Assessing Competitive Position
Determining the firm’s position in its competitive environment and its internal resources and capabilities is the foundation for setting strategy. This assessment aims to profile the industry, and the firm’s position in it, along several dimensions:
Structure of the industry and intensity of rivalry.
Sources of change and turbulence that may trigger a shift in industry structure. Chapter 4 highlights a number of the classic forces of change.
Dimensions of relative strength and weakness among players in the industry.
Propensity of individual players to take action, exploit change forces, and alter the industry structure.
Drivers of competitive strength and weakness in the industry.
Outlook for profitability of investment in the industry.
To prepare the executive for strategic planning, a number of analytic tools are worth noting because of their practical popularity and usefulness. As Exhibit 6.4 illustrates, none of these tools dictate strategy. But they lend insights useful in the effort to inventory the firm’s SWOTs. This is the foundation for strategic planning.
GROWTH-SHARE MATRIX: WHO HAS AN ATTRACTIVE POSITION? This first tool seeks to identify the relative positions of firms in an industry or divisions within a firm along three dimensions: size, growth, and relative share of market. This was popularized by Boston Consulting Group (BCG) in the 1970s and is used to indicate positions of weakness and strength. The choice of the three criteria for comparison reveals an underlying view about competitive advantage: some economic research supports the view that large absolute size and large market share are associated with competitive power and higher returns. Relative market share is measured as the ratio of your own share of market to that of your largest competitor. Growth should be measured in real, not nominal, terms. High real growth and pricing power derived from strong competition position are important drivers of value creation. A stalemate where competitors grow rapidly but slug it out with heavy investment while failing to obtain the profits envisioned with growth can destroy value. In the parlance of BCG, this leads to four broad categories of positions, as sketched in Exhibit 6.5, and available to the reader on the CD-ROM in the spreadsheet model “Growth Share.xls.”
1 A “cash cow” (lower left quadrant) is a business with high market share and low growth, and hence low ongoing investment to sustain the business; firms in this segment are net providers of cash. Within multibusiness firms, cash cows are often milked to support growth of other divisions.
2 A “star” (upper left quadrant) is a firm with high market share and high growth: It generates plenty of cash for its ongoing expansion. And because of its strong market position, the continued investment to grow that business is attractive.
3 A “dog” (lower right quadrant) is a business with low growth and low market share. This business has low competitive power in the marketplace and has low prospects for growing into a more attractive position. Unless the position is changed, a business in this quadrant will be a sump for cash. EXHIBIT 6.4 Overview of Tools for Strategic AnalysisWhat It IsHow to Use ItPros and ConsGrowth-share matrix Illustrates the relative competitive position of firms or divisions on three dimensions: growth rate, relative share of market, and size.Load data into “Growth Share.xls” on the CD-ROM and interpret the resulting figure.Cash cow generates cash with which to sustain other businesses.Star generates cash and grows rapidly. A keeper.Dog uses cash and grows slowly. Earmark for serious improvement or sale.Problem child. Grows rapidly but has a disadvantageous market share. Earmark for improvement but watch closely.+ A helpful graphic depiction of business units or competitors.+ Highlights the different kinds of attention the various units might warrant.– Focused on market position, not directly on shareholder value.– Makes no clear action recommendation about the four categories—ultimately this remains a matter of judgment.Porter model A diagram illustrating how the structure of competition in an industry drives conduct and outcomes.Use the model as a general guide in assessing a firm’s competitive position:What are the barriers to entry?What power do customers have?What power do suppliers have?Do substitutes affect pricing?What are the patterns of competitive conduct in the industry?+ A useful guide and discipline for industry and competitor analysis.+ Adds the idea that power from barriers or outside players affects outcomes.– Focused on market position and only indirectly on shareholder value.– Prescriptions are a matter of judgment.Learning curve A graph that depicts the decline in costs as cumulative volume grows.Load the data into “Learning Curve.xls” on the CD-ROM and interpret the resulting figure. The curve lends a prediction for the future path of production costs for your firm and competitors. Think critically about what might cause the curve to change slope or kink.+ A foundation for setting goals for internal transformation and cost management.– The curve smooths over the results of many observations. Inspect the specific points and inquire into sources of deviation from the curve.Strategic map A generic figure for comparing the relative positions of competitors on three dimensions.Load the data into “Strategic Map.xls” and interpret the resulting figure. Of particular interest will be the appearance of groups or “strategic clusters” as well as areas of the map that are unoccupied by any competitors.+ A useful illustration of the relative positions of competitors.– Not guided by any theory that specifies which criteria matter.Strategic canvas A generic figure for comparing the strategies of competitors on a number of dimensions.Load the data into “Strategic Canvas.xls” and interpret the resulting figure. Of particular interest are points of similarity and difference.+ A useful illustration of the relative positions of competitors.– Not guided by any theory that specifies which criteria matter.Attractiveness-strength matrix A grid for comparing business units of a diversified firm on the basis of industry attractiveness and the competitive strength of the unit within that industry.Select a range of criteria for scoring industries for their attractiveness and business units for their competitive strength. Score the units and their industries. Position the unit in the nine-cell matrix. Interpret the resulting table.+ A useful illustration of the relative positions of competitors.– Not guided by any theory that specifies which criteria matter.Self-sustainable growth rate A formula for determining the rate at which the firm can grow its assets without issuing new equity or altering its capital structure.Insert values into the formulas outlined in Appendix 6.1 and interpret the resulting estimates of self-sustainable growth rate (SSGR). Compare the SSGR to growth rates of competitors, industry, or internal goals as a test of feasibility of strategy.+ An easy test of strategic feasibility and source of critical thinking about financial sustainability.– Not directly focused on value creation.EXHIBIT