Industry Analysis Foundation of Strategy By: Andy Carrabine, David Mault, Colleen Hawk, Emily Doris, and Hayden Holub

Objectives Be familiar with a number of frameworks used to analyze an organizations Industry Be able to use evidence on structural trends within industries to forecast industry changes Understand the value and challenges of undertaking industry analysis Be able to understand key success factors

From environmental analysis to industry analysis Business Environment PEST Analysis Political, Economic, Social, Technological

PEST Analysis The Industry Environment The national/international economy Government and politics The natural environment Demographic structure Social Structure Technology

The determinants of industry profit: demand and competition What determines the level of profit in an industry? The value of the product to customers The intensity of competition The bargaining power of the producers relative to their suppliers

Analyzing Industry Attractiveness using Porters Five Forces Industry Competitors SuppliersSubstitutesBuyers Potential Entrants Bargaining Power of Suppliers Threat of new entrants Bargaining power of Buyers Threat of substitutes

The Threat of Entry Capital Requirements Economies of Scale Absolute Cost Advantages Product Differentiation Access of Channels of Distribution Governmental and Legal Barriers Retaliation The Effectiveness of Barriers to Entry

Rivalry between established competitors Concentration Diversity of Competitors Product Differentiation Excess Capacity and Exit Barriers Cost Conditions: Scale Economies and the ratio of fixed to variable costs

Bargaining Power of Buyers The firms in an industry compete in two types of markets: Markets for inputs Markets for outputs

Buyers’ Price Sensitivity The greater the importance of an item as a proportion of total cost, the more sensitive buyers will be about the price they pay. The less differentiated the products of the supplying industry, the more willing the buyer is to switch suppliers on the basis of price

Buyers’ Price Sensitivity The more intense the competition among buyers, the greater their eagerness for price reductions from their sellers. The more critical an industry’s product to the quality of the buyer’s product or service, the less sensitive are buyers to the prices they are charged.

Relative Bargaining Power Size and concentration of buyers relative to suppliers Buyers’ information Ability to integrate vertically

Bargaining Power of Suppliers Cartelisation Suppliers of complex, technically sophisticated components Personal computer industry

Porter’s Five Forces: Mobile Handset Industry Competition from substitutes Rivalry between established competitors Buyer and supplier power

Forecasting Industry Profitability 1-Examine how industry’s current and recent levels of competition and profitability are a consequence of its present structure. 2-Indentify the trends that are changing the industry’s structure. 3-Identify how these structural changes will affect the five forces of competition and resulting profitability of the industry

“The Future of Horse Racing” Arkansas Derby Online gambling beginning in 1995

Positioning the company Recognizing and understanding the competitive forces that a firm faces within its industry allows managers to position the firm where the competitive firm is the weakest. Effective positioning requires any firm to aniticpate changes in the competitive forces that are likely to affect the industry.

Strategies to alter industry structure Identify the key structural features that are responsible for depressing profitability. Find structural features that are amendable to change through strategic initiatives. Samsung Galaxy S3 vs. Apple Iphone 5

Defining the industry Before you analyze a company, you must determine what industry the company competes. From the economists standpoint, the key to defining market boundaries is substantiality. Demand or Supply side.

Defining the industry Insight 2.4 Demonstrates how companies who aren’t particularly threat can become one (HTC manufacturing smart phones after starting out making notebook computers. Choosing an appropriate level of analysis. Mainly determining boundaries and choosing broad or narrowing segmenting. Segmentation- figuring out which customers to serve and what to offer them.

Choosing an appropriate level of analysis Segmentation variables ex. Color difference of two like models sell at a vary similar price making it a poor variable. Having full-size cars sell at a premium price while also having sub-compact cars at a cheaper price. Matrix- First is to observe many segmentation variable, then decide which correlate the best or are important by chipping off the less important to simplify the matrix. Analysis attractiveness- Profitability within segments or seen looking at the five forces analysis to individual segments.

Key success factors in each segment- analyzing buyers and basis of competition within individual segments can lead to the answer of success for a particular segment. Analyze the attraction between broad and narrow scope- this is the point where the company decides to be a segment specialist or compete multiple segments. (Broad over narrow focus depends on the similarity of key success factors and the presence of shared cost) Insight 2.5 Choosing an appropriate level of analysis- This uses the five forces framework. Depending on geographic areas could depend on the profitability of the particular market segment. Ex (different cell phones being sold in different countries)

Adding additional forces Substitutes and Compliments Substitute good and services are looked upon as a force of competition. (lessening profitability of one and increasing it to another) Compliment goods actually increase value to a particular item. (having repair services for our vehicles) How two products that are compliments can prevail over one another is by becoming monopolistic. This is done by having an important characteristic of competitive advantage.

Dealing with missing factors Insight 2.6 mentions how complements are needed in certain services. In this example smart phone companies are required to have a wireless license. The price the government sets influences the nature of competition, the market, and overall industry profitability. Dealing with dynamic competition- if speed and structural change in the industry is slow then the five forces model is more predictable than structural transformation that is rapid Today we have a hypercompetition industry meaning it is intense and rapid. Innovation has to be quick, or pick up on new competitive advantages.

Does Industry Matter? Businesses can still succeed in a dull industry Apple, with the iPhone, bucked this trend in the short term Industry factors account for less than 20% of variation in return on assets among firms The correct choice of firm strategy is more important than the correct choice of industry

Identifying Key Success Factors Five forces framework allows us to determine an industry’s potential for profit How is profit shared between competing firms in an industry? A business must supply what customers want to buy, and survive the competition

Identifying Key Success Factors Two crucial questions to ask: What do our customers want? What does the firm need to do to survive the competition?

What do our customers want? (Demand Analysis) Must look more closely at customers of the industry and to view them, not as a threat to profitability because of their buying power, but as the purpose of the industry and its underlying source of profit. Who are our customers? What are their needs? How do they choose between competing offerings? Ex: if customers choose a supermarket based on price, then cost efficiency is the primary basis for competitive advantage and the key success factors are the determinants of inter-firm cost differentials

How to survive the competition? (Competitive Analysis) Examine the nature of the competition What drives competition? What are the main dimensions of competition? How intense in competition? How to obtain a superior competitive position? Ex: In the airline industry, survival requires sufficient financial strength to survive intense price competition. Not low fares, convenience, or safety, as one might assume.