Industry driving forces analysis

Driving Forces and Key Success Factors

Driving Forces (or Change Drivers)

Driving forces are forces outside the firm (external factors) that trigger the change of strategy in an organization. Industry conditions change because important forces (the most dominant ones that have the biggest influence on what kinds of changes will take place in the industry’s structure and competitive environment) are driving industry participants (competitors, customers, or suppliers) to alter their actions. Thus the driving forces in an industry are the major underlying causes of changing industry and competitive conditions. Driving forces analysis has two steps: identifying what the driving forces are and assessing the impact they will have on the industry.

The Most Common Driving Forces

Many forces can affect an industry powerfully enough to qualify as driving forces. Some are unique and specific to a particular industry situation, but most drivers of change fall into one of the following categories:

1. The Internet and new e-commerce opportunities and threats it breeds in the industry;

2. Increasing globalization of the industry;

3. Changes in the long-run industry growth rate;

4. Changes in who buys the products and how they use it.

5. Product innovation;

6. Technological change;

7. Market innovation;

8. Entry or exit of major firms;

9. Diffusion of technical know-how across more companies and more countries;

10. Changes in cost and efficiency

11. Growing buyer for preferences for differentiated products instead of a commodity product (or for a more standardized product instead of strongly differentiated products);

12. Regulatory influences and government policy changes;

13. Changing societal concerns, attitudes, and lifestyles;

14. Reductions in uncertainty and business risk.

The link between driving forces and strategy

Sound analysis of an industry’s driving forces is a prerequisite to sound strategy making. Without keen awareness of what external factors will produce the biggest potential changes in the company’s business over the next one to three years, managers will be ill prepared to construct a strategy tightly matched to emerging conditions. Similarly, if managers are uncertain about the implications of each driving force or if their views are incomplete or wrong, it’s difficult for them to craft a strategy that is responsive to the driving forces and their consequences for the industry. Therefore, driving forces is not something to take lightly. The concept has practical strategy-making value and is basic to the task of thinking strategically about where the industry is headed and how to prepare for the changes.

Key Success Factors

An industry's key success factors (KSFs) are those things that most affect industry members' ability to prosper in the marketplace-the particular strategy elements, product attributes, resources, competencies, competitive capabilities, and business outcomes that spell the difference between profit and loss and, ultimately, between competitive success or failure. KSFs by their very nature are so important that all firms in the industry must pay close attention to them-they are the prerequisites for industry success or, to put it another way, KSFs are the rules that shape whether a company will be financially and competitively successful. The answers to three questions help identify an industry's key success factors:

 On what basis do customers choose between the competing brands of sellers? What product attributes are crucial?

 What resources and competitive capabilities does a seller need to have to be competitively successful?

 What does it take for sellers to achieve a sustainable competitive advantage?

In the beer industry, the KSFs are full utilization of brewing capacity (to keep manufacturing costs low), a strong network of wholesale distributors (to gain access to as many retail outlets as possible), and clever advertising (to induce beer drinkers to buy a particular brand and thereby pull beer sales through the established wholesale/retail channels). In apparel manufacturing, the KSFs are appealing designs and color combinations (to create buyer interest) and low-cost manufacturing efficiency (to permit attractive retail pricing and ample profit margins). In tin and aluminum cans, because the cost of shipping empty cans is substantial, one of the keys is having plants located close to end use customers so that the plant's output can be marketed within economical shipping distances (regional market share is far more crucial than national share).

Determining the industry's key success factors, given prevailing and anticipated industry and competitive conditions, is a top-priority analytical consideration. At the very least, managers need to understand the industry situation well enough to know what is more important to competitive success and what is less important. They need to know what kinds of resources are competitively valuable. Misdiagnosing the industry factors critical to long-term competitive success greatly raises the risk of a misdirected strategy. In contrast, a company with perceptive understanding of industry KSFs can gain sustainable competitive advantage by training its strategy on industry KSFs and devoting its energies to being distinctively better than rivals on one or more of these factors. Indeed, companies that stand out on a particular KSF enjoy a stronger market position for their efforts - being distinctively better than rivals on one or more key success factors presents a golden opportunity for gaining competitive advantage. Hence, using the industry's KSFs as cornerstones for the company's strategy and trying to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy approach.

Key success factors vary from industry to industry and even from time to time within the same industry as driving forces and competitive conditions change. Only rarely does an industry have more than three or four key success factors at anyone time. And even among these three or four, one or two usually outrank the others in importance. Managers, therefore, have to resist the temptation to include factors that have only minor importance on their list of key success factors-the purpose of identifying KSFs is to make judgments about what things are more important to competitive success and what things are less important. To compile a list of every factor that matters even a little bit defeats the purpose of concentrating management attention on the factors truly critical to long-term competitive success.

MGT 6359 Page 3

Seminar in Strategic Management