A resource-based framework for analysis of the business and its com-petitive environment is shown in Figure 7.2. Analysis is divided into five inter-related areas:
1 the organization;
2 its industry;
3 product markets (existing markets, markets for substitutes, potential new markets);
4 resource markets;
5 other industries.
The significance of each area is considered below.
Chapter 7 Analysis of the competitive environment 145
Figure 7.2
The resource-based model of strategy. (Note: competence-related industries are those in which businesses possess similar competences to those of competitors.)
The organization
‘The organization’ concerns the configuration of the internal value chain, its competences, resources and core competences, and is dis-cussed in Part II of this book (in particular, in Chapter 2). In this context, we are particularly concerned with analysing the organiza-tion’s value-adding capabilities and its backward and forward value chain linkages.
The organization’s industry
The organization’s industry consists of the business and a group of companies producing similar products, employing similar capabilities and technology.
Analysis of the industry therefore examines over time (for each player in the industry):
& the skills and competences of the competitors;
& the configuration of value-adding activities;
& the technologies employed;
& the number and relative size of competitors in the industry;
& the performance of competitors (particularly in financial
terms);
& ease of entry to and exit from the industry;
& strategic groupings (see later in the chapter for a discussion
of this concept).
This analysis will assist the organization in gaining greater under-standing of its core competences, its major competitors and their core competences, and competitive and collaborative opportunities and threats.
Product markets
Product markets are those in which businesses deploy their compe-tences and sell their products. A business may operate in one or more product markets. In addition, a business will be interested in under-standing markets to which it is considering entry on the basis of its core competences and also markets for substitute products. Each of these markets will have its own characteristics and can be analysed in terms of:
& customer needs and motivations;
& unmet customer needs;
146 External analysis Part III
& market segments and their profitability;
& the number of competitors to the market and their relative
market shares;
& the number of customers and their relative purchasing
power;
& access to distribution channels;
& potential for collaboration with customers;
& ease of entry;
& potential for competence leveraging;
& need for new competence building.
Unless an organization’s products are sold at a profit, the business will ultimately fail. Market-driven businesses that set out to meet exist-ing customer needs, anticipate their currently unmet needs and actu-ally seek to shape the needs of their customers are likely to be the most successful. For example, the Dutch electronics company Philips created a new customer need when it developed and launched the CD format for music and computer software.
Market subgroups
An important part of understanding the market is identifying sub-groups within the market that share common needs. Such shared characteristics will cause specific customer groups to have different needs and to act and behave differently to other customer groups (or segments). Fundamentally, segmentation means subdividing the total market into customer subgroupings, each with their own distinctive attributes and needs. Customer groups are commonly segmented according to demographic variables (or ‘people dividers’) such as age, sex, occupation, socio-economic grouping, race, lifestyle, buying habits, geography (i.e. where they live), although other segmentation instruments are widely used (see Chapter 5). When customers are other businesses, they can be grouped by the nature of the business, organization type and their size. Each segment is then analysed for its size and potential profitability, for customer needs and for potential demand, based on ability and willingness to buy. Segmentation ana-lysis assists in the formulation of strategy by identifying particular segments and consumer characteristics that can be targeted.
Customer motivations
Once market segments have been identified, they must be analysed to reveal the factors that influence customers to buy or not to buy
pro-Chapter 7 Analysis of the competitive environment 147
ducts. It is particularly important to understand factors that affect customer motivations, such as sensitivity to price, sensitivity to quality and the extent of brand loyalty.
Differences in customer motivations between market segments can be illustrated by reference to the market for air travel. The market can be segmented into business and leisure travellers. Customers in each group have very different characteristics and needs. Business travel-lers are not particularly price-sensitive but are sensitive to standards of service, to scheduling and to availability of connections. Leisure travellers are generally much more price conscious than service conscious and are less sensitive to scheduling and connections.
Market research has an important role to play in building understand-ing of customer needs so that they can be targeted by appropriate product or service features.
Potential new markets are those where the product or service bought by customers is based upon similar competences to those of the organization or where customer needs are similar to those of customers in a business’s market. If conditions are favourable, the organization may consider using its current competences to enter new markets. Of course, it may also have to build new competences in order to be able to meet new customer needs.
Resource markets
Resource markets are those in which organizations obtain finance, human resources, materials, equipment, services, etc. It is evident that businesses will normally operate in several such markets, each with its own characteristics, depending upon the company-specific resources that are required. Resource markets can be analysed in terms of:
& resource requirements;
& number of actual and potential resource suppliers;
& size of suppliers;
& supplier capabilities and competences;
& potential for collaboration with resource suppliers;
& access by competitors to suppliers;
& the nature of the resource and the availability of substitutes.
By analysing each of its resource markets, the managers of a busi-ness can identify the extent of competition that they face from sup-pliers of resources, the competition that they face from other
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competitors using the same resources, and the potential for collabora-tion with suppliers (if appropriate).
Competence-related industries
Other industries containing businesses that possess similar compe-tences and which often produce products that are substitutes for those of the business in question must also be analysed. This analysis is necessary for three reasons. First, the organization may face a threat from other competitors that possess similar competences and which may seek to enter its industry and markets. Second, the organization may be able to enter industries where competences are similar to those it already possesses. Third, the organization may be able to enter the markets currently served by competitors in the competence-related industry. Competence-related industries can be analysed for:
& key competences of the businesses in the industry;
& the number and size of the businesses in the industry;
& the threat from competitors in such industries who may
leverage their competences to enter the markets of the business;
& opportunities for the business to leverage its existing
compe-tences and build new ones in order to enter competence-related industries and their markets;
& substitutability of the products of the industry for those of
the business – i.e. how close the substitute product is to satisfying the same consumer demands as the business’s pro-duct or service.