Strategy: A View from the Top Chapter 4 : Analyzing an Industry

1. Strategy: A View from the TopChapter 4: Analyzing an Industry Group 5: Jason Bullard Grant Gerhardt Patrick Kirkland Laura Moore Jeffri Vaughn Chet Visser

2. Industrial Analysis • Defining an Industry • Dimensions of Industry • Competitive Analysis and Porter’s Five Forces

3. Industries can be defined in multiple ways • Is the competition between products, companies, or networks of alliance partners? • Should we analyze the rivalry at the business level or the corporate level? • Should we differentiate between regional competition and global rivalry?

4. Misspecification of an industry can be costly • To narrow can lead to strategic myopia causing great opportunities or dangers to be overlooked. • Ex. Railroads judged to be competing with just other railroads. • To broad can prevent a meaningful assessment of the competition. • Ex. Identifying a firm such as Microsoft as simple a high technology firm

5. Defining an Industry • An industry is best defined in terms of four dimensions. • Products • Customers • Geography • Stages in the Product-distribution Pipeline

6. Products • Products can be broken into two components: • Function- What the product or service does. • Ex. Some cooking machines bake and some fry. • Ex. One ship is a freighter and one is designed to carry passengers. • Technology- How does it perform the function. • Ex. Some cooking machines use gas and some use electricity. • Ex. One type of power plant uses coal and another type uses nuclear fission.

7. Customers • Here we distinguish between what industry the firm competes in from what market it caters to. • Industry- the general product type the company produces. • Ex Do they make aircraft, ships, computers, and cars. • Market- which particular customer base in the industry does the firm serve. • Ex. Do they make and sell cargo ships or passenger ships. • Ex. Does our firm make industrial super computer or do we make personal computers.

8. Geography • This asks where the company competes. Are they a world wide company or do they just serve the domestic market. • Ex. Southwest’s geography is southern half of the United States, where as Continental has many international destinations

9. Stages in the Product-Distribution Pipeline • Here we ask where the company is in the industry. Do they make components for a final product in the industry, or do the assemble the finished product? • Ex. Boeing Jetliners- Different aerospace companies make different components that eventually are installed in Boeings jets. • The engines can be made by GE, Rolls Royce, or Pratt and Whitney. • Instrumentation is made by other companies such as Honeywell or Raytheon and then installed in the aircraft at the Boeing factory

10. Competitive Analysis • Porters five forces help describe the intensity of the rivalry in the industry. • This intensity can drastically affect the industry’s profit potential. • Usually the more intense the rivalry the lower the profit potential.

11. Porters Five Forces • Threat of new Entrants- the level of difficulty in entering an industry • Likelihood of new entrants depends on: • What barriers exist. • Economies of Scale • Product Differentiation • Capital Requirements • Cost Disadvantages • Access to Distribution Channels • Government Regulations • How current competitors will react

12. Powerful suppliers and buyers- influence competition by exerting pressure over prices, quality, or the quantity demanded or sold. • Suppliers powerful when: • Few Dominant companies • Switching among suppliers difficult • Suppliers can integrate forward • Industry generates only a small portion of supplier’s revenue • Buyers powerful when: • Few of them or a they buy a large volume • Product relatively undifferentiated • Buyer’s purchase is a significant amount of the seller’s revenue • Buyers can integrate backward

13. Substitute Products and Services- thesecontinually threaten the industry and put a limit on prices and profitability. • Substitute Products or Services that require the most scrutiny are: • Those that show a price performance improvements • Products produce by companies with deep pockets

14. Rivalry Among Participants- the number, size, and competitive prowess of its participants, the industries growth rate, and related characteristics. • Intense Rivalry exists when: • Competitors numerous and equal in size • Industry growth is slow • Fix costs are high, and or products are perishable • Capacity increases are secured in large increments • Exit barriers are high

15. The Bargaining power of Customers- Are the customers powerful (Bulk Orders) or are they not (Low Volume Orders). • High Power Customers- buy in large quantities and have a greater say on the price or customization of a good. This situation makes the rivalry more intense. • Low Power Customers- buy in smaller quantities and have a very little say in the price or customization of a good. This situation tends not to produce intense rivalries.

16. Porter’s Five Forces ModelFigure 4-1

17. Industry Evolution • Industry structures change over time • Models of industry evolution can help us understand how and why industries change over time. • The word evolution can be deceiving, suggesting a process of slow, gradual change • Structural change can occur with remarkable rapidity, as is the case when a major technological breakthrough enhances the prospects of some companies at the expense of others

18. Four Trajectories of Change • A recent study suggests that industries evolve according to one of four distinct trajectories of change • Radical • Progressive • Creative • Intermediating. • Two types of obsolescence define these paths of change • A threat to an industry’s core activities, which account for a significant portion of an industry’s profits • Example: The steady decrease in importance of a dealer’s traditional sales activities as online shopping has increased • A threat to the industry’s core assets, which are valued as differentiators. • Example: The eroding brand value of many prescription drugs in the face of generic competition.

19. Four Trajectories of Change, Cont. • Radical change occurs when an industry is threatened with obsolescence of both its core activities and core assets at the same time. • Progressive change can be expected when neither form of obsolescence is imminent. • Creative and intermediating change paths are defined by the dominance of one of the two forms of obsolescence. • Core assets are threatened in creative change. • Core activities are threatened in intermediating change.

20. Trajectories of Industry ChangeFigure 4-2

21. Industry Structure, Concentration, and Product Differentiation • The convergence of telecommunications, computers, and television • “Rule of Three and Four”

22. Product Life Cycle Analysis • Product life cycle model—Based on the theory of diffusion of innovations and its logical counterpart, the pattern of acceptance of new ideas—is perhaps the best known model of industry evolution. • The different stages are defined by changes in the rate of growth of industry sales, generally thought to follow an S-shaped curve, reflecting the cumulative result of first and repeat adoptions of a product or service over time.

23. Product Life Cycle Analysis • The product life cycle can be a useful analytical tool for strategy development. Research has shown that the evolution of an industry or product class depends on the interaction of a number of factors, including the competitive strategies of rival firms, changes in customer behavior, and legal and social influences. • Growth environments are less uncertain and competitively more intense. • Mature industries, although the most competitively stable, are relatively stagnant in terms of sales growth. • Declining industries are typically regarded as unattractive, but clever strategies can produce substantial profits.

24. New Patterns • Many new industries evolve through some convergence in technological standards. • C.K. Prahalad has proposed a model that describes industry evolution in three phases. • In the first phase, competition is mostly focused on ideas, product concepts, technology choices, and the building of a competency base. The goal at this stage is to learn more about the future potential of the industry and about the key factors that will determine future success or failure.

25. New Patterns, Cont. • In the second phase, competition is more about building a viable coalition of partners that will support a standard against competing formats. Companies cooperating at this stage my compete vigorously in phase three of the process—the battle for market share for end products and profits. • As industry boundaries become more permeable, structural changes in adjacent industries (industries serving the same customer base with different products or services, or industries using similar technologies and production processes) or related industries (industries supplying components, technologies, or complementary services) increasingly influence an industry’s outlook for the future.

26. New Patterns, Cont. • Finally, change sometimes is simply a function of experience. Buyers generally become more discriminating as they become more familiar with a product and its substitutes and, as a consequence, they are likely to be more explicit in their demands for improvements.

27. Methods for Analyzing an Industry • The method usually used for analyzing an industry is StrategicSegmentation. • This strategically looks at a subset of the entire customer market, competitor analysis that concentrates on individual corporations and/or their major units, or a group analysis of all firms that face similar threats and opportunities.

28. Strategic Segmentation • The process of dividing an industry or market into relatively homogeneous, minimally overlapping segments that benefit from distinct competitive strategies. • This is put together by a six-step process.

29. The Six-Steps Process • Strategic Segmentation • Strategic Targeting • Positioning Customer Characteristics Product-related Variables Service-related Variables

30. The Total Process • Strategically target a specific segment and position the firm for competitive advantage. • Must identify the segments that offer the best chance for long-term, sustainable results. • It also considers the long-term defensibility of different segments by analyzing barriers to entry such as capital investment intensity, proprietary technologies and patents, geographical location, tariffs, and other trade barriers.

31. Customer Characteristics, product, and service-related variables • Segmentation is very complex because there are a lot of ways to divide an industry, and these characteristics and variables are the most widely used variables in segmentation.

32. Customer Descriptors • Geography • Size of customer firm • Customer Type • Customer Lifestyle Age Income Sex

33. Product- or Service-Related Segmentation • User type • Level of use • Benefits sought • Competitive offerings Purchase frequency Loyalty Price Sensitivity

34. Competitor Analysis • Analyzing a business or industry to come up with a competitive strategy is much harder than it used to be because of the lack of boundaries from one market to another. • Because of our ever-changing business market, we must pair competitive analysis and the drivers of industry evolution.

35. Analyzing Immediate Competitors Who are our firm’s direct competitors now and in the near term? What are their major strengths and weaknesses? How have they behaved in the past? How might they behave in the future? How will our competitors’ actions affect our industry and company?

36. Competitor Identity’s • Leader • Challengers • Followers • Nichers

37. Leaders • Focus on expanding total demand by attracting new users, developing new uses for their products or services, and by encouraging more use of existing products and services

38. Challengers • Typically concentrate on a single target-the leader.

39. Followers and Nichers • Compete with more modest strategic objectives.

40. Potential Competitors • Firms that aren’t currently in the industry but could enter at a relatively low cost should be considered as potential competitors.

41. Too Many to be Analyzed • Normally, there are too many competitors that can be analyzed individually • To make analyzing more manageable, strategic groups were formed. • A strategic group is a set of firms that face similar threats and opportunities, which are different from the threats and opportunities faced by other sets of companies in the same industry. • Rivalry is often more intense within strategic groups than between them, because members of the same strategic group focus on the same market segments with similar strategies and resources.

42. Analyzing Product/Market Scope • Four techniques: • Market Analysis • Growth Vector Analysis • Gap Analysis • Profit Pool Analysis

43. Market Analysis • Purpose: To quantify the attractiveness of a particular industry or segment • Also useful for developing a better understanding of the key success factors and core competencies needed for achieving strategic objectives

44. Market Analysis • Includes an assessment of the following: • Actual and potential size of the market • Market and segment growth • Market and segment profitability • Underlying cost structure and trends • Current and emerging distribution systems • Importance of regulatory issues • Technological changes

45. Growth Vector Analysis • Growth within the current market is called Concentration • Growth by moving into related or new customer segments is called Market Development • Growth into related or new products is called Product/Technology Development • Growth in both customer segments and products/technologies is called Diversification • Also useful to analyze key competitors

46. Product and Market Combination AnalysisFigure 4-5

47. Gap Analysis • Gaps: Industry sales are below their potential • Gap Analysis: process of comparing an industry’s market potential to the combined current market penetration by all competitors

48. Gap Analysis • Can be the result of: • Unavailability of product versions for specific applications or usage occasions (Product Line Gaps) • Overlooked customer segments that have difficulty accessing the product (Distribution Gaps) • Underdeveloped applications for the product (Usage Gaps) • Opportunities to displace competitors that offer weak product entries or questionable performance (Competitive Gaps)

49. Gap AnalysisFigure 4-6

50. Profit Pool Analysis • Profit Pool: The total amount of profit earned at all points along the industry’s value chain • Example: Automotive industry • Car manufacturing and distribution have highest revenues • Auto leasing, insurance, and auto loans have highest profits