Industry Analysis

1. Industry Analysis

2. Introduction • Industry analysis takes two broad forms • Porter’s Five Forces Analysis • Brandenberger and Nalebuff’s Value Net • Outcome • assessment of industry and firms performance • identification of key factors affecting performance • show how changes in business environment affect performance • assess effectiveness of generic business strategies

3. Introduction (cont.) • Limitations • restricted view of demand and growth • conducted at the industry rather than firm level • limited role for government • qualitative rather than quantitative • difficult to combine results with different combinations of “high”, “medium” and “low” into an overall assessment • The five forces analysis is an organizing framework not a set of principles

4. Five-Forces Analysis: overview Entry Internal Rivalry Buyer Power Supplier Power Internal Rivalry Substitutes and Complements

5. Internal Rivalry • Jockeying for market share • Define the market • assess methods of competition: price and non-price • price rivalry is intense when • there are many sellers • products of different sellers are relatively homogeneous • there are low consumer switching costs • terms of sale/prices are unobservable; prices slow to adjust • sales orders are large and infrequent • there is excess capacity • there is little history of facilitating practices • erodes profits by driving down prices

6. Internal Rivalry (cont.) • Non-price rivalry • advertising • product proliferation • R&D • Erodes profits by raising costs • Rivalry is intense • when consumers are motivated to shop around and can do so • when cost increases cannot be passed on in prices

7. Entry Internal Rivalry Buyer Power Supplier Power Substitutes and Complements Five-Forces Analysis: overview Entry

8. Entry • Profits attract entry which erodes profits • steals incumbents’ market share • increases internal rivalry • Entry is affected by • economies of scale and scope • consumer attitudes to reputation and brand loyalty • ease of access to key inputs • technology; locations; distribution channels

9. Entry (cont.) • Entry is affected by: • experience curve • network externalities • advantage to firms with large installed base • government regulation protecting incumbents • expectations regarding post-entry competition • exit costs • if entry creates specific assets that are unrecoverable

10. Entry Internal Rivalry Buyer Power Supplier Power Substitutes and Complements Five-Forces Analysis: overview Substitutes and Complements

11. Substitutes and Complements • Distinct from entry • may be in related but not identical industries • new substitutes can be really problematic • render existing products obsolete • gain from learning economies • influenced by and take advantage of changes in fashion

12. Substitutes and complements • Substitutes erode profits • Complements boost demand • Factors to consider • availability • product performance characteristics • price/value characteristics • little threat/opportunity if priced too high relative to value • price elasticity of industry demand • if high the increased prices drive away consumers

13. Entry Supplier Power Buyer Power Internal Rivalry Buyer Power Supplier Power Substitutes and Complements Five-Forces Analysis: overview

14. Supplier and Buyer Power • Supplier power looks at strength of an industry’s suppliers • can they erode profits through their pricing policies? • An industry’s suppliers have power if • they are concentrated • their customers are locked in through specific investments • Need not relate to importance of the input • for example if major input is produced competitively

15. Supplier and buyer power • Buyer power is similar • ability of an industry’s customers to erode profits • by negotiating tough prices • by demanding specific product design • Supplier and buyer power have many features in common

16. Supplier and buyer power • Supplier (and buyer) power is affected by • concentration • a highly concentrated supplying or buying industry exercises more power • purchase volume: price discounts to large buyers • availability of substitutes • relationship-specific investment • threat of forward integration • ability to price discriminate

17. Coping with the Five Forces • Identifies threats to profitability for all firms • How to circumvent? • position to outperform rivals • develop a cost or differentiation advantage • identify particular industry segment that is less competitive • change the five forces • create switching costs (tie-in sales; warranty policy;..) • entry-deterring strategies • forward/backward integration to limit supplier/buyer power

18. Coopetition and the Value Net • Brandenberger and Nalebuff identify a weakness in the five forces analysis • views all firms as threats to profitability • But interaction can be positive as well as negative • firms increasingly cooperative • with suppliers/buyers • with direct competitors • Cooperation can take many forms

19. Coopetition • Efforts to set technology standards • HDTV; DVD • Promote favorable regulatory environment • Cooperation with suppliers • to improve quality • to improve efficiency: JIT • Cooperation with buyers to reduce inventory costs

20. The Value Net • Looks at suppliers, customers, competitors, complementary firms • assesses threats and opportunities • is there unexplored potential for profitable cooperation? • example of DVDs • five-forces analysis predicts intense brand rivalry • but the value net introduces the possibility of • cooperation among manufacturers to boost acceptance • cooperation with suppliers to boost supplies of discs