Industry Analysis

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

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

Five-Forces Analysis: overview

InternalRivalry

Entry

Substitutes andComplements

SupplierPower

BuyerPower

InternalRivalry

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

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

Five-Forces Analysis: overview

InternalRivalry

Entry

Substitutes andComplements

SupplierPower

BuyerPower

Entry

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

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

Five-Forces Analysis: overview

InternalRivalry

Entry

Substitutes andComplements

SupplierPower

BuyerPower

Substitutes andComplements

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

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

Five-Forces Analysis: overview

InternalRivalry

Entry

Substitutes andComplements

SupplierPower

BuyerPower

SupplierPower

BuyerPower

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

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

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

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

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

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

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