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)