Chapter 4 Analyzing an Industry Carli Slingerland Charity Moore Andrew Keeling Kolt Pederson Hayley Rush Alex Beverly Emily Dale Everett Gibson

Introduction What is an industry? Industry Structure and Porter’s Five Forces Industry Evolution Methods for Analyzing an Industry Analyzing Product/Market Scope

Four Dimensions to an Industry 1.Products 2.Customers 3.Geography 4.Stages in the product distribution pipeline

Products: Two Components Function: What the product or service does; this can be actual or perceived –Example of function: Some cooking appliances back. Others bake and roast. Still others fry and boil. –Example of function perception: Some over the counter nasal congestion remedies are positioned as cold relievers, whereas others with similar chemicals are promoted as allergy medicines.

Products: Two Components Continued Technology: While some appliances are gas, some are electric. While some medication is in liquid form, other medicine is in capsules.

Industry vs. Market Served Examples –Industry: Large kitchen appliance industry –Market Served: Refrigerators

Porter’s Five Forces Model

Six Barriers to Market Entry 1.Economies of Scale 2.Product Differentiation 3.Capital Requirements 4.Cost Disadvantages (independent of size) 5.Access to Distribution Channels 6.Government Regulation –Example: Soda and Beer Industries

Powerful Suppliers and Buyers Buyers and suppliers influence competition in an industry by exerting pressure over prices, quality, or the quantity demanded or sold. Example: Soft drink bottlers in the late 1980s

Powerful Suppliers Suppliers, in general, are more powerful when: –There are a few dominant companies, and they are more connected than the industry they serve. –The component supplied is differentiated, so switching suppliers is difficult. –There are few substitutes. –Suppliers can integrate forward. –The industry generates but a small portion of the suppliers’ revenue base.

Powerful Buyers Buyers have substantial power when: –There are few of them and/or they buy in large volume. –The product is relatively undifferentiated, making it easy to switch to other suppliers. –The buyers’ purchases represent a sizeable portion of the sellers’ total revenues. –Buyers can integrate backwards.

Substitute Products and Services Substitute products: –Continually threaten most industries –Limit prices and profitability –Can take substantial market share from existing businesses Example: Pay-per-view vs. Cable television

Substitute Products and Services From a strategic perspective, substitutes that deserve the closest scrutiny are those that: –Show improvements in price performance relative to the industry average –Are produced by companies with deep pockets

Rivalry Among Participants Characteristics producing intense rivalry: –Competitors are numerous and relatively equal –Industry growth is slow –Fixed costs are high –Capacity increases are secured in large increments –Exit barriers are high

Rivalry Among Participants Complementary products, when aligned with the industry it compliments, preserve the status quo. New technologies or approaches upset the status quo. Change in technological standards that render previously compatible products and services incompatible. –Example: Increasing dependence on the internet

Industry Evolution Industry structures change over time –Example: Sony Models help us understand change Change can occur rapidly

Four Trajectories of Change Two types of obsolescence define change 1. Threat to core activities 2. Threat to core Assets Radical Change –Both core assets and activities are threatened Example: Airlines Progressive Change –Neither core activities or assets are threatened Example: Trucking Industry

Four Trajectories of Change Continued Creative Change –Core Assets are threatened, but not Core Activities Example: Movie Studio Intermediating Change –Core Activities are threatened but not Core Assets Example: Museums

Industry Structure, Concentration, and Product Differentiation Useful to analyze changes in structure –Example: Vertical-Horizontal, Concentration, Product Differentiation Telecommunications, Computers, Television –Traditional boundaries have disappeared –All have evolved into 5 horizontal segments Content, packaging, network, Transmission, display

Industry Structure, Concentration, and Product Differentiation Continued Vertical Integration important Again Concentration –Economies of scale are important –“Rule Three and Four” Market Maturity Differentiation

Product Life Cycle Model Based on the theory of diffusion of innovations and its logical counterpart and the pattern of acceptance of new ideas. Model states the industry passes through stages: introduction, growth, maturity, and decline These stages are defined by changes in the rate of growth of industry sales.

Strategic Choices over Product Life Cycle Emerging Stage: High level of uncertainty Growth Environment: Less uncertainty, Competition intense Mature Industries: Competitively stable, Stagnant in sales growth Declining Industries: Unattractive

Product Life Cycle Model Pitfalls Little predictive value Industry growth does not follow S-shape pattern Does not acknowledge that companies can affect the shape of growth curve Can become a self-fulfilling prophecy

New Patterns Industry evolution in three phases 1.Competition based on ideas, product concepts, technology choices, and building of competency base. 2.Competition based on building a viable coalition of partners that will support a standard against competing formats. 3.Competition in the battle for market share for end products and profits.

Methods for Analyzing an Industry Segmentation Competitor Analysis Strategic Groups

Strategic Segmentation Segmentation –Identify Segmentation –Develop Segment Profiles Targeting –Evaluate Segment Attractiveness –Select Target Segment(s) Positioning –Identify Possible Positionings –Select Develop Positioning

Competitor Analysis Five Key Questions: 1.Who are the firm’s direct competitors now and in the near term? 2.What are their major strengths and weaknesses? 3.How might they have behaved in the past? 4.How might they behave in the future? 5.How will our competitors’ actions affect our industry and company?

Competitor Analysis: Roles of Competitors Leaders –Focus to expand total demand –Example: Coca-Cola Challengers –Target the leader –Example: Quizno’s Subs Followers –Use strategy of “innovative imitation” –Example: Gilletee Nichers –Concentrate on small slice of market –Example: Stepan Company

Strategic Groups “A set of firms that face similar threats and opportunities, which are different from the threats and opportunities faced by other sets of companies in the same industry.” »Strategy page 92 McDonald’s is not concerned with Spago

Analyzing Product/Market Scope Market Analysis Growth Vector Analysis Gap Analysis Profit Pool Analysis

Market Analysis Used to quantify the attractiveness of a particular industry or segment Helps develop better understanding of key success factors companies need to develop in order to achieve their strategic objectives Includes assessment of: 1.Actual and potential size of market 2.Market and segment growth 3.Market and segment profitability 4.Underlying cost structure and trends 5.Current and emerging distribution systems 6.Importance of regulatory issues 7.Technological changes

Growth Vector Analysis A company can increase its strategic scope within in industry by offering more products/technologies/services to tap more customer segments Product Options Present Products Future Products Present MarketsConcentrationProduct Development Future MarketsMarket Development Diversification Market Options

Gap Analysis Process of comparing an industry’s market potential to the combined current market penetration by all competitors –Leads to identification of new avenues of growth –Possible gaps include: Product-line gap Distribution gap Usage gap Competitive gap

Profit Pool Analysis Profit pool- an industry’s total amount of profit earned at all points along the value chain “Mapping” profit pools provides insight into industry’s profit potential, its evolution, why they form where they do, and how it might change Four steps: 1. Defining pool’s boundaries 2. Estimating its overall size 3. Allocating profits to the different value chain activities 4. Verifying results

Conclusion/Summary What is an Industry? Industry Evolution Methods for Analyzing and Industry Analyzing Product/Market Scope