To accompany contemprory strategy analysis concepts techiniques application chapter03slides

Industry Industry Analysis: Analysis: The The Fundamentals Fundamentals OUTLIN E • The objectives of industry analysis • From environmental analysis to industry analysis • Porter’s Five Forces Framework • Applying industry analysis • Industry & market boundaries • Identifying Key Success Factors The The Objectives Objectives of of Industry Industry Analysis Analysis • To understand how industry structure drives competition, which determines the level of industry profitability • To assess industry attractiveness • To use evidence on changes in industry structure to forecast future profitability • To formulate strategies to change industry structure to improve industry profitability • To identify Key Success Factors From From Environmental EnvironmentalAnalysis Analysis to to Industry IndustryAnalysis Analysis The national/ international economy Technology Government & Politics The natural environment THE INDUSTRY ENVIRONMENT • Suppliers • Competitors • Customers Demographic structure 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 Profitability Profitabilityof ofUS USIndustries Industries Median return on equity (%), 1999-2002 Pharmaceuticals Tobacco Household & Personal Products Food Consumer Products Medical Products & Equipment Beverages Scientific & Photographic Equipt Commercial Banks 16.0 Publishing, Printing Petroleum Refining Apparel Computer Software Electronics, Electrical Equipment Furniture Chemicals Computers, Office Equipment Health Care 26.8 Gas & Electric Utilities 10.5 22.0 Food and Drug Stores 10.3 20.5 Motor Vehicles & Parts 9.8 20.3 Home Equipment 9.5 18.8 Railroads 9.0 18.8 Hotels, Casinos, Resorts 8.0 16.5 Insurance: Life and Health 7.6 Building Materials, Glass 7.0 14.3 Metals 6.0 14.3 Semiconductors & 14 Electronic Components 5.8 13.5 Insurance: Property & Casualty 5.3 13.3 Food Production 5.3 13.3 Telecommunications 3.5 12.8 Forest and Paper Products 3.5 11.8 Communications Equipment (4.0) 11.5 Airlines (34.8) Long-term Profitability of US Industries: EVA and ROA, 1986-97 Industry EVA/CE ROA Tobacco Computer software & services Personal care products Medical products Printing & advertising Food processing Drugs & research Beverages Textiles (0.1) Fashion retailing Building materials Metals Telecom services Discount retailing Semiconductors & components 9.4 5.9 2.8 2.7 (2.0) 2.5 0.7 0.2 7.4 (0.4) (0.6) (1.0) (1.2) (1.2) (1.3) Industry EVA/CE ROA 14.4 Paper and products (1.5) Broadcasting and 10.4 publishing (1.5) Cars & trucks (1.5) 8.0 Healthcare services (1.7) 9.5 Machine tools, hand tools (1.7) Appliances and home 2.3 furnishings (1.9) 8.5 Telephone equipment & 7.6 services (2.1) 5.6 Plastics & products (2.6) Computers & peripherals (3.1) 3.1 9.3 Electrical products (3.3) 5.6 Aerospace & defense (3.3) Railroads (3.4) 4.6 Airlines (4.1) 6.4 Steel (6.4) Cable television (7.2) 6.0 Electronics (9.2) Average Source: Hawawini et al, Strategic Management Journal (January 2003) (1.1) 5.2 6.0 2.2 3.3 6.0 3.4 7.0 5.3 4.6 4.8 3.8 1.0 2.3 (3.3) 3.5 5.6 The The Determinants Determinants of of Industry Industry Profitability Profitability key influences: • The value of the product to customers • The intensity of competition • Relative bargaining power at different levels within the value chain The The Spectrum Spectrum of of Industry Industry Structures Structures Perfect Competition Oligopoly Duopoly Monopoly Concentration Many firms A few firms Two firms One firm Entry and Exit Barriers No barriers Product Differentiation Homogeneous Product Potential for product differentiation Perfect Information flow Imperfect availability of information Information Significant barriers High barriers Porter’s Porter’s Five Five Forces Forces of of Competition Competition Framework Framework SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS POTENTIAL Threat of ENTRANTS new entrants Threat of Rivalry among existing firms SUBSTITUTES substitutes Bargaining power of buyers BUYERS The The Structural Structural Determinants Determinants of of Competition Competition BUYER POWER • Buyers’ price sensitivity • Relative bargaining power THREAT OF ENTRY •Capital requirements •Economies of scale •Absolute cost advantage •Product differentiation •Access to distribution channels •Legal/ regulatory barriers •Retaliation INDUSTRY RIVALRY •Concentration •Diversity of competitors •Product differentiation •Excess capacity & exit barriers •Cost conditions BUYER POWER • Buyers’ price sensitivity • Relative bargaining power SUBSTITUTE COMPETITION • Buyers’ propensity to substitute • Relative prices & performance of substitutes Threat Threat of of Substitutes Substitutes Extent of competitive pressure from producers of substitutes depends upon: • Buyers’ propensity to substitute • The price-performance characteristics of substitutes The The Threat Threat of of Entry Entry Entrants’ threat to industry profitability depends upon the height of barriers to entry The principal sources of barriers to entry are: • Capital requirements • Economies of scale • Absolute cost advantage • Product differentiation • Access to channels of distribution • Legal and regulatory barriers • Retaliation Bargaining Bargaining Power Power of of Buyers Buyers Buyer’s price sensitivity Relative bargaining power • Cost of purchases as % of buyer’s total costs • How differentiated is the purchased item? • How intense is competition between buyers? • How important is the item to quality of the buyers’ own output? • Size and concentration of buyers relative to sellers • Buyer’s information • Ability to backward integrate Note: analysis of supplier power is symmetric Rivalry Rivalry Between Between Established Established Competitors Competitors The extent to which industry profitability is depressed by aggressive price competition depends upon: • Concentration (number and size distribution 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 Profitability Profitability and and Market Market Growth Growth ROI (%) 30 25 20 15 10 Return sales Return onon sales Return investment Return onon investment Cash flow/Investment Cash flow/ Investment -5 to 5% 5% to Less than -5% < -5% -5% to 0-5% to00 to 5% 5% to10% 10%> 10% Over 10% ANNUAL RATE OF GROWTH OF MARKET DEMAND The The Impact Impact of of Unionization Unionization on on Profitability Profitability None Percentage of employees unionized 1%-35% 35%-60% 60-75% >75% ROI (%) 25 24 23 18 19 ROS (%) 10.8 9.0 9.0 7.9 7.9 ROI = Return on Investment ROS = Return on Sales Applying Applying Five Five Forces Forces Analysis Analysis Forecasting Industry Profitability • Past profitability a poor indicator of future profitability • If we can forecast changes in industry structure we can predict likely impact on competition and profitability Strategies to Improve Industry Profitability • What structural variables are depressing profitability • Which can be changed by individual or collective strategies? Drawing Drawing Industry Industry Boundaries Boundaries :: Identifying Identifying the the Relevant Relevant Market Market • What industry is BMW in: – World Auto industry – European Auto industry – World luxury car industry? • Key criterion: SUBSTITUTABILITY – On the demand side : are buyers willing to substitute between types of cars and across countries – On the supply side : are manufacturers able to switch production between types of cars and across countries • May need to analyze industry at different levels for different types of decision Identifying Identifying Key Key Success Success Factors Factors Pre-requisites forsuccess success Pre-requisites for What customers want? Analysis of demand • Who are our customers? • What they want? How does the firm survive competition Analysis of competition • What drives competition? What are drives •• What the competition? main •dimensions What are the of main competition? dimensions of competition? ••How Howintense intenseis iscompetition? competition? Howcan canwe weobtain obtainaasuperior ••How superior competitive competitive position? position? KEY SUCCESS FACTORS Identifying Identifying Key Key Success Success Factors Factors Through Through Modeling Modeling Profitability: Profitability: The The Airline Airline Industry Industry Profitability Income ASMs = Yield = Revenue RPMs • Strength of competition on routes • Responsiveness to chaanging market conditions • % business travelers x Load factor - Unit Cost x RPMs ASMs - • Price competitiveness • Efficiency of route planning • Flexibility and responsiveness • Customer loyalty • Meeting customer requirements • Achieving differentiation advantage ASM = Available Seat Miles Expenses ASMs • Wage rates • Fuel efficiency of planes • Employee productivity • Load factors • Administrative overhead RPM = Revenue Passenger Miles Identifying Identifying Key KeySuccess Success Factors Factors by byAnalyzing AnalyzingProfit ProfitDrivers: Drivers: Retailing Retailing Sales mix of products Return on Sales Avoiding markdowns through tight inventory control Max buying power to minimize cost of goods purchased ROCE Max sales/sq foot through: *location *product mix *customer service *quality control Sales/Capital Employed Max inventory turnover through electronic data interchange, close vendor relationships, fast delivery Minimize capital deployment through outsourcing & leasing SUMMARY: SUMMARY: What What Have Have We We Learned? Learned? Forecasting Industry Profitability • • Past profitability a poor indicator of future profitability If we can forecast changes in industry structure we can predict likely impact on competition and profitability Strategies to Improve Industry Profitability • • What structural variables are depressing profitability? Which can be changed by individual or collective strategies? Defining Industry Boundaries • • Key criterion: substitution The need to analyze market competition at different levels of aggregation (depending on the issues being considered) Key Success Factors • Starting point for the analysis of competitive advantage ... in industry structure to forecast future profitability • To formulate strategies to change industry structure to improve industry profitability • To identify Key Success Factors From From Environmental... • To identify Key Success Factors From From Environmental EnvironmentalAnalysis Analysis to to Industry IndustryAnalysis Analysis The national/ international economy Technology Government & Politics... Return onon investment Cash flow/Investment Cash flow/ Investment -5 to 5% 5% to Less than -5% < -5% -5% to 0-5% to0 0 to 5% 5% to1 0% 10%> 10% Over 10% ANNUAL RATE OF GROWTH OF MARKET DEMAND The