AN INTRO TO INDUSTRY
ANALYSIS: CHALLENGE AND
RESPONSE
Alfred Marcus
Edson Spence Chair of Strategy and Technological Leadership at the University of Minnesota, Carlson School
of Management and the Center for Technological Leadership
AGENDA
•The Challenge
•The Takeaway
•Strategic Formula
•Chess analogy
•External Analysis
•Five Forces
•Macroenvironment
•Business Strategy: Positioning
•Generic Moves
•Best Value
•How to Win
•Four secrites
The challenge:
Industries major transformations
• broad social, economic, and technological
changes transform structure and how firms
relate
The response:
• How to systematically analyze changes and
impacts?
• Once analyzed, what can do?
The hope: Maintain discussion about how
forces affecting your industry and what to do
THE TAKEAWAY
Proposed Actions
1-3
years
4-7
years
8-10
years
Likely to
Increase
Revenue
(range)
Likely to
Increase
Profits
(range)
WHY?
A Portfolio of Initiatives Over Time
Initiatives
A
B
C
D
E
F
G
H
I
J
K
L
M
N
Time →
X
X
X
X
X
√
X
X
X
X
√
X
Adapted from McKinsey’s Enduring Ideas Presentation Series
X
√
AT LEAST 3 HORIZONS
sequence of moves
Best Moves
J
M
O
V
E
S
G
H
I
B
F
One Out
Two Out
Three Out
B&I
D&F
A
D
K
C
E
J&A
A Mix of Low and High Risk Initiatives
FORMULA
For Strategic Success
ANALYSIS
SCA
[EA + IA] +
MOVES
[BS + CS + GS + IS +
I + R]
CHESS ANALOGY
To what extent does analogy work?
• Key rival &
rivalries shift over
time?
• Game itself shifts?
• Etc.???
FORMULA
For Strategic Success
External Analysis
ANALYSIS
ANALYSIS
SCA
[EA + IA] +
[
+ IA] +
EA
MOVES
MOVES
[BS + CS + GS + IS]
[BS + CS + GS + IS + R]
Five Forces
– How attractive is
industry?
• But INDUSTRIES
CHANGE
– Macroenvironment
THUS, MOVES
– POSITION, RE-POSITION
BUSINESS
Five Forces
Why Some Industries are More Attractive?
SUPPLIERS
Bargaining power of suppliers
POTENTIAL Threat of
ENTRANTS new entrants
INDUSTRY
COMPETITOR
S
Rivalry among
existing firms
Bargaining power of buyers
BUYERS
Threat of
substitutes
SUBSTITUTES
Spectrum of 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
Significant barriers
High barriers
Potential for product differentiation
Five forces determine attractiveness
U.S. Industries 1985-95
INDUSTRY
RETURN ON EQUITY (1985-'95)
Food and kindred products
--of which Tobacco products
Instruments and related products
Printing and publishing
Electrical, and electronic equipment
Aircraft, guided missiles, and parts
Fabricated metal products
Rubber and misc. plastics products
Paper and allied products
Retail trade corporations
Petroleum and coal products
Textile mill products
Wholesale trade corporations
Stone, glass and clay products
Machinery, exc. electrical
Nonferrous metals
Motor vehicles and equipment
Iron and Steel
Mining corporations
13.85
Pharmaceuticals
Airlines
19.39
18.60
11.24
10.16
10.00
8.36
8.15
9.95
8.47
8.37
7.88
7.25
6.23
5.72
4.29
4.21
2.61
1.30
1.24
-2.84
But, STRUCTURE CHANGES
industries do not remain attractive forever
10 Worst Performing Industries 2006
Industry Name
Automobiles
Airlines
Percent Change 10 years
-40.14%
-38.83%
Tires
-35.18%
Gas Distribution
-32.30%
Automobiles & Parts
-25.73%
Fixed Line
Telecommunications
-21.18%
Pharmaceuticals
-19.90%
Telecommunications
-18.22%
Aluminum
-17.48%
Broadcasting &
Entertainment...
-16.84%
Why? MACROENVIRONMENT
CHANGES STRUCTURE-- inflections
+ Model
Five Force
Political and Legal
Environment
Supplier
power
Technological
Environment
Potential
competitors
Rivalry
Buyer
power
Physical Env.
Natural Resources
Energy
Substitutes
Social & Demographic
Environment
Macro-Economic
Environment
Macroenvironment example
• Governments affect economy
•Outlays
& deficits
•Money supply
& interest rates
•GDP
•Inflation
•Unemployment
•Median Income
•Consumption
Patterns
Macroenvironment: example
• Social structure and demography create & destroy
market opportunities
– Population growth (demographic transition) & segments
•Age, education
•Ethnic diversity
•Median income
•Leisure
•Work habits
•Household formation
•Geographic distribution
•Consumption
•Patterns
Cross Impact Analysis --- Scenarios
CUSTOMERS
POLITICS
WORLD ECONOMY
TECHNOLOGY
SOCIAL FORCES
ENERGY &
ENVIRONMENT
ETC.
SUPPLIERS
NEW
ENTRANTS
SUBSTITUTES
EXISTING
COMPETITORS
FORMULA
For Strategic Success
ANALYSIS
[EA + IA] +
SCA
MOVES
BS
[
+ CS + GS + IS +R]
+ Implementation
Generic Moves to Re-Position in Existing Market
• Find Comparative Advantage
• Separate from Competitors
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
FOUR CHOICES
LowCost
Differentiated
Narrow
Broad
(One Type of Product)
(Many Kinds of Products)
Discount
specialty
stores
Discount
department
stores
-Toys ‘R Us
--T.J. Maxx
Specialty
stores
-Kmart
-Wal*Mart
Sears
Penney Elite
-FAO Schwarz
-Abercrombie & Fitch
department
stores
-Nordstrom
-Nieman Marcus
Porter
“Don’t Get Stuck in Middle!!!!”
Why?
MY FIRM HAS
A COMPETITIVE
ADVANTAGE
MY FIRM HAS
A COMPETITIVE
ADVANTAGE
STUCK
IN
MIDDLE
No mass customization – Why?
• Either customers
– accept single product at low price
(Model T)
• Or customers
– pay for unique features
customized to needs
• Trade-off cost & quality
– customers cannot have diverse
products that meet needs at low
price
WHY NOT THE MIDDLE?
Internal Strengths for Cost Leadership & Differentiation Not Compatible!!!
Generic strategy
COST
LEADER
SHIP
RESOURCES
CAPABILITIES
-Scale-efficient plants
-Access to capital
-Design for manufacture
-Process engineering skills
-Control of overheads &
-Frequent reports
R&D
-Tight cost control
-Avoidance of
-Specialization of jobs and
marginal customer
accounts
DIFFERENTIATION
functions
-Quantitative
targets/incentives
-Branding
-Marketing product
and brand advertising
-Engineering creativity.
-Custom design
-Product R&D
-Special service
-Qualitative measurement/
-Unique quality features
incentives
-Strong cross-functional
coordination
Conventional Wisdom Today???
“BEST VALUE”
Combine
High Quality
&
Low Cost
ATTRACTIVE VALUE-FORMONEY PACKAGE
• Successful companies combine low
cost & differentiation
• McDonalds
• Toyota
• IKEA
– “democratic design”
• attractive form
• inexpensive production
• highly functional
Low Cost & High Quality Can be Combined
Innovate
1. Regularly reposition products/services
Find unique, uninhabited space before competitors (EA)
2. Add capabilities
Combine cost leadership and differentiation (IA) to protect
Cost
Leadership
Benefits
Combined
Benefits
Differentiation
Benefits
Re-Position not Once but Over and Over
Keep Moving –Deepen & Refine Position!!!!
LowCost
Ivory –
After Dial and
Dove Challenges
Narrow
LowCost
Best Buysuperstore
format
Best
Value
Differentiated
Ivory –
Before Dial and
Dove Challenges
Best Buy –
mass market
commodities plus
specialty items/myths
(a hybrid)
Narrow
Best Buy –
Differentiated “Sound of Music”
specialty store
Customer
Customer
Centricity
Centricity
How to Win
Marcus
1992-2002 -- few winners
•
Small Beats
Big
• 1000 companies Wall Street Journal Shareholder
Scorecard
– 32 winners
• $3.5b revenue & 14.5k employees
– 64 losers
• $10.7b revenue & 48k employees
Four “Secrets”
1.
SWEET SPOT =
uncontested
Position
Micro-segment & reconfigured value
chain ---thereby in unique position
2.
AGILITY = get to it
Movement
3. DISCIPLINE = protect it
Hard-to-imitate
capabilities
4.
FOCUS = exploit it
Concentration
1.SWEET SPOT
Micro-Segment Customers
=
customers
Micro-Segmentation
Creates
• larger market
– people pay more for product
• better suited to needs
• greater functionality
• customized
• personalized
2. BEING IN SWEET SPOT REQUIRES
AGILITY
Move From Product to Solution
CUSTOMER PROCESS
BEFORE THE SOLUTION
CUSTOMER PROCESS
AFTER THE SOLUTION
•Honeywell
responsibility for
Boeing’s entire avionics
system
•GE complete package
of maintenance, service,
& financing
3.MUST HAVE DISCIPLINE TO
PROTECT
feedback loop
essential business processes
customer pull
Wal-Mart
Family Dollar
Precision Merchandising
first identify customer needs
• then satisfy
– no mismatch customer wants & what on shelves
– speed & consistency
4.MUST HAVE FOCUS TO EXPLOIT
Concentrate where leadership
FOCUS
Carefully
assess
profitability
of elements
in value chain
• shifting profits & power
• across stream,
upstream, or down
As Opposed To…
GAP(strong brand)
segments (kids/baby,
B.Republic,Old Navy)
designs own clothes
Three Factors to Consider
products and
services to fulfill
customer
requirements
payment
methods, e.g.
subscription
models
how a company
creates its
outputs – e.g.
lean simplified
design
• How do you envision your industry today?
• What are major changes?
• How can your particular business best
respond?
• How can you move to sustainable competitive
position?