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Feedbackreinforces or
suggests changes
in managers'
mental models
Managers' Mental Models
Industry environments + How to compete + Appropriate size/diversity, how businesses are related, how diversification should be managed + How to organize
Decisions about
Business Definition
Decisions about
Organizational
Structure
Decisions about
Business Strategy
Decisions about
Corporate Strategy
and Diversification
Market Position,Resources, and
Capabilities
Performanceand
CompetitiveAdvantage
Industry Analysis
All companies face competition.
For resources, customers, sales revenues, and profits.
All companies face uncertain industry environments.
Managers must position the organizations strategically in order to compete successfully.
•This is what we call business definition.
•Requires that managers understand the dynamics of their firms’ markets before formulating strategies.
Salient Issues Regarding Industry
Rapidly growing markets (emerging industries) tend to be less competitive and often attract new entrants.
Usually provide sufficient room in competitive space for making some mistakes.
Mature, concentrated markets provide firms with very little breathing room.
Mistakes by one firm can significantly impact entire industry.
•One firm’s price reductions can set off industry-wide price war.
Industry Life Cycles
performance of all firms in an industry will explain about 20% of the variation in the performance of any single firm in that industry.
Firm Performance & Industry
How Much Does Industry Matter? How Much Does Industry Matter?
One cannot generalize that the “industry is all that matters.”
Metals
Pharmaceuticals
Semiconductors
Temporary Help
Beverages
Airlines
13%
10%
5%
6%
8%
8%
Average Return on Assets of Average Return on Assets of Different IndustriesDifferent Industries
Average Return on Assets in the Average Return on Assets in the Automobile Industry: 1993 - 1997Automobile Industry: 1993 - 1997
High- and Low-Performing High- and Low-Performing Firms in the Steel IndustryFirms in the Steel Industry
High- and Low-Performing Firms High- and Low-Performing Firms in the Pharmaceuticals Industryin the Pharmaceuticals Industry
The Five Forces ModelThe Five Forces Model
Industry structure will impact the competitive behavior
Firms’ conduct will influence the average performance of firms in that industry
As intensity of forces increases, the industry environment becomes more hostile and overall industry profitability will decline.
BargainingPower ofSuppliers
Threat ofSubstitutes
Threat ofNew
Entrants
BargainingPower ofBuyers
IndustryCompetitors
Intensity of
Rivalry
Five Forces ModelBarriers to EntryEconomies of ScaleExperience effectsBrand IdentificationSwitching CostsTechnologyCapital
Number of Important SuppliersImportance of componentssupplies
Availability of close SubstitutesValue price ratio
Number of ImportantBuyersImportance to Buyers
Number of Firms Industry Growth RateExcess Capacity
Steel:Steel: A Five Force ConspiracyA Five Force ConspiracyConsistent low industry performance average.
All but one of the five forces are intense.
•Remember that as the intensity of any of the forces becomes higher, the industry becomes less attractive and industry performance tends to decline.
Threat of Entry
Threat is very real. Initial investment required is very large, but several Minimills have entered industry in last 25 years.
Threat of Substitutes
Significant factor in this industry.
•Aluminum
•Plastics
•Composite materials
Power of Steel Buyers
Also significant.
•Small number of companies account for very large proportion of steel purchases. Normal threat is to take their business elsewhere.
Rivalry
Very intense.
•Key reason is the significant overcapacity which still exists today despite the closing of many mills over the last 20 years.
–Mills try to keep running at full capacity in order to spread their fixed costs over a large volume.
–Price of steel today is about the same as 20 years ago
Pharmaceuticals:Pharmaceuticals: Best of all Best of all Possible Industry Worlds? Possible Industry Worlds? Marked contrast to steel industry.
Suppliers exercise little power because most of raw materials are commodities that can be obtained from a large number of suppliers.
Significant barriers to entry reduce the threat of new entrants.
R&D costs and personnel.Operating finances for many years while new drugs are developed and approved by FDA.Must build large professional sales force.
Few true substitutes exist.Very small market (in relative terms) of natural medicines.
Healthy living styles have not been adopted by majority of U.S. population.
Buyers exercise very little control.Sick patients typically do not argue with drug company over price of product.
•Normally, insurance company pays the bill.
Rivalry.
Industry enjoys an almost “friendly” competition.
•Patent protection for 17 years.
Summary
Low intensity of all five forces helps to explain the high performance of firms in this industry.
•New HMO realities may change that situation. Many patents due to expire soon.
Two options if firms are in unattractive industries:
•Diversify their firms away from or exit completely the industry.
–Firms often lack sufficient resources to do this.
–Diversification can be risky for firms with little diversification experience.
•Attempt to minimize the impact of any of the forces that are acting to make the industry unattractive.
–Shield or protect their companies from the power of the forces. Certain action may lead to allegations of collusion or other unfair practices (Microsoft vs. Justice Department).
Evolution of Computer Industry was inconsistent with Porter’s Five Force Model.
Incumbent firms not only did not erect sufficient barriers to new entrants, but the entrenched incumbents experienced declines in profitability.
New frameworks and models needed to explain the evolution of industries and better understanding of industry environments.
Any industry may be analyzed along three dimensions, but analyst must identify relevant labels.
Customers
(the “who” dimension)
•Age
•Disposal income
•Value
•Lifestyle
Dynamic Model of Industry Analysis
Products and Services
(the “what” dimension)•Size•Availability•Accessories•Cost
Technologies
(the “how” dimension)•State-of-the-Art?•Effectiveness