assignment 2
ahmd54
Industryanalysis_2017.pptConcepts and Techniques
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- Industry structure & company performance
- Does industry matter much?
- Five forces
- Why do some industries outperform others?
- Limitations of Porter’s five forces
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X
P
- Total profit
- Profit rate (ROA, ROS)
- Total revenue
- Market share
- Growth
- Shareholder returns
- Market capitalization
- Stakeholder satisfaction
- Employees
- Social contribution
What Causes Superior Performance?
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Sources of competitive advantage
- External factors
- Industry structure
- Small number of competitors
- Protection by laws and regulations
- A company’s positioning in the industry
- Internal factors
- Know-how
- Reputation
- Unique capabilities
- Intellectual property
- Culture
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Discussion questions
What are the five forces?
According to Porter, what’s the significance of analyzing the five forces?
What are the steps in conducting industry analysis?
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1. What are the five forces?
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Five Forces Analysis
Why do some industries outperform others?
Industry structure. The five forces:
1. New entrants
2. Competitive Rivalry
3. Power relative to Buyers
4. Power relative to Suppliers
5. Threat of Substitutes
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A tool to gauge the level of competition within a company’s industry and to help managers set their profitability expectations
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Competitors
Buyers
Suppliers
New entrants
Substitutors
Power relative
to suppliers
Power relative
to buyers
Threat of
substitutes
Threat of
new entry
Rivalry
Five Forces Analysis
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4
Richard Whittington, New College
Oxford MBA, Strategic Management
Michael Porter Explains His Famous Five Forces And How They Can Be Used In Business Strategy
https://www.youtube.com/watch?v=WS0TfJGfKGk
0:42 -5:30
Supply-side economies of scale
Demand-side benefits of scale
High customer switching costs
High investment: capital requirements
Specialized knowledge: Unequal access to distribution channels
Strict regulations
New entrants
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Source: Porter (2008, p.81)
The barriers to entry is high if. . .
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Competitive Rivalry
Competitors are numerous or are roughly equal in size and power.
Industry growth is slow.
Exit barriers are high.
Rivals are highly committed.
Firms cannot read each other’s signals well because of lack of familiarity with one another.
The intensity of rivalry is greatest if. . .
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Source: Porter (2008, p.85)
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Power re: Buyers
Number: There are few buyers.
The industry’s products are standardized or undifferentiated.
Buyers face few switching costs in changing vendors.
Buyers can credibly threaten to integrate backward and produce the industry’s product themselves if vendors are too profitable.
A customer group has negotiating leverage if. . .
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Source: Porter (2008, p.83)
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Power re: Suppliers
Number: It is more concentrated than the industry it sells to.
Industry participants face switching costs in changing suppliers.
Product differentiation: Suppliers offer products that are differentiated
There is no substitute for what the supplier group provides.
The supplier group can credibly threaten to integrate forward into the industry.
A supplier group is powerful if . . .
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Source: Porter (2008, p.82)
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Threat of Substitutes
It offers an attractive price-performance trade-off to the industry’s product.
The buyer’s cost of switching to the substitute is low.
The threat of a substitute is high if. . .
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Source: Porter (2008, p.84)
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2. According to Porter, what’s the significance of analyzing the five forces?
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The most profitable industries in 2015
Source: Forbes, 2015
Here Are the 10 Most Profitable Companies
http://fortune.com/2016/06/08/fortune-500-most-profitable-companies-2016/
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In the first 100 years of US air
travel (1903-2002) the industry
made exactly zero net profit.
Financial Times, 22/11/03
“If there had been a capitalist at Kitty Hawk,
he should have shot down Wilbur Wright.”
Warren Buffet
An Unattractive Industry
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Industry Structure
& Firm Performance
Industry structure
Firm performance
Attractive
Unattractive
Low
High
Unattainable
performance
Uncompetitive
performance
Pharmaceuticals
Financial svcs
Telecomm
Airlines
Retail
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Two Ways to Improve
Firm Performance
Change industry structure
- Manage the five forces (raise entry barriers, reduce rivalry, …)
- Manage the value chain, profit pools, complementarities
Migrate into attractive industries
- Manage corporate growth; the corporate portfolio
- Diversification strategy; merger & acquisition; synergies
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3. What are the steps in conducting industry analysis?
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New entrants
Threat of
Substitutes
Rivalry
Power re:
Suppliers
Power re:
Buyers
Analysis
- Define the industry
- Plot positions on each axis
3. Join the positions
- the larger the area, the more attractive the industry
4. Manage industry structure?
Low
Low
Low
Low
Low
Star Plot of Industry Structure
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•
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•
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13
Richard Whittington, New College
Oxford MBA, Strategic Management
Five forces analysis
- High: supplier power
- High: buyer power
- High: threat of substitutes
- High: competitive rivalry
- Low switching cost
- High/Low: Threat of new entrants
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Starbucks
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Structural change and industry profitability
- Negative structural changes in the Pharmaceutical industry
Cost controls
Emergence of generic drugs
Emergence of biotechnology
=> Decreases industry profitability
- Positive structural changes in the Airline industry
Hub and spoke route system
=> Higher barriers for new entrants
Sophisticated management system
=> Higher barriers for new entrants
Frequent traveler programs
=> The competitive rivalry becomes less intense
=> Increases industry profitability
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HBS] Michael Porter on Competitive Strategy (structural change)
https://www.youtube.com/watch?v=c4ZBVp8-9gA
13:26-18
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Limitations of Porter’s five force model
Industry structure cannot fully explain the performance differences among competitors in the same industry.
Inside-out strategy is ignored (e.g., capabilities)
- It ignores innovation.
- Innovation creates change in industry structures, altering the competitive environment.
It is often possible to create completely new markets instead of selecting from existing ones (e.g., Blue Ocean strategy)
This view portrays an industry as a zero-sum game
- The way you get a bigger piece of the pie is to take it from one of the other participants in the industry.
- Companies can also work with other industry participants to try to build a larger pie.
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