Complete an Industry Analysis for two different industries then compare these industries by answering the following questions
review Figures 3.3, p.65 from your textbook. Complete an Industry Analysis for two different industries then compare these industries by answering the following questions.
- Detail Porter’s Five Forces framework with a graphic representation, like Figure 3.3, (p.65), and a written explanation in relation to the Five Forces for both industries.
- Use the results from Porter’s Five Forces framework to explain the reasons why profitability is what it is in the two different industries expressed as high, intermediate, or low.
- Explain the structural features of that industry that generate either high or low profitability.
- How are structural changes likely to impact competition and profitability in these industries? Is this industry attractive for investment? Why or why not?
Your well-written paper should meet the following requirements:
- Be 4 to 5 pages in length, which does not include the required title and reference pages, which are never a part of the content minimum requirements.
- Use APA style guidelines.
- Support your submission with course material concepts, principles, and theories from the textbook and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.
- It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before submitting it to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step instructions.
Required
- Chapters 3 & 4 in Contemporary Strategy Analysis
- Chapter 3 PowerPoint slides Chapter 3 PowerPoint slides – Alternative Formats in Contemporary Strategy Analysis
- Chapter 4 PowerPoint slides Chapter 4 PowerPoint slides – Alternative Formats in Contemporary Strategy Analysis
- Isabelle, D., Horak, K., McKinnon, S., & Palumbo, C. (2020). Is Porter’s Five Forces Framework Still Relevant? A study of the capital/labour intensity continuum via mining and IT industries. Technology Innovation Management Review, 10(6), 28–41. https://doi.org/10.22215/timreview/1366.
- Yas, H., Mardani, A., Albayati, Y. K., Lootah, S. E., & Streimikiene, D. (2020). The Positive Role of the Tourism Industry for Dubai City in the United Arab Emirates. Contemporary Economics, 14(4), 601–616. https://doi.org/10.5709/ce.1897-9254.430.
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CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 3
Industry Analysis:
The Fundamentals
- Introduction / Objectives
- From environmental analysis to industry analysis
- Analyzing industry attractiveness
- Applying industry analysis to forecast industry profitability
- Using industry analysis to develop strategy
- Defining industries: Where to draw the boundaries
- Identifying Key Success Factors
Industry Analysis: the Fundamentals
Copyright (© 2019 John Wiley & Sons, Inc.
OUTLINE
1
17
- 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 to forecast future profitability
- To formulate strategies to change industry structure to improve industry profitability
- To identify Key Success Factors
The Objectives of Industry Analysis
Copyright (© 2019 John Wiley & Sons, Inc.
INTRODUCTION / OBJECTIVES
2
18
THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers
Social structure
The national/ international economy
Technology
Government
& Politics
The natural environment
Demographic structure
Social structure
The Macro Environment impacts the firm through its effect on the Industry Environment
At the Core of the Macro Environment is the Industry Environment
Copyright (© 2019 John Wiley & Sons, Inc.
FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS
3
Profitability of Selected US Industries (median ROCE)
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS
| HIGH PROFITABILITY | % | LOW PROFITABILITY | % |
| Tobacco | 59.9 | Food and Drug Stores | 10.2 |
| Computer Software | 29.8 | Utilities: Gas and Electric | 9.6 |
| Household, Personal Care | 25.2 | Telecom Services | 9.5 |
| Semiconductors | 22.5 | Agricultural Processing | 9.5 |
| Pharmaceuticals | 21.3 | Petroleum | 9.2 |
| Entertainment | 20.7 | Insurance | 9.1 |
| Aerospace, Defense | 19.9 | Food Retailing | 9.1 |
| Beverages | 19.2 | Trucking | 9.1 |
| Chemicals, Specialty | 18.2 | Hotels, Casinos | 9.0 |
| Food Processing | 18.0 | Motor Vehicle Parts | 9.0 |
| Medical Products | 17.5 | Electrical Power | 6.0 |
| Engineering/Construction | 16.8 | Motor Vehicles | 5.7 |
| Restaurants/Catering | 16.6 | Airlines | 5.1 |
3 key influences:
The value of the product to customers
The intensity of competition
Relative bargaining power at different stages of the value chain
The Determinants of Industry Profitability
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS
5
Product
Differentiation
Information
availability
Many firms
A few firms
Two firms
One firm
No barriers
Significant barriers
High barriers
Homogeneous
Product
Potential for product differentiation
Perfect
Information
Imperfect availability of information
The Spectrum of Industry Structures
© 2019 Robert M. Grant www.contemporarystrategyanalysis.com
Concentration
Entry and Exit
Barriers
Perfect
Competition
Oligopoly
Duopoly
Monopoly
ANALYZING INDUSTRY ATTRACTIVENESS
6
2
Porter’s Five Forces of Competition Framework
SUPPLIERS
POTENTIAL
ENTRANTS
SUBSTITUTES
BUYERS
INDUSTRY
COMPETITORS
Rivalry among
existing firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new entrants
Threat of
substitutes
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS
7
INDUSTRY RIVALRY
Concentration
Diversity of
competitors
Product differentiation
Excess capacity and
exit barriers
Cost conditions
THREAT OF ENTRY
- Capital requirements
- Economies of scale
- Absolute cost advantage
- Product differentiation
- Access to distribution
channels
- Legal/ regulatory barriers
- Retaliation
SUBSTITUTE
COMPETITION
Buyers’ propensity
to substitute
Relative prices &
performance of
substitutes
BUYER POWER
Buyers’ price sensitivity
Relative bargaining
power
SUPPLIER POWER
Buyers’ price sensitivity
Relative bargaining
power
The Structural Determinants of Competition
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS
7
Extent of competitive pressure from producers of substitutes depends upon:
- Buyers’ propensity to substitute
- The price-performance characteristics of substitutes.
Threat of Substitutes
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS
8
Entrants’ threat to industry profitability depends upon the height of barriers to entry.
The principal sources of barriers to entry are:
- Capital requirements
- Economies of scale
- Absolute cost advantage
- Product differentiation
- Access to channels of distribution
- Legal and regulatory barriers
- Retaliation
Threat of New Entry
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS
9
Buyer’s price sensitivity
Relative bargaining power
Importance of item in relation
to buyers’ total costs.
Differentiation of the
purchased item
Intensity of competition
among buyers
Whether item is critical to the
quality of buyers’ own output
Size and concentration of
buyers relative to sellers.
Buyer’s information .
Ability to backward integrate.
NOTE: analysis of supplier
power is symmetric
Bargaining Power of Buyers
Copyright (© 2019 John Wiley & Sons, Inc.
The extent to which buyers are able to depress
profitability in an industry depends upon:
ANALYZING INDUSTRY ATTRACTIVENESS
12
The extent to which industry profitability is depressed by aggressive price competition depends upon:
Concentration (number and size distribution of firms)
Diversity of competitors (differences in goals, costs strategies, etc.)
Product differentiation
Excess capacity and exit barriers
Cost conditions
- Ratio of fixed to variable costs
- Extent of scale economies
Rivalry Between Established Competitors
Copyright (© 2019 John Wiley & Sons, Inc.
ANALYZING INDUSTRY ATTRACTIVENESS
10
Perform a Five Forces Analysis to understand why the industry’s current level of profitability is what it is
Identify the changes in industry structure that are likely to occur over the next few years. E.g.
Is new entry likely?
Will concentration increase as a result of mergers and acquisitions?
Will additions to industry capacity outpace the growth in demand?
Will innovation create new substitutes?
Use the Five Forces Framework to predict the impact of these structural changes on competition and profitability
Applying Five-Forces Analysis to Forecast Industry Profitability
Copyright (© 2019 John Wiley & Sons, Inc.
APPLYING INDUSTRY ANALYSIS TO FORECAST INDUSTRY PROFITABILITY
Strategies to Improve Industry Profitability
Which of the structural variables that are depressing profitability can we change by individual or collective strategies?
Strategic Positioning
- Once we know which structural features of the industry support profitability and which depress profitability, we can choose a favorable positioning within the industry.
Using Industry Analysis to Develop Strategy
Copyright (© 2019 John Wiley & Sons, Inc.
USING INDUSTRY ANALYSIS TO DEVELOP STRATEGY
What industry is Ferrari in?
- The Motor Vehicle industry (SIC 371)
- The Automobile industry (SIC 3712)
- The sports car industry
- Is its industry global, regional (Europe) or national (Italy)?
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
We may need to draw industry boundaries differently for different types of decision
Drawing Industry Boundaries
Copyright (© 2019 John Wiley & Sons, Inc.
DEFINING INDUSTRIES
15
What drives competition?
What are the main
dimensions of competition?
How intense is competition?
How can we obtain a
superior competitive position?
Analysis of demand
Who are our
customers?
What do they want?
KEY SUCCESS FACTORS
Analysis of competition
- What drives competition?
- What are the main dimensions of competition?
- How intense is competition?
- How can we obtain a superior competitive position?
What do customers want?
How does the firm survive competition
Pre-requisites for success
Identifying Key Success Factors
Copyright (© 2019 John Wiley & Sons, Inc.
IDENTIFYING KEY SUCCESS FACTORS
17
KSFs in Steel, Fashion Clothing, and Supermarkets
IDENTIFYING KEY SUCCESS FACTORS
Copyright (© 2019 John Wiley & Sons, Inc.
| WHAT DO CUSTOMERS WANT? | HOW FIRMS SURVIVE COMPETITION? | KEY SUCCESS FACTORS | |
| Steel | Low price Product consistency Reliability of supply Specific technical specifications for special steels | Strong price competition and cyclical demand require low costs and financial strength | Cost efficiency requires either large plants in low-cost locations, or hi-tech, flexible, mini-mills close to customers Quality and service differentiation |
| Fashion clothing | Demand segmented by garment type, style, quality, color Price premium for brand, style, exclusivity, and quality Mass market highly price sensitive | Intensely competitive due to low entry barriers, low seller concentration, and strong retail buying power Differentiation can yield substantial price premium, but imitation rapid | Combining differentiation with low-costs Key differentiation variables: design, speedy to fashion trends, brand reputation, quality Cost efficiency requires low labor costs |
| Super-markets | Low prices Convenient location Wide product range adapted to local tastes Fresh produce, good service, pleasant ambience, easy parking | Markets localized Intensity of price competition depends on number and proximity of competitors Bargaining power essential to low input costs | Low-costs require operational efficiency, efficient supply chain, buying power, low wage costs. Differentiation requires wide product range (hence, large stores), convenient location, easy parking |
Profitability = Yield x Load factor – Unit Cost
Income Revenue RPMs Expenses
ASMs RPMs ASMs
=
x
–
Price competitiveness.
Efficiency of route
planning.
Flexibility and
responsiveness.
Customer loyalty.
Meeting customer
requirements.
Wage rates.
Fuel efficiency of
planes.
Employee
productivity.
Load factors.
Administrative
overhead.
Strength of competition on routes.
Responsiveness to changing market conditions
% business travelers.
Achieving differentiation advantage
NOTE: ASM = Available Seat Miles; RPM = Revenue Passenger Miles
Identifying KSFs Through Modeling Profitability: The Airline Industry
Copyright (© 2019 John Wiley & Sons, Inc.
IDENTIFYING KEY SUCCESS FACTORS
18
ROCE
Return on Sales
Sales/Capital
Employed
Sales mix of products
Avoiding markdowns through
tight 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 through
electronic data interchange, close
vendor relationships, fast delivery
Minimize capital deployment
through outsourcing & leasing
Identifying KSFs by Analyzing Profit Drivers: Retailing
© 2019 Robert M. Grant
www.contemporarystrategyanalysis.com
IDENTIFYING KEY SUCCESS FACTORS
19
7
Forecasting Industry Profitability
- Past profitability a poor indicator of future profitability.
- If we can forecast changes in industry structure we can predict likely impact on competition and profitability.
Strategies to Improve Industry Profitability
Influencing industry structure by individual or collective strategies
Positioning the firm to shelter from the forces of competition
Defining Industry Boundaries
Key criterion: substitution
Industry definition depends upon the strategic issues being considered
Key Success Factors
Gateway to the analysis of competitive advantage
Summary
Copyright (© 2019 John Wiley & Sons, Inc.
INDUSTRY ANALYSIS: THE FUNDAMENTALS
From Environmental Analysis to Industry Analysis:
- The industry is the core of a firm’s external environment. Political, economic, social, and technological forces impact the firm through its industry :
14
,
*
CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 4
Further Topics in Industry
and Competitive Analysis
Objectives
The limits of industry analysis
Does Industry Matter?
Hypercompetition
Winner-Take-All Industries
Beyond the Five-Forces
Complements
Ecosystems
Business Models
Competitive Interaction
Game Theory
Competitor Analysis
Segmentation and strategic groups
Further Topics in Industry and
Competitive Analysis
Copyright © 2019 John Wiley & Sons, Inc.
OUTLINE
*
30
To recognize the limits of the Porter five forces framework, and extend the framework to include the role of complements as well as substitutes
To acknowledge competition as a dynamic process, to appreciate the insights that game theory offers into the dynamics of rivalry, and to use competitor analysis to predict competitive moves by rivals
To segment an industry into its constituent markets, appraise the relative attractiveness of different segments and apply strategic group analysis to classify firms according to their strategic types
FURTHER TOPICS IN INDUSTRY AND COMPETITIVE ANALYSIS
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
Objectives
*
30
THE LIMITS OF INDUSTRY ANALYSIS
Does Industry Matter?
Copyright © 2019 John Wiley & Sons, Inc.
Chart1
| Misangy et al (2006)i | Misangy et al (2006)i | Misangy et al (2006)i |
| Roquebert et al (1996) | Roquebert et al (1996) | Roquebert et al (1996) |
| Hawawini et al (2003) | Hawawini et al (2003) | Hawawini et al (2003) |
| McGahan& Porter ((1997) | McGahan& Porter ((1997) | McGahan& Porter ((1997) |
| Rumelt (1991) | Rumelt (1991) | Rumelt (1991) |
| Schmalensee (1985) | Schmalensee (1985) | Schmalensee (1985) |
Sheet1
| Industry effects | Firm effects | Other and unexplained | |
| Misangy et al (2006)i | 7.6 | 43.8 | 48.6 |
| Roquebert et al (1996) | 10.2 | 55 | 34.8 |
| Hawawini et al (2003) | 8.1 | 35.8 | 56.1 |
| McGahan& Porter ((1997) | 18.7 | 31.7 | 49.6 |
| Rumelt (1991) | 4 | 44.2 | 51.8 |
| Schmalensee (1985) | 19.6 | 0.8 | 79.6 |
Porter framework assumes:
industry structure drives competitive behavior
Industry structure is (fairly) stable.
But, competition also changes industry structure:
- Schumpeterian Competition: A “perennial gale of creative destruction” –market leaders overthrown by innovation
- Hypercompetition: “intense and rapid competitive moves…. continuously creating new competitive advantages and destroying existing competitive advantages”
Implication: –Within 5-forces framework:
INDUSTRY STRUCTURE COMPETITION
–Under dynamic competition:
COMPETITIVE STRATEGY INDUSTRY STRUCTURE
Competition as a Dynamic Process: Hypercompetition
Copyright © 2019 John Wiley & Sons, Inc.
LIMITS OF INDUSTRY ANALYSIS
*
14
In some industries, the notion of “industry attractiveness” is meaningless because one firm takes all the industry’s profits and other firms earn little or no profit
These “winner-take-all” industries tend to be those with extreme scale economies (e.g. search engines) or network externalities (online auction sites, social networks)
LIMITS OF INDUSTRY ANALYSIS
Copyright © 2019 John Wiley & Sons, Inc.
Winner-Take-All Industries
*
30
SUPPLIERS
POTENTIAL
ENTRANTS
SUBSTITUTES
BUYERS
INDUSTRY
COMPETITORS
Rivalry among
existing firms
Bargaining power of suppliers
Bargaining power of buyers
Threat of
new entrants
Threat of
substitutes
COMPLEMENTS
The suppliers of
complements create
value for the industry
and can exercise
bargaining power
Five Forces or Six?
Introducing Complements
BEYOND THE 5-FORCES
© 2019 Robert M. Grant,
www.contemporarystrategyanalysis.com
*
7
A business ecosystem is the “community of organizations, institutions, and individuals that impact the enterprise”
BEYOND THE 5-FORCES
Copyright © 2019 John Wiley & Sons, Inc.
Business Ecosystems: Managing Value Migration
Change within a business ecosystem causes value to migrate between firms and groups of firms
A firm can influence value migration within a business ecosystem in order to increase its share of value within the system. E.g. by becoming a “guardian of quality”, becoming irreplaceable, exploiting changing customer needs, or reconfiguring the value chain.
*
30
Infrastructure
Activities
Resources
Partners
Customer
Segments
Channels
Relationships
Offer
Value
Proposition
Financial viability
Revenues
Costs
Profit
BEYOND THE 5-FORCES
Using Business Models to Manage the Ecosystem
A business model is a simplified description of a business that specifies the core logic for creating value
Business models are useful for developing strategies that can exploit the opportunities available in complex business ecosystems
The Business Model Canvas is a graphical tool for designing business models:
THE BUSINESS
MODEL CANVAS
- Frames strategic decisions as interactions between competitors
- Predicts outcomes of competitive situations involving a few,
evenly-matched players
- Provides key insights into the nature and determinants of interactions
among competitors. E.g.:
Competition and Cooperation—Game theory can show conditions
where cooperation more advantageous than competition
Deterrence—changing the payoffs in the game in order to deter
a competitor from certain actions
Commitment—irrevocable deployments of resources that
give creditability to threats
Signaling—communication to influence a competitor's decision
Problems of game theory:
- Able to explain past competitive behavior—weak in predicting future behavior.
- Lack of an integrated general theory— Many different models; outcomes highly
sensitive to small changes in assumptions
The Contribution of Game Theory to Competitive Analysis
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE INTERACTION
PREDICTIONS
- What strategy changes
will the competitor
initiate?
- How will the competitor
respond to our strategic
initiatives?
OBJECTIVES
What are competitor’s current goals?
Is performance meeting there goals?
How are its goals likely to change?
STRATEGY
How is the firm competing?
ASSUMPTIONS
What assumptions does the competitor
hold about the industry and itself?
RESOURCES & CAPABILITIES
What are the competitors’ key
strengths and weaknesses?
A Framework for Competitor Analysis
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE INTERACTION
*
5
Identify key variables
and categories
Construct a segmentation matrix
Analyze segment attractiveness
Identify KSFs in each segment
Analyze benefits of
broad vs. narrow scope
Identify segmentation variables
Reduce to 2 or 3 variables
Identify discrete categories for
each variable
Potential for economies
of scope across segments
Similarity of KSFs
Differentiation benefits of
segment focus
Segmentation Analysis: The Principal Stages
Copyright © 2019 John Wiley & Sons, Inc.
SEGMENTATION AND STRATEGIC GROUPS
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31
Opportunities for
Differentiation
Characteristics
of the Buyers
Characteristics
of the Product
Industrial buyers
Household buyers
Distribution channel
Geographical
location
- Size
- Technical
sophistication
- OEM/replacement
- Demographics
- Lifestyle
- Purchase occasion
- Size
- Distributor/broker
- Exclusive/
nonexclusive
- General/specialist
- Size
- Price
- Features
- Technology/design
- Inputs used (e.g. raw materials)
- Performance characteristics
- Pre-sales/after-sales services
Customer and Product Characteristics as Segmentation Variables
Copyright © 2019 John Wiley & Sons, Inc.
SEGMENTATION AND STRATEGIC GROUPS
*
1
Segmenting the World Automobile Market
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