1. Chapter 3 Industry Analysis
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2. How Are Industries Defined?
Products in the industry are functionally similar.
Example: Air conditioners cool the air in a building in a functionally similar way that is different from a fan, which is a substitute.
Products in the industry compete directly by influencing demand.
Changes in the value or price of a firm’s product affect demand for competing firms’ products.

3. Industry Analysis Identifying industry competitors
Firms whose products provide value in functionally equivalent ways.
Firms that compete directly through changes in product value and price.
Firms that face the same common factors of economic interdependence in an industry.
Identifying substitute producers
Firms whose products are functionally different from an industry’s products but compete to provide value to the same industry buyers.

4. What Determines Firm Profitability?
Macroeconomic factors
The overall state of the economy
Industry factors
Business environment and competitive conditions specific to an industry
The firm’s market position
The degree to which a firm is strategically benefited by the position it holds within an industry

5. Transportation Sector
Relative Contributions of Industry and Business Unit to Economic Performance
Manufacturing Sector
Transportation Sector
Services Sector
Percentage Contribution of Business Segment, Industry and Other Factors to Business Return on Assets 1980–1994 (U.S. data).
Figure 3.3

6. Economies of Scope Economies of Scope Reduce costs Enhance value
Generalist Strategy
Specialist Strategy

7. Industry Development over Time
More
Product Price
Product Value
Market Segmentation
Less
Early
Industry Development
Late

8. Forces Influencing Firm Performance
The potential for entry into the industry by new firms
The strength of competition
The power of buyers
The power of suppliers
The strength of substitutes for the industry’s products
The strength of complements of the industry’s products

9. Porter’s Five Forces Framework
Competition for dominance in the industry
Source: Michael Porter, Competitive Strategy (New York: Free Press, 1980), p. 4.
Figure 3.1

10. The Effect of Industry Forces on Value, Cost, and Price
Table 3.1a

11. The Effect of Industry Forces on Value, Cost, and Price (cont’d)
Table 3.1b

12. Rivalry’s Effects on Competition
Perfect competition
No firm makes a profit above its capital cost, since rivalry has driven the market price down to marginal cost.
Oligopolistic competition
Localized competition occurs among a few similar firms within and across market segments.

13. Rivalry and Economic Performance
Characteristics of increased rivalry that lead to low economic performance:
Many competitors
A common set of buyers for all firms
The same value offered by all firms
The same cost structure in all firms
Relatively costless entry
Relatively costless exit
The combination of these conditions produces a state of perfect competition.

14. Buyer Power Buyer power is increased by:
The availability of competing products with the same value and price
Buyer concentration (few buyers)
Low market growth
Low importance of the product to the buyer
High importance of selling product to buyer
Supplier need to fill capacity by selling to buyer
Credible threat of vertical (backward) integration by the buyer

15. Supplier Power Supplier power is increased by:
Supplier concentration (few suppliers)
Growth in supplied industry (buyer demand)
Low percentage of supplier volume bought by customer (size of buyer relative to supplier)
The strategic importance of supplier to buyer
The strategic importance of buyer to supplier
Low threat of backward integration by buyer

16. What Factors Raise Entry Barriers?
High barriers to imitation
Property rights
Dedicated assets
Causal ambiguity
Learning curve and development costs
High customer switching costs
Lower prices by firms in the industry
Limit pricing

17. Substitutes The threat of substitutes increases when:
A firm has a low buyer surplus (value minus price) relative to the substitute.
A firm’s customers have low switching costs.
Defenses against substitutes:
Increase the buyer’s surplus
Raise buyer’s switching costs

18. Cooperation for mutual gain
The Value Net
Cooperation for mutual gain
Adapted from: Adam Brandenburger and Barry Balebuff, Co-opetition (New York: Doubleday, 1996), p. 17.
Figure 3.2

19. Industry Forces Increasing Profits
Coordination among competitors
Cooperative pricing (not price-fixing) to avoid price competition
Readily available pricing information
Comparable value-cost profiles for competitors
Establishing interfirm partnerships

20. Industry Forces Increasing Profits
Cooperation between buyers and suppliers
Sharing information
Operating (e.g., logistics)
Strategic (e.g., technology development
Sharing resources and capabilities
Quality management techniques

21. Cooperative Pricing Example
Price leadership requires:
Observable prices
Common buyers
Strategic discipline
A small number of firms
Common history of competition
Comparable market positions
Adherence to antitrust law
Cooperative output levels
Interfirm partnerships

22. What Are Complements? Complementary products
Are products, not in the same industry, whose patterns of demand are systematically positively correlated and move in tandem.
Create a reciprocal expansion of demand.
Example: Skis and ski boots, sails and sailboats, tires and automobiles.

23. Strategic Groups
Strategic groups are a level of analysis between the firm and the industry.
Characteristics of strategic groups:
Firms within an industry that have similar cost and value drivers compared to firms in other groups.
Firms which compete in the same segment or across segments for the same customers.
Firms that take a similar approach to competing in an industry.

24. Mobility Barriers and Strategic Groups
Mobility barriers for strategic groups
Are actions taken by stronger and more profitable competitors to protect their segments from entry by rival firms in the industry.
Prevent the movement of firms from one strategic group to another.
Are created by entry-deterring behavior of firms in a group (e.g., isolating mechanisms specific to the group or limit pricing).
Are similar to barriers to entry to the industry.

25. Value (quality, technology)
Strategic groups in the Chain Saw Industry in 1978 (Classic Example of a Products Industry)
High
Stihl
Husqvarna
Jonsereds
Partner
Solo
Homelite
McCullough
Value (quality, technology)
Beaird-Poulan
Remington
Echo
Roper
Low
High
Cost (higher price in professional market and lower price in mass market)
Low

26. The Internet Brokerage Industry: Selected Firms (Fall 2000)
Table 2.1a

27. The Internet Brokerage Industry: Selected Firms (Fall 2000)
Table 2.1b