Identifying Key Industry Factors for Competitive Advantage

Abstract

MGMT 475 MODULE 3 Part A Reading Understanding the Competitive Forces that Shape Strategy One aspect of assessing the quality of a firm’s strategy is to test if it aligns, or fits, with the nature of their market. To assess this, we need to know the most critical things firms operating in this industry (who we call “producers” since they produce the good or service that defines the industry) must have or do to be successful (i.e. achieve a superior level of performance…remember that is the goal). So – begin with the end in mind. Our objective in this phase is to identify: Industry Key Success Factors – what must producers have or do to achieve competitive advantage? First we must get clear on what industry we are analyzing. Defining the industry is critical. Consider the primary products or services your focal firm and its main competitors offer. That often gets you to a good industry definition. If needed, look up the firm’s NAICS classification (just Google the company and NAICS). Once you are clear on the industry, be sure you are clear on the basic characteristics of Producers, Buyers, and Suppliers. “Who” are we talking about when we examine this industry? Producers / Sellers (think of these as your firm’s competitors) – the set of all firms offering the primary industry good/service. Don’t name them but describe their common characteristics (for example: a few large ones? Many small mom-and-pops? Local firms vs international? Manufacturers or just resellers? etc.) Buyers – describe in broad terms the people (or organizations) that are the primary purchasers of the goods/services the producers offer. (e.g. Urban families on a budget or people with high discretionary income? fashion-conscious women aged 18-35 or budget-conscious mothers?; small businesses or only large enterprises?) Suppliers – describe in broad terms the major types of suppliers the producers need for the raw inputs they need to produce their goods/services. (e.g. for restaurants: Fresh meat and produce distributors… for automobile manufacturers: plastic, aluminum and steel producers…. For the paint industry: major chemical producers…for real estate developers: architects and construction contractors). A full Example: For the Movie Theatre industry: Movie Theatre firms (mostly large national chains, but some local specialty operators) are the producers; Film studios (major and independent) and their distributors are the suppliers as are concession product (snack food and beverages) distributors; Individuals of all types are the buyers (you could define as maybe 13+ as little kids won’t buy without their parents). ** Don’t confuse these actors or your analysis will go off track. This is also the time to think about what is the need the buyers have that the producers meet. Why do the buyers buy the producers goods/services? This will be valuable later when you consider ‘substitutes’. (more on this in a moment) For out movie industry example, the need could be described generally as ‘entertainment’. Think of all the substitutes for entertainment! You could also get more specific and say the need is “audio/visual entertainment” (as distinct from ‘experiential entertainment’ such as rides, surfing, skiing, etc.). So, how else – besides going to the theater to watch a movie – could you meet that need? Television. Go see a play or the ballet. YouTube. Video Games. Competitive Forces The objective of this part of our external analysis is understand the competitive forces that make it difficult for producers to earn higher profits. This isn’t just about competition among rivals. There are others who want to take a portion of the value created in an industry. If we know what the forces are that inhibit success, we can surmise that the firms that are best able to overcome these forces will be the ones with superior performance. The five forces framework is very useful here as it helps identify the forces competing over ‘value’ and how they shape overall industry profitability levels. Specifically, the five forces framework helps us identify the factors inhibiting producer profitability…and since our focal firm is one of the producers, this analysis is going to tell us about the challenges our firm faces in the quest to achieve superior performance. The five forces framework is arguably the most-used analytical tool in all of strategic management. You can find a great deal of additional information and explanation material on the Internet. For example, there is an interview with Dr. Porter on this on YouTube (search ‘Porter the five competitive forces that shape strategy’) and you can find many other resources to help you understand the basic concept, each of the five forces, and what it all means. One quite good overview is this YouTube video: https://www.youtube.com/watch?v=Dfp23xSqpdk As before, this is NOT about any single firm…this analysis is about the INDUSTRY. You must be clear on the industry and the actors (Producers, Buyers, and Suppliers) as we defined and characterized in step 1. You also must get clear on what potential SUBSTITUTES are available. Don’t confuse RIVALS (competing producers) or the different brands used by the rivals with SUBSTITUTES! This is where the understanding of what NEED the buyers are trying to satisfy when the buy from the producers becomes valuable. Substitutes are goods/services from a DIFFERENT industry that can (to some extent) meet the same need that buyers are filling by purchasing from this industry’s producers. So – think about...