B300 P1 STRATEGY FOR BUSINESS MODULE TWO Section 2 Industry Effects

B300: Overview Business behaviour in a changing world Organisation Decision making Strategy Organisation Policy

Introduction This section focuses on the characteristics of external industrial environment and its impact on the firm’s strategy and performance. CHAPTER 4 Analyzing the Industry Environment by R. M. Grant CHAPTER 5 Industry Evolution by R. M. Grant CHAPTER6 The firm matters more than industry by C.B.Fuller and J.Stopford

Analyzing the Industry Environment Chapter 4 Analyzing the Industry Environment This chapter… This chapter helps us to understand the influences of relevant external business environment that impact a firm’s decisions and performance ------the ‘macro-environment’.

The macro-environment From Environmental Analysis to industry Analysis The national/ international economy The natural environment The industry environment Suppliers Competitors Customers Technology Demographic Structure Government Social Structure The macro-environment

Determinates of Industry Profit: Demand and Competition Business is about creating value for your customers. The creation of values requires that the price paid by customer should exceed the cost incurred by the producer. Consumer supply vs. producer surplus Consumer (power) vs. producer (power) Profit is determined by 3 forces: The value of products or services to customers The intensity of competition The relative bargaining power of different levels in the production chain.

Analyzing Industry Attractiveness Profitability is influenced by industrial structure as the following: Monopoly Duopoly Oligopoly Perfect Competition Entry Barriers Profit Ability

The spectrum of industry structures Industry types Perfect competition Oligopoly Duopoly Monopoly Concentration Many firms A few firms Two firms One firm Entry and exit barriers No barriers Significant barriers High barriers Structural features Product differentiation Homogeneous product Potential for product differentiation Information Perfect Information flow Imperfect availability of information

Porter’s five forces of competition framework Industry Competitors Rivalry among existing firms Potential entrants Buyers Suppliers Substitutes Threat of entry substitutes Bargaining power of suppliers Bargaining power of buyers

Porter’s 5 Forces of competition Variables affecting forces of competitive pressure: Horizontal source of competition: Substitutes Entrants Established rivals Vertical sources of competition Buyers Suppliers

Supplier power Industry rivalry Threat of substitutes Buyer power Threat of entry Factors determining power of suppliers relative to producers; same as those determining power of producers relative to buyers – see ‘Buyers power’ box Absolute cost advantages Economies of scale Capital requirements Product differentiation Access to distribution channels Government and legal barriers Retaliation by established producers Concentration Diversity of competitors Excess capacity and exit barriers Cost conditions Buyers prosperity to substitute Relative price performance of substitutes Price sensitivity Cost of product relative to total cost Competition between buyers Bargaining power Size and concentration of buyer relative to suppliers Buyers’ switching costs Buyers’ information Buyers’ ability to backward integrate

Porter’s 5 Forces of competition Substitutability Threat of entry and entry barriers: Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to channels of distribution Governmental and legal barriers Retaliation Rivalry Between Established Competitors: Concentration Diversity of competitors Excess capacity Exit barriers Cost Conditions: Scale economies and ratio of fixed to variable costs.

Porter’s 5 Forces of competition ..cont…. Bargaining power of buyers Buyer’s price sensitive (importance of total cost or quality item, differentiation, competition between buyers.) Relative bargaining Power: size and concentration of buyers relative to suppliers, buyer’s information on price and quality (ignorance), ability to integrate vertically either backward or forward). Bargaining Power of Suppliers It is again the same power analysis introduced in the “buyer’s power”. Therefore smaller suppliers selling to grant customers normally go for cauterization, e.g, OPEC, framers, Labor unions Also forward integration and purchase concentration result in power for suppliers.

Applying Industry Analysis 1 Forecasting Industry Profitability Forecast profitability for 5-10 years before deciding to commit resources to it. Past and present performance is not a good predictor of future. Predict structural changes through analysis of: Changes in product and process technologies. Strategies of leading players The changes occurring in the infrastructure and related industries, and government policy. 2 Strategies to Alter industry structure Blocking unwanted channels of distribution Mergers Using competitors capacity Building entry barriers (license)

Industry = suppliers for a specific market Defining Industries: Identifying the relevant market Industry = suppliers for a specific market This is controlled by the demand aspect of substitutability. i.e. if product A is a substitute for B in a consumer mind then the 2 products suppliers, belong to the same industry.

Beyond the 5 Forces Model: Dynamics, Game Theory and Cooperation Structure is not a static case but it changes over time through strategic moves by leading players and mergers as well as cooperation and even privatization.

Schumpeterian Competition Innovation is the source for creative destruction through which favorable industry structures (especially monopoly) that allows attacking established positions through new approaches to competition. Innovative industries have a rapid learning wave, unstable structure.

Contribution of Game Theory In competitors interactions the game theory explains: The setting of the game i.e: The players The options The outcomes of options Sequencing of decisions The choices have payoffs e.g. Compete or cooperate Sequential competitive move Threats, promises, and commitments Cooperation whether complementor or or competitor to create a “value net”. i.e. changing the structure of the game to improve payoffs. Examples: Repeated games to maximize Deterrence Bringing in competitors.

Opportunities for competitive advantage: Identifying key success factors What do customer want? What do we need to survive competition? Customers are the reason for existence and the source for profit, so who are they? What do they want? How they select suppliers offerings? Competition is analyzed on basis of: Intensity Key determinates? (cost, quality, price…) to insure survival.

Identifying Key Success Factors for CA Prerequisites for success What do customers want? How does the firm survive competition? Analysis of demand Analysis of competition Who are our customers? What do they want? What drives competition? What are the main dimensions of competition? How intense is competition? How can we obtain a superior competitive position? Key Success Factors

Conclusion Profound understanding of the competitive environment is a critical ingredient of a successful strategy. We have developed a systematic approach to analyzing a firm’s industry environment in order to evaluate that industry’s profit potential and to identify the sources of competitive advantage. The centerpiece of our approach is Porter’s Five Forces of Competition framework, which links the structure of an industry to the competitive intensity within it and to the profitability that it realizes. Although every industry is unique, competition and profitability are the result of the systematic influences of the structure of that industry. The Porter framework provides a simple, yet powerful organizing framework for classifying the relevant features of an industry’s structure and predicting their implications for competitive behavior. The framework is particularly useful for predicting industry profitability and for identifying how the firm can influence industry structure in order to improve industry profitability.

Chapter 5 Industry Evolution This chapter… In this chapter Grant present the industry life-cycle which explains how demand change, economic growth, technology change and other competitive forces overtime across the industry life, would cause the change of strategy and industry structure.

Introduction Grant present the industry life-cycle which explain how demand change, economic growth, technology change and other competitive forces overtime across the industry life, would cause the change of strategy and industry structure. The advent of new entrants or new technology at early phase of life cycle causes the industry structure to be more competitive. Or low emphasis on technology at the mature phase causes the industry structure to be stable and less competitive

The Industry Life Cycle Model Industry sales Maturity Decline Introduction Growth Time

Factors affecting industry evolution Demand growth Production and diffusion of knowledgeا

Demand Growth Introduction stage: sales are small and the rate of market penetration is small because the industry product is little known and customers are few that make the cost and price high, so these products are affordable by high-income customer. Growth stage: increase in market penetration as product technology become known, standardized….so price fall and products are affordable to mass market. Maturity stage: increase in market saturation and slowing growth due to customer replacement of old product by new product. Decline stage: the existing industry is challenged by superior substitute products

Creation and Diffusion of knowledge The dual processes of knowledge creation and knowledge diffusion derive industry evolution. Knowledge creation: New knowledge and innovation lead to emerging new industry. In the introduction stage firms compete for alternative technology and new design configuration. There is no dominant product technology. Knowledge diffusion: In the growth phase technology is shifted from product innovation to process innovation. This occur when standardization (i.e. when the product technology and design stabilize), encourage firms to reduce cost with higher quality, through large manufacturing scale methods 'lean production. TQM'. e. g product innovation in automobile shifted from radical to incremental innovation that supports existing technologies.

Product and Process Innovation over Time Rate of Innovation Process innovation Time

How General is the life Cycle Pattern? Industries differ in the pattern of industry evolution: Duration of life cycles varies from industry to industry Industries that supply basic necessitates, such as food processing, never enter the decline phase. Some industries rejuvenate when they foster the break through of new innovation. Industries have different life-cycle stages in different countries, e.g. developing new products and introducing them in advanced countries like US & Europe. When the industry enters the mature stage in US, they shift their attention to other growth markets that exists in other countries

Structure, competition and success factors over life cycle Product differentiation: In the introduction stage, competing for new technology lead to wide variety of product design. In growth and maturity stage there would be standardization of product and it would be a commodity unless the organization develops new differentiation to that product such as after sale service. Industry structure and competition The structure of manufacturing and distribution in the introduction stage is associated with short production and fragmented structure and diversity. In growth stage there is mass production and low cost production. In mature stage there is excess capacity of products. Location and international trade The industry life-cycle changes associated with changes in pattern of trade and direct investment, which leads to migration of production to growth markets. New industries begin in high-income countries because of availability of market & technical resources. As demand grows in other market, they are served through exports. The continuous growth in other markets leads to less need for input of technology. The nature and intensity of competition The nature of competition across the life cycle moves from non- price to price competition Introduction stage competes on technology leadership so there are diversity of design and technology thus this stage is unprofitable. The growth stage profitability is caused by increase in demand and effectiveness of entry barriers. In mature stage increase in product standardization leads to price competition. In decline stage the degree of entry barriers/ price competition go to price wars.

The key success factors and industry evolution The changes in competitive structure, customer needs and resource requirement across life-cycle impact on key success factors and thus the strategy In the introduction stage the innovation is the basis for entry and success, and they need to support the innovation with integrated capabilities like financial resources, manufacturing or distribution In growth stage the firm needs to adapt product design and manufacturing capabilities to large scale production and access to distribution becomes crucial. In maturity stage the product become less differentiated, the success factors would be reducing capital investment less than growth stage. In decline stage the company would focus on encouraging the existing capabilities and build strong position.

Anticipating and Shaping the Future Managing with dual strategies Competing for the future

The Firm Matters More than Industry Chapter 6 The Firm Matters More than Industry This chapter… This chapter helps us to understand that it is not the industry but firm strategy that matters. Therefore, the characteristics of industry need not be blamed for the strategic problems.

Introduction Manger of mature business must not blame the characteristic of industry structure e.g. falling demand or excess capacity for their problems. Instead they regain competitive advantage through innovation and change the rule of the game. It is not the industry but firm strategy that matters. The rejuvenating could succeed even in difficult environmental condition i.e. unattractive industrial structure.

Three Themes There are three rejuvenators (three themes): First: Business can succeed in industry that look unpromising, un attractive (e.g. excess capacity, fall in demand) Second: The building of market share is not the root to success, build competitive advantage first then go for market share. Third: Firm can succeed even if there were limited resources. The rejuvenators combine their resources in new ways and build competencies from them even if the rivals are better resourced

The industry is not to blame Mature managers claim that environment is the cause of failure or success, e.g. competitors, powerful trade union or government regulation which influence the firm performance such as Porters’ 5 forces. Many firms that had failed in one industry, had diversified in to other sector on the basis of industry attractiveness rather than the match of their capabilities with challenges posed by new sector. Dynamic managers feel that the firm determines the industry profit not vice versaا. Profitability variation is not explained by the choice of industry but by the choice of strategy.

Mature industries offer good prospects for success A profitable industry described with high degree of competition, to win in that environment is difficult because of fast changes or high standards. In contrast less profitable industry that has few competitors could be a source of success for creative new comers who could attract customer. Managers in mature firms should realize that firms do not have to enter the decline phase in the life cycle, business can enjoy the long life by adjusting. Or business could transform to new product, process, system or strategy.

Firms can succeed in hostile environments Some firms increased their level of profitability through serious of action from the firm to industry not other way around, they invested in programs to increase efficiency, quality and capacity, they want to challenge the conventional norms of the industry especially practiced by industry leaders. They focused on the lowest-value segment of the market, satisfy customer requirement at lowest price, while the other industry leaders focus on high-value segment. Thus the cause of business transformation to be successful emerges from firm's action not from the environment attractiveness.

Large market share is the reward, not the cause of success Successful businesses grow because they discover a source of competitive advantage such as quality at lower cost, this competitive advantage would leads to increase company market share not other way around. Market share is the reward for creating a value. Market domination is important to achieve success, so first win a large share in the market and then exploit the dominant position

Building resources and competitive advantage Just as small-share firms can win, firms with limited and modest resources can also win even when battling against internal competition. Having large resources is neither necessary nor sufficient for achieving competitive advantage but effective combination between these resources and the appropriateness of these resources to operations. In international market only firm with large resources can win. Basic resources include finances, machines, skills, systems and reputation. This idea was reinforced by the resource-based approach to forming a strategy.

Conclusion Organizations looking to rejuvenate should realize that winners of today’s battles have often been able to overcome their disadvantages by developing new combinations of skills and competencies. They can become innovators and develop approaches to resolve their problems. Even in so called mature industries ,where incumbent strategies have evolved and been honed over long periods, new ideas displace existing leaders. Rejuvenating and dynamic organizations are always striving to reconcile opposites. The real competitive battles are fought between firms with a diversity of approaches to the market.