Transcript Analyzing the Industry Environment The objectives of industry

Analyzing the Industry Environment
OUTLIN
E
• The objectives of industry analysis
• From environmental analysis to industry analysis
• Porter’s Five Forces Framework
• Applying industry analysis
• Industry & market boundaries
• Extending the Five Forces Framework:
--Complements, Dynamics, The New Economy
• Identifying Key Success Factors
The Objectives of Industry
Analysis
• To understand how industry structure drives competition,
which determines the level of industry profitability.
• To assess industry attractiveness
• To use evidence on changes in industry structure to
forecast future profitability
• To identify opportunities to change industry structure to
impose industry profitability
• To identify Key Success Factors
From Environmental Analysis
to Industry Analysis
The national/
international
economy
Technology
Government
& Politics
The natural
environment
THE INDUSTRY
ENVIRONMENT
• Suppliers
• Competitors
• Customers
Demographic
structure
Social structure
•The Industry Environment lies at the core of the Macro Environment.
•The Macro Environment impacts the firm through its effect on the Industry
Environment.
Profitability of US Industries, 1985-97
INDUSTRY
RETURN ON EQUITY (1985-'97)
Drugs
20.3
Food and kindred products
14.8
--of which Tobacco products
19.6
Instruments and related products
11.2
Electrical, and electronic equipment
11.0
Rubber and misc. plastics products
10.7
Printing and publishing
10.6
Fabricated metal products
9.9
Aircraft, guided missiles, and parts
9.7
Petroleum and coal products
9.6
Retail trade corporations
8.9
Paper and allied products
8.5
Textile mill products
7.6
Wholesale trade corporations
6.5
Stone, glass and clay products
6.8
Machinery, exc. electrical
6.0
Nonferrous metals
5.6
Motor vehicles and equipment
5.5
Iron and Steel
2.6
Mining corporations
2.7
Airlines
1.1
US Industrial Profitability, 1986-97: EVA, Market Value Added, and ROA
Industry
Tobacco
Computer Software & Services
Entertainment
Personal Care
Medical Products
Food Processing
IT Consulting Services
Drugs & Research
Chemicals
Beverages
Eating Places
Textiles
Building Materials
Metals
Telephone Companies
Semiconductors & Components
Aluminium
Paper & Products
Broadcasting & Publishing
Cars & Trucks
Computers & Peripherals
Electrical Products
Aerospace & Defence
Railroads
Airlines
Construction & Engineering
Steel
Mean (all industries)
EVA/CE
0.0936
0.0590
0.0442
0.0281
0.0276
0.0251
0.0206
0.0065
0.0029
0.0018
0.0014
-0.0012
-0.0056
-0.0101
-0.0124
-0.0126
-0.0128
-0.0149
-0.0149
-0.0150
-0.0306
-0.0327
-0.0331
-0.0340
-0.0416
-0.0458
-0.0647
-0.0110
MV/CE
3.2314
4.0331
2.8240
2.8700
3.0987
1.7090
2.7136
3.3807
1.8195
2.1688
2.3246
1.9392
1.5521
1.7447
1.3680
2.0560
1.4844
1.2902
1.8042
0.9473
1.7332
1.3056
1.3982
1.0257
1.1676
1.6749
1.2967
1.8930
ROA
14.3979
10.3530
8.4403
8.005
9.5384
8.5306
6.5260
7.6439
7.9589
5.5960
6.8867
7.4093
5.6250
4.6181
5.9906
5.2342
6.0059
2.1660
3.1143
4.6276
4.8390
3.7780
0.9866
2.2646
5.5989
The Determinants of Industry
Profitability
3 key influences:
• The value of the product to customers
• The intensity of competition
• Relative bargaining power at different levels
within the value chain.
The Spectrum of Industry Structures
Perfect
Competition
Oligopoly
Duopoly
Monopoly
Concentration
Many firms
A few firms
Two firms
One firm
Entry and Exit
Barriers
No barriers
Product
Differentiation
Homogeneous
Product
Potential for product differentiation
Perfect
Information flow
Imperfect availability of information
Information
Significant barriers
High barriers
Porter’s Five Forces of
Competition Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL Threat of
ENTRANTS
new
entrants
Threat of
Rivalry among
existing firms
SUBSTITUTES
substitutes
Bargaining power of buyers
BUYERS
Threat of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of
substitutes.
The Threat of Entry
Entrants’ threat to industry profitability depends
upon the height of barriers to entry. The principal
sources of barriers to entry are:
• Capital requirements
• Economies of scale
• Absolute cost advantage
• Product differentiation
• Access to channels of distribution
• Legal and regulatory barriers
• Retaliation
Bargaining Power of Buyers
Buyer’s price sensitivity
Relative bargaining power
• Cost of purchases as %
of buyer’s total costs.
• How differentiated is the
purchased item?
• How intense is
competition between
buyers?
• How important is the
item to quality of the
buyers’ own output?
• Size and concentration of
buyers relative to
sellers.
• Buyer’s information .
• Ability to backward
integrate.
Note: analysis of supplier
power is symmetric
Rivalry Between Established
Competitors
The extent to which industry profitability is depressed by
aggressive price competition depends upon:
• Concentration (number and size distribution of firms)
• Diversity of competitors (differences in goals, cost
structure, etc.)
• Product differentiation
• Excess capacity and exit barriers
• Cost conditions
– Extent of scale economies
– Ratio of fixed to variable costs
Figure 3.5. The Impact of Growth on Profitability
30
25
20
15
10
5
0
Return on sales
Return on
investment
-5
Market
Growth
Less than -5%
-5% to 0
0 to 5%
5% to 10%
Cash
flow/Investment
Over 10%
Profitability and Market Growth
30
25
20
15
10
5
0
R e t u r n o n s a le s
R e t u r n o n in v e s t m e n t
Return on sales
C a s h f lo w / I n v e s t m e n t
Return on investment
Cash flow/ Investment
-5
< -5 %
Less than -5%
-5 % to 0
-5% to 0
0 to 5 %
0 to 5%
5 % to 1 0 %
> 10%
5% to 10%
Over 10%
The Impact of Unionization on Profitability
None
Percentage of employees unionized
1%-35%
35%-60% 60-75% >75%
ROI (%)
25
24
23
18
19
ROS (%)
10.8
9.0
9.0
7.9
7.9
[ROI = Return on Investment
ROS = Return on sales]
Applying Five - Forces Analysis
Forecasting Industry Profitability
• Past profitability a poor indicator of future
profitability.
• If we can forecast changes in industry structure
we can predict likely impact on competition
and profitability.
Strategies to Improve Industry Profitability
• What structural variables are depressing
profitability
• Which can be changed by individual or
collective strategies?
Drawing Industry Boundaries : Identifying
the Relevant Market
• What industry is BMW in:
– World Auto industry
– European Auto industry
– World luxury car industry?
• Key criterion: SUBSTITUTABILITY
– On the demand side : are buyers willing to substitute between
types of cars and across countries
– On the supply side : are manufacturers able to switch
production between types of cars and across countries
• May need to analyze industry at different levels for different
types of decision
The Value Net
CUSTOMERS
COMPETITORS
COMPANY
SUPPLIERS
COMPLEMENTORS
Five Forces or Six? Introducing Complements
The suppliers of
complements create
value for the industry
and can exercise
bargaining power
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL
ENTRANTS
COMPLEMENTS
Threat of
new entrants
Threat of
Rivalry among
existing firms
Bargaining power of buyers
BUYERS
SUBSTITUTES
substitutes
Dynamic Competition
Porter framework assumes
(a) industry structure drives competitive behavior
(b) Industry structure is stable.
But---competition also changes industry structure
Schumpeterian Competition: A “perennial
gale of creative destruction” where innovation
overthrows established market leaders
Hypercompetition: “intense and rapid competitive
moves….creating disequilibrium through
continuously creating new competitive
advantages and destroying, obsoleting or
neutralizing opponents’ competitive advantages
Applying Five Forces to Emerging
E-commerce Markets
• The more unstable is industry structure—the less
helpful is analysis based upon industry structure.
• Taking account of time—willingness to endure losses
today in order to reap profit tomorrow
• General structural features of digital, networked
industries:
Low entry barriers + Extreme scale economies +
Network externalities = Winner-take-all markets
= Intense competition
Identifying Key Success Factors
Pre-requisites
forsuccess
success
Pre-requisites for
What do
customers want?
How does the firm
survive competition
Analysis of competition
Analysis of demand
• Who are our
customers?
• What do they want?
• What drives competition?
What are
drives
•• What
the competition?
main
• What are the
dimensions
of main
competition?
dimensions of competition?
•How
• Howintense
intenseis
iscompetition?
competition?
• Howcan
canwe
weobtain
obtainaasuperior
•How
superior competitive
competitive
position? position?
KEY SUCCESS FACTORS
Identifying Key Success Factors
Through Modeling Profitability: The
Airline Industry
Profitability
Income
ASMs
=
Yield
=
Revenue
RPMs
• Strength of
competition on routes.
• Responsiveness to chaanging market conditions
• % business travelers.
• Achieving differentiation advantage
x Load factor - Unit Cost
x
RPMs
ASMs
-
• Price
competitiveness.
• Efficiency of route
planning.
• Flexibility and
responsiveness.
• Customer loyalty.
• Meeting customer
requirements.
ASM = Available Seat Miles
Expenses
ASMs
• Wage rates.
• Fuel
efficiency of
planes.
• Employee
productivity.
• Load factors.
• Administrative
overhead.
RPM = Revenue Passenger Miles
Identifying Key Success Factors
by Analyzing Profit Drivers: Retailing
Sales mix of products
Return on Sales
Avoiding markdowns through
tight inventory control
Max. buying power to minimize
cost of goods purchased
ROCE
Max. sales/sq. foot through:
*location
*product mix
*customer service *quality control
Sales/Capital
Employed
Max. inventory turnover through
electronic data interchange, close
vendor relationships, fast delivery
Minimize capital deployment
through outsourcing & leasing
SUMMARY: What Have We Learned?
Forecasting Industry Profitability
•
•
Past profitability a poor indicator of future profitability.
If we can forecast changes in industry structure we can predict
likely impact on competition and profitability.
Strategies to Improve Industry Profitability
•
•
What structural variables are depressing profitability?
Which can be changed by individual or collective strategies?
Defining Industry Boundaries
•
•
Key criterion: substitution
Working at different levels of aggregation
SUMMARY (continued)
Game Theory
•
•
•
Valuable in analyzing competitive rivalry between small number of
players
Analysis of cooperation & competition
Offers insights into the structure of the game; competitive
interaction; use of specific strategic plays.
Key Success Factors
•
Starting point for the analysis of competitive advantage
Industry Analysis & The New Economy
•
•
Porter 5 forces analysis less useful when industry structure
unstable
Key to understanding digital, networked markets is to understand
their underlying structure (esp. scale economies and network
externalities)