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 Internal Rivalry Entry Substitutes and Complements Supplier Power Buyer Power Internal Rivalry

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 Internal Rivalry Entry Substitutes and Complements Supplier Power Buyer Power 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 Internal Rivalry Entry Substitutes and Complements Supplier Power Buyer Power Substitutes and Complements

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 Internal Rivalry Entry Substitutes and Complements Supplier Power Buyer Power Supplier Power Buyer Power

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