Strategic Analysis
ANDYXU666
L3Theindustryenvironmentanalysisvt.pdf
22/06/2020
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Strategic Management
Module 3 The industry
(competitive) environment
Dr Xueli (Charlie) Huang
School of Management
A brief review of key points in Module 2
• What is environment?
• Using PESTEL framework for conducting macro-
environment analysis
–Purpose
– Level/focus of analysis
– Process
–Key drivers of changes
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Opening story
-- Who killed Ofo?
• The China’s bicycle sharing industry
–Bicycle sharing in China has increasingly become popular since
it started operating in 2014
–The sharing bicycle market in China is massive with over 400
million registered users.
–Around 60 firms so far have put 16-18 million bicycles onto
Chinese streets.
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Who killed ofo? (2/4)
• Major competitors include Mobike, Bluegogo, and
Xiaoming
– Mobike was acquired by a HK-listed company
(Meituan Dianping, China's largest provider of on-demand online
services) for $2.7 billion in April 2018
• Overall the Chinese bicycle sharing company has been
growing very fast.
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Who killed Ofo? (3/4)
• Dubbed as one of the four China’s new
inventions and next “Uber”, ofo launched its
business in 2015.
• https://www.youtube.com/watch?v=O-
yCzVgD9Vs
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Who killed Ofo? (4/4)
–ofo has raised over US$ 2 billion between 2015 and 2018, deployed over 10 million of bicycles in 250 cities in 20 countries by 2017
–Nevertheless, Ofo is on the brink of bankruptcies due to its cash- burning and its ability to pay debt since July 2018. Over 10 million of Chinese users were waiting for refunding of their deposit.
• What factors at the industry level drive the industry’s performance or profitability?
– Competition, cars, scooters, suppliers, new entrants?
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Learning Objectives
After studying this module, you should be able to:
•Use Porter’s five forces analysis in order to define the attractiveness of industries and sectors and to identify their potential for change.
•Identify successful strategic groups.
•Understand Porter’s structure – conduct –performance perspective or Industrial organisation / positioning perspective.
– A dominant strategic management perspective
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External environment or factors:
Macro and industry environment
Internal factors or environment
Two broad sets of factors primarily determine an
organisational performance: internal and external environment
Organisational
performance Production
Marketing
Human Resources
R&D
The firm
Logistics
Services
Info system
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Industries, markets and sectors
An industry is a group of firms producing products and services
that are essentially the same. For example, automobile industry
and airline industry.
A market is a group of customers for specific products or
services that are essentially the same (e.g. the market for luxury
cars in Germany).
A sector is a broad industry group (or a group of markets)
especially in the public sector (e.g. the healthcare sector)
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Industry (competitive) environment and
Porter’s five forces framework
Porter’s five forces framework helps identify the attractiveness of an industry in terms of five competitive forces:
• the threat of entry,
• the threat of substitutes,
• the bargaining power of buyers,
• the bargaining power of suppliers and
• the extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.
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The Porter’s five forces framework (1)
Figure 2.2 The five forces framework
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The five forces framework (1)
The Threat of Entry & Barriers to Entry
• The threat of entry is low when the barriers to entry are high and vice versa.
• The main barriers to entry are:
➢ Economies of scale/high fixed costs (e.g., steel industry, airline)
➢ Experience and learning (e.g., pharmaceutical industry’s R&D spending)
➢ Access to supply and distribution channels
➢ Differentiation and market penetration costs
➢ Government restrictions (e.g. licensing)
• Entrants must also consider the expected retaliation from organisations
already in the market
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The five forces framework (2)
Threat of Substitutes
Customers will switch to alternatives (and thus the threat increases) if: • Substitutes compete for industry profit, but from outside of the industry
•The price/performance ratio of the substitute is superior (e.g. aluminium maybe more expensive than steel but it is more cost efficient for some car parts)
• The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from one city centre to another)
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The five forces framework (3)
The bargaining power of suppliers
Supplier power is likely to be high when:
➢The suppliers are concentrated (few of them), (e.g., iron ore suppliers to the
steel industry)
➢Suppliers provide a specialist or rare input (e.g., Intel).
➢Switching costs are high (it is disruptive or expensive to change suppliers).
➢Suppliers can integrate forwards (e.g. low cost airlines have cut out the use
of travel agents).
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The five forces framework (4)
The bargaining power of buyers
Buyer power is likely to be high when:
➢ Buyers are concentrated
➢ e.g., Coles buys milk from a large number of farmers
➢ Buyers have low switching costs
➢ e.g., Universities contract travel agency for their services
➢ Buyers can supply their own inputs (backward vertical integration)
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Strategic buyers/customers?
A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.
Examples:
• For a pharmaceutical manufacturer it is the health authorities and hospitals not the final patient.
• For the aged care industry, it is Federal Government as it funds 70% of the industry revenue
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The five forces framework (5)
Rivalry between competitors
• The degree of rivalry is increased when :
– Competitors are of roughly equal size
–Competitors are aggressive in seeking leadership
–The market is mature or declining
–There are high fixed costs
–The exit barriers are high
–There is a low level of differentiation
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Interpreting industry analyses
Porter’s 5 force framework
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Industry life cycle and Porter’s five forces
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Implications of five forces analysis
• Identifies the attractiveness of industries – which industries/markets to enter or leave.
• Identifies strategies to influence the impact of the forces, for example, building barriers to entry by becoming more vertically integrated.
– What are the most attractive opportunities to increase profits?
– What are the potential threats to existing profit?
• The forces may have a different impact on different organisations (or strategic group) e.g. large firms can deal with barriers to entry more easily than small firms.
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Industry environment analysis – A brief summary
• Understanding the purpose of this analysis
– to predict the attractiveness/profitability of the industry analysed
• Be clear about the level (unit) of the analysis
– The entire industry as a whole (a strategic group)
• Using the analytical framework – 5-force analysis
– To use it for analysing the strength of each force through assessing key relevant factors within each force
• Predicting the industry attractiveness/profitability in the future and developing strategies to shape the structure
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Strategic Groups
Strategic groups are organisations within an industry or sector with
similar strategic characteristics, following similar strategies or
competing on similar bases.
• These characteristics are different from those in other strategic
groups in the same industry or sector.
• There are many different characteristics that distinguish between
strategic groups.
• Strategic groups can be mapped on to two dimensional charts –
maps. These can be useful tools of analysis.
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Characteristics for Identifying Strategic Groups
Scope of activities
• Extent of product diversity
• Extent of geographic coverage
• Number of segments served
• Distribution channels
• Degree of vertical integration
Resource commitment
• Extent of branding
• Marketing effort
• Extent of vertical integration
• Product quality
• Technological leadership
• Organisational size
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Breadth of product line Narrow Wide
Low
High
Q u
a li ty
Toyota
Ford
GM
Chrysler
Honda
Nissan
Mercedes
BMW
Ferrari
Porsche
Hyundai
Kia
Great Wall
The World Automobile Industry: Strategic Groups
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Why is the concept of strategic group useful?
• Understanding competition - enables focus on direct competitors within a strategic group, rather than the whole industry. (e.g. Coles will focus on Woolsworth)
• Analysis of strategic opportunities - helps identify attractive ‘strategic spaces’ within an industry and thus chart the future directions of firms’ strategies.
• Analysis of ‘mobility barriers’ i.e. obstacles to movement from one strategic group to another. These barriers can be overcome to enter more attractive groups. Barriers can be built to defend an attractive position in a strategic group.
• It also helps a firm –identify groups those competitive position may be marginal or tenuous –think through the implications of each industry trend for the strategic group
as a whole
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Strategic ‘positioning’ or competitive perspective
• There are two broad ways to competition –Externally–focused or “strategizing”: by positioning your firm against your competitors, suppliers, users, and potential entrants
–Internally-focused or “economizing”: by improving internal efficiency or innovation.
• Market positioning or competitive view (Porter’s positioning perspective) – The external environment is a key determinant of strategy and performance, and
– A firm performance is a function of industry and firm specific effect.
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Module 3 summary
• Industries and sectors can be analysed in terms of Porter’s five forces – barriers to entry, substitutes, buyer power, supplier power and rivalry. Together, these determine industry or sector attractiveness.
• In the inner layer of the environment, strategic group
analysis can further help identify strategic gaps or
opportunities.
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Reading for next week
• Chapter 4 in the textbook
– Resources and capabilities
• Assignment 2 Guide in the Course Canvas
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