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Key Analysis Questions

Competitive Strategy
Spring 2018

Karel Cool
BP Chaired Professor of European Competitiveness, INSEAD

© Karel Cool, 2018


Strategy analysis method

- Benefit in following a strategy process :

- What is the current industry profitability and what factors explain it?
- What has been the competitive strategy and how successful has it been?
- How will the industry and supply chain structure and profitability change?
- What are the major strategic options?
- What is the robustness of the recommended strategy?

- The quality of the analysis is influenced by the quality of the tools and frameworks

© Karel Cool, 2018


Essential competitive strategy analysis questions

1. What is the current industry profitability and what factors explain it?

- What is the appropriate definition of the industry you compete in (defined by the degree of substitution among the
products and services you sell) and what is the structure of the industry supply chain?

- What is the segmentation of the product markets? Has there been a trend towards consolidation or fragmentation? Have
the markets been globalizing or have they remained domestic / regional?

- What are the key drivers of profit in your industry? How stable / structural are they? Which of these drivers are strategic,
i.e. have been changed by some players to their advantage?

- Have there been key events that shaped the competition in the industry? Which? Are they still important? What is the
market share distribution / concentration now? How fast has it changed? Has it impacted competition? How?

- Where is the value-added in the industry supply chain? What has been the value migration among the activities / industries
in the industry supply chain?

© Karel Cool, 2018


Essential competitive strategy analysis questions

2. What has been the competitive strategy and how successful has it been?

- What has been the performance of your business in the past decade: sales growth, market share, financial performance, stock
market performance? How well does this performance compare to the competition? Has the business generated a return
above its cost of capital?

- What have been the defining moments / turning points of your business? How have they shaped today’s business position?

- What is the current value chain of your business? Which are the key activities? What is their economics (scale, scope,
bargaining power)?

- What has been your overall business model, i.e. what are the profit drivers at the business level. What are the key strategy
assumptions underpinning this model?

- What is the portfolio of resources and capabilities that is at the basis of your business? Which of these have given you a
competitive advantage? Which have put you at a disadvantage? How unique are the resources that provide a competitive
advantage, i.e. what are the investments required to develop these resources and how could the resources be duplicated
(acquisitions, etc.)? How serious are your disadvantages? At what investment cost and in what time frame could they be
overcome?

- Is there a critical mass requirement in your business because of platform / ecosystem considerations? If so, how is it
measured in your business? Have you achieved critical mass? How confident are you that you have; how robust is your
position? If not, how far away are you from critical mass? Has the absence of critical mass prevented you from getting positive
returns?

© Karel Cool, 2018


Essential competitive strategy analysis questions

2. What has been the competitive strategy and how successful has it been (cntd)?

- How have you created value for your customers? Is there one overall model or have different parts of the business pursued
different value propositions? Has the organization been optimized for one type of value creation strategy or does the
organization accommodate various value creation approaches? Is your strategy creating value only for your immediate
customers or does it impact parties that are further up or down the supply chain?

- What is your approach towards value capture, i.e. towards getting “money for value” from the customers? Have you had
problems charging for the value you believe you have created? If so, is this because your strategy has been imitated or
because there is no strategy to capture customer value? If there is a strategy of value capture, what are the characteristics?
Is the strategy competitive or is it trailing competitors’ strategy for value capture?

- What is your degree of vertical integration in the industry supply chain, backward and forward? Are you only linked to the
immediate stages up or down the chain or does your business have extended links in the industry supply chain? When and
why were these investments made? How essential are these investments to the competitive strategy and the position you
have today? Does your business have a competitive advantage in each of the businesses in the supply chain in which you
have invested or do these businesses merely support your “core” business?

- What is your degree of horizontal integration in your business, i.e. how many of the value activities / functions required to
run your business do you perform yourself? Has there been a trend towards outsourcing value activities? Why were certain
activities kept in the business and why were others outsourced? How has this impacted the competitive position of your
business? Did ecosystem changes require you to insource/outsource activities?

- In general, how much of your past performance, success or failure, needs to be attributed to industry conditions (e.g. you
were the only competitor) and to your strategy choice and execution?

© Karel Cool, 2018


Essential competitive strategy analysis questions

3. How will the industry and supply chain structure and profitability change?

- What is the horizon over which you want to predict industry events (driven by how fixed the assets are in your business -- e.g.
petrochemicals vs. travel, and by the pay-off horizon that your management is willing / able to take in your strategic
investments) ?

- What are the major forces (e.g. technological, social, regulatory) that will affect the industry supply chain? What is their
impact on the industries downstream from your industry’s position in the chain (i.e. impact of changes in derived demand)?
What will be the consequences for the demand in your industry? What is the impact on the businesses upstream from your
position in the chain? How will this impact the cost of your supplies / inputs?

- To what extend will the financial markets have an impact on competitors’ actions in your industry and in the supply chain?
How (e.g. M&A activity, LBO!s, corporate governance issues)?

- What are the major forces that will shape the demand in your industry? Is market demand primarily derived (i.e. coming from
the demand of businesses down the chain) or can you create demand by affecting the value that is created? If it is derived,
how will the business from which demand is derived develop? Is the demand of your business dependent on a business that
is complementary to yours (e.g. hardware / software)? What is happening in this business? Overall, is demand set to increase,
decrease, by how much?

- How is the segmentation in your market changing? Is there a trend towards consolidation or fragmentation? Are the markets
globalizing or will they remain domestic / regional? What are the new segments that are/will be developing, and when? For
the major segments, what is the estimated demand?

© Karel Cool, 2018


Essential competitive strategy analysis questions

3. How will the industry and supply chain structure and profitability change? (cntd)

- For the market as a whole and for the various segments, what are the resources and capabilities that will be needed to get in
and to stay in (i.e. be competitive)? How different are the resources for the different segments? Are there emerging
economies of scale / scope in these segments that will lead to consolidation?

- What are the ambitions / market share targets and investment plans of the competitors? What strategy (resources - value
creation - value capture - organization) do they pursue? How committed are they to the industry? How will their competitive
attitude and their strategic actions impact industry capacity?

- Are there new competitors that are likely to enter our markets or segments of our markets? In what segments is entry most
likely to come first? Are they likely to come from industries in our supply chain (up/downstream) or from outside the industry
supply chain? What are their ambitions / market share targets and investment plans? What strategy (resources - value
creation - value capture - organization) will they pursue? How committed will they be to the industry? How will their
competitive attitude and their strategic actions impact industry capacity?

- Is there a threat of overcapacity? Is it likely to be structural or can industry capacity be contained? Is a restructuring likely? If
so, what will drive this: individual firm actions (acquisitions, mergers, etc.) or industry actions? What will be the resulting
concentration of the market? What will be the resulting market share distribution?

- Is there likely to be winner-take-all competition driven by a need for critical mass / standards / platforms? What are the
alternative choices that competitors and customers can make (e.g. satellite vs. cable vs. mobile TV)? Can the different
technologies co-exist or will one force out the other? Can the winning technology already be predicted? What are the likely
consequences of the winner-take-all competition for industry consolidation, prices and profits?

© Karel Cool, 2018


Essential competitive strategy analysis questions

3. How will the industry and supply chain structure and profitability change? (cntd)

- Is there a possibility to influence industry entry conditions by investing in entry barriers (fixed, sunk, unavoidable costs)?
Which firms will do this? How risky will this make the industry? To whose advantage will this be? How will this influence
future entry and competitive conditions?

- Is there a threat of a demand decline? Is this decline due to a disappearing need (e.g. less fat consumption for health reasons)
or is it due to an emerging substitute product? How will the declining demand affect the set of competitors given their
different cost structures (i.e. will small or large firms be forced to take actions first to avoid being shaken out)? What strategy
will the various players pursue given their cost structure? What will be the impact on competition and prices?

- Is there a threat of a disruptive technology? Which technologies target the same need of your customers but are still
perceived to be inferior by most competitors and customers? In what segments have these technologies taken off? What is
their rate of performance improvement and how does it compare to the increase of your technology? Can you forecast when
the "inferior” technology will be "sufficiently” good for customers, when it will overtake your technology in performance?

- Given the predicted changes in supply, demand and competitive intensity in your industry, how will prices and profits develop
in the market as a whole and in the major segments? Do you predict a long term profit improvement (with possible off years)
or is the industry set for a long term profit decline (with occasional good years)? What type of players will prosper in the
predicted environment?

- Are there discontinuous events or forces that prevent you from making a likely outlook for the industry? If so, can
predictability be obtained by constructing a small number of scenarios that capture the possible changes in the industry? For
each, what will be the long term outcome for prices and profits?

© Karel Cool, 2018


Essential competitive strategy analysis questions

4. What are the major strategic options?

Note: The outline below provides only the key questions. For the specific points, the questions raised in the previous three
analyses need to be considered also.

- Given the analysis of your industry and the supply chain, what appear to be the most promising market opportunities (i.e.
profitable growth)? What is their horizon?

- In which of these opportunities can you achieve a competitive advantage with your current resources and capabilities? For
these:

- Can you maintain your current strategies of value creation and value capture or will you have to change them? If you
have to change these strategies, how will you change them given your current resources and capabilities?

- Can you maintain your organizational set-up (structures, processes, vertical and horizontal integration) or will you
have to change it? If so, how?

- Have you taken competitors’ likely strategies (from the previous analysis) into account? Will you be able to sustain
your strategic choices and advantage if competitors retaliate / imitate? Do you and/or your competitors have a
"dominant” strategy?

- Are you trying to pursue a niche strategy? If so, how sustainable is this strategy in the face of possible entrants from
within or outside the industry? What assumptions have you made?

© Karel Cool, 2018


Essential competitive strategy analysis questions

4. What are the major strategic options (cntd)?

- Are you trying to obtain dominance in the markets you compete in? If so, how will you be able to change market
pricing? How will you affect competitors’ actions? Will customers accept the consequences of your market power?

- Are you trying to obtain control over (part of) the industry supply chain? How will it help you achieving your
competitive strategy?

- What is the time horizon you have set to pursue your competitive strategy? On the basis of what yardsticks and
targets will you measure progress and success (or failure)? When would the strategy be considered a failure with a
required in-course correction or complete abandonment?

- What are the investment consequences for each of the options? What are the pay- offs? Will these options give the
business a satisfactory return, above the cost of the capital needed to pursue these opportunities?

© Karel Cool, 2018


Essential competitive strategy analysis questions

4. What are the major strategic options (cntd)?

For which of the identified market opportunities will you have to develop major, new resources and capabilities to achieve a
competitive advantage? For these:

- What are the resources and capabilities that you will have to acquire? How major a strategic re-orientation does it
imply for your business? What ambitions do you have if you seek a major change in your business?

- Is it possible to buy the needed resources or will you have to acquire them in some other way (e.g. internal
development, license, franchise, joint venture, alliance, merger)?

- What investments does each of the resource acquisition strategies entail? What is the time horizon needed to
develop competitive resources and capabilities? Can these investments be accelerated? What is the additional cost of
such catch-up investments? How can you avoid over-paying if you need to acquire resources? Is there a critical mass
requirement? How will this impact the cost and timing of your investments and those of your competitors?

- What strategies of value creation and value capture will you chose to pursue your ambitions and new competitive
strategy?

- What will be the organizational consequences of your strategic choices?

- Have you taken competitors’ likely strategies (from the previous analysis) into account? Will you be able to sustain
your strategic choices and advantage if competitors retaliate / imitate? Do you and/or your competitors have a
"dominant! strategy?

- Are you trying to pursue a niche strategy? If so, how sustainable is this strategy in the face of possible entrants from
within or outside the industry? What assumptions have you made?

© Karel Cool, 2018


Essential competitive strategy analysis questions

4. What are the major strategic options (cntd)?

- Are you trying to obtain dominance in the markets you compete in? If so, how will you be able to change market
pricing? How will you affect competitors’ actions? Will customers accept the consequences of your market power?

- Are you trying to obtain control over (part of) the industry supply chain? How will it help you achieve your competitive
strategy?

- What is the time horizon you have set to pursue your competitive strategy? On the basis of what yardsticks and
targets will you measure progress and success (or failure)? When would the strategy be considered a failure with a
required in-course correction or complete abandonment?

- What are the investment consequences for each of the options? What are the pay- offs? Will these options give the
business a satisfactory return, above the cost of the capital needed to pursue these opportunities?

© Karel Cool, 2018


Essential competitive strategy analysis questions

4. What is the robustness of the recommended strategy?

Once a strategy is chosen out of the set of possible strategic options, several tests need to be made:

- How will the competition react to your strategy (scenarios), how will you respond, and taking these actions into account, is
the chosen strategy still the best out of the possible set of options?

- Even if competitors are expected to acquiesce, what is the post-investment impact on industry capacity and profits likely to
be? Is the chosen strategy still the best out of the possible set of options?

- How will the supply chain react to your strategy? Will supply chain profits increase, or does your strategy siphon a bigger
share of the supply chain profits to your business? How will your strategy influence your power in the supply chain? What
kind of reactions from other, powerful firms in the supply chain do your have to expect (e.g. entry in your business)? Do they
have a "dominant” strategy and how does it affect your industry, your competitive position and your returns?

- How committed is management and the organization to the strategy? Will your strategy achieve your ambitions? How badly
do you want to achieve your ambitions? How badly do you need to achieve your ambitions, i.e. have you had to give up all
other attractive options to pursue your strategy? How much are you willing to bet on the strategy? Are you willing to assume
the risk? For how long? How long will shareholders and other capital providers be willing to stand by the strategy?

- Will the strategy be acceptable to the government and social stakeholders? If there is likely to be an issue, have you prepared
a strategy to deal with these constituencies before possible objections are raised?

- Will the chosen strategy produce a return that is (sufficiently) above the cost of the capital needed to pursue the strategy?
Over what horizon?

- On the basis of what measurable criteria will the strategy be considered a success or failure? If there is a failure, when will
corrective action be taken or abort the strategy altogether ?

© Karel Cool, 2018