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Review: Classes 1 - 3Review: Classes 1 - 3
• Objective of Business. Intro. Prisoners’ Dilemma (Game Theory intro)
• What is Strategy? IBP: Cost strategy, KSF changed, Constraints on options.
• Resources & Capabilities. Starbucks: Customer Buying? Value Chain - internal view, Growth Perils. A-B: Power of consistent, unique strategy; power of leader; potential environmental change?
• Tonight: External view
THE INDUSTRYENVIRONMENTCompany TJB• Suppliers X TJB
• Competitors• Customers
Social structure
The national/ The national/ international international
economyeconomy
TechnologyTechnology
GovernmentGovernment& Politics& Politics
The natural The natural environmentenvironment
Demographic Demographic structurestructure
Social structureSocial structure
From Environmental Analysis to Industry Analysis
From Environmental Analysis to Industry Analysis
•The Industry Environment lies at the core of the Macro Environment.
•The Macro Environment impacts the firm through its effect on the Industry Environment.
Context: PEST
The Spectrum of Industry StructuresThe 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
Porter’s Five Forces of Competition ** Framework
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
Book
Threat of SubstitutesThreat of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of substitutes.
My worksheet
The Threat of EntryThe 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 BuyersBargaining 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 supplierpower is symmetric
Rivalry Between Established Competitors
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
-5
0
5
10
15
20
25
30
Return on sales Return oninvestment
Cashflow/Investment
MarketGrowth Less than -5% -5% to 0 0 to 5% 5% to 10% Over 10%
Figure 3.5. The Impact of Growth on Profitability
Surprised?
Applying Five - Forces AnalysisApplying Five - Forces Analysis
Forecasting Industry Profitability• Past profitability a poor indicator of future
profitability. TJB - ?? PharmDrugs v Steel, Airlines
• 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? POA
INDUSTRY RETURN ON EQUITY (1985-'97) Drugs 20.3 Food and kindred products 14.8 --of which Tobacco products 19.6 Instruments and related products 11.2 Electrical, and electronic equipment 11.0 Rubber and misc. plastics products 10.7 Printing and publishing 10.6 Fabricated metal products 9.9 Aircraft, guided missiles, and parts 9.7 Petroleum and coal products 9.6 Retail trade corporations 8.9 Paper and allied products 8.5 Textile mill products 7.6 Wholesale trade corporations 6.5 Stone, glass and clay products 6.8 Machinery, exc. electrical 6.0 Nonferrous metals 5.6 Motor vehicles and equipment 5.5 Iron and Steel 2.6 Mining corporations 2.7 Airlines 1.1
Profitability of US Industries, 1985-97Profitability of US Industries, 1985-97
Industry EVA/CE MV/CE ROATobacco 0.0936 3.2314 14.3979Computer Software & Services 0.0590 4.0331 10.3530Entertainment 0.0442 2.8240 8.4403
Personal Care 0.0281 2.8700 8.005Medical Products 0.0276 3.0987 9.5384Food Processing 0.0251 1.7090 8.5306IT Consulting Services 0.0206 2.7136 6.5260Drugs & Research 0.0065 3.3807 7.6439Chemicals 0.0029 1.8195 7.9589Beverages 0.0018 2.1688 5.5960Eating Places 0.0014 2.3246 6.8867Textiles -0.0012 1.9392 7.4093Building Materials -0.0056 1.5521 5.6250Metals -0.0101 1.7447 -Telephone Companies -0.0124 1.3680 4.6181Semiconductors & Components -0.0126 2.0560 5.9906Aluminium -0.0128 1.4844 -Paper & Products -0.0149 1.2902 5.2342Broadcasting & Publishing -0.0149 1.8042 6.0059Cars & Trucks -0.0150 0.9473 2.1660Computers & Peripherals -0.0306 1.7332 3.1143Electrical Products -0.0327 1.3056 4.6276Aerospace & Defence -0.0331 1.3982 4.8390Railroads -0.0340 1.0257 3.7780Airlines -0.0416 1.1676 0.9866Construction & Engineering -0.0458 1.6749 -Steel -0.0647 1.2967 2.2646Mean (all industries) -0.0110 1.8930 5.5989
US Industrial Profitability, 1986-97: EVA, Market Value Added, and ROA
High
Med.
Low
Strong Average Weak
Mark
et
Att
racti
ven
ess
How
mu
ch
Pro
fit
is t
here
to b
e m
ad
e?
Competitive Strength: What % of profit can WE make?
X Plant is first entry into the Y Industry
Market Attractiveness & Competitive Strength for various ZZZ markets
SectorIndustry 1 Industry 2 Industry 4Industry 3 Industry 5
Drawing Industry Boundaries : Identifying the Relevant Market
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
• May need to analyze industry at different levels for different types of decision
The Value Net The Value Net
COMPANY
CUSTOMERS
SUPPLIERS
COMPLEMENTORSCOMPETITORS
Book.Complexity& Tools
SUPPLIERS
POTENTIALENTRANTS
SUBSTITUTES
BUYERS
INDUSTRYCOMPETITORS
Rivalry amongexisting firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new entrantsThreat of
substitutes
COMPLEMENTS
The suppliers of complements create value for the industry
and can exercise bargaining power
Five Forces or Six? Introducing ComplementsFive Forces or Six? Introducing Complements
Dynamic CompetitionDynamic Competition
Porter framework assumes(a) industry structure drives competitive behavior(b) Industry structure is stable.
But---competition also changes industry structure Schumpeterian Competition: A“perennial
gale of creative destruction” where innovation overthrows established market leaders
Hypercompetition: “intense and rapid competitive
moves….creating disequilibrium through continuously creating new competitive advantages and destroying, obsoleting or neutralizing opponents’ competitive advantages
Applying Five Forces to Emerging E-commerce Markets
Applying Five Forces to Emerging E-commerce Markets
• The more unstable is industry structure—the less helpful is analysis based upon industry structure.
• Taking account of time—willingness to endure losses today in order to reap profit tomorrow • General structural features of digital, networked industries: Low entry barriers + Extreme scale economies +
Network externalities = Winner-take-all markets= Intense competition
Pre-requisites for success
• What drives competition? • What are the main dimensions of competition? • How intense is competition? • How can we obtain a superior competitive position?
Analysis of demand
• Who are our customers?
• What do they want?
KEY SUCCESS FACTORS
Analysis of competitionAnalysis of competition
• What drives competition?What drives competition?
• What are the main What are the main dimensions of competition?dimensions of competition?
•How intense is competition?How intense is competition?
•How can we obtain a superior How can we obtain a superior competitive position?competitive position?
What do What do customers want?customers want?
How does the firm How does the firm survive competitionsurvive competition
Pre-requisites for success
Identifying Key Success FactorsIdentifying Key Success Factors
Identifying Key Success Factors Through Modeling Profitability: The
Airline Industry
Identifying Key Success Factors Through Modeling Profitability: The
Airline Industry
Profitability = Yield x Load factor - Unit Cost Income Revenue RPMs Expenses ASMs RPMs ASMs ASMs
= x -
• Price competitiveness. • Efficiency of route planning.• Flexibility and responsiveness.• Customer loyalty.• Meeting customer requirements.
• Wage rates.• Fuel efficiency of planes.• Employee productivity.• Load factors.• Administrative overhead.
• Strength of competition on routes.
• Responsiveness to cha- anging market conditions
• % business travelers.
• Achieving differentia- tion advantage ASM = Available Seat Miles RPM = Revenue Passenger Miles
ROCE
Return on Sales
Sales/Capital Employed
Sales mix of products
Avoiding markdowns throughtight inventory control
Max. buying power to minimizecost of goods purchased
Max. sales/sq. foot through:*location *product mix*customer service *quality control
Max. inventory turnover through electronic data interchange, closevendor relationships, fast delivery
Minimize capital deploymentthrough outsourcing & leasing
Identifying Key Success Factors by Analyzing Profit Drivers: Retailing
Identifying Key Success Factors by Analyzing Profit Drivers: Retailing
SUMMARY: What Have We Learned?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
• Working at different levels of aggregation
SUMMARY (continued)SUMMARY (continued)
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
• Key to understanding digital, networked markets is to understand their underlying structure (esp. scale economies and network externalities)
Industry EvolutionIndustry Evolution
• The industry life cycle
• Industry structure, competition, and
success factors over the life cycle.
• Anticipating and shaping the future.
OUTLINE
The Industry Life Cycle The Industry Life Cycle
Drivers of industry evolution :• demand growth• creation and diffusion of knowledge
Introduction Growth Maturity Decline
Ind
us
try
Sa
les
Time
Product and Process Innovation Over TimeProduct and Process Innovation Over Time
Time
Ra
te o
f in
no
va
tio
n
Product Innovation
Process Innovation
Standardization of Product Features in AutosStandardization of Product Features in Autos
FEATURE INTRODUCTION GENERAL ADOPTIONSpeedometer 1901 by Oldsmobile Circa 1915Automatic transmission 1st installed 1904 Introduced by Packard as an
option, 1938. Standard on Cadillacs early 1950s
Electric headlamps GM introduces, 1908 Standard equipment by 1916All-steel body GM adoptes 1912 Standard by early 1920sAll-steel enclosed body Dodge, 1923 Becomes standard late 1920sRadio Optional extra 1923 Standard equipment, 1946Four-wheel drive Appeared 1924 Only limited availability by 1994Hydraulic brakes Introduced 1924 Became standard 1939Shatterproof glass 1st used 1927 Standard features in Fords 1938Power steering Introduced 1952 Standard equipment by 1969Antilock brakes Introduced 1972 Standard on GM cars in 1991Air bags GM introduces, 1974 By 1994 most new cars equipped
with air bags
How Typical is the Life Cycle Pattern?How Typical is the Life Cycle Pattern?
• Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries. Individual products do not.
• Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline.
• Industries may experience life cycle regeneration.
Sales Sales
1900 ‘50 ‘60 ‘90 1930 50 60 90 MOTORCYCLES TV’s
• Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre-determined pattern of industy development. Tools, Complexity
ColorB&W Portable
HDTV ?
Evolution of Industry Structure over the Life CycleEvolution of Industry Structure over the Life Cycle
INTRODUCTION GROWTH MATURITY DECLINE DEMAND Affluent buyers Increasing Mass market Knowledgeable,
penetration replacement customers, resi- demand dual segments
TECHNOLOGY Rapid product Product and Incremental Well-diffused innovation process innovation innovation technology
PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation commoditization
MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity URING intensive mass-production
TRADE -----Production shifts from advanced to developing countries-----
COMPETITION Technology- Entry & exit Shakeout & Price wars, consolidation exit (p. 315)
KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design for uction, ration- alization, low
cost sourcing
The Driving Forces of Industry EvolutionThe Driving Forces of Industry Evolution
Customers become more knowledgeable
& experienced
Diffusion of
technology
Demand growthslows as market
saturation approaches
Customers become more price conscious
Products become more standardized
Distribution channels consolidate
Production shifts to low-wage countries
Price competition intensifies
Bargaining power of distributors
increases
BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION
Excess capacity increases
Production becomes less R&D & skill-intensive
Quest for new sources of differentiation
Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
Stages in undertaking multiple Scenario Analysis:• Identify major forces driving industry change• Predict possible impacts of each force on the industry
environment• Identify interactions between different external forces• Among range of outcomes, identify 2-4 most likely/ most
interesting scenarios: configurations of changeforces and outcomes
• Consider implications of each scenario for the company• Identify key signposts pointing toward the emergence of
each scenario• Prepare contingency plan
Tool, POA, Option Value
1880s 1920s 1960s 2000
Mail order, catalogueretailinge.g. Sears Roebuck
ChainStores
e.g. A&P
DiscountStores
e.g. K-MartWal-Mart
“CategoryKillers”
e.g. Toys-R-Us,Home Depot
InternetRetailers
e.g. Amazon;Webvan
WarehouseClubs
e.g. Price ClubSam’s Club
Innovation & Renewal over the Industry Life Cycle: Retailing
Innovation & Renewal over the Industry Life Cycle: Retailing
Review: New tools. Use Insights from to develop POA
Review: New tools. Use Insights from to develop POA
• 4 C’s, PEST• 5 Forces => Market Attractiveness, can combine w/
Competitive Strength => Corporate Strategy• Key Success Factors• Life Cycle• Scenarios, option value• Value Equivalence Line - next• Strategic Groups & competing w/in and between, p. 127 -
129
BCG’s Strategic Environments MatrixBCG’s Strategic Environments Matrix
Small BigSIZE OF ADVANTAGE
Many
Few
SOURCESOF
ADVANTAGE
FRAGMENTED SPECIALIZATION
apparel, housebuilding pharmaceuticals, luxury cars
jewelry retailing, sawmills chocolate confectionery
STALEMATE VOLUME
basic chemicals, volume jet engines, food supermarkets
grade paper, ship owning motorcycles, standard
(VLCCs), wholesale banking microprocessors
BCG’s Analysis of the Strategic Characteristics of Specialization Businesses
BCG’s Analysis of the Strategic Characteristics of Specialization Businesses
high low
ENVIRONMENTAL VARIABILITY
ABILITY TOSYSTEMATIZE
low
high
CREATIVE EXPERIMENTAL
fashion, toiletries, magazines
general publishing food products
PERCEPTIVE ANALYTICAL
high tech luxury cars, confectionery
paper towels