Judgments about what strategy to pursue should ideally be grounded in a probing assessment of a company's external environment and internal situation. Unless a company's strategy is well-matched to the full range of external and internal situational considerations, its suitability is suspect. This section examines the techniques of industry and competitive analysis, the terms used to refer to external situation analysis of a single-business company. Industry and competitive analysis looks broadly at a company's macro environment. The Methods of Industry and Competitive Analysis Industries differ widely in their economic characteristics, competitive situations, and future outlooks. The pace of technological change can range from fast to slow.

Capital requirements can be big or small. The market can be worldwide or local. Sellers' products can be standardized or highly differentiated. Competitive forces can be strong or weak and can center on price, quality, service, or other variables.

Buyer demand can be rising briskly or declining. Industry conditions differ so much that leading companies in unattractive industries can find it hard to earn respectable profits, while even weak companies in attractive industries can turn in good performances. Industry and competitive analysis utilizes a toolkit of concepts and techniques to get a clear fix on changing industry conditions and on the nature and strength of competitive forces. It is a way of thinking strategically about an industry's overall situation and drawing conclusions about whether the industry is an attractive investment for company funds.

The framework for industry and competitive analysis hangs on seven probing questions: 1. What are the chief economic characteristics of the industry? 2. What factors drive change in the industry, and what impact will they have? 3. What competitive forces influence the industry, and how strong are they? 4. Which companies are in the strongest / weakest competitive positions? 5.

Who will likely make what competitive moves next? 6. What key factors will determine competitive success or failure? 7. How attractive is the industry in terms of its prospects for profitability? The collective answers to these questions build understanding of a firm's surrounding environment and form the basis for matching strategy to changing industry conditions and to competitive forces. Let's see what each question involves and consider some concepts and techniques that help managers answer them. Identifying the Industry's Dominant Economic Characteristics Because industries differ significantly in their basic character and structure, industry and competitive analysis begins with an overview of the industry's dominant economic traits. As a working definition, we use the word industry to mean a group of firms whose products have so many of the same attributes that they compete for the same buyers.

The factors to consider in profiling an industry's economic features are fairly standard: Market size. Scope of competitive rivalry (local, regional, national, or global). Market growth rate and where the industry is in the growth cycle (early development, rapid growth and takeoff, early maturity, late maturity and saturation, stagnant and aging, decline and decay). Number of rivals and their relative sizes -- is the industry fragmented with many small companies or concentrated and dominated by a few large companies? The number of buyers and their relative sizes. The prevalence of backward and forward integration. Ease of entry and exit.

The pace of technological change in both production processes and new product introduction s. Whether the product (s) /service (s) of rival firms are highly differentiated, weakly differentiated, or essentially identical. Whether there are economies of scale in manufacturing, transportation, or mass marketing. Whether high rates of capacity utilization are crucial to achieving low-cost production efficiency. Whether the industry has a strong learning and experience curve such that average unit cost declines as cumulative output (and thus the experience of "learning by doing") builds up. Capital requirements.

Whether industry profitability is above / below par. An industry's economic characteristics are important because of the implications they have for strategy. For example, in capital-intensive industries, where investment in a single plant can run several hundred million dollars, a firm can ease the resulting burden of high fixed costs by pursuing a strategy that promotes high utilization of fixed assets and generates more revenue per dollar of fixed-asset investment. Or, in industries like semiconductors, the presence of a learning / experience curve effect in manufacturing causes unit costs to decline about 20 percent each time cumulative production volume doubles. The bigger the experience curve effect, the bigger the cost advantage of the company with the largest cumulative production volume. The Concept of Driving Forces: Why Industries Change An industry's economic features say a lot about the basic nature of the industry environment but very little about the ways in which the environment may be changing.

All industries are characterized by trends and new developments that, either gradually or speedily, produce changes important enough to require a strategic response from participating firms. The popular hypothesis about industries going through evolutionary growth phases of lifecycle stages helps explain why industry conditions change but is still incomplete. The lifecycle stages are strongly keyed to the overall industry growth rate (which is why stages are described with such terms as rapid growth, early maturity, saturation, and decline), yet there are more causes of industry and competitive change than moving to a new position on the growth curve. While it is important to judge what growth stage an industry is in, there's more analytical value in identifying the specific factors causing industry change. Industry conditions change because forces are in motion that create incentives or pressures for change. The most dominant forces are called driving forces because they have the biggest influences on what kinds of changes will take place in the industry's structure and environment.

Driving forces analysis has two steps: (1) identifying what the driving forces are and (2) assessing the impact they will have on the industry. The Most Common Driving Forces. Many events affect an industry powerfully enough to qualify as driving forces. Some are one-of-a-kind, but most fall into one of several basic categories.

The most common driving forces are shown here. Changes in the Long-Term Industry Growth Rate. Shifts in industry growth up or down are a force for industry change because they affect the balance between industry supply and buyer demand, entry and exit, and how hard it will be for a firm to capture additional sales. Changes in Who Buys the Product and How They Use It. Shifts in buyer demographics and the emergence of new ways to use the produce can force adjustments in customer service offerings, open the way to market the industry's product through a different mix of dealers and retail outlets, prompt producers to broaden / narrow their product lines, increase / decrease capital requirements, and change sales and promotion approaches.

Product Innovation. Product innovation can broaden an industry's customer base, rejuvenate industry growth, and widen the degree of product differentiation among rival sellers. Technological Change. Advances in technology can dramatically alter an industry's landscape, making it possible to produce new and / or better products at a lower cost and opening up whole new industry frontiers. Technological change can also change in capital requirements, minimum efficient plant sizes, and desirability of vertical integration, and learning or experience curve effects. Marketing Innovation.

When firms are successful in introducing new ways to market their products, they can spark a burst of buyer interest, widen industry demand, increase product differentiation, and / or lower unit costs -- any or all of which can alter the competitive positions of rival firms and force strategy revisions. Entry or Exit of Major Firms. When an established firm in another industry attempts entry either by acquisition or by launching its own startup venture, it usually intends to apply its skills and resources in some innovative fashion. Entry by a major firm often produces a "new ballgame" not only with new key players but also with new rules for competing. Similarly, exit of a major firm changes industry structure by reducing the number of market leaders. Diffusion of Technical Know-How.

As knowledge about how to perform a particular activity or to execute a particular manufacturing technology spreads, any technically-based competitive advantage held by firms possessing this know-how erodes. Increasing Globalization of the Industry. Global competition usually changes patterns of competitive advantage among key players. For example, the growing ability of multinational companies to transfer their production, marketing, and management know-how from country to country at significantly lower cost than companies with a one-country production base may give global firms a significant competitive advantage over domestic-only competitors. Changes in Cost and Efficiency. Any time important changes in cost or efficiency take place, firms' positions can change radically concerning who has how big a cost advantage.

Emerging Buyer Preferences for a Differentiated Instead of a Commodity Product (or for a more standardized product instead of strongly differentiated products). These swings in buyer demand can drive industry change by shifting patronage to sellers of cheaper commodity products and creating a price-competitive market environment. When sellers are able to win a bigger and more loyal buyer following by introducing new features, making style changes, offering options and accessories, and creating image differences via advertising and packaging, then the driver of change is the struggle among rivals to out-differentiate one another. Regulatory Influences and Government Policy Changes. Regulatory and governmental actions can often force significant changes in industry practices and strategic approaches. Changing Societal Concerns, Attitudes, and Lifestyles.

Emerging social issues and changing attitudes and lifestyles can be powerful instigators of industry change. Reductions in Uncertainty and Business Risk. A young, emerging industry is typically characterized by an unproven cost structure and much uncertainty over potential market size, R&D costs, and distribution channels. Emerging industries tend to attract only the most entrepreneurial companies. Over time, however, if pioneering firms succeed and uncertainty about the 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 buying 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 of 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 strategies.

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 Objectives and Strategies of Competitors Competitive Scope Strategic Intent Market Share Objective Competitive Position/Situation Strategic Posture Competitive Strategy o Local o Regional o National o Multinational o Global o Be dominant leader o Overtake present leader o Be an industry leader (top 5) o Move into the top 10 o Move up a step or two in the industry o Overtake a particular rival o Maintain position o Survive o Grow aggressively (acquisition and internal growth) o Internal expansion (boost mkt share) o Expansion via acquisition o Maintain present share (growth equal to the industry) o Give up share if necessary to achieve short-term profit objectives (stress profitability, not volume) o Getting stronger; on the move o Well-entrenched; able to maintain present position o Stuck in middle of the pack o Going after a stronger market position o Struggling; losing ground o Retrenching to a position that can be defended o Mostly offensive o Mostly defensive o A combination of offensive and defensive o Aggressive risk-taker o Conservative follower o Striving for low-cost leadership o Focus mostly on market niche - High end - Low end - Geographic - Special buyers - Other foci o Differentiation based on - Quality - Service - Technology - Product breadth - Image / reputation - Other features Predicting Competitors' Next Moves. Predicting rivals' moves is the hardest yet most useful part of competitor analysis. Good clues about what moves a specific competitor may make next come from finding out how much pressure the rival is under to improve its financial performance. Aggressive rivals usually undertake some type of new strategic initiative. Content rivals are likely to continue their present strategy with only minor fine-tuning.

Ailing rivals can be performing so poorly that fresh strategic moves, either offensive or defensive, are virtually certain. Since managers generally operate from assumptions about the industry's future and beliefs about their own firm's situation, strategists can gain insights into the strategic thinking of rival managers by examining their public pronouncements about where the industry is headed and what it will take to be successful, listening to what they are saying about their firm's situation, gathering information about what they are doing, and studying their past actions and leadership styles. Strategists also need to consider whether a rival is flexible enough to make major strategic changes. To predict a competitor's next moves, an analyst must get a good "feel" for the rival's situation, how its managers think, and what its options are. The detective work can be tedious and time-consuming since the information comes in bits and pieces from many sources.

But it is a task worth doing well because the information gives managers more time to prepare countermoves and a chance to beat rivals to the punch by moving first. Exhibit 4 Types of Key Success Factors Technology-related KSFs o Scientific research expertise (important in such fields as pharmaceuticals, medicine, space exploration, and other "high-tech" industries) o Production process innovation capability o Product innovation capability o Expertise in a given technology Manufacturing-related KSFs o Low-cost production efficiency o Manufacturing quality (fewer defects, less need for repair) o High utilization of fixed assets (important in capital-intensive / high fixed-cost industries) o Low-cost plant locations o Access of adequate supplies of skilled labor o High labor productivity (important for products with high labor content) o Low-cost product design and engineering (reduces manufacturing costs) o Flexibility to manufacture a range of models and sizes / take care of custom orders Distribution-related KSFs o A strong network of wholesale distributors / dealers o Gaining ample space on retailer shelves o Having company-owned retail outlets o Low distribution costs o Fast delivery Marketing-related KSFs o A well-trained, effective sales force o Available, dependable service and technical assistance o Accurate filling of buyer orders (few back orders or mistakes) o Breadth of product line and product selection o Merchandising skills o Attractive styling / packaging o Customer guarantees and warranties (important in mail-order retailing, big ticket purchases, new product introduction s) Skills-related KSFs o Superior talent (important in professional services) o Quality control know-how o Design expertise (important in fashion and apparel industries) o Expertise in a particular technology o Ability to come up with clever, catchy ads o Ability to get newly developed products out of the R&D phase and into the market very quickly Organizational Capability o Superior information systems (important in airline travel, car rental, credit card, and lodging industries) o Ability to respond quickly to changing market conditions (streamlined decision-making, short lead times to bring new products to market) o More experience and managerial know-how Other Types of KSFs o Favorable image / reputation with buyers o Overall low cost (not just in manufacturing) o Convenient locations (important in any retailing business) o Pleasant, courteous employees o Access to financial capital (important in newly emerging industries with high levels of business risk and in capital-intensive industries) o Patent protection o Overall low cost (not just in manufacturing) Pinpointing the Key Factors for Competitive Success Key success factors (KSFs) are the major determinants of financial and competitive success in a particular industry. Key success factors highlight the specific outcomes crucial to success in the marketplace and the competences and capabilities with the most bearing on profitability. Identifying key success factors is a top-priority strategic consideration.

At the very least, management needs to know the industry well enough to conclude what is more important to competitive success and what is less important. At most, KSFs can serve as the cornerstones for building a company's strategy. Companies frequently win competitive advantage by concentrating on being distinctively better than rivals in one or more of the industry's key success factors. Key success factors vary from industry to industry, and even over time in the same industry, as driving forces and competitive conditions change.

Table 3-4 lists the most common types of key success factors. Only rarely does an industry have more than three or four key success factors at any one time. And even among these three or four, one or two usually outrank the others in importance. Strategic analysts, therefore, have to resist the temptation to include factors that have only minor importance -- the purpose of identifying KSFs is to make judgments about what things are more important to competitive success and what things are less important.

To compile a list of every factor that matters even a little bit defeats the purpose of highlighting the factors ht at are truly crucial to long-term competitive success. Drawing Conclusions about Overall Industry Attractiveness The final step of industry and competitive analysis is to review the overall industry situation and develop reasoned conclusions about the relative attractiveness or unattractiveness of the industry, both near-term and long-term. An assessment that the industry is attractive typically calls for some kind of aggressive, expansion-oriented strategic approach. If the industry and competitive situation is judged relatively unattractive, companies are drawn to consider strategies aimed at protecting their profitability.

Weaker companies may consider leaving the industry or merging with a rival. Important factors to consider in drawing conclusions about industry attractiveness are: The industry's growth potential. Whether prevailing driving forces will favorably or unfavorably impact the industry. The potential for the entry / exit of major firms (probable entry reduces attractiveness to existing firms; the exit of a major firm or several weak firms opens up market share growth opportunities for the remaining firms). The stability / dependability of demand (as affected by seasonality, the business cycle, the volatility of consumer preferences, inroads by substitutes, and the like). Whether competitive forces will become stronger or weaker.

The severity of problems / issues confronting the industry as a whole. The degree of risk and uncertainty in the industry's future. Whether the industry's overall profit prospects are above or below average. However, even if an industry is relatively unattractive overall, it can still be attractive to a company already favorably situated in the industry or to an outsider with the resources and skills to acquire an existing company and turn it into a major contender. Appraising industry attractiveness from the standpoint of a particular company in the industry means looking at the following additional aspects: The company's competitive position in the industry and whether its position is likely to grow stronger or weaker (a well-entrenched leader in a lackluster industry can still generate good profits).

The company's potential to capitalize on the vulnerabilities of weaker rivals (thereby converting an unattractive industry situation into a potentially rewarding company opportunity). Whether the company is insulated from, or able to defend against, the factors that make the industry unattractive. Whether continued participation in the industry adds significantly to the firm's ability to be successful in other industries in which it has business interests. Conclusions drawn about an industry's attractiveness and competitive situation have a major bearing on a company's strategic options and ultimate choice of strategy. Exhibit 5 Industry and Competitive Analysis Summary Profile 1. DOMINANT ECONOMIC CHARACTERISTICS OF THE INDUSTRY ENVIRONMENT (market growth, geographic scope, indsutry structure, scale economies, experience curve effects, capital requirements, and so on) 2.

DRIVING FORCES 3. COMPETITION ANALYSIS o Rivalry among competing sellers (a strong, moderate, or weak force / weapon of competition? why? ) o Threat of potential entry (a strong, moderate, or weak force? assessment of entry barriers? ) o Competition for substitutes (a strong, moderate, or weak force? why? ) o Power of suppliers (a strong, moderate, or weak force? why? ) o Power of customers (a strong, moderate, or weak force? why? ) 4. COMPETITIVE POSITION OF MAJOR FIRMS AND STRATEGIC GROUPS o Favorably positioned? Why? o Unfavorably positioned? Why? 5. COMPETITOR ANALYSIS o Strategic approaches? Predicted moves of key competitors? o Who to watch and why 6. KEY SUCCESS FACTORS 7.

INDUSTRY PROSPECTS & ATTRACTIVENESS (OVERALL) o Factors making the industry attractive o Factors making the industry unattractive o Special industry issues / problems o Profit outlook (favorable / unfavorable ).