1. Strategy A View From The Top Prentice Hall 4-1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter Four Analyzing an Industry Cornelis A. de Kluyver and John A. Pearce II Third Edition

2. In Every Industry There are Deeply Held Orthodoxies… Orthodoxies are the broadly shared beliefs about what drives success within “the industry.” These beliefs form the “dominant industry logic”:  Who is the customer/end user  The type of interface/interaction with the customer/end user  How benefit is defined and value is delivered  How product/service functionality is defined  What form the product/service should take  How processes are structured and managed  The “ideal” cost and pricing structure  … “the way things are done here”

3. Why Orthodoxies Must Be Challenged… “There is no reason anyone would want a computer in their home.” -Ken Olson, President, Chairman and Founder of Digital Equipment Corp., 1977

4. Why Orthodoxies Must Be Challenged… “640K ought to be enough for anybody.” - Bill Gates, 1981

5. Challenging Orthodoxies Allows You to Redefine the Boundaries of Competition Business Practices Core Platforms Core Competencies Product Functionality Culture and Values Price/Performance Levels Benefits Sought and Delivered Served Markets

6. Challenging Orthodoxies Also Helps You to Identify Your Own Weaknesses...  Blindness to new opportunities  Arrogance/elitism  Need for control  Unwillingness to learn  Inability to create benefits through collaboration  Following the herd  Unwillingness to admit what we don’t know  Little real innovation in strategy over the last ______ years

7. Homogeneity in Thinking Can Make Change Difficult...  Many firms are caught in an “Attraction- Selection-Attrition” (ASA) cycle that tend to promote homogeneity in managerial thinking.  Organizations can overcome the dangers of like-minded thinking in at least two ways.  Give greater attention to “contrarian voices.”  They are most likely to see aspects of changing industry environments that are ignored by top managers.  Encourage greater turnover among top management ranks.  If not, top managers risk becoming more and more committed to the status quo.

8. Industry Influences Can Limit Organizational Change  Industry norms and standards (the so- called “common body of knowledge”) can blind managers to new opportunities, technologies, and potential competitors.  Very difficult to formulate and implement totally new strategy in the face of pressures to maintain the status quo.  New entrants almost always have something that is totally different from industry norms.

9. Changes in the Industry Environment: Porter’s Five Forces Model Suppliers Potential Entrants Buyers Substitutes Industry Competitors Rivalry Among Existing Firms Threat of substitute products or services Bargaining power of suppliers Bargaining power of buyers Threat of new entrants

10. Threat of Entry; Barriers to Entry Threat: Whether real or not depends on  What barriers to entry exist  How entrenched competitors are likely to react Barriers to Entry: Factors  Economies of scale  Product differentiation (brand equity)  Capital requirements  Cost advantages of independent size  Access to distribution channels  Government regulations

11. Powerful Suppliers; Buyers Suppliers are more powerful when  There are few dominant companies and they are concentrated on the industry they serve  A differentiated product offering makes switching among suppliers difficult  There are few substitutes  Suppliers can integrate forward  The industry is a small portion of suppliers revenue base Buyers have power when  There are few of them and they buy in large volume  The product is not differentiated making it easier to switch  The buyer’s purchase represents a substantial portion of sellers revenue  Buyers can integrate backwards

12. Substitutes and Complements Substitute products that deserve the closest scrutiny are those that  Show improvements in price-performance relative to industry average  Are produced by industry with deep pockets Complementary products and services may play an important role  Hardware vs. software  Distribution capabilities vs. content

13. Rivalry Among Participants Rivalry is stronger when  There are a large number of competitors and they are of similar size and power  The industry is growing slowly  There are high fixed costs or the products/ services are perishable  There are high exit barriers Note:The Internet can exacerbate or mitigate the relative influences of the different forces

14. Industry Structures Evolve Over Time; Sometimes in Complex Ways  From vertical to horizontal structures  Through industry consolidation  As an industry matures  Through technology  Phase 1: Competition on the basis of ideas, product concepts, technology choices and building core competency base;  Phase 2: Competition focused on building a viable coalition of partners;  Phase 3: Battle for market share for end products & profits

15. Core activities Core Assets Threatened Not Threatened Not threatened Threatened Radical Creative Change Change (Travel agencies) (Movie studios) Intermediating Progressive Change Change (Museums) (Trucking) Trajectories of Industry Change

16. Product Life Cycle Analysis Sales Characteristics & Strategies IntroductionGrowth Competitive Turbulence MaturityDecline Issues:  What Is the Appropriate Unit of Analysis?  What is a product? Category? Industry? Industry segment?  Strategy should lead to growth instead of growth leading to strategy

17. Strategic Segmentation  Focuses on finding out which segment(s) of the industry have the best prospects for the long term  Considers long term defensibility of different segments

18. Segmentation, Targeting and Positioning

19. Competitive Analysis: Key Questions Who Are Our Competitors? How Have They Behaved In The Past? What are Their Major Strengths? How Might They Behave in the Future? How Will This Affect Us?

20. Competitor Roles - Leaders, Challengers, Followers, and Nichers Market Leader 40% Market Challenger 30% Market Follower 20% Market Nicher 10% Hypothetical Market Structure

21. Strategic Positioning  Market Leaders  Focus on expanding total demand  Defending market share is important  May not wish to aggressively take more market share from rivals  Market Challengers  Concentrate on a single target. Attacking the leader  Market Followers  Compete with modest strategic objective  Often use innovative imitation  Compete in selective few segments  Market Nichers  Focus on narrow slice of the market

22. Strategy A View From The Top Prentice Hall 4-22 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.