1. Industry and Market Analysis

2. Profitability Differences Between Industries

3. Profitability Differences within Industries

4. Profitability of US Manufacturing Industries, 1971-1990
INDUSTRY ROE% ROA%
Drugs
Food and kindred products
Chemicals and allied products
Instruments and related products
Industrial chemicals and synthetics
Paper and allied products
Aircraft, guided missiles and parts
Fabricated metal products
Motor vehicles and equipment
Rubber and miscellaneous plastic products
Electtric and electronic equipment
Machinery, expert electrical
Stone, clay and glass products
Textile mill products
Nonferrous metals
Iron and steel

5. The Objectives of Industry Analysis
To understand how industry structure drives competition, which determines industry profitability.
To assess industry attractiveness.
To identify strategies with the greatest potential for profit within the industry.
To consider how changes in industry structure may affect future profitability and the desirability of different strategies.

6. Forces Driving Industry Competition
SUPPLIERS
Bargaining power of suppliers
Threat of new entrants
MARKET
COMPETITORS
POTENTIAL ENTRANTS
SUBSTITUTES
Rivalry among existing firms
Threat of substitute products or services
Bargaining power of customers
BUYERS
Source: Porter (1980)

7. INDUSTRY COMPETITIVENESS
SUPPLIER POWER
Factors determining power of suppliers relative to producers same as those determining power of producers relative to buyers--see “Buyer Power” box.
THREAT OF ENTRY
economies of scale
absolute cost advantages
capital requirements
product differentiation
access to distribution channels
governmental and legal barriers
retaliation by established producers
INDUSTRY COMPETITIVENESS
concentration
product differentiation
excess capacity
ratio of fixed to variable costs
demand growth
cyclical fluctuations of demand
exit barriers
THREAT OF SUBSTITUTES
buyer propensity to substitute
relative price performance of substitutes
Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
BUYER POWER
Price sensitivity
cost of purchases
profitability of buyers
importance of the product to quality of buyers’ product
Bargaining power
size and concentration of buyers relative to suppliers
buyers’ switching costs
buyers’ information
buyers’ ability to backward integrate

8. INDUSTRY COMPETITIVENESS
Airline
Industry
(ROE=-1%)
SUPPLIER POWER
HIGH
strong labor unions
concentrated aircraft makers
THREAT OF ENTRY
HIGH
entrants have cost advantages
low capital requirements
little product differentiation
deregulation of governmental barriers
INDUSTRY COMPETITIVENESS
HIGH
many companies
little product differentiation
excess capacity
high fixed/variable costs
cyclical fluctuations of demand
THREAT OF SUBSTITUTES
MEDIUM
autos for short distance travel
Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
BUYER POWER
MEDIUM/HIGH
Buyers extremely price sensitive
Good access to information
Low switching costs

9. INDUSTRY COMPETITIVENESS
Your
Industry
Segment?
SUPPLIER POWER ?
THREAT OF ENTRY ?
INDUSTRY COMPETITIVENESS ?
THREAT OF SUBSTITUTES ?
Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
BUYER POWER ?

10. Summary of Industry “Five Forces”
Industry structure has a major impact on average company profitability.
Industry structure determines which set of strategies will have the greatest potential for profit.
Even the most profitable strategy can be challenged as industries evolve.
Competition is broader than direct competitors.
Source: Porter (1980)

11. Strategic Implications
Positioning defensively
Influencing the balance of forces through strategic moves
Anticipating shifts in the forces and responding to them

12. Generic Strategies
Source of Advantage
Competitive
Scope

13. Influencing Industry Forces
Defensive Positioning -- less ompetitive, more differentiated niches
Bargaining Power -- VI and Alliances
Rivalry -- Mergers, differentiation, incentives
Substitutes -- raise switching costs
Entry Barriers

14. Influencing Entry Barriers
Pre-emptive investments
Differentiation
Moves to raise capital requirements
Influence government policy
Raise switching costs

15. Anticipating Shifts in Industry Structure
Regulation
Technology
Social and demographic shifts

16. How dynamic is your industry?
Hypercompetition
vs.
Inertia and Persistence

17. The Case for Inertia Percent who stayed in perf. Category: 1981-97
Sustained high performers %
Moderate performers %
Low performers %

18. Understanding Industry Differences
Slow-cycle markets
Standard-cycle markets
Fast-cycle markets

21. Uncertainty and Strategy
Useful prediction
Discrete scenarios
Continuous uncertainty
Formulation
Formal planning and Forecasting
Scenario analysis -- robust strategies, options
Emergent learning, flexibility