Review: Classes 1 - 3
• Objective of Business. Intro. Prisoners’ Dilemma
(Game Theory intro)
• What is Strategy? IBP: Cost strategy, KSF
changed, Constraints on options.
• Resources & Capabilities. Starbucks: Customer
Buying? Value Chain - internal view, Growth
Perils. A-B: Power of consistent, unique
strategy; power of leader; potential
environmental change?
• Tonight: External view
From Environmental Analysis
to Industry Analysis
Context: PEST
The national/
international
economy
Technology
Government
& Politics
THE INDUSTRY
ENVIRONMENT
Company TJB
• Suppliers X TJB
• Competitors
• Customers
The natural
environment
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.
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
Book
Threat of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of
substitutes.
My worksheet
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%
Surprised?
Applying Five - Forces Analysis
Forecasting Industry Profitability
• Past profitability a poor indicator of future
profitability. TJB - ?? PharmDrugs v Steel, Airlines
• 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?
POA
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
X Plant is first entry into the Y Industry
Market Attractiveness
How much Profit is there to be made?
Market Attractiveness & Competitive Strength for various ZZZ markets
High
Med.
Low
Strong
Average
Weak
Competitive Strength: What % of profit can WE make?
Sector
Industry 1
Industry 2
Industry 3
Industry 4
Industry 5
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
Book.
Complexity
& Tools
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)
Industry Evolution
OUTLIN
E
• The industry life cycle
• Industry structure, competition, and
success factors over the life cycle.
• Anticipating and shaping the future.
Industry Sales
The Industry Life Cycle
Introduction
Growth
Maturity
Time
Drivers of industry evolution :
• demand growth
• creation and diffusion of knowledge
Decline
Product and Process Innovation Over Time
Rate of innovation
Product Innovation
Process Innovation
Time
Standardization of Product Features in Autos
FEATURE
INTRODUCTION
Speedometer
1901 by Oldsmobile
Automatic transmission 1st installed 1904
GENERAL ADOPTION
Circa 1915
Introduced by Packard as an
option, 1938. Standard on
Cadillacs early 1950s
Electric headlamps
GM introduces, 1908 Standard equipment by 1916
All-steel body
GM adoptes 1912
Standard by early 1920s
All-steel enclosed body Dodge, 1923
Becomes standard late 1920s
Radio
Optional extra 1923 Standard equipment, 1946
Four-wheel drive
Appeared 1924
Only limited availability by 1994
Hydraulic brakes
Introduced 1924
Became standard 1939
Shatterproof glass
1st used 1927
Standard features in Fords 1938
Power steering
Introduced 1952
Standard equipment by 1969
Antilock brakes
Introduced 1972
Standard on GM cars in 1991
Air bags
GM introduces, 1974 By 1994 most new cars equipped
with air bags
How Typical is the Life Cycle Pattern?
• Technology-intensive industries (e.g. pharmaceuticals,
semiconductors, computers) may retain features of
emerging industries. Individual products do not.
• Other industries (especially those providing basic
necessities, e.g. food processing, construction, apparel)
reach maturity, but not decline.
• Industries may experience life cycle regeneration.
Sales
Sales
B&W
Color Portable
HDTV ?
1900 ‘50 ‘60 ‘90
MOTORCYCLES
1930
50 60
TV’s
90
• Life cycle model can help us to anticipate industry
evolution—but dangerous to assume any common, predetermined pattern of industy development. Tools,
Complexity
Evolution of Industry Structure over the Life Cycle
INTRODUCTION
Affluent buyers
GROWTH
Increasing
penetration
TECHNOLOGY
Rapid product
innovation
Product and
Incremental
process innovation innovation
PRODUCTS
Wide variety,
Standardization
rapid design change
Commoditization
Continued
commoditization
MANUFACTURING
Short-runs, skill
intensive
Deskilling
Overcapacity
DEMAND
TRADE
Capacity shortage,
mass-production
MATURITY
Mass market
replacement
demand
DECLINE
Knowledgeable,
customers, residual segments
Well-diffused
technology
-----Production shifts from advanced to developing countries-----
COMPETITION
Technology-
Entry & exit
KSFs
Product innovation
Process technology. Design for
Shakeout &
consolidation
Cost efficiency
Price wars,
exit (p. 315)
Overhead reduction, rationalization, low
cost sourcing
The Driving Forces of Industry Evolution
BASIC CONDITIONS
Customers become
more knowledgeable
& experienced
INDUSTRY STRUCTURE
Customers become
more price conscious
Products become
more standardized
Diffusion of
technology
COMPETITION
Production
becomes less R&D
& skill-intensive
Production shifts
to low-wage
countries
Quest for new
sources of
differentiation
Price competition
intensifies
Excess capacity
increases
Demand growth
slows as market
saturation approaches
Distribution channels
consolidate
Bargaining power
of distributors
increases
Preparing for the Future : The Role of Scenario
Analysis in Adapting to Industry Change
Stages in undertaking multiple Scenario Analysis:
• Identify major forces driving industry change
• Predict possible impacts of each force on the industry
environment
• Identify interactions between different external forces
• Among range of outcomes, identify 2-4 most likely/ most
interesting scenarios: configurations of changeforces and
outcomes
• Consider implications of each scenario for the company
• Identify key signposts pointing toward the emergence of
each scenario
• Prepare contingency plan
Tool, POA, Option Value
Innovation & Renewal over the
Industry Life Cycle: Retailing
Mail order,
catalogue
retailing
e.g. Sears
Roebuck
1880s
Chain
Stores
e.g. A&P
1920s
Warehouse
Internet
Clubs
Retailers
e.g. Price Club
e.g. Amazon;
Sam’s Club
Webvan
Discount
“Category
Stores
Killers”
e.g. K-Mart
e.g. Toys-R-Us,
Wal-Mart
Home Depot
1960s
2000
Review: New tools.
Use Insights from to develop POA
• 4 C’s, PEST
• 5 Forces => Market Attractiveness, can combine w/
Competitive Strength => Corporate Strategy
• Key Success Factors
• Life Cycle
• Scenarios, option value
• Value Equivalence Line - next
• Strategic Groups & competing w/in and between, p. 127 129
BCG’s Strategic Environments Matrix
Many
FRAGMENTED
SPECIALIZATION
apparel, housebuilding
pharmaceuticals, luxury cars
jewelry retailing, sawmills
chocolate confectionery
SOURCES
OF
STALEMATE
ADVANTAGE
basic chemicals, volume
Few
VOLUME
jet engines, food supermarkets
grade paper, ship owning
motorcycles, standard
(VLCCs), wholesale banking
microprocessors
Big
Small
SIZE OF ADVANTAGE
BCG’s Analysis of the
Strategic Characteristics of
Specialization Businesses
low
ABILITY TO
SYSTEMATIZE
CREATIVE
EXPERIMENTAL
fashion,
toiletries, magazines
general publishing
food products
PERCEPTIVE
ANALYTICAL
high tech
luxury cars, confectionery
paper towels
high
high
low
ENVIRONMENTAL VARIABILITY