Strategy: A View from the TopChapter 4 Analyzing an Industry

Katelyn ReedVenessa Rodriguez

Kristen HodgeMonica Longer

Defined in terms of four dimensions:1. Products2. Customers 3. Geography4. Stage in the production-distribution

What is an Industry?

Industry Structure and Proter’s Five Forces Model

Industry Evolution Entry barriers can fall

◦ Deregulation Or rise

◦ Brand Identity Mac vs. PC

Models of Industry Evolution◦ Help explain how and why industries change

Four Trajectories of Change Radical

◦ Industry threatened with obsolescence of core activities and core assets at the same time

◦ Ex. Travel clients turned to internet-based service profiders

Progressive◦ The most common type of change.

Occurs when neither form of obsolescence is imminent

Ex. Long-haul trucking industry

Four Trajectories of Change Cont. Creative

◦ The core assets are threatened, but the core activities keep their value.

◦ Ex. Movie studios having to produce multiple blockbusters

Intermediating◦ The core activities are threatened, but the core

assets keep their value.◦ Ex. Museums are losing power as educators to

more modern communication methods

Four Trajectories of Change Cont.

Threatened Not Threatened

Threatened

Radical Change(travel industry)

Creative Change(movie studios)

Not Threatened

Intermediating Change

(museums)

Progressive Change(trucking industry)

Core Activities

Core

Ass

ets

Industry Structure, Concentration, and Product Differentiation Changes of Industry Structure

◦ Vertical to horizontal ◦ Ex. The multimedia industry

Started with 3 vertically integrated distinct businesses, evolved into 5 primarily horizontal segments

Those 5 businesses compete in 5 segments: content, packaging, the network, distribution, and display devices

Strategic advantage for a company is determined by their relative positions within one of the 5 segments

Vertical integration is probably going to become an important strategy again when economies of scale and scope become critical to success and a principle driver behind another round of industry consolidation.

Industry Structure, Concentration, and Product Differentiation Changes in the degree of industry

concentration◦ Industry structures are concentrated when

economies of scale are important, market share & total unit costs are inversely related.

Rule of Three and Four◦ “Many stable markets will have only three

significant competitors and the market shares of these competitors will roughly be proportioned as four-to-two-to-one, reflecting a concentration level of approximately 70% of total industry sales for the three competitors.“

Industry Structure, Concentration, and Product Differentiation Studies have shown as markets mature,

they occasionally become less concentrated.◦ This suggests the relationship between relative

share and const position is less pronounced for mature markets than it is for immature markets.

◦ Provides an explanation on why larger companies lose market share as the industry matures. Their cost advantage diminishes over time.

◦ In fragmented industries, which have a low degree of concentration, no single company has a major market share. They are highly differentiated, or a commodity status.

Product Life Cycle Analysis The product life cycle model

◦ Based on the theory of diffusion of innovations and its logical counterpart, the pattern of acceptance of new ideas.

◦ Considered the best known model of industry evolution.

◦ Suggests that an industry goes through 4 stages Introduction, Growth, Maturity, Decline

◦ The different stages are defined by changes in the growth rate of industry sales

◦ Reflects the result of first and repeat adoptions of a product/service over time.

Product Life Cycle Analysis Evolution of an industry or product class

depends on:◦ Competitive strategies or rival firms, changes in

customer behavior, and legal and social influences.

Introduction stage◦ High level of uncertainty

Competitors don’t know which segments to target or how. Customers aren’t familiar with the new product/service, benefits of it, or how much they should pay for it.

Product Life Cycle Analysis Growth Stage

◦ Less uncertain and have more intense competition Largest number of rivals, competitive shakeouts

occur at the end of the growth stage Mature Stage

◦ Industries are relatively stagnant in terms of sales growth. Product development can create growth spurts in

specific segments Technological breakthroughs alter market

development and competitive order

Product Life Cycle Analysis Declining Stage

◦ Industries are considered unattractive, but strategies can produce profits.

Problems with the Product Life Cycle Analysis◦ Has little predictive value◦ Industry growth doesn’t always follow an S-

shaped pattern◦ Doesn’t acknowledge that companies can affect

the growth curve through strategic actions (ex, increasing the pace of innovation or repositioning their offerings)

New Patterns Competition for standards is usually

between the developer of one standard and another group that favors a different standard. ◦ Winning standard gives its adopters a large share

of future profits◦ Winning standard is decided by market share

C.K. Prahalad’s Model of Industry Evolution 3 Phases Competition is focused mainly on ideas, product

concepts, technology choices, and the building of a competency base.◦ Primary goal: learn more about the future potential of the

industry and the key factors that will determine success or failure

Competition is more about building a viable coalition of partners that will support a standard against competing formats.◦ Vigorously compete in phase 3

The battle for market share for end products and profits.

Methods for Analyzing an Industry Strategic Segmentation

◦ The process of dividing an industry/market into relatively homogenous, minimally overlapping segments that benefit from distinct competitive strategies

◦ Linked with strategic targeting and positioning for competitive advantage

Figure 4-4

*Companies using segmentation, targeting, and positioning compete in Red Oceans.*

Competitor Analysis Market boundaries are no longer well

defined Not all about market share Customer & competitor profiles constantly

changing New questions must be asked.

◦ Ex. Do consumer companies compete at the business unit level, at the corporate level, or both?

Analyzing Immediate Competitors Who are our firm’s direct competitors now

and in the near term? What are their major strengths and

weaknesses? How have they behaved in the past? How might they behave in the future? How will our competitors’ actions affect our

industry and company?

Assign Roles

• Assign Roles to competitors– Leaders– Challengers– Followers– Nichers

Assigning labels provides insight into the competitive dynamics.

Leaders & Challengers Leaders

◦ Focus on expanding total demand◦ Important to defend market share

Challengers◦ Concentrate on single target

Followers & Nichers Followers

◦ Imitation◦ Compete in a few segments

Nichers◦ Focus on narrow piece of market

Geographic areas, specialty products or services

Strategic Groups Strategic Groups

◦ A set of firms that face similar threats & opportunities, which are different from the threats & opportunities faced by other sets of companies in the same industry Ex. Fast food chains Rivalry is more intense

The group of product-market combinations that a firm serves makes up its product/market scope.

Four analytical techniques give insight into the attractiveness of a company’s product/market scope.◦ Market Analysis◦ Growth Vector Analysis◦ Gap Analysis◦ Profit Pool Analysis

Analyzing Product/Market Scope

Used to quantify the attractiveness of a particular industry/segment.

Also useful for developing a better understanding of the key success factors and core competencies a company will need to succeed in achieving its strategic objectives.

Market Analysis

Assess 7 things◦ The actual and potential size of the market◦ Market and segment growth◦ Market and segment profitability◦ The underlying cost structure and trends◦ Current and emerging distribution systems◦ The importance of regulatory issues◦ Technological changes

Market Analysis Continued

Four types of growth:◦ Concentration- within current market scope.◦ Market Development- adding new customer

segments.◦ Product/technology development- adding new

products.◦ Diversification- change in both customer

segments and products/technology.

Growth Vector Analysis

When analyzing potential growth directions, it is useful to perform a similar analysis on key competitors to determine:◦ Growth potential◦ Competitive position◦ Potential for improvements◦ Intentions◦ If product markets are evolving

Growth Vector Analysis Continued

Growth Vector Analysis Continued

Gap analysis is the process of comparing an industry’s market potential to the combined current market penetration by all competitors. It can lead to additional paths of growth.

Plotting growth vectors often reveals where industry sales are below their potential (a gap).

Gap Analysis

Types of gaps:◦ Product line gaps: the unavailability of product

versions for specific applications or usage occasions.

◦ Distribution gaps: overlooked customer segments that have difficulty accessing the product.

◦ Usage gaps: underdeveloped applications for the product.

◦ Competitive gaps: opportunities to displace competitors that offer weak product entries or questionable performance.

Gap Analysis Continued

Gap Analysis Continued

Profit Pool- the total amount of profit earned at all points along the industry’s value chain.

Important to recognize the difference in revenues and profits.◦ Automobile industry

Revenue: car manufacturing and distribution Profit: leasing, insurance and loans

Analysis of profit pool helps executives understand how the industry is evolving, why profit pools form where they have, and how the profit distribution is likely to change.

Profit Pool Analysis

Mapping a profit pool:◦ Define the pool’s boundaries◦ Estimate its overall size◦ Allocate profits to the different value chain

activities◦ Verify the results

Profit Pool Analysis Continued