and thus eroding their own market position. This price ceiling, at the same time, puts a lid on the profits that industry members can earn unless they find ways to cut costs. Second, the availability of substitutes invites customers to compare quality and performance as well as price. Another determinant of whether substitutes are a strong or weak competitive force is whether it is difficult or costly for customers to switch to substitutes. If switching costs are high, sellers of substitutes must offer a major cost or performance benefit to steal the industry's customers.
When switching costs are low, it's much easier for the sellers of substitutes to attract buyers. The Power of Suppliers. Whether the suppliers to an industry are a weak or strong competitive force depends on market conditions in the supplier industry and the significance of the item they supply. The competitive force of suppliers is greatly diminished whenever the item they provide is a standard commodity available on the open market from a large number of suppliers with ample ability to fill orders.
Suppliers are also in a weak bargaining position whenever there are good substitute inputs and switching is neither costly nor difficult. Suppliers also have less leverage when the being industry is a major customer. On the other hand, powerful suppliers can put an industry in a profit squeeze with price increases that can't be fully passed on to the industry's own customers. Suppliers become a strong competitive force when their product makes up a sizable fraction of the costs of an industry's product, is crucial to the industry's production process, and / or significantly affects the quality of the industry's product. Likewise, a supplier (or group o...
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Research essay sample on Judging Industry Analysis And Competitive Strategies
