An industry consists of a set of firms vying to sell similar goods to a similar set of customers
Industry definition is always a matter of degree Nuances Segment vs industry differences Geographic scope of industry boundaries
C. Vandervinne - Assistant Prof. ULB
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Contents
1
Introduction to the Strategic Process
2
Industry
3
Micro-economics for strategists
4
Industry analysis
C. Vandervinne - Assistant Prof. ULB
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Micro-economics for Strategists
Demand Segments and price discrimination Demand is composed of many distinct segments Example: Laser printers industry Segments differ in their willingness to pay for • speed • additional fonts • extra memory ---> Successful product development and marketing initiatives require a deep understanding of the segments comprising this market demand curve Ideally, a seller would like to charge each consumer exactly his willingness to pay for each unit of the good. Firms employ a number of clever tactics to achieve similar ends by charging different prices to different buyers, a practice known as price discrimination.
C. Vandervinne - Assistant Prof. ULB
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Micro-economics for Strategists
Application for Strategy Nature of demand aids the strategists in understanding • how a price change affects output • how such changes alter the mix of buyers who are actively purchasing a product Analysis of the segments can be helpful in understanding how to expand the market • Design special products or pricing schemes to bring buyers with lower willingness to pay into the market (American Express credit card for students) In real markets, firms take actions to influence the size of demand and the shape of the demand curve • Nike’s advertising has greatly expanded the demand for athletic shoes and has perhaps made consumers less price-sensitive • Sales efforts by pharmaceutical makers shape demand curves for drugs by communicating their safety and efficacy to prescribing physicians. • Microsoft has invested in Internet-related technologies in part to boost demand for its Windows operating system C. Vandervinne - Assistant Prof. ULB
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Micro-economics for Strategists
Supply analysis A supply curve describes how much of a good a supplier will choose to provide at each price A firm’s supply decision really consists of two decisions: • whether to compete in the market at all • short-run choice of how much to produce in light of current market conditions, givent that the firm is in the market
C. Vandervinne - Assistant Prof. ULB
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Micro-economics for Strategists
Price sensitivity or Elasticity of Supply Where the price elasticity of supply is high, the supply curve is nearly flat. • Industries where facilities for other things can be converted to producing the good in question, • where capacity can be expanded easily, • or where new firms can enter the business readily Other industries have a low elasticity of supply. • Hotel room rates in case of major events in a city A supply curve can be more elastic in one region than in another • supply curve becomes inelastic as firms in the industry run into capacity constraints
C. Vandervinne - Assistant Prof. ULB
Organization & Strategy
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Micro-economics for Strategists
Application for Strategy Nature of supply aids the strategists in understanding • how an industry will react to shifts in input costs and technology • how responsive the quantities supplied will be to prices Analysis of the marginal cost curve shows that firms with high marginal cost curves will be the ones squeezed out of a market when the market falls into a slump, especially in commodity markets
C. Vandervinne - Assistant Prof. ULB
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Micro-economics for Strategists
Perfect Competition The model of market equilibrium holds when: • products are identical • many, small participants (price-taking) • full information The idea that competition and imitation tend to erode profits is captured by models of perfect competition: • identical sellers • free entry • free exit
C. Vandervinne - Assistant Prof. ULB
Organization & Strategy
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Contents
1
Introduction to the Strategic Process
2
Industry
3
Micro-economics for strategists
4
Industry analysis
C. Vandervinne - Assistant Prof. ULB
Organization & Strategy
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Industry analysis
Five forces analysis Threat of Substitute Products or Services
Bargaining Power of Suppliers
Rivalry Among Existing Competitors
Bargaining Power of Buyers
Threat of New Entrants C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Five forces I: Bargaining Power of Suppliers Suppliers have bargaining power when: •
Their products have few substitutes and are important to buyers.
•
The buyer’s industry is not an important customer to the supplier.
•
Differentiation makes it costly for buyers to switch suppliers.
•
Suppliers can vertically integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs.
C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Five forces II: Bargaining Power of Channels & End Users
Buyers are most powerful when: • There are many small sellers and few large buyers. • Buyers purchase in large quantities. • A single buyer is a large customer to a firm. • Buyers can switch suppliers at low cost. • Buyers purchase from multiple sellers at once. • Buyers can easily vertically integrate to compete with suppliers.
C. Vandervinne - Assistant Prof. ULB
Organization & Strategy
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Industry analysis
Five forces III: Concentrate Producers
The intensity of competitive rivalry in an industry arises from: • competitors are numerous or are roughly equal in size and power • industry growth is slow • the product or service lacks differentiation or switching costs • capacity is augmented in large increments • exit barriers are high • the rivals are diverse in strategies and origins.
C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Five forces IV: Threat of substitute Products or Services
• Products that are subject to trends improving their price-performance trade-off with the industry’s product • Products that are made by industries earning high profits Must consider full range of substitutes Relative value/price of each substitute
C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Five forces V: Threat of New Entrants
New entrants into an industry threaten incumbent companies. Barriers to entry: • Brand loyalty • Absolute cost advantages • Economies of scale • Switching costs • Government regulation • Access to distribution channels
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Industry analysis
Five forces
Five forces framework is general and flexible • Emphasizes long-run structure and profit potential versus current price and quantity • a systematic way of thinking about departures from perfect competition • Helps understanding of who benefits from supply/demand imbalances - in industries with intense rivalry or powerful buyers, small amounts of excess supply lead to big price wars
C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Industry Structural Change Industry structure changes, though it normally changes relatively slowly The basic tool for analyzing industry structural change is the Five Forces - Must see an industry as a system, where one change often begets others There is often scope for multiple industry outcomes - Coke/Pepsi, Intel Companies can not only respond to structural change (passive) but shape industry structure - DRAM vs micropressors
C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Examples: Pharmaceutical Industry Threat of Substitute Products or Services
Threat of New Entrants • Biotechnology companies • Joint marketing arrangements C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Reacting to versus Shaping Industry Structure Reacting to Structural Change
Shaping Industry Structure
• Lobbying
• Entering into generic drugs
• Cutting costs
• Reformulating products from ethical to OTC
• Acquiring competitors • Focusing on therapeutic areas of strength
• Marketing directly to patients • Disease management
• Forming alliances with biotechnology
C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Shaping Industry Structure: Two Approaches
Expanding the Pie
Re-dividing the pie
• Expanding the size of value created by the industry
• Shifting the relative bargaining power, thus changing the division of profits among players
C. Vandervinne - Assistant Prof. ULB
Organization & Strategy
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Industry analysis
Expanding the Industry Pie Threat of Substitute Products or Services
• Improve relative value vis-à-vis subsitutes to expand the industry
Bargaining Power of Suppliers • Raise the cost effectiveness of suppliers
Rivalry Among Existing Competitors • Find a way to lower intrinsic industry cost structure
Threat of New Entrants C. Vandervinne - Assistant Prof. ULB
Complementary Products • Improve the price/performance of complementary products and services
Bargaining Power of Buyers
• Expand the quantity purchased per customer • Find latent buyers who are not currently being served Organization & Strategy
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Industry analysis
Re-Dividing the Industry Pie Threat of Substitute Products or Services
• Improve value relative to subsitute products to relax price pressures
Bargaining Power of Suppliers • Multisourcing to limit supplier leverage • Catalyze entry into supplier industries to mitigate supplier bargaining power
C. Vandervinne - Assistant Prof. ULB
Rivalry Among Existing Competitors • Industry consolidation to shift relative bargaining power
Threat of New Entrants • Raise the investmemt/technology threshold for new entrants
Bargaining Power of Buyers • Create switching costs to limit buyer power • Market to end users to reduce channel power • Eliminate the need for powerful channels Organization & Strategy
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Industry analysis
Principles of Industry Transformation Expanding the pie reduces the risk of destructive rivalry compared to efforts to gain market share - a central agenda for industry leaders To restructure an industry, competitor imitation is often desirable Ideally, industry transformation should shift competition in directions where the company can gain a competitive advantage Transformation can just as easily undermine industry attractiveness as enhance it
C. Vandervinne - Assistant Prof. ULB
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Industry analysis
Framework for Industry Structure Analysis Define the industry: what is in, what is out Identify the participants and participants groups - who are the customers, really? Who are the competitors? Assess the strength of each force - which are the controlling forces for profitability? Consistency testing - Is the industry analysis consistent with actual profitability? - Are more profitable players better positioned vis-à-vis the Five Forces? Analyze recent and likely future changes in each force How can industry structure be influenced in positive directions? Typical pitfalls Confusing cyclical/transient and structural Confusing effect (price sensitivity) and cause (buyer economics) Static analysis C. Vandervinne - Assistant Prof. ULB
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Summary
Summary First Session
Industry analysis is a basic building block of strategy development Industry analysis tools allow a holistic understanding of the external environment Industry analysis should be done first/early in the strategy development process
C. Vandervinne - Assistant Prof. ULB
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Next Step
What ’s Next ? Session II Competitive Advantage and Competitive Positioning How can a firm position itself to perform better than its direct rivals ? Superior long-run Return on Investment
Attractive Industry Structure
Competitive Advantage
Unique Competitive Position
Operational Effectiveness
Location C. Vandervinne - Assistant Prof. ULB
Organization & Strategy
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Course Structure
Structure
Industry Structure
Foundations of competitive strategy
Competitive positioning Competitive dynamics Competition and Location
