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