Marketing-Industry Analysis

1. Marketing-Industry Analysis MKT 731 Winter 2005 Lecture 2 Instructor: Armand Gervais Web: www.ryerson.ca/~agervais Email:agervais@ryerson.ca Office: Bus 308 Phone: 416-979-5000 Ext. 4215

2. Lecture 2 Agenda • Research Seminar in Library with Jane Binksma • Learning Commons Lab - on the main floor of library • Break • Attendance • Questions and Answers • Administration • Porters Framework • Structure of Industries • To Do’s for next week’s class

3. Porters 5 Forces Framework

4. Differences in Profitability of Industries

5. Porter 5 Forces Framework Entry BarriersEconomies of ScaleProprietary Product DifferencesBrand IdentitySwitching CostsCapital RequirementsAccess to DistributionAbsolute Cost Advantages- Proprietary learning curve- Access to necessary inputs- Proprietary low-cost product designGovernment PolicyExpected Retaliation Rivalry DeterminantsIndustry GrowthFixed (or Storage) Costs/Value AddedIntermittent Over-CapacityProduct DifferencesBrand IdentitySwitching CostsConcentration and BalanceInformational ComplexityDiversity of CompetitorsCorporate StakesExit Barriers New Entrants Threat of New Entrants IndustryCompetitorsIntensity ofRivalry Buying Powerof Buyers Bargaining PowerofSuppliers Buyers Suppliers Determinants of Supplier PowerDifferentiation of InputsSwitching Costs of Suppliers and Firms in the IndustryPresence of Substitute InputsSupplier ConcentrationImportance of Volume to SupplierCost Relative to Total Purchases in the IndustryImpact of Inputs on Cost or DifferentiationThreat of Forward Integration Relative to the CompetitionThreat of Backward Integration by Firms in the Industry Determinants of Buyer Power Bargaining LeverageBuyer Concentration vs. Firm ConcentrationBuyer VolumeBuyer Switching Costs Relative to Firm Switching CostsBuyer InformationAbility to Backward IntegrateSubstitute ProductsPull-Through Price SensitivityPrice/Total PurchasesProduct DifferencesBrand IdentityImpact on Quality/ PerformanceBuyer ProfitsDecision Makers’ Incentives Threat of Substitutes Substitutes Determinants of SubstitutesRelative Price Performance of SubstitutesSwitching CostsBuyer Propensity to Substitute

6. Entry Barriers Economies of Scale-Auto production, microchips Proprietary Product Differences-Brand IdentitySwitching Costs-Main Frame computers data transferCapital Requirements-Diamond Mining Access to Distribution-Consumer product/PGAbsolute Cost Advantages - Proprietary learning curve - Access to necessary inputs - Proprietary low-cost product designGovernment PolicyExpected Retaliation

7. Rivalry Determinants Industry GrowthFixed (or Storage) Costs/Value AddedIntermittent Over-CapacityProduct DifferencesBrand IdentitySwitching CostsConcentration and BalanceInformational ComplexityDiversity of CompetitorsCorporate StakesExit Barriers

8. Determinants of Buyer Power Bargaining LeverageBuyer Concentration vs. Firm ConcentrationBuyer VolumeBuyer Switching Costs Relative to Firm Switching CostsBuyer InformationAbility to Backward IntegrateSubstitute ProductsPull-Through

9. Determinants of Buyer Power Price SensitivityPrice/Total PurchasesProduct DifferencesBrand IdentityImpact on Quality/PerformanceBuyer ProfitsDecision Makers’ Incentives

10. Determinants of Supplier Power Differentiation of InputsSwitching Costs of Suppliers and Firms in the IndustryPresence of Substitute InputsSupplier ConcentrationImportance of Volume to SupplierCost Relative to Total Purchases in the Industry

11. Determinants of Supplier Power Impact of Inputs on Cost or DifferentiationThreat of Forward Integration Relative to the CompetitionThreat of Backward Integration by Firms in the Industry

12. Determinants of Substitutes Watch Technological developments Relative Price Performance of Substitutes Switching Costs Buyer Propensity to Substitute

13. Sustaining Superior Performance:Commitments and Capabilities Harvard Business School 9-798-010 July 31, 1997 Ghemawat & Pisano

14. Sustaining Competitive Advantage • Is a competitive advantage necessary to sustain superior performance? • Not necessarily so just look at the proverbial mousetrap • PIMS ROI over ten years 1971-80 • 692 business units top ROI 39% bottom 3% • ROI difference shrank by 90%over the 10 year period

15. Threats to Sustainability • Sustained superior performance is likely if two conditions are satisfied: • Scarcity • Appropriability • Diamond Vs Air • Part of the difference is transforming the products • But the big part is scarcity • How do you test whether a strategic position offers scarcity value? • Imitation • Substitution • Appropriability can owners pocket the value • Holdup and Slack

16. Imitation • Most direct and obvious threat-China: toys, clothing etc. • Attempts at product differentiation based on R&D as opposed to Marketing are vulnerable on several counts • Competitors secure detailed information on the bulk of new products within a year of their development • Patenting usually fails to deter imitation and imitation tends to cost a 1/3 less than innovation and 1/3 quicker • Process innovations do not seem to be significantly less imitable than product innovations Summary • Imitation is a serious threat to sustainability • Impediment to imitation can be early mover advantage • First mover advantage may be beneficial but also risky

17. Five Principals of Early mover Advantage • Private information • Better information kept private good example is food processing processes Instant Coffee. • Size Economies • Scale –being large. Shipbuilding Hyundai • Learning-being large at a particular time • Scope-interrelated businesses Canon Optics • Enforceable Contracts/Relationships-Better terms or contracts lock up the supply of a critical input ie • Threats of Retaliation • US Cigarette industry-filtered brands supported by advertising • Response Lags-sum or observation and implementation • US Cigarette Industry-Filter brands 80% of market within two decades • 1951 there were 18 varieties by 1967, 80 varieties • Advertising to sales ratio up from 3.8% to 8.7% • Prisoners’ dilemma

18. Substitution • Less likely to be confined to direct competitors • Successful substitution finds away around scarcity, it is an indirect attack • Substitution is a bigger threat then scarcity since it is often overlooked by companies • Substitution depends on the mismatch between established positions and market opportunities to override early mover advantage • Mainframe computer need 10* performance improvement • Some companies control substitution some get displaced • PBX Switches : 1 Electromechanical AT&T→ 2 Electronic (Voice only) 125 conversations Rolm→3 Voice & Data InteCom →Voice, Data, Video …..Voice over IP

19. Holdup • Consequence of gap between owners and managers • NFL • Survived substitutes like WFL USFL • Recognizing the threat of holdup the NFL evolved practices to thwart holdup by the players • Players were signed to enforceable multiyear contracts • Rights to draft rookies • Restrictions on free agency • Revenue sharing among owners prevented bidding wars • Players formed the NFL players’ association • Owners could not thwart holdup and player salaries climbed 170% 1970-1984 • Players share of revenue jumped from 35% to 55% • Same thing is playing out today in the NHL

20. Slack Slack measures the extent to which the scarcity value realized by the organization falls short of its potential • Holdup concerns portion of pie to owners and non-owners • Slack affects the total size of pie available to owners and non-owners • Slacks stems from organizational problems • Xerox- slack represented 20% of the companies sales revenues • The ratio of shareholder enrichment R/E over the 70’s and early 80’s was -220% Reasons slack build: • High innovation intensity hard to monitor • Incomplete information to monitor • Growth of employees • How to manage • Information, aligning goals of employees with companies and moral suasion Air Canada

21. Building Sustainable Competitive Advantage Multiple potent threats to sustainability implies that manager cannot take the sustainability of a competitive advantage for granted • Is sustainability rooted in resources or activities • Resource base view- intrinsically inimitable-infinitely costly • IE Location, patents, causal ambiguity-sum of parts or social complexity corporate culture – Southwest Culture of service, 3M culture of innovation. Not a 9-5 environment • Activity based focuses on activities rather than resources • Basic idea is takes more time and costs more to imitate along many dimensions than along one or two. The probability decreases as the number of activities increases .9*.9*.9*.9=66% • Both views afford limited insight into building sustainable advantage

22. Making Commitments Making commitments can have significant and lasting effects on possible future outcomes • Three indicators of irreversibility: Significant sunk costs, opportunity costs, time lags • Sunk costs create irreversibility through lock-in Boeing 747 vs Airbus 380 Boeing believes in point to point future not hub model that Airbus is betting on. • Lock out closing a mine- Floods and is destroyed • Time Lags-Coors going national took a decade had to build a distribution network in 39 new states • Staking out particular opportunities through commitments a company may create sustainable early mover advantage • IE Dupont Titanium Oxide Spent 50-100 million to master cheaper feedstock technology which gave Dupont a 20% cost advantage over competitors But also built a large new plant to crowd out large scale expansions by competitors. Made a capacity commitment to lock out others • Commitments can also help prevent substitution Intel CISC vs RISC • Commitments don’t always lead to competitive advantage: • Holdup, slack and uncertainty all reduce advantage

23. Developing Capabilities Not all commitments are lumpy some are cumulative • Intel Organizational capabilities are relevant to strategy for 2 reasons: • Characterize what an organization can do well or not well-choices about product and services influences capabilities • Organizational capabilities differ across companies in the same industries. IE Biotech companies can scale up production in 1/3 less time than other companies • Auto industry Toyota and Honda produce a new model in half the time with half the engineering resources of the Big 3 • This led to vehicles costing $2000 less to produce were better aligned with the customers needs and had significantly higher quality than domestic producers • Capabilities are hard to imitate-private information, tacit , rooted deep in complex organizational processes • Of the threats to sustainability, superior capabilities can indeed support sustained superior performance. In order to do so they must: • Demonstrable-difficult to determine and hard to measure • Prevent the overall coherence of capability development from being nibbled away Specific capabilities commitments imply rigidities and in an uncertain world could result in inferior performance

24. To Do’s for Next Week • Email and Hand in Project Outline before beginning of next class • Email me your contact information if you haven’t done so. • Complete the assigned readings • Work on Industry analysis