To accompany contemprory strategy analysis concepts techiniques application chapter03slides

Industry Analysis: The Fundamentals• The objectives of industry analysis • From environmental analysis to industry analysis • Porter’s Five Forces Framework • Applying industry analysis

Industry Analysis: The Fundamentals

• The objectives of industry analysis

• From environmental analysis to industry analysis

• Porter’s Five Forces Framework

• Applying industry analysis

• Industry & market boundaries

• Identifying Key Success Factors

OUTLIN

E

The Objectives of Industry

Analysis

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 formulate strategies to change industry structure to

improve industry profitability

• To identify Key Success Factors

THE INDUSTRY ENVIRONMENT

Demographic 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

Pharmaceuticals 26.8 Gas & Electric Utilities 10.5 Tobacco 22.0 Food and Drug Stores 10.3 Household & Personal Products 20.5 Motor Vehicles & Parts 9.8 Food Consumer Products 20.3 Home Equipment 9.5 Medical Products & Equipment 18.8 Railroads 9.0 Beverages 18.8 Hotels, Casinos, Resorts 8.0 Scientific & Photographic Equipt 16.5 Insurance: Life and Health 7.6 Commercial Banks 16.0 Building Materials, Glass 7.0

Publishing, Printing 14.3 Metals 6.0 Petroleum Refining 14.3 Semiconductors &

Apparel 14 3 Electronic Components 5.8 Computer Software 13.5 Insurance: Property & Casualty 5.3 Electronics, Electrical Equipment 13.3 Food Production 5.3 Furniture 13.3 Telecommunications 3.5 Chemicals 12.8 Forest and Paper Products 3.5 Computers, Office Equipment 11.8 Communications Equipment (4.0) Health Care 11.5 Airlines (34.8)

Median return on equity (%), 1999-2002

Long-term Profitability of US Industries: EVA and ROA, 1986-97

Industry EVA/CE ROA Industry EVA/CE ROA

Tobacco 9.4 14.4 Paper and products (1.5) 5.2 Computer software Broadcasting and

& services 5.9 10.4 publishing (1.5) 6.0 Personal care Cars & trucks (1.5) 2.2 products 2.8 8.0 Healthcare services (1.7) 3.3 Medical products 2.7 9.5 Machine tools, hand tools (1.7) 6.0 Printing & Appliances and home

advertising (2.0) 2.3 furnishings (1.9) 3.4 Food processing 2.5 8.5 Telephone equipment &

Drugs & research 0.7 7.6 services (2.1) 7.0 Beverages 0.2 5.6 Plastics & products (2.6) 5.3 Textiles (0.1) 7.4 Computers & peripherals (3.1) 3.1

Fashion retailing (0.4) 9.3 Electrical products (3.3) 4.6 Building materials (0.6) 5.6 Aerospace & defense (3.3) 4.8 Metals (1.0) - Railroads (3.4) 3.8 Telecom services (1.2) 4.6 Airlines (4.1) 1.0 Discount retailing (1.2) 6.4 Steel (6.4) 2.3 Semiconductors Cable television (7.2) (3.3)

& components (1.3) 6.0 Electronics (9.2) 3.5

Average (1.1) 5.6

Source: Hawawini et al, Strategic Management Journal (January 2003)

The Determinants of Industry

Profitability

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

Many firms A few firms Two firms One firm

No barriers Significant barriers High barriers

Homogeneous Product Potential for product differentiation Perfect

Information flow Imperfect availability of information

Porter’s Five Forces of Competition Framework

Porter’s Five Forces of Competition Framework

Rivalry among existing firms Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of substitutes

• Buyers’ propensity

to substitute

• Relative prices &

performance of substitutes

Threat of Substitutes

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?

• S ize and concentration of buyers relative to sellers

• Buyer’s information

• Ability to backward

integrate

Note: analysis of supplier power is symmetric

Rivalry Between Established

Profitability and Market Growth

Less than -5% -5% to 0 0 to 5% 5% to 10% Over 10%

Return on sales Return on investment Cash flow/ Investment

ANNUAL RATE OF GROWTH OF MARKET DEMAND

ROI (%)

The Impact of Unionization on Profitability

Percentage of employees unionized None 1%-35% 35%-60% 60-75% >75%

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

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

Pre-requisites for success

• What drives competition?

• What are the main

dimensions of competition?

• How intense is competition?

• How can we obtain a

superior competitive position?

Analysis of demand

• Who are our

customers?

• What do they want?

KEY SUCCESS FACTORS

Analysis of competition

• What drives competition?

• What are the main

dimensions of competition?

• How intense is competition?

• How can we obtain a superior

competitive position?

What do customers want?

How does the firm survive competition

Pre-requisites for success

Identifying Key Success Factors

Identifying Key Success Factors Through Modeling Profitability: The

Airline Industry

Identifying Key Success Factors Through Modeling Profitability: The

Airline Industry

Income Revenue RPMs Expenses

ASMs RPMs ASMs ASMs

Return on Sales

Sales/Capital Employed

Sales mix of products

Avoiding markdowns through tight inventory control

Max buying power to minimize cost of goods purchased

Max sales/sq foot through:

*location *product mix

*customer service *quality control

Max inventory turnover through electronic data interchange, close vendor relationships, fast delivery

Minimize capital deployment through outsourcing & leasing

Identifying Key Success Factors

by Analyzing Profit Drivers: Retailing

Identifying Key Success Factors

by Analyzing Profit Drivers: Retailing

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

• The need to analyze market competition at different levels of

aggregation (depending on the issues being considered)

Key Success Factors

• Starting point for the analysis of competitive advantage