Analyzing an Industry’s Structure

Game-1303 Intro to Game DevSara R. Farr

Game Industry Segments

Some of the Game Industry Segments are:• Console (Hardware or Software)• PC• Handheld• Mobile• Casual• Online (Console or PC)• MMO• Education or Serious Games• Social Networks• Retail or Direct Distribution

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 identify opportunities to change industry structure to impose industry profitability

• To identify Key Success Factors

Porter’s 5 Forces

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:

Porter’s Five Forces of Competition Framework

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

P5 Analyses• For each factor in the five forces

analysis, analysts should determine:– The strength of each force!

– The effect on industry profitability!

– The possibility of change!

Porter’s Five Forces of Competition Framework

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

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

Competitive Rivalry

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Rivalry is more intense:• Many or equal competitors• Slow industry growth• High fixed costs• No differentiation• No switching costs• High exit barriers

Porter’s Five Forces of Competition Framework

SUBSTITUTES

INDUSTRYCOMPETITORS

Rivalry amongexisting firms Threat of

substitutes

Extent of competitive pressure from producers of substitutes depends upon:

•Buyers’ propensity to substitute

•The price-performance characteristics of substitutes.

Threat of Substitutes

SUBSTITUTES

INDUSTRYCOMPETITORS

Rivalry amongexisting firms Threat of

substitutes

• Other Computer Games• Other Games• Other activities• Other sources for entertainment• Other sources for one’s time• Other things perceived more

important

Porter’s Five Forces of Competition Framework

POTENTIALENTRANTS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Threat ofnew

entrants

Incumbents discourage entry by establishing barriers

• Barriers to entry (Bain) include:– Brand loyalty (product differentiation)– Cost advantages

• Production (knowledge, patents, processes, EOS)

• Resource control (raw materials, labor, equipment)

• Access to low-cost capital• Distribution channel control

– Switching Costs– Government regulations (policies,

taxes, EPA)– Retaliation

Threat of New Entrants

POTENTIALENTRANTS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Threat ofnew

entrants

Barriers to Entry in Games

• Economy of scale• Development time• Development cost• Access to media titles• Product differentiation• Capital requirements• Switching costs• Access to marketing & distribution

channels

Porter’s Five Forces of Competition Framework

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

Bargaining Power of Buyers

Buyer’s price sensitivity Relative bargaining power

• Cost of purchases as %of buyer’s total costs.

• How differentiated is thepurchased item?

• How intense is competition between buyers?

• How important is the item to quality of the buyers’ own output?

• Size and concentration ofbuyers relative to sellers.

• Buyer’s information. • Ability to backward

integrate.

Bargaining Power of Buyers

Buyers have more leverage when …• Purchase large volumes• Significant portion of disposable

income• Products are undifferentiated• Switching costs are low• Backward integration• Buyer has full information

Game Buyers …• Purchase small volumes• Insignificant portion of

disposable income• Products are differentiated by

platform, marketing• Switching costs high (games

sold “as-is”)• Buyer has limited information

Bargaining Power of Suppliers

Supplier’s price sensitivityRelative bargaining

power of game developers

• Few suppliers (Publishers)• No competition from substitutes• Industry sold to not important• Supplier has important role• Forward integration• Buyer has full information

• Size and concentration of developer relative to publisher.

• Publisher has information. • Little ability to forward

integrate.• Publisher license critical

The Spectrum of Industry Structures

Concentration

Entry and ExitBarriers

ProductDifferentiation

Information

Perfect Competition Oligopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No barriers Significant barriers High barriers

HomogeneousProduct Potential for product differentiation

PerfectInformation flow Imperfect availability of information

• Companies that sell complements to the enterprises own products.

• i.e.: Sony PlayStation – Game companiesBeer – Chips

High complementor supply/quality = opportunityLow complementor supply/quality = threat

6th Force - Complimentors

The Value Net

COMPANY COMPLEMENTORSCOMPETITORS

CUSTOMERS

SUPPLIERS

Applying Six - 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 competitionand profitability.

Strategies to Improve Industry Profitability• What structural variables are depressing

profitability• Which can be changed by individual or

collective strategies?

Porter’s Limitations

Porter framework assumes(a) industry structure drives competitive behavior,(b) Industry structure is stable.

But --- competition also changes industry structureSchumpeterian Competition: A“perennialgale of creative destruction” where innovationoverthrows established market leaders.

Hyper competition: “intense and rapid competitive moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsolescing or neutralizing opponents’ competitive advantages.

Pre-requisites for success

• What drives competition? • What are the main dimensions of competition?

• How intense is competition? • How can we obtain asuperior competitive position?

Analysis of demand

• Who are our customers?

• What do they want?

KEY SUCCESS FACTORS

Analysis of competition

• What drives competition?

• What are the main dimensions?

• How intense is competition?

What do customers want?

How does the firm survive competition

Pre-requisites for success

Identifying Key Success Factors

SUMMARY

Key Success Factors• Starting point for the analysis of competitive advantage.

Game Theory• Valuable in analyzing competitive rivalry between small number of

players.• Analysis of cooperation & competition.• Offers insights into the structure of the game; competitive

interaction; use of specific strategic plays.

Industry Analysis & The New Economy• Porter 5 forces analysis less useful when industry structure

unstable.