Industry Analysis ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Learning Objectives By the time you have completed this topic you will: be familiar with a number of frameworks used to analyse an organization’s external environment and understand how the structural features of an industry influence competition and profitability; be able to use evidence on structural trends within industries to forecast changes in competition and profitability and to develop appropriate strategies for the future; be able to define the boundaries of the industry within which a firm is located; be able to recognize the limits of Porter’s five forces of competition framework and extend the framework to include the role of complements ; be able to segment an industry into its constituent markets and appraise the relative attractiveness of different segments; be able to analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (key success factors). ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
The profitability of US industries, 2000-2010 Industry Median ROE 2000-10(%) Leading companies Tobacco 33.5 Philip Morris Int., Altria, Reynolds American Household and personal products 27.8 Procter & Gamble, Kimberly-Clark, Colgate-Palmolive Motor vehicles and parts 4.4 GM, Ford, Johnson Controls Entertainment 3.9 Time Warner, Walt Disney, News Corporation Airlines -11.3 AMR, UAL, Delta Airlines Source: Data from Fortune 1000 by industry. See Grant & Jordan 2e Table 2.1 for a more detailed list of US industries. ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
How can we account for these differences in industry profitability? It is all down to luck? Some industries are in decline, others are growing fast? The basic premise that underlies industry analysis is that the level of industry profitability is neither random nor entirely the result of industry-specific influences, it is determined by the industry’s underlying economic characteristics INDUSTRY STRUCTURE ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Analysing the business environment The business environment of the firm consists of the external influences that affect its decisions and performance How can managers monitor the vast array of possible influences? Need to distinguish the ‘vital’ from the ‘merely important Classification schemes like PEST can help ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
PEST Analysis How macro-environmental factors might impact a business organization: Political Changes in government economic policy, e.g. taxation, government spending, monetary policy Changes in legal requirements e.g. employment law, health and safety legislation, licensing practices, environmental regulations, competition policy Changes in the government ownership e.g. nationalization, privatization, de-regulation Economic Changes in the level of economic activity, e.g. growth rates, rates of unemployment, inflation Changes in wage rates and income distribution Changes in exchange rates Social Changes in demographics e.g. the size of the population, the age distribution with the population Changing attitudes e.g. work/life balance, concern for the environment, ethical standards Changes in social structure e.g. socio-economic groupings, social mobility Technological Development of new products and processes Automation Developments in information and communication technologies Developments in the natural sciences ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
From environmental analysis to industry analysis ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Porter’s Five Forces of Competition Framework ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Structural determinants of the competitive forces ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Applying industry analysis Industry analysis can be used to: Explain differences in profitability between industries and changes in the profitability of a given industry over time Assist managers in positioning the firm advantageously Predict possible changes in competition and profitability in the near future Identify opportunities for changing industry structures and alleviating competitive pressures. ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
The challenges of applying the five forces framework Defining the industry Dealing with missing factors Choosing the appropriate level of analysis Dealing with uncertainty and rapid structural change ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Defining the industry Industries versus markets. Substitutability on the supply side versus substitutability on the demand side. Boundaries are seldom clear-cut. In practice the way boundaries are drawn depends on the purpose and context of the analysis. ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Dealing with missing factors ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Choosing the appropriate level of analysis The difficulty in drawing industry boundaries and the need to define industries more broadly or more narrowly depending on the kinds of questions we are seeking to answer means that it is sometimes helpful to undertake more detailed, disaggregated analysis. Segmentation Analysis ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Segmentation analysis Identify possible segmentation variables Construct a segmentation matrix Analyze segment attractiveness Identify key success factors in each segment Select segment scope ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Illustrative segmentation variables Demographic Gender Age Ethnicity Socio-economic Income Education Occupation Psychographic Personality Lifestyle Geographic Region Urban/suburban/rural Behavioural Purchase occasion Loyalty Use rate ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Dealing with uncertainty and rapid structural change At what rate is structural change occurring? Some argue that the pace of change is accelerating Intensifying international competition Rapid technological change Industries becoming hypercompetitive But Systematic evidence of this trend is elusive. ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com
Identifying key success factors ©2015 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com