University:
California State University, Northridge
Course:
MGT 693 | Strategic Management
Academic year:

2024
Views:

248

Pages:

21
Author:

zagrizem20r

Industry Analysis: The Fundamentals OUTLINE • 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 Objectives of Industry 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 Environmental Analysis to Industry 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 of US Industries (selected industries only) Median return on equity (%), 1999-2005 Household & Personal Products Pharmaceuticals Tobacco Food Consumer Products Securities Diversified financials Beverages Mining & crude oil Petroleum Refining Medical Products & Equipment Commercial Banks Scientific & Photographic Equipt. Apparel Computer Software Publishing, Printing Health Care Electronics, Electrical Equipment Specialty Retailers Computers, Office Equipment 22.7 22.3 21.6 19.6 18.9 18.3 18.8 17.8 17.3 17.2 15.5 15.0 14.4 13.9 13.5 13.1 13.0 13.0 11.7 Gas & Electric Utilities 10.4 Food and Drug Stores 10.0 Motor Vehicles & Parts 9.8 Hotels, Casinos, Resorts 9.7 Railroads 9.0 Insurance: Life and Health 8.6 Packaging & Containers 8.6 Insurance: Property & Casualty 8.3 Building Materials, Glass 8.3 Metals 8.0 Food Production 7.2 Forest and Paper Products 6.6 Semiconductors & Electronic Components 5.9 Telecommunications 4.6 Communications Equipment 1.2 Entertainment 0.2 Airlines (22.0) The Profitability of Global Industries: Return on Invested Capital, 1963-2003 Utilities 6.2 Telecom s ervices 6.5 Trans poration 6.9 Energy 7.7 Materials 8.4 OVERALL AVERAGE 9 Retailing 9 Cons um er durables and apparel 9.5 Food retailing 9.6 Capital goods 9.9 Autom obiles and com ponents 9.9 Technology hardware and equipm ent 10.3 Hotels , res taurants , leis ure 10.3 Food, beverages , tobacco 11 Healthcare equipm ernt and s ervices 11.3 Sem iconductors 11.9 Com m ercial s ervices 12.8 Media 14.7 Com puter s oftware and s ervices 15 Hous ehold and pers onal products 15.2 Pharm aceuticals 18.4 0 5 10 Average ROIC 1963-2003 (%) 15 20 The Determinants of Industry Profitability 3 key influences: • The value of the product to customers • The intensity of competition • Relative bargaining power at different levels within the value chain. The Spectrum of Industry 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 Five Forces of Competition 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 Structural Determinants of 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 of Substitutes Extent of competitive pressure from producers of substitutes depends upon: • Buyers’ propensity to substitute • The price-performance characteristics of substitutes. The Threat of 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 Power of 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 Between Established 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 and Market Growth ROI (%) 30 25 20 15 10 5 0 Return sales Return onon sales Return investment Return onon investment Cash flow/Investment Cash flow/ Investment -5 0 to 5% 5% to Less than -5% < -5% -5% to 0-5% to 00 to 5% 5% to10% 10%> 10% Over 10% ANNUAL RATE OF GROWTH OF MARKET DEMAND Supplier Power: The Impact of Unionization on Profitability 25 Profitability (%) 20 15 ROI (%) 10 ROS (%) 5 0 0% 1%-35% 36%-60% 61%-75% Percentage of employees unionized over 75% Applying Five - Forces 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 of these variables can be changed by individual or collective strategies? Drawing Industry Boundaries : Identifying the Relevant 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 • We may need to analyze industry at different levels of aggregation for different types of decision Identifying Key Success Factors Pre-requisites forsuccess success Pre-requisites for What do customers want? Analysis of demand • Who are our customers? • What do they want? How does the firm survive competition Analysis of competition • What drives competition? What are drives •• What the competition? main • What are the dimensions 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 Key Success Factors Through Modeling Profitability: The Airline Industry Profitability Income ASMs = Yield = Revenue RPMs • Strength of competition on routes. • Responsiveness to chaanging market conditions • % business travelers. • Achieving differentia- tion advantage x Load factor - Unit Cost x RPMs ASMs - Expenses ASMs • Price competitiveness. • Wage rates. • Efficiency of route planning. • Flexibility and responsiveness. • Customer loyalty. • Meeting customer requirements. • Fuel efficiency of planes. ASM = Available Seat Miles • Employee productivity. • Load factors. • Administrative overhead. RPM = Revenue Passenger Miles Identifying Key Success Factors by Analyzing Profit Drivers: 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: What Have We 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

Industry Analysis: The Fundamentals

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