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Break Point for the USTA: Developing a Strategic Vision
for the United States Tennis Association
Case
Author: Nels Popp, Jason Miller & Marion Hambrick
Online Pub Date: January 02, 2018 | Original Pub. Date: 2013
Subject: Strategic Management & Business Policy, Strategic Management & Planning
Level: | Type: Direct case | Length: 4694
Copyright: © 2013 Human Kinetics, Inc.
Organization: United States Tennis Association | Organization size: Small
Region: Northern America | State:
Industry: Sports activities and amusement and recreation activities
Originally Published in:
Popp, N. , Miller, J. , & Hambrick, M. ( 2013). Break point for the USTA: Developing a strategic vision for
the United States Tennis Association. Case Studies in Sport Management, 2( 1), 1– 9.
Publisher: Human Kinetics, Inc.
DOI: https://dx.doi.org/10.1123/cssm.2.1.1 | Online ISBN: 9781526433299
SAGE
© 2013 Human Kinetics, Inc.
Business Cases
© 2013 Human Kinetics, Inc.
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Break Point for the USTA: Developing a Strategic Vision for the United
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Abstract
The United States Tennis Association is the National Governing Body for tennis in the U.S. and
is comprised of three major divisions: (a) professional tennis, (b) player development, and (c)
community tennis. The USTA’s signature event and primary source of income is the U.S. Open
tennis tournament. The organization currently faces several challenges, including two issues
which have received significant media attention. The USTA currently lags behind several other
nations in developing elite young players, despite the U.S. having large participant numbers.
Also, financially-speaking, the U.S. Open is a highly successful event, but its largest show court
lacks a roof, which has proven costly as several championship events have been postponed due
to weather. The challenge of this case study is to develop a strategic plan for how the USTA can
best use their resources to grow tennis in the United States.
Case
Keywords: Strategic planning, USTA, tennis, management, North America, professional sport
The leadership staff at the United States Tennis Association is at a crossroads. As an organization which
oversees the country’s most prestigious tennis tournament in the U.S. Open and elite player development, as
well as the nation’s most extensive grassroots development programs, the USTA is responsible for developing
strategies and resources to grow the sport of tennis. But those in leadership positions within the USTA have
had mixed opinions about how to best meet their objectives over the years. That is why they have hired you,
Jim Strong, the director of Superstar Marketing, as a consultant to develop a strategic plan for the USTA. You
have been instructed to help the USTA formulate a plan, working within the organization’s annual operating
budget of approximately $280 million (see Exhibit A), which gives the association a vision and strategy to best
grow their sport over the next ten years.
In order to formulate this strategic plan, members of the Superstar Marketing staff have been assigned to
conduct research on the USTA to determine how the organization is structured, how it functions, how it derives
revenue, and how healthy it is. After spending some time talking to members of the organization and reading
about the USTA in several publications, your staff has prepared the following report. While this report is
not exhaustive, it does provide key background information and some valuable data. After digesting all the
material presented in the report, you will be better able to formulate a strategic plan, aided by the questions
listed at the end of this case study. While this report focuses on the internal structure, mission, and vision of
the USTA, it is critical to remember that the organization does not operate in a vacuum. The USTA has several
key partners and stakeholders, which include the Association of Tennis Professionals (ATP), the Women’s
Tennis Association (WTA), sponsors, media partners, and equipment manufacturers, as well as may levels of
coaches, players, and fans. When formulating a strategic plan, Superstar marketing will need to consider the
impact their advice will have on each of these constituents.
Background on the USTA
The United States Tennis Association is the National Governing Body (NGB) for the sport of tennis within the
U.S. and has been in existence for well over a century (see Exhibit B for Mission Statement). It is the largest
tennis organization in the world with close to three-quarters of a million members, all of whom fall under one
of three membership categories: adults, juniors, and families. The USTA is a non-profit organization with a
volunteer executive board which gives the organization direction and oversees all activity, but there are also
over 50 full-time paid staff members working for the organization, which is headquartered in White Plains, NY
(United States Tennis Association [USTA], n.d.a; Wong, 2009). In addition to the national office and its staff,
the organization has 17 regional offices known as sections and more than 50 state and district associations.
These associations utilize full-time paid staff and volunteers. The USTA is split into three major divisions: (a)
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Professional Tennis, (b) Player Development, and (c) Community Tennis. Each division will be examined in
greater detail in the following paragraphs.
Professional Tennis
The Professional Tennis arm oversees not only the administration of the U.S. Open Tennis Tournament and
the Billie Jean King National Tennis Center (discussed in greater detail below), but also a series of tournament
events leading up to the U.S. Open, called the Olympus U.S. Open Series. This series was developed in 2004
and as of 2011, includes ten tournaments, some specific to men, some specific to women, and some catering
to both genders (see Exhibit C). Professional Tennis also selects the U.S. teams for international competitions
like the Davis Cup, Fed Cup, Olympic Games, and Paralympic Games. Like other professional sports, tennis
has something of a minor league system for professional players. The USTA operates one of these circuits
called the USTA Pro Circuit and typically holds tournaments for men and women professionals with total prize
money of $10,000, $25,000, or $50,000 per event. This circuit is a financial loss for the USTA but is seen by
the organization as vital to developing elite level professional players from the United States.
The U.S. Open
As the USTA’s flagship event, the U.S. Open represents one of the largest sporting events in the nation,
outpacing the attendance numbers for the Super Bowl and the Indianapolis 500 over two weeks. The annual
tournament typically starts in late August and brings in competitors and fans from across the world. The
U.S. Open attracts approximately 700,000 spectators each year (Hoy, 2008) with many more watching on
television at home and via streaming media, offered for the first time in 2010 (Kaplan, 2010).
The tournament is also the USTA’s largest revenue source, generating over $217 million or 77% of the
organization’s annual revenue in 2010 (see Exhibit C) (USTA, 2011). The U.S. Open’s sponsorship rights
and television broadcasting contracts accounted for close to $100 million in 2008 (Hoy, 2008). The USTA
has secured multi-year sponsorship contracts with some of the biggest corporate names across numerous
product categories such as American Express, Grey Goose, Heineken, JPMorgan Chase, and MercedesBenz (Vasquez, 2010). The event appeals to consumer product companies marketing to an affluent target
market attending the event and watching at home. Tournament demographic information revealed over 40%
of U.S. Open fans are female, and almost half of the fan base has an annual household income equal to
or greater than $75,000. Sponsors can reach this affluent market and activate their sponsorships in various
ways, including placing signage in and around the facilities, hosting product tents and booths, and using the
tournament’s logos in promotional materials (Vasquez).
In addition to sponsorships, the tournament’s television contracts represent a significant revenue source. CBS
pays $21 million annually for the rights to broadcast the event. The U.S. Open also has contracts with ESPN
and Tennis Channel, and the tournament initiated a streaming media option where fans can watch matches
on CBSSports.com, ESPN3.com, and USOpen.org (Kaplan, 2010). In early 2011 the USTA negotiated with
CBS to extend its television contract through 2014, and the governing body will receive a small increase from
the $20 to $25 million per year outlined in the previous contract. From the broadcast network’s perspective,
some of the biggest contract benefits include the U.S. Open’s natural fit into its sports schedule between the
end of the professional golf season and the start of NFL play. Additionally, the event’s corporate sponsors
purchase 50% of the television advertising space as part of their sponsorship activation, securing advertising
revenue for the television company (Sandomir, 2011).
The U.S. Open is held in Arthur Ashe Stadium, which is part of the Billie Jean King National Tennis Center
(NTC), the world’s largest public tennis facility. The NTC has 38 courts, 18 of which are used for tournament
play (Matuszewski, 2010). The stadium holds 23,800 spectators and features 90 suites with annual lease
costs of $250,000 each. Built in 1997, the stadium originally cost $254 million and remains the largest tennis
stadium in the world. The stadium is built on land leased from New York State; however, to its detriment, the
NTC is the only facility on the Grand Slam tour without a roof or plans to add a roof in the near future. This
facility attribute has exposed the U.S. Open and USTA to increasing criticisms (Crouse, 2011).
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The U.S. Open experienced rain delays during tournament play four years in a row, much to the dismay
of players, spectators, corporate sponsors, and television broadcasters. In 2009 weather delays forced the
women’s championship from Saturday night to Sunday night, and ESPN2 ultimately showed the match
instead of CBS because of the scheduling changes (Kaplan, 2010). Rescheduling matches can lead to TV
ratings declines. In 2010 the men’s championship rating dropped 22%, while the women’s championship
rating reached an all-time low in the Saturday nighttime slot (Sandomir, 2011). With weather delays and
viewership declines, a debate persists about building a roof on Arthur Ashe Stadium, which hosts the
championship matches (Crouse, 2011). Industry analysts argued the USTA should have considered a
retractable roof in its initial construction plans of Arthur Ashe Stadium. Now, the governing body faces a
difficult financial decision: adding a roof to the existing facility. Estimates suggest the addition would cost
anywhere from $150 million to $300 million (Zinser, 2011). Roof proponents point to the increasing number
of rain delays and argue adding the roof would prevent future weather delays, pleasing TV broadcasters and
spectators alike. Roof detractors argue the USTA must balance the new roof requests with its mission to grow
the sport at the grassroots and professional levels.
As a non-profit organization, the USTA does not possess the financial flexibility of other Grand Slam
tournaments. The Australian Open receives support from the national government, and the All England Club
views hosting Wimbledon as its primary purpose. The U.S. Open and the USTA must consider its options fully
and balance its goals and objectives with the needs of its stakeholders (Crouse, 2011). It should be noted the
U.S. Open has traditionally been the trendsetter among the Grand Slam tournaments. It was the first to utilize
instant replay and to offer equal prize money for male and female participants.
Player Development
The USTA’s Player Development division is based in Boca Raton, FL and also operates training centers
in Carson, CA and Flushing, NY. The mission of USTA Player Development is to identify and develop the
next generation of U.S. champions by surrounding the top junior players and young pros with the resources,
facilities and coaching they need to reach their maximum potential. This division of the USTA works to identify
top young talent, monitors U.S. player success at USTA sanctioned age-group tournaments and scholastic
(high school and college) competitions, and is active in the latest sport science developments which may
improve training for players (United States Tennis Association). In the last few years Player Development has
changed its philosophy. Previously it had only housed junior players at its headquarters for short periods of
time and offered supplemental coaching to the players in coordination with the player’s coach at home. In a
change of policy, Player Development now houses some players full-time, offering coaching, physical training,
and academics.
Motivation for this change in philosophy stems from the fact that U.S. tennis has produced few Grand Slam
champion caliber players in recent years. In fact, in May of 2011, for the first time in close to 40 years of
weekly computerized rankings, no male or female U.S. tennis player was listed among the top 10 in the world
(Clarey, 2011). The past several decades are littered with numerous U.S. players who were rated consistently
among the world’s best, individuals such as Arthur Ashe, John McEnroe, Jimmy Connors, Pete Sampras,
Andre Agassi, Andy Roddick, Michael Chang, and Jim Courier on the men’s side and Billie Jean King, Chris
Evert, Martina Navratilova, Jennifer Capriati, Monica Seles, the Williams sisters (Venus and Serena), and
Lindsay Davenport on the women’s side. Yet, in the last few years, the top of the world rankings have been
dominated by European and South American players and no young U.S.-born player seems poised to regain
these positions any time soon.
Several experts have weighed in on reasons for the lack of growth in development of elite level players. USTA
General Manager of Player Development, John McEnroe, suggests a large part of the problem is coaching
style to which young players are exposed (Clarey, 2011). Meanwhile, Doug MacCurdy, who formerly held
McEnroe’s position at USTA, believes elite junior tennis has become too expensive to make it available to
many promising young players. In addition, top players in many other countries typically train in specialized
academies or clubs from an early age, something that does not happen as effectively in the U.S. Several
excellent tennis academies do exist in the U.S., such as the IMG Bollettieri Tennis Academy, which has served
as a training ground for many top young U.S and international players. The IMG Bollettieri Tennis Academy is
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not, however, affiliated with the USTA.
Another potential hurdle cited in the development of U.S. tennis talent is the lack of college scholarship
opportunities for U.S. players at NCAA universities. Although the U.S. is the only country to sponsor elite
competitive collegiate tennis, according to NCAA data, many college tennis scholarships are going to
international student-athletes. As of the 2009–2010 school year, 40.0% of men’s Division I tennis players
(32.5% of Division II men’s tennis players) and 35.2% of women’s division I tennis players (19.8% of Division
II women’s tennis players) were international student-athletes (NCAA, 2010). These international players are
also having a major impact on NCAA competition. In a March 2009 ITA ranking, of the top 100 collegiate men,
only 38 were from the U.S. and on the women’s side, just over half (51) were from the U.S. (USTA, n.d.b).
While USTA officials point out that nearly all of the top ranked junior players in the U.S. do receive college
scholarship opportunities, many tennis observers have wondered whether so many tennis scholarships going
to foreign athletes has stunted U.S. junior tennis growth.
Community Tennis
The USTA’s Community Tennis arm works to grow tennis at the grassroots levels. This segment of USTA
divides the country into 17 regions or sections and has been responsible for initiating several programs
(such as USTA School Tennis, USTA League Tennis, USTA Jr. Team Tennis, National Junior Tennis League,
USTA Wheelchair Tennis, USTA Tennis on Campus, and Tennis Welcome Centers). It should be noted many
community tennis sections also assist the USTA in player development, hosting events such as junior circuit
tournaments and camps.
Current Grassroots Initiatives
The 17 section associations and more than 50 district and state associations are an important component
to the organizational structure of the USTA. These associations are wide ranging in terms of membership,
budgets, and priorities. While most financial resources, program structure, and regulations are directed from
the USTA National Headquarters, the section, district, and state associations ultimately have autonomy
in the short and long term management of their operations. Each association acts as a separate nonprofit organization governed by its own volunteer officers, boards of directors, and professional staff. The
average section association has an approximate annual budget of $5 million and the average district or state
association budget is approximately $500,000.
The USTA has a current mix of established and new programs and initiatives. Its most established and largest
revenue producer outside of the U.S. Open is USTA League program for adults and seniors. Approximately
330,000 players participate in these age and skill level based programs across the country. A second, less
popular adult option often favored by more skilled players is USTA sanctioned adult tournaments.
For junior players the offerings are similar but with less participants. USTA Jr. Team Tennis (JTT) is a team
based program similar to USTA League where competition is based on age and skill level. Approximately
100,000 kids participate in JTT. Typically more advanced players are drawn to USTA sanctioned junior
tournaments which is tracked by age and offers rankings at state/district, section, and national levels of
competition. Approximately 100,000 kids participate in junior tournaments.
In addition to JTT and sanctioned tournaments, the USTA also has a substantial presence in schools. It is
estimated 1 million kids are impacted annually in physical education classes and afterschool programs. USTA
membership is required for both JTT and sanctioned tournaments. The organization also offers National
Junior Tennis and Learning (NJTL) chapters which combine tennis and education and are often comprised of
kids from difficult socio-economic situations. While some kids participating in school or NJTL programs are
USTA members, it is not required for participation in most cases. At the high school level, just over 345,000
students participated on tennis teams in 2010, according to the National Federation of High Schools. Tennis
was the eighth highest participant sport for boys and seventh for girls (Tennisindustry.org, 2010).
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In recent years the USTA has become more aware of the discrepancy in its base of junior players compared to
other sports in the United States and the larger number of tennis players in other countries. Due to this issue,
the organization has put a tremendous amount of resources in what is being called 10 and Under Tennis
featuring the QuickStart Tennis Play Format. This initiative uses age appropriate courts sizes, racquets,
balls, net heights, and scoring formats to make tennis more fun and accessible. The format is similar to age
appropriate modifications in sports like baseball, basketball and soccer which have been used for decades.
The goals of 10 and under tennis are twofold. One goal is to attract more players to the sport which will
become frequent players as adults. The second is to attract more athletic players to the sport resulting in
more American champions in junior, collegiate, amateur, and professional competitions. The 10 and Under
Tennis initiative is one of the first instances where community tennis and player development have integrated
to achieve mutual goals. Player Development has also worked with the Sections to design and implement
certified regional training centers with a heavy emphasis on identifying talented players.
The State of Tennis in the U.S.
According to the annual Sporting Goods Manufacturers Association (2011) report, in 2010, 18.9 million people
over the age of six in the U.S. played tennis more than once a year. This number is fewer than those
who participated in bowling (55.9 million), cycling (39 million), basketball (26.3 million), or golf (26.1 million)
but ranked ahead of all other team and individual sports such as soccer (14 million), downhill skiing (11.5
million), slow pitch softball (8.4 million), and volleyball (7 million). Since 2000, the number of people playing
tennis has increased 45.7%, the second largest increase in participation for any sport listed in the SGMA
report, behind only lacrosse (218.1%). A similar 2012 report by the National Sporting Goods Association
(NSGA) reported 13.1 million Americans over the age of seven played tennis at least once in the last year.
This participation number was lower than the participation numbers for bicycle riding (39.1), bowling (34.9),
basketball (26.1 million), golf (20.9), and soccer (13.9) but greater than the numbers for baseball (12.3),
softball (10.4), volleyball (10.1), off-road mountain biking (6.0), or water skiing (4.3). (For 10-year historical
results, see Exhibit D. For Harris poll on Americans’ favorite sports to follow, see Exhibit E)
A separate study conducted by the Tennis Industry Association (TIA) and the USTA, found the number of
people in the U.S. over six years old who played at least once a year was just over 30 million in 2009,
a significantly higher estimate than the SGMA and NSGA reports. The TIA/USTA report ranged from 23.6
million to 26.9 million participants per year between 2002 and 2008. Also, according to this same survey,
16.3% of tennis participants are 6–11 years old, 20.5% are 12–17 years old, 18.4% are 18–24 years old, 11%
are 25–39, 8.8% are 40–49, and 4% are 50+. Over 35% of participants come from households where the
annual income is over $100,000, while fewer than 14% of participants come from households with an annual
income under $40,000.
Regarding facilities, the TIA estimates there are 270,000 tennis courts in the United States. These courts
may exist at public recreation parks and centers, private clubs, high schools and universities, apartment
complexes, or other facilities. Tennis’ popularity can also be gauged in equipment sales. According to Garber
(2009), racquet sales went up over 44% (junior racquets went up almost 88%, coinciding with the launch of
the QuickStart Tennis Play program) and tennis ball sales increased over 16% between 2003 and 2008 in the
U.S.
Current USTA Leadership
The Executive Director and Chief Operating Officer of the USTA is Gordon Smith. Smith, who makes over $1
million a year, took over his role in 2009, and in 2011 was given a four-year extension (Kaplan, 2009). Prior to
serving in this leadership capacity at USTA, Smith had no prior experience in managing large events, but had
served in regional leadership roles within USTA as a volunteer. A lawyer by profession, Smith is also an avid
tennis player, and competed collegiately at the University of Georgia (USTA, n.d.a). It has been little secret
that Smith believes the best path to grow tennis is to place a much greater emphasis on grassroots tennis.
This does not mean he plans to ignore elite level tennis. In fact, in a recent article, he stated the four biggest
challenges facing his organization are: (a) getting young people to play the game, (b) improving the U.S.
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Open, (c) increasing revenue, and (d) developing American pro champions (Kaplan, 2011). Prior to Smith’s
arrival, the actions of the USTA were heavily influenced by Arlen Kantarian, the former Chief Executive Officer
of Professional Tennis and one of the most well compensated executives in all of the sport industry. Kantarian
negotiated lucrative contracts for the U.S. Open and clearly wanted the focus of the USTA to be on elite level
tennis (Kaplan, 2009). Smith’s approach has been much different than Kantarian’s, and, in fact, Smith has not
filled Kantarian’s position since he left to take a position with the Miami Dolphins. Administrative restructuring
has occurred in several other places within the upper levels of the organization since he has taken the reigns
and Smith continues to try to develop the right recipe for the USTA. This is where Jim Strong and his expertise
have been brought in to help develop the right plan for the organization.
Discussion Questions
1. Based on the information provided in this case study, develop a S.W.O.T. analysis for the USTA.
How would you summarize the state of tennis in the United States and the job the USTA is doing?
2. Your task is to create a ten-year strategic plan for the USTA. As you formulate this plan, you realize
you cannot improve every area as much as you would like. As you consider your plan, would you
encourage the USTA to adopt a strategy (and allocate resources towards) promoting the U.S. Open
and other professional tennis events, developing young elite level talent, or creating greater
grassroots initiatives? Explain the pros and cons of each option and justify the choice you made.
3. Based upon the strategy you selected for question 2, develop two initiatives that would effectively
meet your objective of growing the sport of tennis in the U.S. Explain the reasons why your
initiatives would be successful.
4. What other information would you need to develop this strategic plan? Where could you access
such information?
5. Recently, the U.S. Open has come under scrutiny because of rainouts during its championship
weekend. Past USTA leaders had vowed to put a roof over the main court to ensure that
championship matches could be played despite the weather, but the current leadership has put
those plans on hold. The cost of adding a roof could cost as much as $300 million, which would
severely impact the amount of spending the USTA could put towards grassroots tennis or player
development. Should the USTA commit to adding a roof to the main stadium on the Billie Jean King
National Tennis Center? Why?
6. Should the USTA lobby the NCAA to limit the number of scholarships member schools allocate to
international student-athletes? Why or why not?
References
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Kaplan, D. (2011, August 29). USTA signs Smith for another 4 years as executive director. SportsBusiness
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asked
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(“FAQ”).
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https://dx.doi.org/10.1123/cssm.2.1.1
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Break Point for the USTA: Developing a Strategic Vision for the United
States Tennis Association
Group 8
Description/Requirements
Review the case study entitled Break Point for the USTA: Developing a Strategic
Vision for the United States Tennis Association.
Popp, N., Miller, J., & Hambrick, M., (2013). Break point for the USTA: Developing a
strategic vision for the united states tennis association. In SAGE Business Cases.
SAGE Publications, Ltd.,
Answer the 6 questions that are at the end of the case. You will need to apply your
learnings from the unit in order to demonstrate your understanding of the
concepts of ethical behavior in relation to strategy formulation and
implementation.
The questions (directly from the case as linked above) are:
1. Based on the information provided in this case study, develop a S.W.O.T.
analysis for the USTA. How would you summarize the state of tennis in the
United States and the job the USTA is doing?
2. Your task is to create a ten-year strategic plan for the USTA. As you formulate
this plan, you realize you cannot improve every area as much as you would like.
As you consider your plan, would you encourage the USTA to adopt a strategy
(and allocate resources towards) promoting the U.S. Open and other
professional tennis events, developing young elite level talent, or creating greater
grassroots initiatives? Explain the pros and cons of each option and justify the
choice you made.
3. Based upon the strategy you selected for question 2, develop two initiatives that
would effectively meet your objective of growing the sport of tennis in the U.S.
Explain the reasons why your initiatives would be successful.
4. What other information would you need to develop this strategic plan? Where
could you access such information?
5. Recently, the U.S. Open has come under scrutiny because of rainouts during its
championship weekend. Past USTA leaders had vowed to put a roof over the
main court to ensure that championship matches could be played despite the
weather, but the current leadership has put those plans on hold. The cost of
adding a roof could cost as much as $300 million, which would severely impact
the amount of spending the USTA could put towards grassroots tennis or player
development. Should the USTA commit to adding a roof to the main stadium on
the Billie Jean King National Tennis Center? Why?
6. Should the USTA lobby the NCAA to limit the number of scholarships member
schools allocate to international student-athletes? Why or why not?
This is my part
Part 1: Group Report
Groups will be required to prepare 4000 word report on the case study provided that
answers the 6 discussion questions at the end of the case study (and presented
immediately above).
Only ONE report is required per group so ensure you have allocated tasks
appropriately to team members, as well as the task of uploading the submission
well before the due date. All group members receive the same grade for the group
report part of Assignment 1.
Part 2: Reflection report (completed individually)
As part of this assessment task, all group members must submit (individually) a selfanalysis of their
contribution to the group assessment. This is an individual submission that will vary fro
m groupmember to group member. Consideration should be given to the contribution m
ade in planning,research, task allocation, quality of report, reliability, time management
and group effectiveness.The selfanalysis report is worth 10% of each student’s total mark for this unit.
The selfanalysis can be completed in conjunction with the group report and is due to be
submitted 7 days after the group report deadline.
Your selfanalysis should provide a realistic account of your contribution to the project, including
reflections that demonstrate insight and understanding of both the
subject matter and teamwork.Your selfanalysis report should NOT be simply a description of what you contributed as part of
the project. Guiding questions might include:
•
What skills did I bring to my group, and how did I demonstrate my skills through the
•
development of our submission for this assessment?
What were the strengths and weaknesses of our team that I observed throughout the
development of the submission, and how do these observations impact my plan for
future teamwork?
•
What have I learned from this experience and what might I have done differently to add
value to the development of our assessment
•
If your contribution was really good, please provide a reflection about what was good,
and why.
Note: Your self-analysis report is an individual submission. You need to
submit one individualsubmission (maximum of 500 words) based on your selfassessment. Please submit your self-analysis report in the individual dropbox for A1.
Case Analysis
Textbook C2 – C16
Why Use Cases?
n Get familiar with problems and
solutions
n Build analytical skills
n Practice
n Critical decision making
n Understanding of different
companies and industries
Preparing for class discussion
Skim
n Read
n Review all evidence
n What are the strategic issues?
n Quantitative analysis
n Apply concepts and techniques of strategic
analysis
n Identify conflicts, make decisions
n Support with evidence
n Develop action plan and recommendations
n
Participating in Class
discussion
n It is inappropriate to be the silent
observer
n Expect, and tolerate challenges
n Allow yourself to change your
mind as discussion unfolds
Written analysis
n Identify issues
n Analysis and evaluation
n Recommendations
Extra research
n Online
l What information is good
information?
Steps
1.
2.
3.
4.
5.
6.
7.
8.
9.
Read questions
Read Case
Define
Industry
What are they trying to do to be
successful?
Situational analysis
Industry Analysis
Answer questions
Write Report
MMS736 Strategic
Management
Module 3
Competitive Strengths
Question 5: Is the Company Competitively Stronger or Weaker
than Its Key Rivals?
Step 1: Make a list of 6 to 10 of the industry’s key success factors and
its
most
relevant
measures
of
competitive
strength/weakness
Step 2: Assign weights to each of the measures of competitive
strength based on their perceived importance (the sum of
the weights must equal 1.0)
Step 3: Rate the firm and its key rivals on each strength measure
using rating scale of 1 to 10 (1 = very weak; 5 = average; 10
= very strong)
Step 4: Multiply each strength rating by its importance weight to
obtain weighted strength scores
Step 5: Sum the weighted strength scores to get an overall weighted
measure of competitive strength for each rival
Step 6: Use the overall weighted strength scores to draw conclusions
about the firm’s net competitive advantage or disadvantage
vis-à-vis each of its rivals
Copyright © 2018 by Glo-Bus Software, Inc.
➢ Whether a firm is competitively
stronger or weaker than key rivals
hinges on:
➢ How the firm ranks relative to
competitors on each important factor
that determines market success
➢ The firm’s net competitive advantage or
disadvantage versus major competitors
A Representative Weighted Competitive
Strength Assessment
Copyright © 2018 by Glo-Bus Software, Inc.
Strategic Implications of Competitive Strength Scores
➢ A firm’s competitive strength scores pinpoint where it is competitively stronger and
weaker vis-à-vis rivals
➢ When a firm has high competitive strength scores in areas where one or more rivals
have low scores, it should consider offensive moves that pit its competitive strengths
directly against rivals’ competitive weaknesses
➢ When a firm has low scores on strength measures where one or more rivals have
high scores, it should consider defensive moves to curtail its vulnerability to rivals’
offensive attacks
Copyright © 2018 by Glo-Bus Software, Inc.
Summary
• Resources, capabilities, competencies and value
• SWOT Analysis
• Value Chain
• Application to sport?
• Benchmarking
• Competitive Strength Scores
• External and Internal analysis precedes ‘crafting strategy’
Deakin University CRICOS Provider Code: 00113B
Your Tasks this Week
•
Next Week:
• Read Chapter 5
• Read Topic 5 of the Unit Site
• Watch week 5 Lecture recording
• Read the week 5 Lecture and Seminar slides
• Assessment No. 1 Get Going
MMS736-WK-1.prs
MMS736 Strategic
Management
The Five Generic Competitive Strategy Options:
Which One to Employ
Module 3
Achieving Competitive Advantage Via
a Broad Differentiation Strategy
To build sustainable competitive advantage via broad differentiation, a firm typically
must do one or more of the following:
• Focus on continuous product innovation
• Incorporate features that raise product performance and deliver added value to the buyer/end-user
• Incorporate product attributes and user features that lower the buyer’s overall costs of using the firm’s
product
• Incorporate features or features that enhance buyer satisfaction in intangible ways
• Deliver value to customers using competitively potent resources and capabilities that rivals do not have
or cannot afford to match
Copyright © 2018 by Glo-Bus Software, Inc.
When a Broad Differentiation Strategy
Works Best
➢ Buyer needs and uses of the product are diverse.
➢ There are many ways to differentiate the product or service that have
value to buyers.
➢ Few rival firms are following a similar differentiation approach.
➢ Technological change is fast paced and competition revolves around
rapidly evolving product features and attributes.
Copyright © 2018 by Glo-Bus Software, Inc.
Pitfalls to Avoid in Pursuing
a Differentiation Strategy
•
Differentiation keyed to product/service attributes and features that are easily and
quickly copied
•
Incorporating differentiation attributes that produce an unenthusiastic response on
the part of buyers
•
Overspending to differentiate the firm’s product offering, thus eroding profitability
•
Failing to achieve meaningful differences in quality, service or performance features
vis-à-vis rival products
•
Adding frills and extra features that exceed the needs and use patterns of most
buyers
•
Charging too high a price premium
Copyright © 2018 by Glo-Bus Software, Inc.
Pursuing a Differentiation Strategy:
Three Principles to Keep in Mind
➢ A differentiating feature that works well is a magnet for imitators
➢ Over-differentiating and overcharging are fatal strategy mistakes
➢ Small differences among the product offerings of rival firms may
not be important to buyers—a good differentiation strategy must
aim at strong rather than weak product differentiation
3. Focused Low Cost Strategies
• A focused strategy based on low cost aims at securing a competitive
advantage by serving buyers in the target market niche at a lower
cost and lower price than rival competitors
• This type of strategy has considerable attraction when a firm can
lower costs significantly by limiting its customer base to a welldefined buyer segment group
• Focused low-cost strategies are fairly common
4. Focused Differentiation Strategies
• A focused strategy based on differentiation aims at securing a
competitive advantage by offering niche members a product they
perceive is better suited to their own unique tastes and preferences.
• Successful use of a focused differentiation strategy depends on the
existence of a buyer segment that is looking for special product
attributes or seller capabilities and on a firm’s ability to stand apart
from rivals competing in the same target market niche.
Risks of a Focused Low Cost or Focused
Differentiation Strategies
Focusing a strategy carries several risks such as:
a. The chance that competitors will find effective ways to match the
focused firm’s capabilities in serving the target niche
b. The potential for the preferences and needs of niche members to
shift over time toward the product attributes desired by the majority
of buyers
c. The segment may become so attractive it is soon inundated with
competitors, intensifying rivalry and splintering segment profits
5. Best-Cost Provider Strategies
• Stake out a middle ground:
• Between pursuing a low-cost advantage and a differentiation
advantage
• Between appealing to the broad market as a whole and a narrow
market niche
• Are aimed squarely at buyers looking for appealing extras
and functionality at an appealingly low price
The
Objective
Copyright © 2018 by Glo-Bus Software, Inc.
Deliver superior value by meeting or exceeding
buyer expectations on product attributes and
beating their price expectations
The Standout Traits of
Best-Cost Provider Strategies
• The essence of a best-cost provider strategy is giving customers more
value for the money by:
• Satisfying buyer desires for appealing features/performance/quality/service
• Charging a lower price for those attributes than its rivals
• To profitably employ a best-cost provider strategy, a firm must
incorporate attractive upscale attributes at lower costs than its rivals
Copyright © 2018 by Glo-Bus Software, Inc.
A Best-Cost Provider’s
Competitive Advantage
A best-cost provider’s competitive advantage is its lower costs in
incorporating upscale attributes than rivals
This low-cost advantage allows a firm to underprice rivals and still earn attractive
profits (provided the size of the price discount does not squeeze profit margins)
Competitive
Strategy
Principle
Copyright © 2018 by Glo-Bus Software, Inc.
It is usually not difficult to entice buyers away from
rivals with an equally good product at a more
economical price
How a Best-Cost Strategy Differs
from a Low-Cost Strategy
Upscale product attributes in a best-cost provider’s offering entail added
costs that a low-cost provider avoids by offering a basic product with few
frills
• The two strategies are aimed at different buyers:
• Best-cost provider’s target market is value-conscious buyers looking for valued
extras and utility at an appealingly low price
• Low-cost provider’s target market is price-conscious buyers seeking a basic product
at a bargain price
Copyright © 2018 by Glo-Bus Software, Inc.
When a Best-Cost Provider Strategy
Works Best
• Markets where product differentiation is the norm
• The buying side of the market consists of attractively large numbers of
value-conscious buyers that can be induced to purchase mid-range or
near-luxury products rather than
• The cheap basic products of low-cost producers
• The expensive products of top-of-the-line differentiators
• Economically tough times when there are even more buyers attracted to
economically-priced products/services with especially appealing
attributes
Copyright © 2018 by Glo-Bus Software, Inc.
Summary
• The Five Basic Competitive Strategy Options
• Low-Cost Provider Strategies (perform value chain activities more efficiently, revamp VC)
• Broad Differentiation Strategies (buyer desired attributes, mass)
• Focused Low-Cost Strategies (Niche)
• Focused Differentiation Strategies (buyer desired attributes, niche)
• Best-Cost Provider Strategies
• Between pursuing a low-cost advantage and a differentiation advantage
• Between appealing to the broad market as a whole and a narrow market niche
• Careful: not to be stuck in the middle?
Deakin University CRICOS Provider Code: 00113B
Next Week – No classes
•
Following Week:
• Read Chapter 6
• Read Topic 6 of the Unit Site
• Watch week 6 Lecture recording
• Read the week 6 Lecture and Seminar slides
• Assessment No. 1
page 50
chapter 3
Evaluating a Company’s External
Environment
Learning Objectives
After reading this chapter, you should be able to:
Recognize the factors in a company’s broad macro-environment that
may have strategic significance.
LO 3-2
Use analytic tools to diagnose the competitive conditions in a
company’s industry.
LO 3-3
Map the market positions of key groups of industry rivals.
LO 3-4
Determine whether an industry’s outlook presents a company with
sufficiently attractive opportunities for growth and profitability.
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
LO 3-1
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
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Fanatic Studio/Getty Images
No matter what it takes, the goal of strategy is to beat the competition.
page 51
Kenichi Ohmae—Consultant and author
Companies that solely focus on competition will die. Those that focus on value creation will thrive.
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
Edward de Bono—Author and consultant
Continued innovation is the best way to beat the competition.
Thomas A Edison—Inventor and Businessman
In Chapter 2, we learned that the strategy formulation, strategy execution process begins with an appraisal
of the company’s present situation. Two facets of a company’s situation are especially pertinent: (1) its
external environment—most notably, the competitive conditions of the industry in which the company
operates; and (2) its internal environment—particularly the company’s resources and organizational
capabilities.
Insightful diagnosis of a company’s external and internal environments is a prerequisite for managers to
succeed in crafting a strategy that is an excellent fit with the company’s situation—the first test of a winning
strategy. As depicted in Figure 3.1, strategic thinking begins with an appraisal of the company’s external
and internal environments (as a basis for deciding on a long-term direction and developing a strategic
vision). It then moves toward an evaluation of the most promising alternative business models, and
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
Created from deakin on 2022-08-10 01:07:46.
strategies and finally culminates in choosing a specific strategy.
FIGURE 3.1 From Analyzing the Company’s Situation to Choosing a
Strategy
This chapter presents the concepts and analytic tools for zeroing in on those aspects of a company’s
external environment that should be considered in making strategic choices. Attention centers on the broad
environmental context, the specific market arena in which a company operates, the drivers of change, the
positions and likely actions of rival companies, and key success factors. In Chapter 4, we explore the
methods of evaluating a company’s internal circumstances and competitive capabilities.
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
page 52
ASSESSING THE COMPANY’S INDUSTRY AND
COMPETITIVE ENVIRONMENT
Thinking strategically about a company’s industry and competitive environment entails using
some well-validated concepts and analytical tools to get clear answers to seven questions:
1. Do macro-environmental factors and industry characteristics offer sellers opportunities for
growth and attractive profits?
2. What kinds of competitive forces are industry members facing, and how strong is each
force?
3. What forces are driving industry change, and what impact will these changes have on
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
Created from deakin on 2022-08-10 01:07:46.
competitive intensity and industry profitability?
4. What market positions do industry rivals occupy—who is strongly positioned and who is
not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors of competitive success?
7. Does the industry outlook offer good prospects for profitability?
Analysis-based answers to these questions are prerequisites for a strategy offering good fit
with the external situation. The remainder of this chapter is devoted to describing the
methods of obtaining solid answers to these seven questions.
page 53
ANALYZING THE COMPANY’S MACROENVIRONMENT
• LO 3-1
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
Recognize the
factors in a
company’s broad
macro-environment
that may have
strategic
significance.
A company’s external environment includes the immediate industry and competitive
environment and a broader “macro-environment” (see Figure 3.2). This macro-environment
comprises six principal components: political factors; economic conditions in the firm’s
general environment (local, country, regional, worldwide); sociocultural forces; technological
factors; environmental factors (concerning the natural environment); and legal/regulatory
conditions. Each of these components has the potential to affect the firm’s more immediate
industry and competitive environment, although some are likely to have a more important
effect than others. An analysis of the impact of these factors is often referred to as PESTEL
analysis, an acronym that serves as a reminder of the six components involved page 54
(Political,
Economic,
Sociocultural,
Technological,
Environmental,
Legal/regulatory).
FIGURE 3.2 The Components of a Company’s Macro-Environment
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
Created from deakin on 2022-08-10 01:07:46.
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
CORE
CONCEPT
PESTEL analysis
can be used to
assess the strategic
relevance of the
six principal
components of the
macro-environment:
Political, Economic,
Social,
Technological,
Environmental, and
Legal/Regulatory
forces.
Since macro-economic factors affect different industries in different ways and to different
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
Created from deakin on 2022-08-10 01:07:46.
degrees, it is important for managers to determine which of these represent the most
strategically relevant factors outside the firm’s industry boundaries. By strategically
relevant, we mean important enough to have a bearing on the decisions the company
ultimately makes about its long-term direction, objectives, strategy, and business model. The
impact of the outer-ring factors depicted in Figure 3.2 on a company’s choice of strategy can
range from big to small. Those factors that are likely to a bigger impact deserve the closest
attention. But even factors that have a low impact on the company’s business situation merit
a watchful eye since their level of impact may change.
CORE
CONCEPT
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
The macroenvironment
encompasses the
broad environmental
context in which a
company’s industry
is situated.
For example, when stringent new federal banking regulations are announced, banks must
rapidly adapt their strategies and lending practices to be in compliance. Cigarette producers
must adapt to new antismoking ordinances, the decisions of governments to impose higher
cigarette taxes, the growing cultural stigma attached to smoking and newly emerging ecigarette technology. The homebuilding industry is affected by such macro-influences as
trends in household incomes and buying power, rules and regulations that make it easier or
harder for homebuyers to obtain mortgages, changes in mortgage interest rates, shifting
preferences of families for renting versus owning a home, and shifts in buyer preferences for
homes of various sizes, styles, and price ranges. Companies in the food processing,
restaurant, sports, and fitness industries have to pay special attention to changes in lifestyles,
eating habits, leisure-time preferences, and attitudes toward nutrition and fitness in
fashioning their strategies. Table 3.1 provides a brief description of the components of the
macro-environment and some examples of the industries or business situations that they
might affect.
TABLE 3.1 The Six Components of the Macro-Environment
Component
Description
Political factors
Pertinent political factors include matters such as tax policy, fiscal policy, tariffs, the
political climate, and the strength of institutions such as the federal banking system.
Some political policies affect certain types of industries more than others. An example
is energy policy, which clearly affects energy producers and heavy users of energy
more than other types of businesses.
Economic conditions include the general economic climate and specific factors such
as interest rates, exchange rates, the inflation rate, the unemployment rate, the rate of
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
Created from deakin on 2022-08-10 01:07:46.
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
Economic
conditions
economic growth, trade deficits or surpluses, savings rates, and per-capita domestic
product. Some industries, such as construction, are particularly vulnerable to
economic downturns but are positively affected by factors such as low interest rates.
Others, such as discount retailing, benefit when general economic conditions weaken,
as consumers become more price-conscious.
Sociocultural
forces
Sociocultural forces include the societal values, attitudes, cultural influences, and
lifestyles that impact demand for particular goods and services, as well as
demographic factors such as the population size, growth rate, and age distribution.
Sociocultural forces vary by locale and change over time. An example is the trend
toward healthier lifestyles, which can shift spending toward exercise equipment and
health clubs and away from alcohol and snack foods. The demographic effect of
people living longer is having a huge impact on the health care, nursing homes,
travel, hospitality, and entertainment industries.
page 55
Technological
factors
Technological factors include the pace of technological change and technical
developments that have the potential for wide-ranging effects on society, such as
genetic engineering, nanotechnology, and solar energy technology. They include
institutions involved in creating new knowledge and controlling the use of technology,
such as R&D consortia, university-sponsored technology incubators, patent and
copyright laws, and government control over the Internet. Technological change can
encourage the birth of new industries, such as drones, virtual reality technology, and
connected wearable devices. They can disrupt others, as cloud computing, 3-D
printing, and big data solution have done, and they can render other industries
obsolete (film cameras, music CDs).
Environmental
forces
These include ecological and environmental forces such as weather, climate, climate
change, and associated factors like flooding, fire, and water shortages. These factors
can directly impact industries such as insurance, farming, energy production, and
tourism. They may have an indirect but substantial effect on other industries such as
transportation and utilities. The relevance of environmental considerations stems from
the fact that some industries contribute more significantly than others to air and water
pollution or to the depletion of irreplaceable natural resources, or to inefficient
energy/resource usage, or are closely associated with other types of environmentally
damaging activities (unsustainable agricultural practices, the creation of waste
products that are not recyclable or biodegradable). Growing numbers of companies
worldwide, in response to stricter environmental regulations and also to mounting
public concerns about the environment, are implementing actions to operate in a
more environmentally and ecologically responsible manner.
Legal and
regulatory
factors
These factors include the regulations and laws with which companies must comply,
such as consumer laws, labor laws, antitrust laws, and occupational health and safety
regulation. Some factors, such as financial services regulation, are industry-specific.
Others affect certain types of industries more than others. For example, minimum
wage legislation largely impacts low-wage industries (such as nursing homes and fast
food restaurants) that employ substantial numbers of relatively unskilled workers.
Companies in coal-mining, meat-packing, and steel-making, where many jobs are
hazardous or carry high risk of injury, are much more impacted by occupational safety
regulations than are companies in industries such as retailing or software
programming.
As the events surrounding the coronavirus pandemic of 2020 made abundantly clear, there
is a class of macro-level external factors that is not included as part of PESTEL analysis. This
is the set of factors that occurs more irregularly and unpredictably, unlike the categories
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
Created from deakin on 2022-08-10 01:07:46.
within PESTEL that can be expected to affect firms in an ongoing and more foreseeable
manner. This additional set of factors can be thought of as societal shocks to the macroenvironment; they include terrorism (whether by domestic or foreign agents), civil war,
foreign invasion or occupation, and epidemics and pandemics. Societal shocks such as these
also affect different industries and companies to varying degrees, but they are much harder
for companies to anticipate and prepare for since they often begin with little warning. The
coordinated terrorist attacks by al-Qaeda against the United States now referred to as 9/11
(since they occurred on September 11, 2001) offer an example. These attacks had a
significant economic impact, not only within the United States, but on world markets as well.
New York City’s businesses suffered enormously, particularly those located within
page 56
and nearby the World Trade Center complex. Industries suffering an outsized
effect include the airline industry, which had to cut back travel capacity by nearly 20%, and
the export industry. Illustration Capsule 3.1 illustrates how another such societal shock—the
coronavirus pandemic of 2020—affected industries, businesses, geographies, and countries
differentially.
ILLUSTRATION
CAPSULE 3.1
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
The Differential Effects of the
Coronavirus Pandemic of 2020
While the world had suffered through a number of other pandemics, including the Spanish Flu (which caused
somewhere between 20 to 50 million deaths in 1918–1919), the Coronavirus pandemic of 2020 was
predicted to be even more devastating. Not only was the world now more interconnected due to
globalization, but the disease causing the pandemic, known as Covid-19, was easily transmissible. By April
1, 2020, there were already more than 31,000 deaths worldwide, despite the fact that the disease had not
yet peaked in some of the world’s most populous countries.
The virus was new to the world and identified as such in early January, 2020. First appearing in Wuhan, a
Chinese city of 11 million, it spread around the globe rapidly, reaching at least 170 countries by the end of
March. Different countries were affected by the pandemic at different rates and handled the crisis in different
ways. Nations that were particularly hard hit by Covid-19 include China, Italy (with 1/3 of the deaths as of
April 1, 2020), Spain, France, Iran, and the United States. Italy’s high death rate may be explained in part
due to demographics, since its much older population was more susceptible to the disease. But in contrast
to South Korea, which utilized extensive testing to identify and control the spread of the disease, Italy failed
to test widely. The United States also found itself with insufficient test kits to implement South Korea’s
strategy, a situation exacerbated by the Trump administration’s downplaying the seriousness of the threat
until March.
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
Created from deakin on 2022-08-10 01:07:46.
Shutterstock / theskaman306
Copyright © 2021. McGraw-Hill US Higher Ed ISE. All rights reserved.
The economic impact of the pandemic was catastrophic, despite a $2 trillion U.S. fiscal stimulus package
and similar measures elsewhere designed to combat its economic consequences. Emerging markets
seemed destined to absorb much of the hit, as international investment dried up, tourism collapsed, and
demand for commodities fell. But even wealthy nations were not immune from dire consequences, although
different sectors and industries were affected to varying degrees. In the United States, the hospitality and
transportation industries were hard hit, along with retail, oil and gas, live sports and other forms of
entertainment. Small businesses and low-margin industries, with little ability to weather a significant
downturn, were particularly vulnerable. Some industries, such as health care, online retail, and delivery
services found themselves facing demand in excess of their capabilities, especially in light of supply chain
breakdowns. A number of large companies responded to the crisis by switching to the production of supplies
needed for managing the crisis. GM, Ford, and other automakers aided the efforts to produce critically
needed ventilators, while distilleries such as Tito’s Handmade Vodka and Dillon’s Distillery began making
hand sanitizers. Fashion companies, such as Inditex (with its Zara brand) and Los Angeles Apparel, turned
their production capabilities toward making hospital gowns and face masks. Virtually no company was
unaffected by the pandemic, but those which quickly adopted practices to remain nimble, control costs,
minimize job losses, support their workers and suppliers, and join in the effort to combat the crisis were best
positioned to weather it.
Sources: “Timeline: How the new coronavirus spread, Aljazeera news, March 29, 2020; “These companies
are switching gears to help address coronavirus shortages”, by Chloe Hadavas, Slate, March 23, 2020;
SlateStatista.com (accessed April 1, 2020).
page 57
As company managers scan the external environment, they must be alert for
potentially important outer-ring developments (whether in the form of societal shocks or
among the components of PESTEL analysis), assess their impact and influence, and adapt the
company’s direction and strategy as needed. However, the factors in a company’s
environment having the greatest strategy-shaping impact typically pertain to the company’s
immediate industry and competitive environment. Consequently, it is on a company’s
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industry and competitive environment (depicted in the center of Figure 3.2) that we
concentrate the bulk of our attention in this chapter.
ASSESSING THE COMPANY’S INDUSTRY AND
COMPETITIVE ENVIRONMENT
• LO 3-2
Use analytic tools to
diagnose the
competitive
conditions in a
company’s industry.
After gaining an understanding of the industry’s general economic characteristics, attention
should be focused on the competitive dynamics of the industry. This entails using some wellvalidated concepts and analytic tools. These include the five forces framework, the value net,
driving forces, strategic groups, competitor analysis, and key success factors. Proper use of
these analytic tools can provide managers with the understanding needed to craft a strategy
that fits the company’s situation within their industry environment. The remainder of this
chapter is devoted to describing how managers can use these tools to inform and improve
their strategic choices.
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The Five Forces Framework
The character and strength of the competitive forces operating in an industry are never the
same from one industry to another. The most powerful and widely used tool for diagnosing
the principal competitive pressures in a market is the five forces framework.1 This
framework, depicted in Figure 3.3, holds that competitive pressures on companies within an
industry come from five sources. These include (1) competition from rival sellers, (2)
competition from potential new entrants to the industry, (3) competition from producers of
substitute products, (4) supplier bargaining power, and (5) customer bargaining power.
FIGURE 3.3 The Five Forces Model of Competition: A Key Analytic Tool
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
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Sources: Adapted from M. E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 57,
no. 2 (1979), pp. 137–145; M. E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business
Review 86, no. 1 (2008), pp. 80–86.
Using the five forces model to determine the nature and strength of competitive pressures
in a given industry involves three steps:
Step 1: For each of the five forces, identify the different parties involved, along with the
specific factors that bring about competitive pressures.
Step 2: Evaluate how strong the pressures stemming from each of the five forces are
(strong, moderate, or weak).
Step 3: Determine whether the five forces, overall, are supportive of high industry
profitability.
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Competitive Pressures Created by the Rivalry among
Competing Sellers
The strongest of the five competitive forces is often the rivalry for buyer patronage among
competing sellers of a product or service. The intensity of rivalry among competing sellers
within an industry depends on a number of identifiable factors. Figure 3.4 summarizes these
factors, identifying those that intensify or weaken rivalry among direct competitors in an
industry. A brief explanation of why these factors affect the degree of rivalry is in order:
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FIGURE 3.4 Factors Affecting the Strength of Rivalry
Rivalry increases when buyer demand is growing slowly or declining. Rapidly page 58
expanding buyer demand produces enough new business for all industry members
to grow without having to draw customers away from rival enterprises. But in markets
where buyer demand is slow-growing or shrinking, companies eager to gain more business
are likely to engage in aggressive price discounting, sales promotions, and other tactics to
Peteraf, M., Gamble, J., Strickland, A., & Strickland, A. (2021). Ise ebook online access for crafting and executing strategy : Concepts and cases : concepts. McGraw-Hill US Higher Ed ISE.
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increase their sales volumes at the expense of rivals, sometimes to the point of igniting a
fierce battle for market share.
Rivalry increases as it becomes less costly for buyers to switch brands. The less costly (or
easier) it is for buyers to switch their purchases from one seller to another, the easier it is
for sellers to steal customers away from rivals. When the cost of switching brands page 59
is higher, buyers are less prone to brand switching and sellers have protection from
rivalrous moves. Switching costs include not only monetary costs but also the time,
inconvenience, and psychological costs involved in switching brands. For example,
retailers may not switch to the brands of rival manufacturers because they are hesitant to
sever long-standing supplier relationships or incur the additional expense of retraining
employees, accessing technical support, or testing the quality and reliability of the new
brand. Consumers may not switch brands because they become emotionally attached to a
particular brand (e.g. if you identify with the Harley motorcycle brand and lifestyle).
Rivalry increases as the products of rival sellers become less strongly differentiated. When
the offerings of rivals are identical or weakly differentiated, buyers have less reason to be
brand-loyal—a condition that makes it easier for rivals to convince buyers to switch to
their offerings. Moreover, when the products of different sellers are virtually identical,
shoppers will choose on the basis of price, which can result in fierce price competition
among sellers. On the other hand, strongly differentiated product offerings among rivals
breed high brand loyalty on the part of buyers who view the attributes of certain brands as
more appealing or better suited to their needs.
Rivalry is more intense when industry members have too much inventory or page 60
significant amounts of idle production capacity, especially if the industry’s product
entails high fixed costs or high storage costs. Whenever a market has excess supply
(overproduction relative to demand), rivalry intensifies as sellers cut prices in a desperate
effort to cope with the unsold inventory. A similar effect occurs when a product is
perishable or seasonal, since firms often engage in aggressive price cutting to ensure that
everything is sold. Likewise, whenever fixed costs account for a large fraction of total cost
so that unit costs are significantly lower at full capacity, firms come under significant
pressure to cut prices whenever they are operating below full capacity. Unused capacity
imposes a significant cost-increasing penalty because there are fewer units over which to
spread fixed costs. The pressure of high fixed or high storage costs can push rival firms
into offering price concessions, special discounts, and rebates and employing other
volume-boosting competitive tactics.
Rivalry intensifies as the number of competitors increases and they become more equal in
size and capability. When there are many competitors in a market, companies eager to
increase their meager market share often engage in price-cutting activities to drive sales,
leading to intense rivalry. When there are only a few competitors, companies are more
wary of how their rivals may react to their attempts to take market share away from them.
Fear of retaliation and a descent into a damaging price war leads to restrained competitive
moves. Moreover, when rivals are of comparable size and competitive strength, they can
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usually compete on a fairly equal footing—an evenly matched contest tends to be fiercer
than a contest in which one or more industry members have commanding market shares
and substantially greater resources than their much smaller rivals.
Rivalry becomes more intense as the diversity of competitors increases in terms of longterm directions, objectives, strategies, and countries of origin. A diverse group of sellers
often contains one or more mavericks willing to try novel or rule-breaking market
approaches, thus generating a more volatile and less predictable competitive environment.
Globally competitive markets are often more rivalrous, especially when aggressors have
lower costs and are intent on gaining a strong foothold in new country markets.
Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the
industry. In industries where the assets cannot easily be sold or transferred to other uses,
where workers are entitled to job protection, or where owners are committed to remaining
in business for personal reasons, failing firms tend to hold on longer than they might
otherwise—even when they are bleeding red ink. Deep price discounting typically ensues,
in a desperate effort to cover costs and remain in business. This sort of rivalry can
destabilize an otherwise attractive industry.
The previous factors, taken as whole, determine whether the rivalry in an industry is
relatively strong, moderate, or weak. When rivalry is strong, the battle for market share is
generally so vigorous that the profit margins of most industry members are squeezed to barebones levels. When rivalry is moderate, a more normal state, the maneuvering among
industry members, while lively and healthy, still allows most industry members to earn
acceptable profits. When rivalry is weak, most companies in the industry are relatively well
satisfied with their sales growth and market shares and rarely undertake offensives to steal
customers away from one another. Weak rivalry means that there is no downward pressure on
industry profitability due to this particular competitive force.
page 61
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The Choice of Competitive Weapons
Competitive battles among rival sellers can assume many forms that extend well beyond
lively price competition. For example, competitors may resort to such marketing tactics as
special sales promotions, heavy advertising, rebates, or low-interest-rate financing to drum
up additional sales. Rivals may race one another to differentiate their products by offering
better performance features or higher quality or improved customer service or a wider
product selection. They may also compete through the rapid introduction of next-generation
products, the frequent introduction of new or improved products, and efforts to build stronger
dealer networks, establish positions in foreign markets, or otherwise expand distribution
capabilities and market presence. Table 3.2 displays the competitive weapons that firms often
employ in battling rivals, along with their primary effects with respect to price (P), cost (C),
and value (V)—the elements of an effective business model and the value-price-cost
framework, discussed in Chapter 1.
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TABLE 3.2 Common “Weapons” for Competing with Rivals
Types of Competitive
Weapons
Primary Effects
Discounting prices, holding
clearance sales
Lowers price (P), increases total sales volume and market share, lowers
profits if price cuts are not offset by large increases in sales volume
Offering coupons, advertising
items on sale
Increases sales volume and total revenues, lowers price (P), increases
unit costs (C), may lower profit margins per unit sold (P – C)
Advertising product or
service characteristics, using
ads to enhance a company’s
image
Boosts buyer demand, increases product differentiation and perceived
value (V), increases total sales volume and market share, but may
increase unit costs (C) and lower profit margins per unit sold
Innovating to improve
product performance and
quality
Increases product differentiation and value (V), boosts buyer demand,
boosts total sales volume, likely to increase unit costs (C)
Introducing new or improved
features, increasing the
number of styles to provide
greater product selection
Increases product differentiation and value (V), strengthens buyer
demand, boosts total sales volume and market share, likely to increase
unit costs (C)
Increasing customization of
product or service
Increases product differentiation and value (V), increases buyer switching
costs, boosts total sales volume, often increases unit costs (C)
Building a bigger, better
dealer network
Broadens access to buyers, boosts total sales volume and market share,
may increase unit costs (C)
Improving warranties,
offering low-interest financing
Increases product differentiation and value (V), increases unit costs (C),
increases buyer switching costs, boosts total sales volume and market
share
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Competitive Pressures Associated with the Threat of New
Entrants
New entrants into an industry threaten the position of rival firms since they will compete
fiercely for market share, add to the number of industry rivals, and add to the industry’s
production capacity in the process. But even the threat of new entry puts added competitive
pressure on current industry members and thus functions as an important competitive force.
This is because credible threat of entry often prompts industry members to lower their prices
and initiate defensive actions in an attempt to deter new entrants. Just how serious page 62
the threat of entry is in a particular market depends on (1) whether entry barriers are
high or low, and (2) the expected reaction of existing industry members to the entry of
newcomers.
Whether Entry Barriers Are High or Low
The strength of the threat of entry is
governed to a large degree by the height of the industry’s entry barriers. High barriers reduce
the threat of potential entry, whereas low barriers enable easier entry. Entry barriers are high
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under the following conditions:2
There are sizable economies of scale in production, distribution, advertising, or other
activities. When incumbent companies enjoy cost advantages associated with large-scale
operations, outsiders must either enter on a large scale (a costly and perhaps risky move) or
accept a cost disadvantage and consequently lower profitability.
Incumbents have other hard to replicate cost advantages over new entrants. Aside from
enjoying economies of scale, industry incumbents can have cost advantages that stem from
the possession of patents or proprietary technology, exclusive partnerships with the best
and cheapest suppliers, favorable locations, and low fixed costs (because they have older
facilities that have been mostly depreciated). Learning-based cost savings can also accrue
from experience in performing certain activities such as manufacturing or new product
development or inventory management. The extent of such savings can be measured with
learning/experience curves. The steeper the learning/experience curve, the bigger the cost
advantage of the company with the largest cumulative production volume. The
microprocessor industry provides an excellent example of this:
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Manufacturing unit costs for microprocessors tend to decline about 20 percent each time cumulative production volume
doubles. With a 20 percent experience curve effect, if the first 1 million chips cost $100 each, once production volume
reaches 2 million, the unit cost would fall to $80 (80 percent of $100), and by a production volume of 4 million, the unit
cost would be $64 (80 percent of $80).3
Customers have strong brand preferences and high degrees of loyalty to seller. The
stronger the attachment of buyers to established brands, the harder it is for a newcomer to
break into the marketplace. In such cases, a new entrant must have the financial resources
to spend enough on advertising and sales promotion to overcome customer loyalties and
build its own clientele. Establishing brand recognition and building customer loyalty can
be a slow and costly process. In addition, if it is difficult or costly for a customer to switch
to a new brand, a new entrant may have to offer a discounted price or otherwise persuade
buyers that its brand is worth the switching costs. Such barriers discourage new entry
because they act to boost financial requirements and lower expected profit margins for new
entrants.
Patents and other forms of intellectual property protection are in place. In a number of
industries, entry is prevented due to the existence of intellectual property protection laws
that remain in place for a given number of years. Often, companies have a “wall of patents”
in place to prevent other companies from entering with a “me too” strategy that replicates a
key piece of technology.
There are strong “network effects” in customer demand. In industries where buyers are
more attracted to a product when there are many other users of the product, there are said
to be “network effects,” since demand is higher the larger the network of users. Video
game systems are an example because users prefer to have the same systems as their
friends so that they can play together on systems they all know and can share page 63
games. When incumbents have a large existing base of users, new entrants with
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otherwise comparable products face a serious disadvantage in attracting buyers.
Capital requirements are high. The larger the total dollar investment needed to enter the
market successfully, the more limited the pool of potential entrants. The most obvious
capital requirements for new entrants relate to manufacturing facilities and equipment,
introductory advertising and sales promotion campaigns, working capital to finance
inventories and customer credit, and sufficient cash to cover startup costs.
There are difficulties in building a network of distributors/dealers or in securing adequate
space on retailers’ shelves. A potential entrant can face numerous distribution-channel
challenges. Wholesale distributors may be reluctant to take on a product that lacks buyer
recognition. Retailers must be recruited and convinced to give a new brand ample display
space and an adequate trial period. When existing sellers have strong, well-functioning
distributor–dealer networks, a newcomer has an uphill struggle in squeezing its way into
existing distribution channels. Potential entrants sometimes have to “buy” their way into
wholesale or retail channels by cutting their prices to provide dealers and distributors with
higher markups and profit margins or by giving them big advertising and promotional
allowances. As a consequence, a potential entrant’s own profits may be squeezed unless
and until its product gains enough consumer acceptance that distributors and retailers are
willing to carry it.
There are restrictive regulatory policies. Regulated industries like cable TV,
telecommunications, electric and gas utilities, radio and television broadcasting, liquor
retailing, nuclear power, and railroads entail government-controlled entry. Government
agencies can also limit or even bar entry by requiring licenses and permits, such as the
medallion required to drive a taxicab in New York City. Government-mandated safety
regulations and environmental pollution standards also create entry barriers because they
raise entry costs. Recently enacted banking regulations in many countries have made entry
particularly difficult for small new bank startups—complying with all the new regulations
along with the rigors of competing against existing banks requires very deep pockets.
There are restrictive trade policies. In international markets, host governments commonly
limit foreign entry and must approve all foreign investment applications. National
governments commonly use tariffs and trade restrictions (antidumping rules, local content
requirements, quotas, etc.) to raise entry barriers for foreign firms and protect domestic
producers from outside competition.
The Expected Reaction of Industry Members in Defending against New Entry A
second factor affecting the threat of entry relates to the ability and willingness of industry
incumbents to launch strong defensive maneuvers to maintain their positions and make it
harder for a newcomer to compete successfully and profitably. Entry candidates may have
second thoughts about attempting entry if they conclude that existing firms will mount wellfunded campaigns to hamper (or even defeat) a newcomer’s attempt to gain a market
foothold big enough to compete successfully. Such campaigns can include any of the
“competitive weapons” listed in Table 3.2, such as ramping up advertising expenditures,
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offering special price discounts to the very customers a newcomer is seeking to attract, or
adding attractive new product features (to match or beat the newcomer’s product offering).
Such actions can raise a newcomer’s cost of entry along with the risk of failing, making the
prospect of entry less appealing. The result is that even the expectation on the part of new
entrants that industry incumbents will contest a newcomer’s entry may be enough to page 64
dissuade entry candidates from going forward. Microsoft can be counted on to
fiercely defend the position that Windows enjoys in computer operating systems and that
Microsoft Office has in office productivity software. This may well have contributed to
Microsoft’s ability to continuously dominate this market space.
However, there are occasions when industry incumbents have nothing in their competitive
arsenal that is formidable enough to either discourage entry or put obstacles in a newcomer’s
path that will defeat its strategic efforts to become a viable competitor. In the restaurant
industry, for example, existing restaurants in a given geographic market have few actions
they can take to discourage a new restaurant from opening or to block it from attracting
enough patrons to be profitable. A fierce competitor like Nike was unable to prevent
newcomer Under Armour from rapidly growing its sales and market share in sports apparel.
Furthermore, there are occasions when industry incumbents can be expected to refrain from
taking or initiating any actions specifically aimed at contesting a newcomer’s entry. In large
industries, entry by small startup enterprises normally poses no immediate or direct
competitive threat to industry incumbents and their entry is not likely to provoke defensive
actions. For instance, a new online retailer with sales prospects of maybe $5 to $10 million
annually can reasonably expect to escape competitive retaliation from much larger online
retailers selling similar goods. The less that a newcomer’s entry will adversely impact the
sales and profitability of industry incumbents, the more reasonable it is for potential entrants
to expect industry incumbents to refrain from reacting defensively.
Even high entry
barriers may not
suffice to keep out
certain kinds of
entrants: those with
resources and
capabilities that
enable them to leap
over or bypass the
barriers.
Figure 3.5 summarizes the factors that cause the overall competitive pressure from
potential entrants to be strong or weak. An analysis of these factors can help managers
determine whether the threat of entry into their industry is high or low, in general. But certain
kinds of companies—those with sizable financial resources, proven competitive capabilities,
and a respected brand name—may be able to hurdle an industry’s entry barriers even when
they are high.4 For example, when Honda opted to enter the U.S. lawn-mower market in
competition against Toro, Snapper, Craftsman, John Deere, and others, it was easily able to
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hurdle entry barriers that would have been formidable to other newcomers because it had
long-standing expertise in gasoline engines and a reputation for quality and durability in
automobiles that gave it instant credibility with homeowners. As a result, Honda had to spend
relatively little on inducing dealers to handle the Honda lawn-mower line or attracting
customers. Similarly, Samsung’s brand reputation in televisions, DVD players, and other
electronics products gave it strong credibility in entering the market for smartphones—
Samsung’s Galaxy smartphones are now a formidable rival of Apple’s iPhone.
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FIGURE 3.5 Factors Affecting the Threat of Entry
It is also important to recognize that the barriers to entering an industry can become
stronger or weaker over time. For example, once key patents preventing new entry in the
market for functional 3-D printers expired, the way was open for new competition to enter
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this industry. On the other hand, new strategic 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.
High entry barriers
and weak entry
threats today do not
always translate into
high entry barriers
and weak entry
threats tomorrow.
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Competitive Pressures from the Sellers of Substitute
Products
Companies in one industry are vulnerable to competitive pressure from the actions of
companies in a closely adjoining industry whenever buyers view the products of the two
industries as good substitutes. Substitutes do not include other brands within your page 65
industry; this type of pressure comes from outside the industry. Substitute products
from outside the industry are those that can perform the same or similar functions for the
consumer as products within your industry. For instance, the producers of eyeglasses and
contact lenses face competitive pressures from the doctors who do corrective laser surgery.
Similarly, the producers of sugar experience competitive pressures from the producers of
sugar substitutes (high-fructose corn syrup, agave syrup, and artificial sweeteners). Internet
providers of news-related information have put brutal competitive pressure on the publishers
of newspapers. The makers of smartphones, by building ever better cameras into their cell
phones, have cut deeply into the sales of producers of handheld digital cameras—most
smartphone owners now use their phone to take pictures rather than carrying a digital camera
for picture-taking purposes.
page 66
As depicted in Figure 3.6, three factors determine whether the competitive
pressures from substitute products are strong or weak. Competitive pressures are stronger
when
FIGURE 3.6 Factors Affecting Competition from Substitute Products
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1. Good substitutes are readily available and attractively priced. The presence of readily
available and attractively priced substitutes creates competitive pressure by placing a
ceiling on the prices industry members can charge without risking sales erosion. 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.
2. Buyers view the substitutes as comparable or better in terms of quality, performance, and
other relevant attributes. The availability of substitutes inevitably invites customers to
compare performance, features, ease of use, and other attributes besides price. The users of
paper cartons constantly weigh the price-performance trade-offs with plastic page 67
containers and metal cans, for example. Movie enthusiasts are increasingly
weighing whether to go to movie theaters to watch newly released movies or wait until
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they can watch the same movies streamed to their home TV by Netflix, Amazon Prime,
cable providers, and other on-demand sources.
3. The costs that buyers incur in switching to the substitutes are low. Low switching costs
make it easier for the sellers of attractive substitutes to lure buyers to their offerings; high
switching costs deter buyers from purchasing substitute products.
Some signs that the competitive strength of substitute products is increasing include (1)
whether the sales of substitutes are growing faster than the sales of the industry being
analyzed, (2) whether the producers of substitutes are investing in added capacity, and (3)
whether the producers of substitutes are earning progressively higher profits.
But before assessing the competitive pressures coming from substitutes, company
managers must identify the substitutes, which is less easy than it sounds since it involves (1)
determining where the industry boundaries lie and (2) figuring out which other products or
services can address the same basic customer needs as those produced by industry members.
Deciding on the industry boundaries is necessary for determining which firms are direct
rivals and which produce substitutes. This is a matter of perspective—there are no hard-andfast rules, other than to say that other brands of the same basic product constitute rival
products and not substitutes. Ultimately, it’s simply the buyer who decides what can serve as
a good substitute.
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