1. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)1 Lecture #3: Analyzing the Industry Environment The objectives of industry analysis Porter’s Five Forces Model Identifying Key Success Factors

2. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)2 The Objectives of Industry Analysis To assess industry attractiveness To use evidence on changes in industry structure to forecast future profitability To identify Key Success Factors

3. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)3 From Environmental Analysis to Industry Analysis THE INDUSTRY ENVIRONMENT Suppliers Competitors Customers Social structure The Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on the Industry Environment. The national/ international economy Technology Government The natural environment Demographic structure Social structure

4. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)4 Profitability of US Industries, 1985-95

5. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)5 The Determinants of Industry Profitability The value of the product to customers The intensity of competition Relative bargaining power at different levels within the value chain. 3 key influences:

6. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)6 The Spectrum of Industry Structures Concentration Entry and Exit Barriers Entry and Exit Barriers Product Differentiation Product Differentiation Perfect Competition Perfect Competition Oligopoly Duopoly Monopoly Many firms A few firms Two firms One firm No barriers Significant barriers High barriers Homogeneous Product Homogeneous Product Potential for product differentiation

7. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)7 Porter’s Five Forces of Competition Framework SUPPLIERS POTENTIAL ENTRANTS SUBSTITUTES BUYERS INDUSTRY COMPETITORS Rivalry among existing firms Bargaining power Threat of

8. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)8 The Threat of Entry Depends on the barriers to entry. The principal sources of barriers to entry are: Capital requirements Economies of scale Cost advantage Product differentiation Access to channels of distribution Legal and regulatory barriers Retaliation

9. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)9 Bargaining Power of Buyers Buyer’s price sensitivityRelative bargaining power Cost of purchases as % of total costs How differentiated is the item? How intense is competition? How important is the item to quality of own output? S ize and concentration of buyers Buyer’s information Ability to backward integrate

10. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)10 Threat of Substitutes Competitive pressure from substitutes depends on: Buyers’ propensity to substitute The price-performance characteristics of substitutes.

11. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)11 Rivalry Between Established Competitors Aggressive price competition depends on: Concentration (number and size of firms) Diversity of competitors (differences in goals, cost structure, etc.) Product differentiation Excess capacity and exit barriers Cost conditions –Extent of scale economies –Ratio of fixed to variable costs

12. Fall 2000MGTO321 -- L1 & L2 (Dr. JT Li)12 Identifying Key Success Factors Pre-requisites for success What drives competition? What are the main dimensions of competition? How intense is competition? How can we obtain a superior competitive position? Analysis of demand Who are our customers? What do they want? KEY SUCCESS FACTORS Analysis of competition What drives competition? What drives competition? What are the main dimensions of competition? What are the main dimensions of competition? How intense is competition?How intense is competition? How can we obtain a superior competitive position?How can we obtain a superior competitive position? What do customers want? How does the firm survive competition Pre-requisites for success