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Strategic Management
Industry Analysis
Professor Jeff Dyer
BYU, Marriott School
Sources of Superior Profitability
Superior Profitability
AttractiveIndustry
Firm Resources& Capabilities
Professor Jeff Dyer
BYU, Marriott School
Historical ROE Spreads Across Industries(1976-91)
0 2 4 6 8 10 12 14 16 18
-17
-15
-13
-11
-9
-7
-5
-3
-1
1
3
5
7
9
11
13 Soft DrinksEthical DrugsTobacco
Grocery Stores
Food WholesalersPublishing
Integrated Oil Hotels/GamingBasic Chemicals
Tire & RubberPackaging & Container
Metals & MiningAuto & Truck Mfg.
Textiles
Steel
Air Transport
Oil Field ServicesNumber of Industries
Equity Spread (ROE-Ke)
Source: Marakon Associates, Value Line
meanstd.dev.
= -
=1 3
5 0
.
.
Professor Jeff Dyer
BYU, Marriott School
Perspectives on Strategic Management
Industry Opportunities
STRATEGY
Firm Resources and Capabilities
“IndustryStructure”
“FirmCapability”
-Analyze industry structure-Superior product positioning in an attractive industry
-Analyze firm resources-Develop unique resources and capabilities
HOW TO BUILDSUSTAINABLECOMPETITIVEADVANTAGE
Professor Jeff Dyer
BYU, Marriott School
“Industry Structure” Perspective “Five Forces” Analysis of Competitive Strategy
Bargaining Power of Suppliers
Threat ofNew Entrants
Rivalry amongExisting
Competitors
Bargaining Power of Buyers
Threat of Substitutes
Professor Jeff Dyer
BYU, Marriott School
Barriers to EntryWhat factors keep potential competitors out?
Scale economies– e.g., aerospace industry
Scope economies– e.g., retailing
Capital requirements– e.g., aerospace industry
Switching costs– e.g., Windows operating system
Access to distribution– e.g., soft drinks
Product Complexity– e.g., supercomputers, microprocessors
Entry deterring regulations– e.g., Tobacco
D
A
B C
Industry
Professor Jeff Dyer
BYU, Marriott School
Threat of SubstitutesWhat alternatives are available to customers
Direct substitution with the same functionality
– diesel vs gas engines– DirecTV vs cable
Eliminating need for product
– water meters vs flat rate
A
B C
Industry
Customers
D
Professor Jeff Dyer
BYU, Marriott School
Nature and Focus of RivalryWhy industries are more or less “competitive”?
Factors– Industry growth rates
Where to secure growth
– Exit barriers e.g., specialized assets, emotional barriers
– Fixed costs e.g. capacity increments
– Lack of product differentiation e.g. differences in functionality, performance
– Switching costs
A
B C
Industry
Competitive rivalry can focus on many factors, including price,
quality, technology, features, service, etc.
Professor Jeff Dyer
BYU, Marriott School
Supplier or Buyer PowerHow can my suppliers or customers extract value
Buyer Power Buyer concentration
– Few vs many customers Volume of purchases
– Large vs small purchase decisions
Available alternative products– Competitive products
Threat of backward integration– Ability to become a competitor
Switching costs– Threat of switching suppliers
Supplier Power Supplier concentration
– Few vs many suppliers Supplier volume
– Large vs small purchase decisions
Product differences– Dependence on unique features
Threat of forward integration– Ability to become competitor
Switching costs– Limitations on ability to change
suppliers
Professor Jeff Dyer
BYU, Marriott School
How Industry Structure Influences Profitability
0
10
20
30
40
50
60
70
80
90
100
Farmers5-10% ROE
Frozen Entree Makers 20-25% ROE
Food Retailers 8-12% ROE
Percent ofMarket
Others(>10,000)
ConAgra(1%)
Stouffer(34%)
Swanson(25%)
Campbell(17%)
Green Giant(4%%)
Others (>10)(20%)
Safeway (4%)Kroger(3%)American (2%)
Others (>1000)(90%)
Professor Jeff Dyer
BYU, Marriott School
SUPPLIER POWERHIGH
•strong labor unions•concentrated aircraft makers
THREAT OF ENTRYHIGH
•entrants have cost advantages•moderate capital requirements•little product differentiation •deregulation of governmental barriers
INDUSTRY COMPETITIVENESS
HIGH•many companies•little differentiation•excess capacity•high fixed/variable
costs•cyclical demand
THREAT OF SUBSTITUTES
MEDIUM
•Autos/train for short distances
BUYER POWERMEDIUM/HIGHBuyers extremely price sensitiveGood access to informationLow switching costs
Example:
Airlines
Source: J. de la Torre
Professor Jeff Dyer
BYU, Marriott School
SUPPLIER POWERLOW
THREAT OF ENTRYLOW
•economies of scale•capital requirements for R&D and clinical trials•product differentiation •control of distribution channels•patent protection
INDUSTRY COMPETITIVENESS
LOW
•high concentration•product differentiation•patent protection•steady demand growth•no cyclical fluctuations of demand
THREAT OF SUBSTITUTESLOW
No substitutes.(Changing as managed care
encourages generics.)
BUYER POWER LOWPhysician as buyer: Not price sensitive No bargaining power.(Changing with managed care.)
Example:
Pharmaceutic
als
Source: J. de la Torre
Professor Jeff Dyer
BYU, Marriott School
Successful Strategies Should:
Minimize buyer power– (e.g., build customer loyalty)
Offset supplier power– (e.g., alternative source(s))
Avoid excessive rivalry– (e.g., attack emerging vs entrenched segments)
Raise barriers to entry– (e.g., make preemptive investments)
Reduce the threat of substitution– (e.g., incorporate their benefits)
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