To accompany contemprory strategy analysis concepts techiniques application chapter03slides

Industry
Industry Analysis:
Analysis: The
The Fundamentals
Fundamentals
OUTLIN
E
• 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


The
The Objectives
Objectives of
of Industry
Industry
Analysis
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

From
From Environmental
EnvironmentalAnalysis
Analysis
to
to Industry
IndustryAnalysis
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.


Profitability
Profitabilityof
ofUS
USIndustries
Industries
Median return on equity (%), 1999-2002
Pharmaceuticals
Tobacco
Household & Personal Products
Food Consumer Products
Medical Products & Equipment
Beverages
Scientific & Photographic Equipt.
Commercial Banks
16.0
Publishing, Printing
Petroleum Refining
Apparel
Computer Software
Electronics, Electrical Equipment
Furniture
Chemicals
Computers, Office Equipment

Health Care

26.8
Gas & Electric Utilities
10.5
22.0
Food and Drug Stores
10.3
20.5
Motor Vehicles & Parts
9.8
20.3
Home Equipment
9.5
18.8
Railroads
9.0
18.8
Hotels, Casinos, Resorts
8.0
16.5
Insurance: Life and Health
7.6
Building Materials, Glass
7.0
14.3
Metals
6.0
14.3
Semiconductors &

14. 3
Electronic Components
5.8
13.5
Insurance: Property & Casualty 5.3
13.3
Food Production
5.3
13.3
Telecommunications
3.5
12.8
Forest and Paper Products
3.5
11.8
Communications Equipment
(4.0)
11.5
Airlines
(34.8)


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

EVA/CE ROA

Tobacco
Computer software
& services

Personal care
products
Medical products
Printing &
advertising
Food processing
Drugs & research
Beverages
Textiles (0.1)
Fashion retailing
Building materials
Metals
Telecom services
Discount retailing
Semiconductors
& components

9.4
5.9
2.8
2.7
(2.0)
2.5
0.7
0.2
7.4
(0.4)
(0.6)
(1.0)
(1.2)

(1.2)
(1.3)

Industry

EVA/CE

ROA

14.4

Paper and products
(1.5)
Broadcasting and
10.4
publishing
(1.5)
Cars & trucks
(1.5)
8.0
Healthcare services
(1.7)
9.5
Machine tools, hand tools (1.7)
Appliances and home
2.3
furnishings
(1.9)
8.5
Telephone equipment &

7.6
services
(2.1)
5.6
Plastics & products
(2.6)
Computers & peripherals (3.1)
3.1
9.3
Electrical products
(3.3)
5.6
Aerospace & defense
(3.3)
Railroads
(3.4)
4.6
Airlines
(4.1)
6.4
Steel
(6.4)
Cable television
(7.2)
6.0
Electronics
(9.2)
Average

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

(1.1)

5.2
6.0
2.2
3.3
6.0
3.4
7.0
5.3
4.6
4.8
3.8
1.0
2.3
(3.3)
3.5
5.6


The
The Determinants
Determinants of
of Industry
Industry
Profitability
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
The Spectrum
Spectrum of
of Industry
Industry Structures
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
Porter’s Five
Five Forces
Forces of
of

Competition
Competition Framework
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


The
The Structural
Structural Determinants
Determinants of
of Competition
Competition

BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power

THREAT OF ENTRY
•Capital requirements
•Economies of scale
•Absolute cost advantage
•Product differentiation
•Access to distribution
channels
•Legal/ regulatory barriers
•Retaliation

INDUSTRY RIVALRY

•Concentration
•Diversity of
competitors
•Product differentiation
•Excess capacity &
exit barriers
•Cost conditions

BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power

SUBSTITUTE
COMPETITION
• Buyers’ propensity
to substitute
• Relative prices &
performance of
substitutes


Threat
Threat of
of Substitutes
Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of
substitutes.


The
The Threat
Threat of
of Entry
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
Bargaining Power
Power of
of Buyers
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
Rivalry Between
Between Established
Established
Competitors
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


Profitability

Profitability and
and Market
Market Growth
Growth
ROI (%)
30

25

20

15

10

5

0
Return
sales
Return
onon
sales

Return
investment
Return
onon
investment

Cash
flow/Investment
Cash
flow/
Investment

-5
0 to 5%
5% to
Less than -5% < -5%
-5% to 0-5% to00 to 5%
5%
to10%
10%> 10% Over 10%
ANNUAL RATE OF GROWTH OF MARKET
DEMAND


The
The Impact
Impact of
of Unionization
Unionization on
on Profitability
Profitability

None

Percentage of employees unionized
1%-35%

35%-60% 60-75% >75%

ROI (%)

25

24

23

18

19

ROS (%)

10.8

9.0

9.0

7.9

7.9

ROI = Return on Investment
ROS = Return on Sales

Applying
Applying Five
Five -- Forces
Forces Analysis
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
Drawing Industry
Industry Boundaries
Boundaries :: Identifying
Identifying
the
the Relevant
Relevant Market
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


Identifying
Identifying Key
Key Success
Success Factors
Factors
Pre-requisites
forsuccess
success
Pre-requisites for
What do
customers want?

Analysis of demand
• Who are our
customers?
• What do they want?

How does the firm
survive competition
Analysis of competition
• What drives competition?
What are
drives
•• What
the competition?
main
•dimensions
What are the
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
Identifying Key
Key Success
Success Factors
Factors
Through
Through Modeling
Modeling Profitability:
Profitability: The
The
Airline
Airline Industry
Industry
Profitability
Income
ASMs

=

Yield

=

Revenue
RPMs

• Strength of
competition on
routes.
• Responsiveness to chaanging market
conditions
• % business travelers.

x Load factor - Unit Cost

x

RPMs
ASMs

-

• Price
competitiveness.
• Efficiency of route
planning.
• Flexibility and
responsiveness.
• Customer loyalty.
• Meeting customer
requirements.

• Achieving differentiation advantage

ASM = Available Seat Miles

Expenses
ASMs
• Wage rates.
• Fuel
efficiency of
planes.
• Employee
productivity.
• Load factors.
• Administrative
overhead.

RPM = Revenue Passenger Miles


Identifying
Identifying Key
KeySuccess
Success Factors
Factors
by
byAnalyzing
AnalyzingProfit
ProfitDrivers:
Drivers: Retailing
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:
SUMMARY: What
What Have
Have We
We Learned?
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