Masters in Engineering and
Management of Technology
Masters in engineering
Design
Introduction to Entrepreneurship
and New Venture Creation
Rui Baptista
The Structural
Analysis of
Industries
What is Strategy?
|
Distinguishing strategy from tactics:
z
Strategy is the overall plan for deploying
resources to establish a favorable position
z Tactic is a scheme for a specific maneuver
|
Characteristics of strategic decisions:
z
Important both in the short and long run
z Involve a significant commitment of resources
z Not easily reversible
The Basic Framework of
Strategy: the Link Between
the Firm and Its Environment
THE FIRM
Goals &
Values
Resources &
Capabilities
Structure &
Systems
STRATEGY
STRATEGY
THE
INDUSTRY
ENVIRONMENT
Competitors
Customers
Suppliers
Analyzing the Industry
Environment
OUTLINE
|
The objectives of industry analysis
|
From environmental analysis to industry analysis
|
Industry & market boundaries
|
Porter’s Five Forces Framework
|
Applying industry analysis
|
Extending the Five Forces Framework:
Complements, Dynamics, The New Economy
|
Identifying Key Success Factors
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
Drawing Industry Boundaries:
Identifying the Relevant Market
|
What industry is BMW in:
z World Auto industry?
z European Auto industry?
z World luxury car industry?
|
Key criteria: GEOGRAPHY and SUBSTITUTABILITY
z On the demand side :
• Where are the buyers located? Are they willing to substitute across
countries?
• Are buyers willing to substitute between types of cars?
z
On the supply side :
• Where are the manufacturers located? Are they able to switch
production across countries?
• Are manufacturers able to switch production between types of cars?
Determinants of Industry
Profitability (Revenues-Costs)
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 5 Competitive
Forces Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL Threat of
ENTRANTS
new
entrants
Threat of
SUBSTITUTES
Rivalry among
existing firms
substitutes
Bargaining power of buyers
BUYERS
Threat of Potential
Entrants
New entrants’ threat to industry profitability depends
upon the height of barriers to entry. The principal
sources of barriers to entry are:
z
z
z
z
z
z
z
Capital requirements
Economies of scale
Absolute cost advantages
Proprietary product differentiation (e.g. brand identity)
Access to channels of distribution
Government Policies: legal and regulatory barriers
Threat of retaliation
Threath of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
z
z
z
z
Switching costs
Buyers’ propensity to substitute
Price-performance characteristics of substitutes
Network externalities
Bargaining Power of Buyers
Buyer’s price sensitivity
Relative bargaining power
• Switching Costs
• 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 vs. sellers
• Buyer volume
• Buyer’s information
• Ability to backward
integrate
Note: analysis of supplier
power is symmetric
Rivalry Between Incumbents
(Established Competitors)
The extent to which industry profitability is
depressed by aggressive price competition
depends upon:
z
z
z
z
z
z
Industry growth – product/technology life cycle
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
Applying 5 Forces Analysis
Forecasting Industry Profitability
z
z
Past profitability is a poor indicator of future profitability
If we can create of foresee changes in industry structure
we can induce changes on competition and profitability
Strategies to Improve Industry Profitability
• What structural variables affect profitability?
• Which of those variables can be changed by individual
or collective strategies?
Entrepreneurial Industry
Evaluation
Factors
Attractiveness
High
Low
Competition among
companies
Competition is minimal but
will become intense in a
year
The industry is mature or
declining
Power of customers
Volume is high and willing
to negotiate
Customer has few
switching costs
Power of suppliers
Many substitutes and
sources are available
Limited supply;
differentiated products
Entry
Complex barriers and high
entry costs
Many start-ups attempting
to enter
Few, simple entry barriers
Few companies are
entering this market
Complement
Complementary products
being introduced with high
demand growth
Dominant companies
control market for
complementary products
Entrepreneurship and
Dynamic Competition
Porter’s framework assumes:
•
•
industry structure drives competitive behavior
Industry structure is stable
But competition also changes industry structure
Schumpeterian Competition:
A “perennial gale of creative destruction” where innovation
overthrows established market leaders
Hyper-competition:
intense and rapid competitive moves, creating disequilibrium
through continuously creating new competitive advantages and
destroying, neutralizing or making obsolete opponents’ competitive
advantages—overlapping product/technology life-cycles
Applying the 5 Forces to
Digital/E-Business 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
Porter’s Framework in the
Knowledge Economy
SUPPLIERS
Bargaining power of suppliers
Network externalities:
the suppliers of
complements create
value for the industry
and can exercise
bargaining power
INDUSTRY
COMPETITORS
POTENTIAL Threat of
ENTRANTS
new
entrants
Threat of
SUBSTITUTES
Rivalry among
existing firms
substitutes
Bargaining power of buyers
BUYERS
Identifying Key Sucess Factors
Pre-requisites
for for
success
Pre-requisites
success
What do
customers want?
How may the firm
survive competition?
Analysis of competition
Analysis of demand
• Who are our
customers?
• What do they want?
• What drives competition?
•• What
What drives
are thecompetition?
main
• What
are theof
main
dimensions
competition?
dimensions of competition?
•• How
How intense
intense is
is competition?
competition?
•• How
How can
can we
we obtain
obtain aa superior
superior
competitive
competitive
position?position?
KEY SUCCESS FACTORS
Entrepreneurial Industry
Evaluation
Factors
Rivalry/Competition
Costumer Power
Supplier Power
Barriers to Entry
Substitute and
Complementary
Products
Attractiveness
High
Low