international strategic management - SUDZUCKER company Germany
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lec3.pptxCORP 5039 Lecture Week 3 External Environment – Micro Analysis
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Lecture Focus
The objectives of industry analysis
From environmental analysis to industry analysis
Porter’s Five Forces Framework
Applying industry analysis
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From Macro to Micro (Industry) Analysis
THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers
Social structure
The national/ international economy
Technology
Government
& politics
The natural environment
Demographic structure
Social structure
The Industry Environment lies at the core of the Macro Environment.
The Macro Environment impacts the firm through its effect on the Industry
Environment.
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Determinants of Industry Profitability
3 key influences:
The value of the product to customers
The intensity of competition
Relative bargaining power at different levels within the value chain.
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Industry Analysis
Define your industry.
It’s not easy! Globalising forces, internet connectivity and technological developments blur traditional industry parameters, and enable entrance into hitherto unrelated industries.
Boundaries further change as customer needs evolve
Google returns about 490 million in October 2017 (up from 310m in 2016) ‘hits’ for “e-books”. Has eBooks.com & bookhub.com, for example, merely advanced traditional book distribution. Are e-books and e-readers rivals, substitutes, new entrants, or complementors to traditional print media?
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Industry Analysis
Industry Definition: A group of companies offering products or services that are close substitutes for each other – that is, products or services that satisfy the same basic customer needs.
In identifying the industry, a good starting point is being clear on the basic customer needs being served. That is, adopted a customer-oriented view of the business.
Industry Sector: Group of closely related industries
E.g. Computer sector
Components industries: disk drive; semiconductor; modem
Hardware: Mainframe; PC; handheld
Software
Market Segment: Groups of customers within a market differentiated from one another based on distinct attributes and specific demands
E.g. PC industry: Desktop PC; Notebook PC; Servers (hosting centralised network of PCs)
Hill & Jones (2009) Theory of Strategic Management:43-44
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Profitability of Selected US Industries: Median return on equity (%), 1999-2007
| HIGH PROFITABILITY | LOW PROFITABILITY | ||
| Household & Personal Products | 26.0 | Motor Vehicles & Parts | 9.3 |
| Pharmaceuticals | 21.0 | Insurance Life & Health | 9.1 |
| Petroleum | 20.1 | Forest & Paper Products | 7.3 |
| Tobacco | 21.6 | Food Production | 6.5 |
| Food Consumer Products | 19.5 | Semiconductors & Electronic Components | 6.2 |
| Securities and Investment Banking | 18.4 | Network & Communications Equipment | 5.9 |
| Beverages | 17.2 | Telecommunications | 5.8 |
| Medical Products & Equipment | 17.2 | Entertainment | 2.7 |
| Scientific & Photographic Equip. | 15.6 | Airlines | -12.6 |
| Commercial Banks | 14.8 | ||
| Computer Software | 14.0 | ||
| Aerospace & Defense | 13.9 |
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Industry Structures as Indicator for Profitability
Concentration
Entry and Exit
Barriers
Product
Differentiation
Information
Perfect
Competition
Oligopoly
Duopoly
Monopoly
Many firms
A few firms
Two firms
One firm
No barriers
Significant barriers
High barriers
Homogeneous
Product
Potential for product differentiation
Perfect
Information flow
Imperfect availability of information
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Introduction to Porter’s Five Forces (1979/80)
Most commonly used tool for analysing the competitive environment.
Describes the environment in terms of five basic competitive forces.
Collectively, the factors determine the profit potential of an industry and relationships with the forces tend to be seen as conflictual and ‘zero-sum’ in nature.
The industry competitive analysis should focus on the overall industry a firm competes in prior to accounting for market segments or sector issues.
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Porter’s Five Forces
Bargaining Power of Suppliers.
Threat of New Entrants.
Threat of Substitutes.
Bargaining Power of Buyers.
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Intensity of rivalry
Suppliers
Substitutes
Buyers
Potential
Entrants
Determinants of the Strength of the Forces
THREAT OF ENTRY
Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution
channels
Legal/ regulatory barriers
Retaliation
SUBSTITUTE
COMPETITION
Buyers’ propensity
to substitute
Relative prices &
performance of
substitutes
SUPPLIER POWER
Suppliers’ price sensitivity
Relative bargaining
power
INDUSTRY RIVALRY
Concentration
Diversity of competitors
Product differentiation
Excess capacity &
exit barriers
Cost conditions
BUYER POWER
Buyers’ price sensitivity
Relative bargaining
power
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Threat of New Entrants
Threat of new entrants to industry profitability depends upon the height of barriers to entry.
Higher barriers lead to lower risks of entry and greater profitability.
The principal sources of barriers to entry are:
Capital requirements (e.g. Airbus/Boeing)
Economies of scale
Absolute cost advantage
Product differentiation (brands)
Access to channels of distribution & supply (shelf spaces; vertical integration)
Legal and regulatory barriers
Retaliation (Price wars; marketing blitz)
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Threat of Substitutes
Substitute products (services): Offerings of companies to customer needs in a similar fashion to the industry under analysis.
Extent of competitive pressure from producers of substitutes depends upon:
Buyers’ propensity to substitute
The closer the similarity, the greater the likelihood of price sensitivity and possible inclination for substitution.
The price-performance characteristics of substitutes. (e.g. Aluminum and Steel)
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Bargaining Power of Buyers (Suppliers)
Buyer’s price sensitivity
Relative bargaining power
Cost of purchases as %
of buyer’s total costs.
How differentiated is the
purchased item?
How intense is
competition between
buyers?
How important is the
item to quality of the
buyers’ own output?
Size and concentration of
buyers relative to
sellers.
Buyer’s information .
Ability to backward
integrate.
Note: analysis of supplier
power is symmetric
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Competitive Rivalry
The extent to which industry profitability is depressed by aggressive price competition depends upon:
Concentration (number and size distribution of firms)
Diversity of competitors (differences in goals, cost structure, etc.)
Product differentiation
Excess capacity and exit barriers
Cost conditions
Extent of scale economies
Ratio of fixed to variable costs
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Five Forces: Implications
Firstly, the 5Fs analysis is a good indicator of the industry structure
Monopoly, oligopoly, hypercompetition, perfect competition
Importantly, the tool should be seen as a means to an end not the end in itself.
Findings should prompt further evaluation:
What industries to enter (or leave)
What influences can be exerted?
How are competitors variously affected by changes to structure and environment?
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Five Forces: Implications
Most industries are somewhere between the extremes
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If Threats are High
Expect Normal Profits
If Threats are Low
Expect Above Normal Profits (results from market imperfections)
