Industry Analysiso

7/27/2019 Industry Analysiso

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Industry Analysis: The Fundamentals

The objectives of industry analysis From environmental analysis to industry analysis Porters Five Forces Framework Applying industry analysis Industry & market boundaries Identifying Key Success Factors

OUTLINE


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The Objectives of IndustryAnalysis

To understand how industry structure drives competition,which determines the level of industry profitability.

To assess industry attractiveness

To use evidence on changes in industry structure toforecast future profitability

To formulate strategies to change industry structure toimprove industry profitability

To identify Key Success Factors


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THE INDUSTRYENVIRONMENT

Suppliers Competitors Customers

Social structure

The national/international

economy

Technology

Government& Politics

The naturalenvironment

Demographicstructure

Social structure

From Environmental Analysisto Industry Analysis

The Indu s t ry Env i ronm en t l i es a t the co re o f the Macro Env i ronm en t . The Macro Env i ronm en t impac ts the f i rm th ro ugh i t s e ff ec t on the Indu s t ry

Env i ronmen t .


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The Determinants of IndustryProfitability

3 key inf lu ences : The value of the product to customers

The intensity of competition

Relative bargaining power at different levelswithin the value chain.


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The Spectrum of Industry Structures

Concentration

Entry and Exit Barriers

Product

Differentiation

Information

Perfect Compet i t ion

Ol igopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No barriers Significant barriers High barriers

Homogeneous

ProductPotential for product differentiation

PerfectInformation flow Imperfect availability of information


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Porters Five Forces of Competition Framework

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

newentrants

Threat of

substitutes


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THREAT OF ENTRY Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distributionchannels

Legal/ regulatory barriers Retaliation

SUBSTITUTECOMPETITION Buyers propensity

to substitute Relative prices &

performance of

substitutes

BUYER POWER Buyers price sensitivity Relative bargaining

power

INDUSTRY RIVALRY Concentration Diversity of competitors

Product differentiation Excess capacity &exit barriers

Cost conditions

BUYER POWER Buyers price sensitivity Relative bargaining

power

The Structural Determinants of Competition


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Threat of Substitutes

Exten t o f com pet it ive p ressure f rom pro duc ers o f

subs t i tu tes d epends up on :

Buyers propensity to substitute

The price-performance characteristics of substitutes.


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Bargaining Power of Buyers

Buyers price sensitivity Relative bargaining power

Cost of purchases as %of buyers total costs.

How differentiated is thepurchased item?

How intense iscompetition betweenbuyers?

How important is theitem to quality of the

buyers own output?

S ize and concentration of buyers relative tosellers.

Buyers information . Ability to backward

integrate.

Note: analys is o f sup pl ier

pow er i s sym metr ic


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Rivalry Between Established

CompetitorsThe ex ten t to w hich indus t ry p rof i tab i l i ty i s depressed by aggress ive p r ice comp et i t ion d epends u pon:

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


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Applying Five - Forces Analysis

Forecast in g Ind us try Prof i tabi l i ty Past profitability a poor indicator of future

profitability. If we can forecast changes in indus t ry s t ruc ture

we can predict likely impact on compet i t ion and prof i tabi l i ty .

Strategies to Imp rov e Ind us try Prof i tabi l i ty What structural variables are depressing

profitability Which can be changed by individual or

collective strategies?


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Drawing Industry Boundaries : Identifyingthe 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 differenttypes of decision


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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?

An alys i s o f demand

Who are our customers?

What do they want?

KEY SUCCESS FACTORS

Analys i s o f com pet i tion What drives competition? What are the maindimensions of competition? How intense is competition? How can we obtain a superior competitive position?

What docustomers want?

How does the firmsurvive competition

Pre-requisites for success

Identifying Key Success Factors


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Identifying Key Success FactorsThrough Modeling Profitability: The

Airline IndustryProfi tabi l i ty = Yield x Lo ad factor - Unit Cost

Income Revenue RPMs ExpensesASMs 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. Administrativeoverhead.

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

In the airline industry, the percentage of seats filled by fare-paying passengers (passenger loadfactor) or the percentage of cargo space filled by paid cargo (cargo load factor).


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ROCE

Return on Sales

Sales/CapitalEmployed

Sales mix of products

Avoiding markdowns throughtight inventory control

Max. buying power to minimize

cost of goods purchased

Max. sales/sq. foot through:* location *product mix*customer service *quality control

Max. inventory turnover throughelectronic data interchange, closevendor relationships, fast delivery

Minimize capital deploymentthrough outsourcing & leasing

Identifying Key Success Factorsby Analyzing Profit Drivers: Retailing


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SUMMARY: What Have We Learned?

Forecast ing Indu stry Prof i tabi l i ty Past profitability a poor indicator of future profitability. If we can forecast changes in indus t ry s t ruc tu re we can predict

likely impact on compet i t ion and prof i tab i l i ty .

S trategies to Im pro ve Indu stry Prof i tabi l i ty What structural variables are depressing profitability? Which can be changed by individual or collective strategies?

Defining Ind ustry B ou ndaries Key criterion: subs t i tu t ion The need to analyze market competition at different levels of

aggregation (depending on the issues being considered)

Key Succ ess Fac tors Starting point for the analysis of competitive advantage

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Industry Analysiso