Group 3: Taylor Mullings, Yetunde Oyinwola, Eric Carstens, Alex Kollaritsch, Laura Padilla

Introduction and Objectives Examine External Factors Porter’s Five Forces Identifying Key Success Factors

The Mobile Phone Industry Motorola, Ericsson, Nokia, and Siemens Increasingly Complex Devices Apple’s IPhone and Google’s Android Two major uncertainties facing producers: o Differentiation o Balance of Bargaining Power

Environmental Analysis External Influences PEST Analysis o P- Political o E- Economic o S- Social o T- Technological

PEST Analysis Political Licences Standardization Restriction on Usage

PEST Analysis Economic The level of economic activity The rapid take-up of mobile technologies in developing economies

PEST Analysis Social Health Scares Changes in Fashion

PEST Analysis Technological Rapid Change Technological Improvements

PEST Analysis Can’t Scan Everything Listing Factors is not Enough Must Learn to Exercise Judgment

Industry Analysis Industry Environment o Customers o Suppliers o Competitors

Industry Profit Create Value for the Customer Surplus of Value o Consumer Surplus o Producer Surplus

Industry Attractiveness Industries Earn Different Rates of Profit Not Random Small Markets vs Large Markets

Porter's Five Forces A framework for classifying and analysing the factors that determine the intensity and level of competition in different industries. o Views profitability as determined by sources of competition.

Porter's Five Forces

Competition from Substitutes Customers willingness to buy depends on availability of substitutes. o Demand elasticity/ inelasticity to price. The internet as a substitute to established industry. o Travel agencies, newspaper and telecommunication.

The Threat of Entry Industry earning in excess of capital cost. o Entry restriction: licensed doctors and orthodontists.  Creates barriers to entry: any advantage an established firm has over an entrant. o Threat of entry vs. actual entry.

Sources of Barriers to Entry Capital requirements: the cost of establishment in an industry. o Rockets and launching facilities vs. internet ventures. Economies of scale: operating on a large scale and bearing the costs of underutilized capacity vs. small scale with high unit costs. Absolute cost advantages: acquisition of low-cost sources of raw materials. o Saudi Aramco vs. Shell, Exxon and BP.

Sources of Barriers to Entry Product differentiation: established firms possess advantages of brand recognition and customer loyalty. o Advertising and promotions. Access to channels of distribution: limited capacity in channels, risk aversion and cost associated with products. Governmental and legal barriers: the only effective barrier to entry. o Licensing, exclusivity, patents and copyrights o Compliance costs tends to weigh more heavily on newcomers.

Sources of Barriers to Entry Retaliation: aggressive price-cutting, increased advertising, sales promotion or litigation. o To avoid retaliation, new entrant may seek initial less visible small-scale market segments. The effectiveness of barriers to entry: depends on resources and capabilities that entrants possess. o Established firms diversifying from other industry.

Rivalry Between Established Competitors Aggressive competition: price cuts and industry-wide losses. Mute competition: advertising, innovation and other non-price dimensions.

Intensity of Competition Concentration: numbers and size distribution of firms competing within a market. Diversity of competition: The extent that firms can avoid price wars depends on how similar they are in origin, objectives, costs and strategy. Product differentiation: similar firms and products --> customers switching between them --> prices cutting.

Intensity of Competition Excess capacity and exit barriers: the balance between demand and capacity. o Barriers to entry are costs associated with capacity leaving an industry. Cost conditions: scale economies & ratio of FC and VC o Cost structure: firms will take a marginal business at any price that covers variable costs. o Scale economies: encourages price wars to gain greater volume.

Bargaining Power of Buyers Bargaining power of buyers in an industry establishes the ability of buyers to: o Force a reduction in the prices of products or services o To demand a higher quality of better service o Seek more value for their purchases

Inputs vs. Outputs Input Markets o Raw materials, labour services, components Output Markets o Sell goods and services to consumers Bottom Line o Transactions create value for buyers and sellers.

Buyer Price Sensitivity Sensitivity to prices charged by firms in an industry depend on the following: o Product differentiation o Competition between buyers o Cost of product relative to total cost

Relative Bargaining Power Key issue: The relative costs each party sustains as a result of the transaction not occurring. Factors that influence the bargaining power of buyers: o Importance of volume to buyers o Buyers’ information o Switching costs

Restaurant Example

Bargaining Power of Suppliers Comparable analysis to buyer power Key difference o Firms in the industry become buyers; producers of inputs become suppliers

Applying Industry Analysis Understanding how industry structure drives competition, allows us to apply this analysis in three ways: o Forecast Industry Profitability o Position the Company o Change industry structure for the better

Forecasting Industry Profitability Not to explain the past, but to predict the future. Use observations of structural trends in an industry to forecast changes in competition and profitability. Three stage process o Examine how industry’s current level of profitability are a consequence of its present structure o Identify trends o Identify how structural changes will affect five forces of competition

Positioning the Company How you position yourself in an industry is crucial in determining if you succeed or fail. Can you think of any examples of companies that either repositioned and thrived or ignored changes and fell behind?

Positioning the Company Music Industry Trucking Industry Movie Industry

Strategies to Alter Industry Structure ● Identify key structural features of an industry that are depressing profitability ● Consider which of these structural features can be changed through strategic innovations ○ Consolidation of an industry ○ Limit excess capacity, ○ Entry barriers preserve profitability

Using Industry Analysis Mobile Phone Industry: ● Describing industry structure ● Forecasting industry profitability ● Positioning the company ● Strategies to alter industry structure

Key Issues and Challenges Defining the Industry: ● Substitutability - The ability for customers to purchase another product for the same purpose of a different but similar product Is a Jaguar and a Ford Focus substitutable with each other?

Key Issues and Challenges (Cont.) Choosing an appropriate level of analysis Segmentation - When a firm divides a market to better push products towards certain consumers and users Steps to take: Identify possible segmentation variables Construct a segmentation matrix Analyze segmentation attractiveness Identify key success factors in each segment Analyze the attraction of brand versus narrow scope

Adding Additional Forces? While the presence of substitutes reduces the value of a product, complements increase value. The suppliers of compliments create value for the industry and can exercise bargaining power

Examples

Profit Will Go To: The supplier that builds a stronger market position and reduces the value contributed by the other supplier How is this done?

The Key Is To Achieve: Monopolisation Differentiation Shortage of supply in ones own product While encouraging: Competition Commoditization Excess capacity in production of complementary product

Another Addition To Porter’s Five Governments Example: o Australian government proposes to raise taxes on profits of mining companies

Dealing With Dynamic Competition Porter’s five determines competition in a predictable way but ignores the dynamic forces of innovation and entrepreneurship. If structural transformation is rapid, the five forces model has limited predictive value. General feature of industries today: Hypercompetition

Does Industry Matter? Are firms that are located in profitable industries likely to be more profitable than those that are not? The correct choice of firm strategy may be more important than the correct choice of industry.

Identifying Key Success Factors Start by asking two questions: What do customers want? What does the firm need to do to survive competition?

Identifying Key Success Factors Prerequisites for success What do customers want? How does the firm survive the competition? Analysis of demand ●Who are our customers ●What do they want? Analysis of competition ●What drives competition? ●What are the main dimensions of competition? ●How intense is competition? ●How can we obtain a superior competitive position?

Identifying Key Success Factors Example: Clothing Industry Focus: Customers willing to pay premium for exclusivity and quality How to survive: differentiation can yield substantial price premium, but imitation is rapid Key success factor: differentiation requires speed of response to changing fashions, style, reputation, and quality

Summary It is important for an industry to understand its competitive environment in order to be successful. Porter’s Five Forces Limitations, intensity, and capability are all up to each industry and firm.