Transcript Foundations of Strategy Chapter 2

Industry Analysis
Foundation of Strategy
By: Andy Carrabine, David Mault, Colleen Hawk, Emily Doris,
and Hayden Holub
Objectives
 Be familiar with a number of frameworks used to
analyze an organizations Industry
 Be able to use evidence on structural trends within
industries to forecast industry changes
 Understand the value and challenges of undertaking
industry analysis
 Be able to understand key success factors
From environmental analysis to
industry analysis
 Business Environment
 PEST Analysis
 Political, Economic, Social, Technological
PEST Analysis
The
national/international
economy
Government
and politics
Technology
The Industry
Environment
Social
Structure
The natural
environment
Demographic
structure
The determinants of industry
profit: demand and competition
 What determines the level of profit in an industry?
 The value of the product to customers
 The intensity of competition
 The bargaining power of the producers relative to their
suppliers
Analyzing Industry Attractiveness
using Porters Five Forces
Suppliers
Bargaining Power of Suppliers
Potential
Entrants
Threat of new
entrants
Industry
Competitors
Threat of
substitutes
Bargaining power of Buyers
Buyers
Substitutes
The Threat of Entry
 Capital Requirements
 Economies of Scale
 Absolute Cost Advantages
 Product Differentiation
 Access of Channels of Distribution
 Governmental and Legal Barriers
 Retaliation
 The Effectiveness of Barriers to Entry
Rivalry between established
competitors
 Concentration
 Diversity of Competitors
 Product Differentiation
 Excess Capacity and Exit Barriers
 Cost Conditions: Scale Economies and the ratio of fixed
to variable costs
Bargaining Power of Buyers
 The firms in an industry compete in two types of
markets:
 Markets for inputs
 Markets for outputs
Buyers’ Price Sensitivity
 The greater the importance of an item as a proportion
of total cost, the more sensitive buyers will be about
the price they pay.
 The less differentiated the products of the supplying
industry, the more willing the buyer is to switch
suppliers on the basis of price
Buyers’ Price Sensitivity
 The more intense the competition among buyers, the
greater their eagerness for price reductions from their
sellers.
 The more critical an industry’s product to the quality of
the buyer’s product or service, the less sensitive are
buyers to the prices they are charged.
Relative Bargaining Power
 Size and concentration of buyers relative to suppliers
 Buyers’ information
 Ability to integrate vertically
Bargaining Power of Suppliers
 Cartelisation
 Suppliers of complex, technically sophisticated
components
 Personal computer industry
Porter’s Five Forces: Mobile
Handset Industry
 Competition from substitutes
 Rivalry between established competitors
 Buyer and supplier power
Forecasting Industry Profitability
 1-Examine how industry’s current and recent levels of
competition and profitability are a consequence of its
present structure.
 2-Indentify the trends that are changing the industry’s
structure.
 3-Identify how these structural changes will affect the
five forces of competition and resulting profitability of
the industry
“The Future of Horse Racing”
 Arkansas Derby
 Online gambling beginning in 1995
Positioning the company
 Recognizing and understanding the competitive forces
that a firm faces within its industry allows managers to
position the firm where the competitive firm is the
weakest.
 Effective positioning requires any firm to aniticpate
changes in the competitive forces that are likely to
affect the industry.
Strategies to alter industry
structure
 Identify the key structural features that are responsible
for depressing profitability.
 Find structural features that are amendable to change
through strategic initiatives.
 Samsung Galaxy S3 vs. Apple Iphone 5
Defining the industry
 Before you analyze a company, you must determine
what industry the company competes.
 From the economists standpoint, the key to defining
market boundaries is substantiality.
 Demand or Supply side.
Defining the industry
 Insight 2.4 Demonstrates how companies who aren’t
particularly threat can become one (HTC manufacturing
smart phones after starting out making notebook
computers.
 Choosing an appropriate level of analysis.
Mainly determining boundaries and choosing broad or
narrowing segmenting.
 Segmentation- figuring out which customers to serve and
what to offer them.
Choosing an appropriate level of
analysis
 Segmentation variables ex. Color difference of two
like models sell at a vary similar price making it a poor
variable. Having full-size cars sell at a premium price
while also having sub-compact cars at a cheaper price.
 Matrix- First is to observe many segmentation variable,
then decide which correlate the best or are important
by chipping off the less important to simplify the
matrix.
 Analysis attractiveness- Profitability within segments
or seen looking at the five forces analysis to individual
segments.
 Key success factors in each segment- analyzing
buyers and basis of competition within individual
segments can lead to the answer of success for a
particular segment.
 Analyze the attraction between broad and narrow
scope- this is the point where the company decides to
be a segment specialist or compete multiple segments.
(Broad over narrow focus depends on the similarity of key
success factors and the presence of shared cost)
 Insight 2.5 Choosing an appropriate level of
analysis- This uses the five forces framework.
Depending on geographic areas could depend on the
profitability of the particular market segment. Ex
(different cell phones being sold in different countries)
Adding additional forces
 Substitutes and Compliments
 Substitute good and services are looked upon as a force of
competition. (lessening profitability of one and increasing it to
another)
 Compliment goods actually increase value to a particular
item. (having repair services for our vehicles)
 How two products that are compliments can prevail
over one another is by becoming monopolistic. This is
done by having an important characteristic of
competitive advantage.
Dealing with missing factors
 Insight 2.6 mentions how complements are needed in certain
services. In this example smart phone companies are
required to have a wireless license. The price the
government sets influences the nature of competition, the
market, and overall industry profitability.
 Dealing with dynamic competition- if speed and
structural change in the industry is slow then the five forces
model is more predictable than structural transformation that
is rapid
 Today we have a hypercompetition industry meaning it is
intense and rapid. Innovation has to be quick, or pick up on
new competitive advantages.
Does Industry Matter?
 Businesses can still succeed in a dull industry
 Apple, with the iPhone, bucked this trend in the short
term
 Industry factors account for less than 20% of variation in
return on assets among firms
 The correct choice of firm strategy is more important
than the correct choice of industry
Identifying Key Success Factors
 Five forces framework
allows us to determine an
industry’s potential for
profit
 How is profit shared
between competing firms
in an industry?
 A business must supply
what customers want to
buy, and survive the
competition
Identifying Key Success Factors
 Two crucial questions to ask:
 What do our customers want?
 What does the firm need to do to survive the competition?
What do our customers want?
(Demand Analysis)
 Must look more closely at customers of the industry and
to view them, not as a threat to profitability because of
their buying power, but as the purpose of the industry
and its underlying source of profit.
 Who are our customers?
 What are their needs?
 How do they choose between competing offerings?
 Ex: if customers choose a supermarket based on price,
then cost efficiency is the primary basis for competitive
advantage and the key success factors are the
determinants of inter-firm cost differentials
How to survive the competition?
(Competitive Analysis)
 Examine the nature of the competition
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What drives competition?
What are the main dimensions of competition?
How intense in competition?
How to obtain a superior competitive position?
 Ex: In the airline industry, survival requires sufficient
financial strength to survive intense price competition.
Not low fares, convenience, or safety, as one might
assume.