MISSION STATEMENTS &

EXTERNAL ANALYSIS

Contents

1. Introduction 1
2. Corporate mission statements and objectives 1
2.1. Who are the stakeholders in the business ? 1
2.2. Conflicts and Complexity 2
2.3. Different levels of objectives 2
2.4. Mission or Vision 3
2.5. What should the mission statement contain ? 4
2.6. Corporate, business unit and functional
objectives 6

3. External analysis 8
3.1. Political, economic, social and technical
analysis (PESTE) 8
3.2. Overview of industry, market and
competitor analysis 11
3.3. . Porter’s 5 force 13
3.4 Competitor analysis competitor analysis 18

4. References 21
Revised by Tim Perry

Copyright © 2000 University of Warwick

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MISSION STATEMENTS & EXTERNAL ANALYSIS

1. Introduction
When setting up a new business, or reviewing the condition of an existing business, we need
to be clear about the purpose of the business ; only then can we start to develop how this
purpose can be achieved. This purpose is usually expressed as a set of objectives. The
objectives set for a business will depend not only on the external environment but also on the
views of individuals who have a stake in the business. These individuals are known as
'stakeholders'. Figure 1 summarises the differences between mission statement, objectives,
strategy and policies.

MISSION STATEMENT
A statement of purpose which:
» distinguishes the business from competitors
» incorporates the scope of its ‘offerings’
» provides a cultural overview
» defines a framework for objectives and strategies
OBJECTIVES
Measurable milestones to monitor performance against mission
STRATEGY
A definition of the businesses current and projected ‘sustainable
competitive advantage’ and their resource implications
POLICIES
A framework of operating rules within which the business will
operate

Figure 1

This section will examine who the stakeholders are and the conflicts & complexity resulting
from having a wide group of stakeholders. It will then examine the different levels of
objectives within a company, what a mission statement should contain and finally the sort of
objectives which might be set. Having set the mission statement and objectives the company
must now go about planning how these will be achieved. When setting any problem the first
step is to do some analysis. In strategy we split this analysis into two parts external analysis
and internal appraisal. These notes will end by examining methods for conducting external
analysis.

2. Corporate mission statements and objectives

2.1. Who are the stakeholders in the business ?
In order to determine the objectives for a company we first need to determine who has an
interest in the business. This seems like a very simple question and yet today there is a
growing list of groups who have an interest in businesses. These include :-
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Shareholders
Employees, managers, board of directors, Unions
Customers
Suppliers and creditors
Distributors
Competitors
Government ; local and national
International bodies i.e. European Union
Local community, special interest groups, general public

The extent to which the organisation needs to take account of the interests of these groups
must be established and managed. The most obvious group of stakeholders is the shareholders
who require a return for their investment or they may withdraw their capital. However many
other groups can have an impact on the organisation. European employers need not only to
ensure they comply with their own country’s laws but also those laid down by the European
Commission. In the UK the Ministry of Defence has been forced to pay compensation to
women whom it dismissed for being pregnant as this contravened European law. Growing
public interest in environmental issues is forcing many companies to consider the impact of
their operations on the local community. UK road builders and food retailers wishing to build
new roads or out of town supermarkets on green field sites are starting to meet resistance
from well organised protest groups who wish to preserve the countryside. These are just a few
examples of the possible influence stakeholders can have on business strategy.

The set of objectives for the business must take into account the needs of all these individuals.

2.2. Conflicts and Complexity

Given such a wide group of stakeholders and broad range of questions to answer it must be
accepted that creating a mission statement is going to result in conflicting objectives and
complexities. The employees' objectives might be to obtain the highest wages possible but
this may increase the price paid by the customer, reduce profit margins and result in
decreased dividends being paid to the shareholders. Taken to extremes the cost of wages may
result in the company being unable to sell its products because they are too expensive, the
company will go out of business and all stakeholders will suffer. It is also clear that
requirements of all the different stakeholders can not be translated into one single objective ;
achieving success will require a number of different objectives to ensure that the interests of
all stakeholders are dealt with. To conclude developing a set of objectives is going to involve
a great deal compromise and negotiation.

2.3. Different levels of objectives

In most medium and large companies today it is easy to recognise at least two different levels
i.e. the corporate level overseeing everything and the business unit level dealing with one

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defined area of the company's operations. The organisational structure for a company of this
type is shown below in figure 2.

Corporate

Strategic Strategic Strategic Strategic

Business Business Business Business
Unit Unit Unit Unit

Figure 2 - Organisational Structure

In a company of this type 3 levels of objectives are typical :-

Mission statement - a general statement explaining why the company exists

Corporate objectives - formal statements of stakeholder expectations
Business unit objectives - objectives which relate to one individual unit in the organisation

Objectives can be defined in two main ways ; either open or closed. Open objectives can not
be measured whilst closed objectives can be measured. Some authors such as Ansoff (1965 p
44) believe that objectives must be both measurable and achievable. However, many mission
statements are open statements and express long term goals such as 'to be world class in
manufacturing' or 'to be technology leader'. While the definitions of these statements will
change over time it is important that some indication of what they mean is determined so that
they can be effectively translated and therefore communicated into milestones of objectives
for all levels of the business. Otherwise they soon just become some initially catchy phrase
which no one in the business can relate to and therefore no one takes any notice of.

Corporate objectives are more likely to be closed and should relate to the current definition of
the more open objectives of the mission statement. At business unit level objectives are most
likely to be closed but may include both financial and non financial targets. For instance in a
manufacturing unit it would be common to find targets for reduction in product
manufacturing lead times or in the number of quality defects.

2.4. Mission or Vision ?

Some businesses have one or the other and therefore they may be seen as the same. Other
businesses distinguish between them. In which case the Vision tends to be the 'snappy'

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unforgettable phrase which everyone learns (?) or doesn't as the case may be, while the
Mission is a more elaborate and lengthy statement of what the business is about

2.5 What should the mission statement contain ?

The most fundamental questions to be answered is 'what should this business be ?' The
mission statement should be designed to answer this question. However an organisation can
be in existence for a very long time and so according to Richards (1978) it should be "a
visionary projection of the central and overriding concepts on which the organisation is
based". As with most topics in business strategy there are differing views as to what a mission
statement should contain. David (1986) states that it should answer the following questions:

1. Customers - who are they ?

2. Products or services - what are they ?
3. Markets - where does the business compete geographically ?
4. Technology - what is the firm's basic technology ?
5. Concern for survival, growth, and profitability - what is the firm's attitude towards
these ?
6. Philosophy - what are the fundamental beliefs, values, aspirations, and philosophical
priorities of the firm ?
7. Self-concept - what are the firm's major strengths and competitive advantage ; what
does it have that the competition does not ?
8. Concern for public image - what is the desired image ?
9. Reconciliatory effectiveness - does the mission statement address the needs of the
stakeholders ?
10. Inspiring quality - does the mission statement motivate and stimulate its reader to
action ?

A simpler view of what a mission statement should contain is given by Derek Abell who
advocates a three dimensional concept of mission. Products offered and markets served are
the results of choices made by the company about whom to satisfy, what needs to satisfy, and
how to produce the satisfactions. It is this combination of factors that defines the business.
The approach is useful as a powerful tool of analysis to explore potential future strategic
moves by the company. Also, by bringing in the technical dimension reflecting core skills and
competencies the company is kept alert to changes in both its market and its technological
environment.

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Needs satisfied/Values received by customers

Alternative Customer
technologies groups

Figure 3 - Elements of a mission statement

James C. Collins and Jerry I Porras in their article Building Your Company Vision in HBR
(1996) expressed their belief that a well conceived vision consists of two major components
• Core ideology, and

• Envisioned future

Core ideology defines the enduring character of the organisation, providing the glue that
holds the organisation together. It comprises two distinct parts:

• Core Values - a system of guiding principles, which

• require no external justification as they have intrinsic value to those inside the
organisation.

• are independent of the current environment, competitive requirements, or

management fads

• should stand the test of time and therefore should probably number no more
than five or six.

• Core purpose - the organisations most fundamental reason for existence, which

• should reflect the idealistic motivations for doing the company's work

• should be the ultimate answer to 'Why' anything we do is important.

• should guide and inspire

• has nothing to do with creating shareholder wealth.

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Core ideology captures what you stand for and why you exist while core competence is a
strategic concept that defines your capability.

Envisioned future consists of two parts:

• 10 to 30 year Big, Hairy, Audacious, Goal (BHAG), which

• is clear and compelling, serving as a unifying focal point of effort

• is tangible, energising and highly focussed

• requires a management team to be visionary rather than strategic or tactical

• Vivid descriptions of what it would be like to achieve that goal

2.6 Corporate, business unit and functional objectives

In many companies the purpose of the corporate objectives is to translate the open, long term
mission statement into medium to short term measurable targets. For example one corporate
objective might be to achieve a 20% growth in sales turnover during a 12 month period.
These targets are usually set by senior members of the board, the chief executive or chairman.
In a small company this may be the only level of objectives. In larger organisations the
corporate objectives are handed down to the heads of the business units who must translate
these into specific objectives for their business unit. To achieve the company's sales growth
target an individual business unit responsible for manufacturing the companies products
might have a target to recruit and train 10% more staff over the next 3 months.

In a traditional organisation business unit or divisions might have been organised based on
their function as shown below :-

Corporate

Marketing Manufacturing Design Computer

Division Division Division Services (IT)
Division

Figure 4 - A traditional organisational structure

Each division would be responsible for supporting all the products or services offered by the
company. The organisation would then need two categories of strategies ; strategies for each
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division, known in this case as functional strategies and strategies for the individual products
or services. The product strategies would need to be co-ordinated across all the different
divisions.

If we examine the impact of this organisational structure on a customer we can see that some
problems might arise. A customer might approach the company with an order to design and
manufacture a product. The customer would place the order with the marketing division, the
marketing division would then pass the order to the design division who in turn would pass
their completed design to the manufacturing division. Some companies found that this
organisation resulted in a poor service being given to the customer. For example no one
division in the company had ownership of the customer order and communication across
divisions was difficult. This has resulted in some large organisations creating 'strategic
business units'. These units are effectively small businesses in their own right and in our
example one strategic business unit would have responsibility for completing the customer's
order. This creates an organisation focused on meeting customer requirements and provides
one central point of contact for the customer. A typical organisation structure is shown below:

Corporate

Strategic Strategic Strategic Strategic

Business Business Business Business
Unit Unit Unit Unit

Marketing Manufacturing Design Computer

Department Department Department Services (IT)
Department

Figure 5 - A Strategic Business Unit (SBU) structure

In this organisation the strategic business unit strategy deals with one separate range of
products or services. However, co-ordination of the different functions across these strategic
business units is often still required. The company then has a corporate strategy, strategies for
strategic business units and functional strategies. For example in many large companies it is
essential that communications are conducted effectively and this might mean the use of the

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same computer hardware and software. A functional strategy for information strategy would
be required and all the strategic business units would need to implement this strategy.

The topic of organisational structure and its impact on implementing strategy will be looked
at in a later section. However, we can see that structure has a significant impact on the
formulation of, and, ability to implement strategy successfully.

3. External analysis
Changes in the external environment are occurring at an increasing pace in many industries.
Computer technology is just one example of rapid change which resulted in a nasty 'external
shock' for IBM. To avoid receiving an 'external shock' companies must keep checking or
auditing what is going on outside. In general, companies have little influence over these
external factors and so they must monitor the situation and be prepared to respond if a change
is predicted, or occurs. To help ensure companies carry out a thorough audit a number of
check lists have been produced listing typical factors which should be monitored. These
factors can be placed in two groups ; general factors under the headings political, economic,
social and technical and the company's own markets, industry and competition. The purpose
of carrying out this analysis is to determine any opportunities or threats facing the
organisation. To do this analysis the company must consider 2 questions:-

- What impact is this external factor going to have on my business ?

- What is the likely time scale for this impact to be felt ?

3.1. Political, economic, social, technical and environmental analysis

(PESTE)
The company must first define the time scale for the analysis ; the next 5 years, the next 10
years etc. The time scale is likely to be dependent on the industry. For example the nuclear
power industry must look ahead for many decades. Having defined the time scale each
category must be examined. When conducting the analysis it may be difficult to decide under
which category a factor should be classified. For example the level of taxation might be
considered as both a political and economic factor. In fact the exact positioning is not
important ; the check lists are simply designed to ensure that all major factors are
remembered. Most external factors can be viewed as either a threat or an opportunity and
often the speed of response determines the outcome. The increased social awareness for
safety when driving cars created an opportunity for increased sales to the automotive
manufacturer who first added passenger air bags. For the remaining manufacturers the
introduction of air bags on a competitor's product posed a threat to sales. However the
disadvantage of being first is that the customer may not yet be prepared to pay for the
increased level of safety.

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3.1.1. Political factors

Examples of opportunities and threats posed by the Government include :-

- Change in policies due to a change in the ruling party. For example in the UK the
Conservative Government has a policy of privatising national industries. If the Labour
party was to be elected this policy could be changed and some privatisation might be
reversed.
- Change in industry structure through monopoly and restrictive trade practices
legislation. The Monopolies Commission recently investigated the price of music CDs
but ruled that these products were not over priced in the UK.
- Policy on regional development and industrial regeneration policies. Both the UK and
European Governments can provide funds for companies locating to particular regions
or to help specific industries.
- Potential customer for defence contracts, civil works, education, health etc. The peace
dividend provided by the ending of the cold war between America and Russia is
reducing sales in the defence industry.
- Policy on international trade can protect or expose businesses to international
competition. Japanese companies have chosen to locate manufacturing in Europe
partly to overcome European trade barriers.
- Policy on wages can determine company's costs. The UK does not have a minimum
wage unlike most countries in the European Union. UK Government is encouraging
companies to keep wage increases below the level of inflation and in the past there
have been more rigid wage controls.

3.1.2. Economic factors

Examples of opportunities and threats posed by the current economic state include :-

- The position of the trade cycle. Is there economic growth or recession and what is the
impact on domestic disposal income, industrial spending / investment and on income
distribution ? In a recession unemployment is likely to be high and this can greatly
affect company's policies for human resources.
- Level of inflation and interest rates. High inflation results in rapidly increasing costs
and the need for regular price reviews. Interest rates can impact on both sales levels
and costs, if the company owes money to others.
- Level of taxation both direct and indirect. In the UK value added tax is a form of
indirect taxation whereas income tax is direct taxation.
- Exchanges rate and balance of payments. When the value of sterling is low in
comparison to other currencies exported UK manufactured goods are cheaper for other
countries to purchase.

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3.1.3. Social factors

Examples of opportunities and threats posed by changing social factors include :-
- Changes in demographic and population trends. Factors such as the birth rate and
health trends obviously influence the level and make-up of the population. Many
Western nations have an ageing population as people's health improves and birth rates
slow. These changes are long term.
- Changes in life styles and fashion. The impact of technology on working patterns with
the possibility of working from home and increase in the number of working women
are two examples. In car design the increasing amount of leisure time may change car
demand in the medium term whilst fashion may impact on colour choice in the short
term.
- Attitudes to pollution and environmental issues. This is a factor which can appear
under many sections since public opinion could be said to be encouraging increased
legislation.

3.1.4. Technical factors

Examples of opportunities and threats posed by changing technical factors include :-

- Level of industry wide research and development innovation. How much should each
individual company spend on R&D ? UK companies are often criticised for spending
far too little on R&D and hence lose sales to foreign competitors with more advanced
products.
- National and international investment in infrastructure for both transport and
communications. The state of a country's infrastructure greatly affects its contribution
to the costs of manufacturing and delivering products to the customer.
- Developments in information technology. Working from home would not be possible
for many without the use of computers, modems and telephone lines.

3.1.5. Environmental factors

This is a relatively recent addition to the analytical list an includes such opportunities and
threats posed by such factors as:
- Pollution and the growing awareness of its impact, resulting in curbing legislation,
which may at its extreme close down some industries or increase costs.
- Consumption of limited resources, resulting in either formal restriction or significantly
raising the costs
- Animal welfare

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The factors discussed are summarised on the following chart.

ENVIRONMENT TYPICAL FACTORS FOR ANY COMPANY

POLITICAL Ruling party and political climate.

UK Government policy.
EEC or International policy.
Monopoly controls, fair trading legislation, advertising controls.
Health & safety legislation, employment law.
Government purchasing policy.
Wage & price controls.
ECONOMIC Economic growth, domestic disposable income, income
distribution.
Inflation, interest rates.
Fiscal policy ; direct / indirect taxes.
Balance of payments, exchange rates.
Unemployment.
SOCIAL Changing trends in life styles, leisure, health.
Demographic & population trends.
Pollution, environmental lobby.
TECHNOLOGICAL Industry wide R&D innovation.
Transport infrastructure, communications.
Information technology
ENVIRONMENTAL .Pollution
Consumption of limited resources
Animal Welfare
Figure 6 - PESTE analysis

3.2. Overview of industry, market and competitor analysis

It is not enough to look at general external factors. A business must also have a thorough
understanding of the industry and markets in which it operates and who its competitors are.
There is an important difference between an industry and a market. The industry produces
goods or services to meet a customer demand whilst the market is the combined demand for
these goods or services. In addition we think of the industry as including all companies
offering a particular good or service. For example the automotive industry includes all car
manufacturers. However, we would normally recognise that Ford and Porsche do not compete
in the same market and would not be considered as direct competitors. Three areas will be
examined ; firstly industry structure & growth potential, secondly buyer behaviour, market
segmentation & differentiation and finally two separate sections will be devoted to competitor
analysis.

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3.2.1. Industry structure and growth potential

It is vital to know the structure of the industry. The following questions need to be answered :

- What is the number and size of the competitors ?

Is there a monopoly or are there numerous competitors ? The fewer the number of
companies the more power they are likely to have over price but the more attractive
the industry may appear to new entrants. The more companies in the industry the
greater the competition and the lower the power of individual companies. As
'concentration' increases companies tend to compete on price and hence larger
companies can lower their costs by achieving greater economies of scale, particularly
in manufacturing. Older companies may also benefit from having a lot of experience.
This experience is usually referred to as the 'learning curve'. Later sections will
examine competitor analysis in more detail.

- What is the growth potential of the industry or market ?

All industries, markets and products have a life cycle which can be separated into four
distinct stages ; introduction or development, growth, maturity or saturation and
decline. Refer to the figure below showing the pattern of sales and profit during the
life of a product. Some businesses specialise in being first with new products or
developments whilst others follow the latest developments..

Sales
and
Profit

4 Sales

Profit

1. Introduction or Development 3. Maturity or Saturation

2. Growth 4. Decline

Figure 7 - Product life cycle

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[Link] behaviour, market segmentation and differentiation

A market is made up of individual buyers. It is highly unlikely that these buyers are all the
same. When a completely new product is launched it is common to find only one or two
options which are designed to meet most of the different buyers' needs. For example when
televisions were first introduced they were all black and white and would have had the same
screen size. Today a huge range of options is available for a wide range of prices.
Concentrating on one smaller group of buyers is known as market segmentation. For example
Porsche have concentrated on those buyers wishing to own a sports car and within the sports
car market they have concentrated on a particular price range. The Porsche car has been
specially designed to suit this market segment and this type of product is usually referred to as
'differentiated'. The Porsche design is different or unique to other designs. When a market is
saturated one way to enter is to target a particular market segment with a differentiated
product which can be sold for a higher price. One problem with this strategy is that buyers
requirements can change or that larger competitors respond by incorporating the 'unique'
design components into their products. Remote controls for televisions were once a unique
feature available for a premium price but now they are an essential part of the product.

3.3. Porter’s 5 force competitor analysis

To bring together the analysis of the industry in which you are competing Michael Porter
(1980) developed a useful model depicting the forces driving industry competition.

POTENTIAL
ENTRANTS

Threat of new entrants

Bargaining Industry Bargaining

power power
SUPPLIERS BUYERS
of of
Suppliers Competitors buyers

Threat of substitute products

SUBSTITUTES
Figure 8 - Forces driving competition

Porter identified that these forces to varying degrees work together to drive down the return
of the business therefore as part of the development a competitive strategy a business must
identify and evaluate the strength of these forces working both for and against the business.
Any strategy should have as part of its aims the protection from and destabilising of the forces
against it.

Expanding on these forces :-

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3.3.1. Threat of new entrants

New entrants bring new capacity, the desire to gain market share and often substantial
resources. The threat they pose depends on the barriers to entry which are present combined
with the likely reaction they can expect from current players. Reaction is likely to be strongest
where there is a past history of vigorous retaliation, existence of resources to fight back,
highly illiquid assets and slow industry growth. There are seven major sources of barrier to
entry.

Economies of scale - the decline in unit costs as the volume per period increases. Such scale
economies can be present in nearly any function and deter new entrants by forcing them to
come in at a large scale and risk strong reaction from existing competitors. However, the
sheer scale of operations can become a liability if not managed properly or if the nature of the
market changes. For example the experience of ICI and IBM shows that the dangers of
becoming too large can include inertia to change and loss of concentration on core businesses.
The steel industry has also suffered from over capacity as the economic recession has not only
depressed demand but also reduced the need for such large volumes. This has left a number of
steel companies carrying very large fixed costs and operating very inflexible, high volume
manufacturing equipment. The search is on in manufacturing for more flexible capacity with
lower break even volumes and the ability to increase capacity in smaller steps without
becoming uncompetitive on cost.

Product differentiation - this means that the established businesses have strong brand
identification and therefore customer loyalty. New entrants are deterred as they have to spend
heavily to overcome the existing loyalties.

Capital requirements - the need to commit large financial resources in order to compete is a
particularly strong deterrent if the investment is required for working capital as well as
facilities.

Switching costs - these are one time costs that the buyer would incur in changing a supplier.
They can include new equipment, retraining costs, trials etc. If they are high the new entrant
must offer an incentive to the customer to switch. This is particularly relevant when selling
equipment, such as computer systems, to commercial customers.

Cost disadvantages independent of scale - these include proprietary product technology,

favourable access to raw materials, favourable location, Government subsidies and the
experience or learning curve.

Government policy - entry or exit can be restricted by licensing agreements, limits on access
to raw materials, pollution standards etc.

3.3.2. Intensity of rivalry between existing competitors

Rivalry involves the jockeying for position and occurs when one or more of the competitors
feel threatened or can see an opportunity to improve position. Price competition tends to
cause great instability with the likely result of the entire industry becoming worse off. Rivalry

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can vary from being bitter and cut throat to polite and gentlemanly but the intensity results
from a number of interacting structural factors:

Numerous or equally balanced competitors - numerous firms increase the likelihood of

mavericks as individual firms believe that they will not be noticed if they make moves. Even
when there are only a few firms, equally balanced, they may be prone to fight each other.
Where there is an established hierarchy the leader can be in a position to play a co-ordinating
role.

Slow industry growth - competition turns into a market share game and in some cases a fight
for survival, if supply exceeds demand.

High fixed costs - the pressure to fill capacity where there is a rigid cost structure can lead to
price cutting.

Lack of differentiation or switching costs - commodity products are sold primarily on price
while some differentiation can help insulate against competitive warfare. Switching costs
have the same impact as differentiation.

Capacity augmented in large increments - large sales economies tend to dictate large step
changes in capacity rather than slow increments and decreases as demand changes.

Diverse competitors - where strategies result from parent companies with differing goals it
can be difficult to predict intentions accurately, resulting in confusion. Strategic choices right
for one competitor may be wrong for another.

High exit barriers - economic, strategic or emotional factors that keep businesses competing
in an industry despite earning low or even negative returns. Examples include specialised
assets, fixed costs of exits such as labour agreements & spares contracts, interrelationship
with other business units, and Government/social restrictions.

Entry and exit barriers and business returns can be plotted on a four box matrix as shown
below.

Exit Barriers
Low High
Low Low, stable Low, risky
Entry returns returns
Barriers High, stable High, risky
High returns returns

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3.3.3. Pressure from substitute products

The concept of substitutes makes businesses view their offerings within a broader perspective,
as a solution to a problem rather than simply a generic product. For example video
conferencing acts as a substitute for air travel whereas historically travel companies may only
have considered alternative modes of travel in their competitive analysis. Such alternatives
may offer a distinct performance and price advantage and are of particular threat if they come
from a company earning high profits. Failure to spot a new substitute product can leave a
company with no customers for its products. For example the introduction of calculators has
virtually eliminated demand for slide rulers.

3.3.4. Bargaining power of buyers or customers

Buyers compete by driving prices down and bargaining for high quality and service. As a
group buyers are powerful under the following circumstances:

Buyers are concentrated or purchase large volumes relative to the seller - large volume
buyers are a particularly potent force if high fixed costs characterise the supplying industry.

The products purchased represent a significant proportion of the buyer's costs - this situation
may not give the buyers power but making them more price sensitive will mean that they will
use whatever power they have to greatest effect.

The products purchased are standard or undifferentiated - the easy availability of alternatives
enables buyers to play one supplier off against another.

Few switching costs - switching costs lock the buyer into a supplier.

Low profits earned by the buyer - this again may not give power but it will ensure that
whatever power is available it used.

Credible threat of backward integration - changes in the make or buy policy of the buyer's
business combined with ability to set up its own facility keep pressure on the supplier.

The industry’s product is unimportant to the quality of the buyers products - the more
important quality is to the buyer the less price sensitive they will tend to be.

The buyer has full information - with full information about the market place buyers can
ensure that they receive the best prices available and can counter suppliers claims that their
viability is threatened.

3.3.5. Bargaining power of suppliers

Powerful suppliers can squeeze profits by threatening to raise prices or reduce quality. Their
power is even greater if the buyers can not pass on the cost increases through higher prices to
their customers. The conditions making a supplier powerful tend to mirror those making the
buyer powerful:

More concentrated than the industry they sell to - suppliers selling to fragmented buyers will
usually be able to exert considerable influences on prices, quality and terms.

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No substitutes - heavy reliance on a supplier because only they can supply what is required
and can check even large and otherwise powerful buyers.

The industry is not an important customer of the supplier - the less a supplier relies on a
particular customer the more power will tend to be exerted.

The suppliers product is an important input to the buyer's business - the more reliant a
customer is on a supplier the more power the supplier has.

The suppliers products are differentiated or switching costs have been built up - the existence
of one or both of these reduces the buyers options to play one supplier off against another.

The supplier poses a serious threat of forward integration - the possibility of the supplier
expanding to miss out the immediate buyers and go straight to their customers improves the
suppliers negotiating position.

The definition of suppliers must also include the labour force as a business which ties itself
into either tightly unionised and/or scarce, highly skilled labour may see its profits quickly
bargained away. However, in recent times the level of unemployment in the UK has left
employers in a strong bargaining position.

3.3.6. Structural analysis and competitive strategy

Before explaining how the analysis of these 5 forces can be used to develop competitive
strategy it is worthwhile examining some recent developments which may alter this force
analysis.

In recent years the use of strategic alliances & joint ventures between competitors and buyers
& suppliers and the impact of supply chain management & strategic or partnership sourcing
have caused people to challenge the traditional views of these 5 forces. Some have even
criticised Porter’s model for perpetuating the adversarial, win-lose relationships between
customers and suppliers where it is believed that true competitive advantage can only be
derived by improving the performance of the total supply chain in comparison to other chains.
What companies in the future are seeking is to move away from the ‘zero sum’ game where
one party wins at the expense of the other to a ‘win-win’ position where partners work
together to reduce total costs and take equal shares in the increased profits. Whether or not
this invalidates Porter’s model is arguable. Certainly it can be said that the costs of switching
suppliers may have been greatly underestimated and consequently buyers may have used their
bargaining power inappropriately. It could be argued that Porter’s model is still valid but it is
the assessment of relative power and the use of this power which has been misinterpreted and
inappropriately applied.

To conclude, by diagnosing the forces affecting competition and their causes the business is
in a position to examine it strengths and weaknesses relative to the industry. An effective
competitive strategy takes offensive or defensive action in order to create a defensible
position against the five forces. This broadly involves a number of possible approaches:

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• Positioning the business so that its capabilities provide the best possible defence against
the existing array of competitive forces.

• Influencing the balance of forces through strategic moves in order to improve the relative
competitive position.

• Anticipating the shifts in the factors underlying the forces and responding to them,
thereby exploiting the change by choosing a strategy appropriate to the new competitive
balance before rivals recognise it.

3.4. Competitor analysis

Obviously one on the most important aspects of external analysis is the consideration of
competitors. This section gives some guidance on how to conduct this analysis by
investigating in depth individual competitor companies. Porter's 5 force analysis takes a wider
view of competitive forces and expands the analysis not only to include existing competitors
but the threats posed by new entrants, substitute products, buyers and suppliers.

The objective of competitor analysis is to develop a profile of:

• the nature and success of the likely strategy changes each competitor might make,
• each competitor's probable reaction to the array of industry changes, and
• broader environmental shifts that might occur.

The analysis is required to answer such questions as:

• Who should we pick a fight with in the industry (or more commonly in recent years who
can we form a strategic alliance with) ?
• What is the meaning of a competitor’s strategic moves ?
• What areas should we avoid because the competitors response will be emotional or
desperate ?

There are four diagnostic components to competitor analysis which should be the basis for
analysing potential and this analysis can be used both for competitors and for self analysis.

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These components are shown below.

Components of Competitor Analysis

What Drives
the Competitor What the Competitor
FUTURE GOALS is Doing and Can do
At all levels of CURRENT STRATEGY
management and in How the business
multiple dimensions is currently competing

Competitor’s Response
Profile
• Is the competitor satisfied with its
current position?
• What moves or strategy shifts is the
competitor likely to make?
• Where is the competitor vulnerable?
• What will provoke the greatest and
most effective retaliation?

Assumptions Capabilities
Held about itself Both strengths
and the industry and weaknesses

Figure 9

3.4.1. Future goals

These give an indication of what drives the competitor, how content the competitor is with the
current situation and will aid in predicting its reaction to future changes. The goals of the
business unit in direct competition should be identified and evaluated but so also should the
goals of the corporate parent and the interaction of the two. The goals are likely to include:

• Financial goals

◊ Profitability
◊ Cash flow
◊ Growth

• Non financial goals

◊ Market leader
◊ Industry statesman
◊ Industry maverick
◊ Technology leader

Questions surrounding these goals need to relate to the competitor's attitude to risk and how
they appear to balance any conflict between different sets of goals.

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3.4.2. Current strategy

The current strategy needs to be broken down, not just to identify how it is currently
achieving any competitive advantage that it may have or be striving to achieve but also to
identify its key operating policies in each functional area and how it seeks to interrelate the
functions. Figure 9 shows the elements of this strategy.

Competitor Analysis
Wheel of Strategy
Target
Markets Service
Product
Line
Marketing
R&D
Generic Goals
Strategy Objectives
Definition of for profit-ability,
Finance how the growth, Sales
and business is market share,
Control going to gain or social
competitive responsive-
advantage ness Distribution
Procurement
Manufact-
Human uring
Resources

Figure 10

3.4.3. Assumptions
Every competitor acts on the basis of implicit or explicit assumptions about:

• itself
• its competitors
• the industry

Examining these assumptions can identify blind spots where the competitor will either not see
the significance of events or perceive them incorrectly.

3.4.4. Capabilities
The previous components will influence the likelihood, timing, nature and intensity of a
competitors reactions. Its strengths and weaknesses will determine its ability to initiate or
react to strategic moves. This can be done by analysing the competitors competitive position
and considering their capabilities:

• in each of the functional areas

• to grow
• to respond quickly
• to change
• to sustain a protracted battle

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By bringing the analysis together it is possible to build a profile of how the competitor is
likely to respond in the future with respect to both offensive and defensive moves.

3.5 Conclusions

It is vital that from this analysis to develop a picture of the environment and predict its future
trend with respect to such aspects as:

- Market demand and growth rates

- Customer needs by segment and how these might change

- Customers perception of the business and its competitors

An analysis of the trends should enable you to identify

- Developments and changes in key factors for success

- Opportunities and threats facing the business in each segment

For more detailed examination refer to “Competitive Strategy : Techniques for Analysing
Industries and Competitors” by Michael Porter.

4. References
Ansoff Igor (1965) "Corporate Strategy" Penguin, 1965.

David Fred R. (1986) "Fundamentals of Strategic Management", Colombus, Ohio:

Merrill Publishing Co., 1986.

Johnson G. and Scholes K. (1984) "Exploring Corporate Strategy", London:

Prentice Hall International, 1984, p 9.

Porter Michael E. (1980) "Competitive Strategy" Free Press.

Richards M. (1978) "Organisational Goal Structures" West

.James C. Collins & Jerry I. Porras (HBR 1996) "Building Your Company's Vision"

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