Today: Industry AnalysisAdministrative issues

Current Events

Porter’s Five Forces Framework

How To Analyze Industry Environments

Walmart Case Analysis

Team assignment

Assign new case: RCA Records

WEBSITE:

www.sba.pdx.edu/faculty/stephens/ss.html

The External Environmental

Think in terms of Opportunities and Threats - the “O” and “T” of TOWS

Relate Strategic Objectives to “O” and “T”increased sales and/or market sharenew product offeringsprocessing technology innovation

Continually scan to identify “O’s” and “T’s”

The External Environmental

The General Environment

Demographic: age, ethnicity, household size, occupation

Economic: income distribution, inflation, interest rates, exchange rates, urbanization

Political/Legal: consumer and environmental protection, unions

The External Environmental

The General Environment

Social and Cultural: conservatism/ liberalism, nesting, materialism

Technological: e-tailing, intranets, diffusion rates

Global: nationalism, transnational corporations, cultural differences

The External Environmental

The Industry Environment

The following factors in an Industry…Bargaining Power of Buyers

Bargaining Power of SuppliersThreat of New EntrantsThreat of Substitute Products

...Determine Intensity of Competitive Rivalry

The External Environmental

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Competitive Rivalry

The Industry Environment

The External EnvironmentalThreats of New Entrants decreases if barriers to

entry are high... Economies of Scale are high Product Differentiation is high Capital Requirements are high Switching Costs are high Access to Distribution Channels is limited Cost Disadvantages Independent of Scale are high Government Policy is restrictive

Expected Retaliation is high

Threat

of

New Entrants

The External Environmental

Suppliers are likely to be powerful if: Supplier industry dominated by a few firms Suppliers’ products have few substitutes Buyer is not important customer Suppliers’ product is an important input Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat to forward integration

Bargaining Power of Suppliers

The External Environmental

Buyers are likely to be powerful if: They are concentrated or purchases are large relative to

seller’s sales Purchase accounts for a significant fraction of supplier’s

sales Product unimportant to quality Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Buyer has full information Buyer presents a credible threat to backward integration

Bargaining Power

of

Buyers

The External Environmental

The keys to evaluating Substitute Products are: Products with improving price/performance tradeoffs

relative to present industry products

For example:

Electronic security systems in place of security guards

Email and fax machines in place of overnight mail delivery

Threat of Substitute Products

The External Environmental

Future objectives: goals and risks, ability to achieve

Current strategy: competitive advantages

Retaliation: How will competitor(s) respond to your actions?

Assumptions: Can competitor(s) adapt to changing environment?

Capabilities: relative strengths and weaknesses?

Understanding Competitors

Barriers to Entry & Exit

If some industries are more profitable, why don’t many companies enter?

Barriers to entry

If some industries are so unprofitable, why don’t most companies leave?

Barriers to exit

Barriers To Entry

Costs new entrants have to bear to enter the industry

A barrier to entryincreases the expected costs of entry for new entrantsor limits their potential market share

Barriers To Entry

Factors Increasing Costs:Economies Of Scale

Capital Requirements

Absolute Cost Advantages

Learning Curve / Experience Curve

Barriers To Entry: Economies of Scale

Lower unit cost with large production

Economies of scale can arise fromFixed costs

Distribution and marketing

Barriers To Entry: Capital Requirements

The higher the capital requirement, the higher the barrier?

Barriers To Entry: Absolute Cost Advantages

An incumbent’s absolute cost advantage may be an entry barrier (variable costs)

Proprietary technology

Government subsidiaries

Scarce resources, such as least cost supplies, locking up shelf space or distribution channels, or hiring best engineers.

Barriers To Entry: Learning Curve / Experience Curve

What is the learning curve/experience curve?

Costs decline as a function of past cumulative output

Barriers To Entry: Market Share and Other

Factors Limiting Market Share Product DifferentiationAdvertising / Brand ImageAccess To DistributionExpected Retaliation

Other FactorsGovernment PolicyReputation

Exit barriers? Closing costs can be very high Sometimes, it is cheaper to lose money now (by remaining

open), than to close, reopening only when market conditions are better.– Reputation effects

– Taking a charge against earnings

– Start-up costs

– Organizational learning.

Differentiate fixed costs and sunk costs– If costs are not sunk, barriers are low (i.e. airline industry)

– If costs are sunk, barriers are high (i.e. auto plant)

Two ways around barriers to entry

Fly under the radar!– Find a small market niche, and develop your skills

there– Gradually expand out of the niche towards more

lucrative customers

Operate the toll gate!– Work upstream or downstream of the market, and

integrate into the lucrative market.

Entry and Sustainable Competitive Advantage

A ParadoxLong-run profitable industries are those with significant entry barriers An entry barrier is an industry condition that makes entry attractive

Solution to the paradoxThe question is not whether there should be entry, but who should enter

In other words, the key determinant of entry decisions is the presence of a sustainable competitive advantage.

It may well pay to incur large entry costs, if a firm can create a sustainable competitive advantage over incumbents or potential future entrants.

What do we mean by buyer power?

PreferencesHow consumer tastes are distributed and how strong those tastes are

Related to consumer branded goods

Bargaining Powerthe consumer’s ability to exercise monopoly power

Related to industrial markets

Supplier PowerSuppliers affect our ability to achieve a competitive advantage through:

the strength of their bargaining power

Suppliers can be broadly defined as the supplier of any input:

LaborManagementTechnologyPhysical Materials

Why don’t businesses “switch” suppliers more often?

Inertia—– before remote controls, people didn’t “channel surf”

Switching costs: – Changing your major as a freshman is a whole lot less

traumatic than changing it next spring. (sunk costs)

Idiosyncratic assets– If you are a one of a kind buyer, your suppliers are few

Search costs– how do you find a new, reputable supplier?

A Supplier Matrix

Buyer is vulnerable Mutual Dependence

Anonymous market transactions

Buyer wields monopsony power

Importance of the supplier in the buyer’s input base

Importance of the buyer in the supplier’s customer base

High

High

Low

Low

From: Oster, Sharon, 1999. Modern Competitive Analysis. P.43

How do we identify substitutes?

Substitutes are products that fulfill the same function but are different products

Beer vs. wine

Air conditioner vs. fans

Industries Evolve Over Time As The Relationships Between The Five Forces Change

time

dem

an

d

A Sixth Force - Presence of “Complementors”

ComplementorsIndustry Participants whose businesses enhance the value of yours

The Opposite of Substitutes

The Emergence of “Networks” of Organizations

ExamplesComputer Manufacturers & Software Makers

Consumer Electronics & Entertainment Companies

The Central IssueHow to get “complementors” to make strategic investments which mutually benefit both companies

How to increase the size of the pie rather than compete over the slices

Some Important Points About Industry Analysis

The four external forces are interrelated to one anotherChanges in one force will cause subsequent changes in other forcesFirm actions will help to shape the industry environmentOften the most important thing to understand about an industry is understanding how the forces are “linked” together.

Some linkages to think about

The threat of substitutes suggests– That there is a “hole in the barrier to entry”– buyers have more power because they can go

elsewhere

The power of suppliers suggests that– You as a buyer are weak– You don’t have alternatives

» No substitutes» No new applicants

What does competitive rivalry mean to barriers to entry?

The Uses of Industry Analysis

Static Analysis -How Do We Explain Current Rivalry and Profitability?

Dynamic Analysis -Where Is The Industry Headed In The Future?

Next Time: Internal Analysis

Current Events

Case Analysis: RCA Records

Read Chapter 4

Team Time

WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html

Questions for RCA Records

How are industry changes affecting traditional record companies, new entrants, artists, and retailers?Describe RCA’s business strategy.Where do you envision the music industry in three to five years?What, if anything, should RCA do differently?