1. Industry Analysis: The Fundamentals
MGMT 460
Business Planning
CHAPTER 3
Industry Analysis: The Fundamentals
Alex Zabolotnov 1

2. Corporate Strategy
Corporate strategy is concerned with deciding which industries the firm should be engaged in and how it should allocate its resources among them.
Such decisions require assessment of the attractiveness of different industries in terms of their profit potential.

3. Business Strategy
Business strategy is concerned with establishing competitive advantage.
By analyzing customer needs and preferences and the ways in which firms compete to serve customers, we identify the general sources of competitive advantage in an industry—what we call key success factors.

4. From Environmental Analysis to Industry Analysis
The business environment of the firm consists of all the external influences that affect its decisions and performance.
PEST ANALYSIS
political, economic, social, and technological factors
PESTEL/PESTLE ANALYSIS
political, economic, social, and technological, legal, environmental factors

5. PESTEL / PESTLE ANALYSIS
PESTLE analysis, which is sometimes referred as PEST analysis, is a concept in marketing principles. Moreover, this concept is used as a tool by companies to track the environment they’re operating in or are planning to launch a new project/product/service etc.

6. PESTEL / PESTLE ANALYSIS

7. 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 producers relative to their suppliers and buyers.
Industry analysis brings all three factors into a single analytic framework

8. Industry Attractiveness

9. The Joys of Niche Markets
Chewing Tobacco – UST Inc.
It controls 78% of the U.S. market for “smokeless tobacco”
Highest return on assets ever: 63%
Slot Machines - International Game Technology (IGT)
ITG maintains its 70% U.S. market share
Policy of leasing rather than selling machines
Zipper – YKK
7.2 billion zippers a year
>50% world market share, rest for Chinese companies

10. Monopoly – Perfect Competition
Monopoly exists where an industry comprises a single firm protected by high barriers to entry. The monopolist can appropriate in profit the full amount of the value it creates.
The U.S. market for Chewing Tobacco
Perfect competition exists where there are many firms supplying an identical product with no restrictions on entry or exit.
Vegetables on Bazaar

11. Oligopoly
Oligopolies: They are dominated by a small number of major companies.

12. Porter’s Five Forces of Competition Framework
Three sources of “horizontal” competition: competition from substitutes, competition from entrants, and competition from established rivals;
Two sources of “vertical” competition: the power of suppliers and power of buyers

13. Competition from Substitutes
The price that customers are willing to pay for a product depends, on the availability of substitute products.
The absence of close substitutes, (gasoline or cigarettes) means that consumers are comparatively insensitive to price (demand is inelastic).
The existence of close substitutes means that customers will switch to substitutes in response to price increases for the product (demand is elastic)
The internet ?? Travel agencies, newspapers and telecommunication

14. Threat of Entry
If an industry earns a return on capital in excess of its cost of capital, it will act as a magnet to firms outside the industry
If the entry of new firms is unrestricted, the rate of profit will fall toward its competitive level

15. Threat of Entry Governmental and Legal Barriers Capital Requirements:
Boeing and Airbus (duopoly)
Commercial Satellite
Absolute Cost Advantages:
Saudi Aramco vs Shell, Exxon Mobil, and BP.
Product Differentiation:
Customer loyalty to a single brand
30% in batteries
61% in toothpaste
71% in cigarettes
Governmental and Legal Barriers
License requirements taxi cabs, banking, telecommunications and broadcasting

16. Rivalry Between Established Competitors
In some industries, firms compete aggressively—sometimes to the extent that prices are pushed below the level of costs and industry-wide losses are incurred
Perfect Competition
In other industries, price competition is muted and rivalry focuses on advertising, innovation, and other non-price dimensions
Monopoly and Oligopoly
Duracell and Energizer
Coke and Pepsi

17. Bargaining Power of Buyers
The firms in an industry compete in two types of markets:
The markets for inputs:
Raw materials, components and labor services
The markets for outputs:
Firms sell their goods and services to customers

18. Bargaining Power of Suppliers
Analysis of the determinants of relative power between the producers in an industry and their suppliers.
Raw materials, and components are often supplied by small companies to large manufacturing companies.
Suppliers usually lack of bargaining power

19. Industries and Markets
Industry:
Economists define an industry as a group of firms that supplies a market
Analyzing industry structure vs analyzing market structure
Industries are identified with relatively broad sectors, whereas markets refer to specific products.
Thus, the firms within the packaging industry compete in many distinct product markets:
glass containers, steel cans, aluminum cans, paper cartons, plastic containers and so on.

20. Identifying Key Success Factors
To survive and prosper in an industry, a firm must meet two criterias:
First, it must supply what customers want to buy
Second, it must survive competition
Two questions:
What do our customers want?
What does the firm need to do to survive competition?

21. Identifying Key Success Factors

22. Identifying Key Success Factors