View
215
Download
0
Tags:
Embed Size (px)
Citation preview
Today: Industry AnalysisAdministrative issues
Current Events
Porter’s Five Forces Framework
How To Analyze Industry Environments
Walmart Case Analysis
Team assignment
Assign new case: RCA Records
WEBSITE:
www.sba.pdx.edu/faculty/stephens/ss.html
The External Environmental
Think in terms of Opportunities and Threats - the “O” and “T” of TOWS
Relate Strategic Objectives to “O” and “T”increased sales and/or market sharenew product offeringsprocessing technology innovation
Continually scan to identify “O’s” and “T’s”
The External Environmental
The General Environment
Demographic: age, ethnicity, household size, occupation
Economic: income distribution, inflation, interest rates, exchange rates, urbanization
Political/Legal: consumer and environmental protection, unions
The External Environmental
The General Environment
Social and Cultural: conservatism/ liberalism, nesting, materialism
Technological: e-tailing, intranets, diffusion rates
Global: nationalism, transnational corporations, cultural differences
The External Environmental
The Industry Environment
The following factors in an Industry…Bargaining Power of Buyers
Bargaining Power of SuppliersThreat of New EntrantsThreat of Substitute Products
...Determine Intensity of Competitive Rivalry
The External Environmental
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
Competitive Rivalry
The Industry Environment
The External EnvironmentalThreats of New Entrants decreases if barriers to
entry are high... Economies of Scale are high Product Differentiation is high Capital Requirements are high Switching Costs are high Access to Distribution Channels is limited Cost Disadvantages Independent of Scale are high Government Policy is restrictive
Expected Retaliation is high
Threat
of
New Entrants
The External Environmental
Suppliers are likely to be powerful if: Supplier industry dominated by a few firms Suppliers’ products have few substitutes Buyer is not important customer Suppliers’ product is an important input Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat to forward integration
Bargaining Power of Suppliers
The External Environmental
Buyers are likely to be powerful if: They are concentrated or purchases are large relative to
seller’s sales Purchase accounts for a significant fraction of supplier’s
sales Product unimportant to quality Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Buyer has full information Buyer presents a credible threat to backward integration
Bargaining Power
of
Buyers
The External Environmental
The keys to evaluating Substitute Products are: Products with improving price/performance tradeoffs
relative to present industry products
For example:
Electronic security systems in place of security guards
Email and fax machines in place of overnight mail delivery
Threat of Substitute Products
The External Environmental
Future objectives: goals and risks, ability to achieve
Current strategy: competitive advantages
Retaliation: How will competitor(s) respond to your actions?
Assumptions: Can competitor(s) adapt to changing environment?
Capabilities: relative strengths and weaknesses?
Understanding Competitors
Barriers to Entry & Exit
If some industries are more profitable, why don’t many companies enter?
Barriers to entry
If some industries are so unprofitable, why don’t most companies leave?
Barriers to exit
Barriers To Entry
Costs new entrants have to bear to enter the industry
A barrier to entryincreases the expected costs of entry for new entrantsor limits their potential market share
Barriers To Entry
Factors Increasing Costs:Economies Of Scale
Capital Requirements
Absolute Cost Advantages
Learning Curve / Experience Curve
Barriers To Entry: Economies of Scale
Lower unit cost with large production
Economies of scale can arise fromFixed costs
Distribution and marketing
Barriers To Entry: Capital Requirements
The higher the capital requirement, the higher the barrier?
Barriers To Entry: Absolute Cost Advantages
An incumbent’s absolute cost advantage may be an entry barrier (variable costs)
Proprietary technology
Government subsidiaries
Scarce resources, such as least cost supplies, locking up shelf space or distribution channels, or hiring best engineers.
Barriers To Entry: Learning Curve / Experience Curve
What is the learning curve/experience curve?
Costs decline as a function of past cumulative output
Barriers To Entry: Market Share and Other
Factors Limiting Market Share Product DifferentiationAdvertising / Brand ImageAccess To DistributionExpected Retaliation
Other FactorsGovernment PolicyReputation
Exit barriers? Closing costs can be very high Sometimes, it is cheaper to lose money now (by remaining
open), than to close, reopening only when market conditions are better.– Reputation effects
– Taking a charge against earnings
– Start-up costs
– Organizational learning.
Differentiate fixed costs and sunk costs– If costs are not sunk, barriers are low (i.e. airline industry)
– If costs are sunk, barriers are high (i.e. auto plant)
Two ways around barriers to entry
Fly under the radar!– Find a small market niche, and develop your skills
there– Gradually expand out of the niche towards more
lucrative customers
Operate the toll gate!– Work upstream or downstream of the market, and
integrate into the lucrative market.
Entry and Sustainable Competitive Advantage
A ParadoxLong-run profitable industries are those with significant entry barriers An entry barrier is an industry condition that makes entry attractive
Solution to the paradoxThe question is not whether there should be entry, but who should enter
In other words, the key determinant of entry decisions is the presence of a sustainable competitive advantage.
It may well pay to incur large entry costs, if a firm can create a sustainable competitive advantage over incumbents or potential future entrants.
What do we mean by buyer power?
PreferencesHow consumer tastes are distributed and how strong those tastes are
Related to consumer branded goods
Bargaining Powerthe consumer’s ability to exercise monopoly power
Related to industrial markets
Supplier PowerSuppliers affect our ability to achieve a competitive advantage through:
the strength of their bargaining power
Suppliers can be broadly defined as the supplier of any input:
LaborManagementTechnologyPhysical Materials
Why don’t businesses “switch” suppliers more often?
Inertia—– before remote controls, people didn’t “channel surf”
Switching costs: – Changing your major as a freshman is a whole lot less
traumatic than changing it next spring. (sunk costs)
Idiosyncratic assets– If you are a one of a kind buyer, your suppliers are few
Search costs– how do you find a new, reputable supplier?
A Supplier Matrix
Buyer is vulnerable Mutual Dependence
Anonymous market transactions
Buyer wields monopsony power
Importance of the supplier in the buyer’s input base
Importance of the buyer in the supplier’s customer base
High
High
Low
Low
From: Oster, Sharon, 1999. Modern Competitive Analysis. P.43
How do we identify substitutes?
Substitutes are products that fulfill the same function but are different products
Beer vs. wine
Air conditioner vs. fans
Industries Evolve Over Time As The Relationships Between The Five Forces Change
time
dem
an
d
A Sixth Force - Presence of “Complementors”
ComplementorsIndustry Participants whose businesses enhance the value of yours
The Opposite of Substitutes
The Emergence of “Networks” of Organizations
ExamplesComputer Manufacturers & Software Makers
Consumer Electronics & Entertainment Companies
The Central IssueHow to get “complementors” to make strategic investments which mutually benefit both companies
How to increase the size of the pie rather than compete over the slices
Some Important Points About Industry Analysis
The four external forces are interrelated to one anotherChanges in one force will cause subsequent changes in other forcesFirm actions will help to shape the industry environmentOften the most important thing to understand about an industry is understanding how the forces are “linked” together.
Some linkages to think about
The threat of substitutes suggests– That there is a “hole in the barrier to entry”– buyers have more power because they can go
elsewhere
The power of suppliers suggests that– You as a buyer are weak– You don’t have alternatives
» No substitutes» No new applicants
What does competitive rivalry mean to barriers to entry?
The Uses of Industry Analysis
Static Analysis -How Do We Explain Current Rivalry and Profitability?
Dynamic Analysis -Where Is The Industry Headed In The Future?
Next Time: Internal Analysis
Current Events
Case Analysis: RCA Records
Read Chapter 4
Team Time
WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html
Questions for RCA Records
How are industry changes affecting traditional record companies, new entrants, artists, and retailers?Describe RCA’s business strategy.Where do you envision the music industry in three to five years?What, if anything, should RCA do differently?