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... f suppliers) gains bargaining leverage the more difficult or costly it is for users to switch suppliers. Big suppliers with good reputations and growing demand for their output are harder to wring concessions from than struggling suppliers striving to broaden their customer base. Suppliers are also more powerful when they can supply a component cheaper than industry members can make it themselves.
In such situations, suppliers' bargaining position is strong until a customer needs enough parts to justify backward integration. Then the balance of power shifts away from the supplier. The more credible the threat of backward integration, the more leverage companies have in negotiating favorable terms with suppliers. A final instance in which an industry's suppliers play an important competitive role is when suppliers, for one reason or another, do not have the manufacturing capability or a strong enough incentive to provide items of adequate quality. Suppliers who lack the ability or incentive to provide quality parts can seriously damage their customers' business. The Power of Buyers.
Just as with suppliers, the competitive strength of buyers can range from strong to weak. Buyers have substantial bargaining leverage in a number of situations. The most obvious is when buyers are large and purchase a sizable percentage of the industry's output. Buyers also gain power when the cost of switching to competing brands or substitutes is relatively low. Any time buyers can meet their needs by sourcing from several sellers, they have added room to negotiate. When sellers' products are virtually identical, buyers can switch with little or no cost.
However, if sellers' products are strongly differentiated, buyers are less able to switch without incurring sizable switching costs. One last point: all buyers don't have equal bargaining power will sellers; some may be less sensitive than others to price, quality, or service. Strategic Implications of the Five Competitive Forces. To analyze the competitive environment, the strength of each one of the five competitive forces must be assessed. The collective impact of these forces determines what competition is like in a given market.
As a rule, the stronger competitive forces are, the lower the collective profitability of participating firms. The competitive structure of an industry is clearly "unattractive" from a profit-making standpoint if rivalry among sellers is very strong, entry barriers are low, competition from substitutes is strong, and both suppliers and customers have considerable bargaining leverage. On the other hand, when an industry offers superior long-term profit prospects, competitive forces are not unduly strong and the competitive structure of the industry is "favorable" and "attractive. " However, even though some of the five competitive forces are strong, an industry can be competitively attractive to those firms whose market position and strategy provide a good enough defense against competitive pressures to preserve their competitive advantage and retain an ability to earn above-average profits. Assessing the Competitive Positions of Rival Companies The next step in examining the industry's competitive structure is studying the market positions of rival companies. One technique for comparing the competitive positions of industry participants is strategic group mapping.
This analytical tool bridges the gap between viewing the industry as a whole and considering the standing of each separate firm. It is most useful when an industry has too many competitors to examine each in depth. A strategic group consists of those rival firms with similar competitive approaches and positions in the market. Companies in the same strategic group can resemble one another in several ways: they may have comparable product lines, be vertically integrated to the same degree, offer buyers similar services and technical assistance, appeal to similar types of buyers with the same product attributes, emphasize the same distribution channels, depend on identical technology, and / or sell in the same price / quality range.
An industry has only one strategic group if all sellers use essentially identical strategies. At the other extreme, there are as many strategic groups as there are competitors if each one pursues a distinctive competitive approach and occupies a substantially different position in the marketplace. To construct a strategic group map, analysts need to: 1. Identify the competitive characteristics that differentiate firms in the industry -- typical variables are price / quality range (high, medium, low), geographic coverage (local, regional, national, global), extent of technological leadership (high, medium, low), degree of vertical integration (none, partial, full), product-line breadth (wise, narrow), use of distribution channels (one, some, all), and degree / type of service offered (no frills, limited, full service). 2. Plot the firms on a two-variable map using pairs of these characteristics. 3.
Assign firms from about the same strategy space to the same strategic group. 4. Draw circles around each strategic group, making the circles proportional to the size of the group's respective share of total industry sales revenues. This produces a two-dimensional strategic group map such as the ones for the steel and restaurant industries shown in Exhibits 1 and 2. To map the positions of strategic groups accurately in the industry's overall "strategy space, " several guidelines must be observed. First, the two variables selected as axes for the map should not be highly correlated; if they are, the circles on the map will fall along a diagonal and analysts will learn nothing more than they would by considering only one variable. For instance, if companies with broad product lines use multiple distribution channels while companies with narrow lines use a single distribution channel, one of the variables is redundant.
Second, the variables chosen as axes for the map should expose big differences in how rivals have positioned themselves to compete in the marketplace. This means that analysts must identify the characteristics that differentiate rival firms and use these differences as variables for the axes and as the basis for deciding which firm belongs in which group. Thus, the variables used for the axes don't have to be either quantitative or continuous; they can be discrete variables or defined in terms of distinct classes and combinations. Fourth, the circles on the map should be drawn proportional to the combined sales of the firms in each group so that the map will reflect the relative size of each strategic group.
Fifth, if more than two good competitive variables can be used for axes, several maps can be drawn to give different exposures to the competitive relationships. Because no one best map exists, it is advisable to experiment with different pairs of competitive variables. Strategic group analysis helps deepen understanding of competitive rivalry. To begin with, driving forces and competitive pressures often favor some strategic groups and hurt others. Firms in adversely affected strategic groups may try to shift to a more favorably situated group; how hard such a move proves to be depends on whether the entry barriers in the target group are high or low. Attempts by rival firms to enter a new strategic group nearly always increase competitive pressures.
If certain firms are known to be changing their competitive positions, arrows can be added to the map to show the targeted direction and help clarify the picture of competitive jockeying among rivals. Second, the profit potential of different strategic groups may vary due to the strengths and weaknesses in each group's market position. Differences in profitability can occur because of different bargaining leverage with suppliers or customers and different exposure to competition from substitute products. Generally speaking, the closer strategic groups are on the map, the stronger competitive rivalry among member firms tends to be.
Although firms in the same strategic group are the closest rivals, the next closest rivals are in the immediately adjacent groups. Often, firms in strategic groups that are far apart on the map hardly compete at all. For instance, Red Lobster and Taco Bell are both restaurants, but the prices and perceived qualities of their products are much too different to generate any real competition between them. For the same reason, Timex is not a meaningful competitor of Rolex, and Subaru is not a close competitor of Lincoln or Mercedes-Benz. Competitor Analysis: Predicting What Moves Which Rivals Are Likely to Make Studying the actions and behavior of close competitors is essential.
Unless a company pays attention to what competitors are doing, it ends up "flying blind" into battle. A firm can't outmaneuver its rivals without monitoring their actions and anticipating what moves they are likely to make next. The strategies rivals are using and the actions they are likely to take next have direct bearing on what a company's own best strategic moves are -- whether it will need to defend against rivals' actions or whether rivals' moves provide an opening for a new offensive thrust. Identifying Competitors's tragedies.
Strategists can get a quick profile of key competitors by studying where they are in the industry, their strategic objectives (as revealed by their recent actions), and their basic competitive approaches. Exhibit 3 provides an easy-to-use scheme for categorizing rivals' objectives and strategies. Such a summary, along with a strategic group map, usually suffices to diagnose the competitive intent of rivals. Evaluating Who the Industry's Major Players Are Going to Be.
It's usually obvious who the current major contenders are, but these same firms are not necessarily positioned strongly for the future. Some may be losing ground or be ill-equipped to compete on the industry's future battleground. Smaller companies may be poised for an offensive against larger but vulnerable rivals. In fast-moving, high-technology industries and in globally competitive industries, companies can and do fall from leadership; others end up being acquired. Today's industry leaders don't automatically become tomorrow's. In deciding whether a competitor is favorably positioned to gain market ground, attention needs to center on why there is potential for it to do better or worse than other rivals.
Usually, how securely a company holds its present market share is a function of its vulnerability to driving forces and competitive pressures, whether it has a competitive advantage or disadvantage, and whether it is the likely target of offensive attacks from other industry participants. Trying to identify which rivals are poised to gain or lose market position helps a strategist figure out what kinds of moves key rivals are likely to make next. Exhibit 3 Categorizing the Ob...
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Research essay sample on Judging Industry Analysis And Competitive Strategies
