Critical thinking 1: Strategy & Industry Analysis
ra1411
MGT510_PPTSlides_Mod0203.pptxChapter 2
Industry Analysis
Learning Objectives
By the time you have completed this topic you will:
be familiar with several frameworks used to analyse an organisation’s external environment and understand how the structural features of an industry influence competition and profitability;
be able to use evidence on structural trends within industries to forecast changes in competition and profitability and to develop appropriate strategies for the future;
understand the value and challenge of undertaking industry analysis and be able to provide a critique of Porter’s five forces framework;
be able to analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (key success factors).
©2012 Robert M. Grant & Judith Jordan
2
The profitability of US industries, 2000-2010
| Industry | Median ROE 2000-10(%) | Leading companies |
| Tobacco | 33.5 | Philip Morris Int., Altria, Reynolds American |
| Household and personal products | 27.8 | Procter & Gamble, Kimberly-Clark, Colgate-Palmolive |
| Motor vehicles and parts | 4.4 | GM, Ford, Johnson Controls |
| Entertainment | 3.9 | Time Warner, Walt Disney, News Corporation |
| Airlines | -11.3 | AMR, UAL, Delta Airlines |
©2012 Robert M. Grant & Judith Jordan
3
Source: Data from Fortune 1000 by industry. See Grant & Jordan Table 2.1 for a more detailed list of US industries.
3
How can we account for these differences in industry profitability?
It is all down to luck?
Some industries are in decline, others are growing fast?
The basic premise that underlies industry analysis is that the level of industry profitability is neither random nor entirely the result of industry-specific influences, it is determined by the industry’s underlying economic characteristics
INDUSTRY STRUCTURE
©2012 Robert M. Grant & Judith Jordan
4
Analysing the business environment
The business environment of the firm consists of the external influences that affect its decisions and performance
How can managers monitor the vast array of possible influences?
Need to distinguish the ‘vital’ from the ‘merely important
Classification schemes like PEST can help
©2012 Robert M. Grant & Judith Jordan
5
PEST Analysis
How macro-environmental factors might impact a business organisation:
©2012 Robert M. Grant & Judith Jordan
6
| Political Changes in government economic policy, e.g. taxation, government spending, monetary policy Changes in legal requirements e.g. employment law, health and safety legislation, licensing practices, environmental regulations, competition policy Changes in the government ownership e.g. nationalisation, privatisation, de-regulation | Economic Changes in the level of economic activity, e.g. growth rates, rates of unemployment, inflation Changes in wage rates and income distribution Changes in exchange rates |
| Social Changes in demographics e.g. the size of the population, the age distribution with the population Changing attitudes e.g. work/life balance, concern for the environment, ethical standards Changes in social structure e.g. socio-economic groupings, social mobility | Technological Development of new products and processes Automation Developments in information and communication technologies Developments in the natural sciences |
From environmental analysis to industry analysis
©2012 Robert M. Grant & Judith Jordan
7
7
Porter’s Five Forces of Competition Framework
©2012 Robert M. Grant & Judith Jordan
8
Structural determinants of the competitive forces
©2012 Robert M. Grant & Judith Jordan
9
Applying industry analysis
Industry analysis can be used to:
Explain differences in profitability between industries and changes in the profitability of a given industry over time
Assist managers in positioning the firm advantageously
Predict possible changes in competition and profitability in the near future
Identify opportunities for changing industry structures and alleviating competitive pressures.
©2012 Robert M. Grant & Judith Jordan
10
The challenges of applying the five forces framework
Defining the industry
Choosing the appropriate level of analysis
Dealing with missing factors
Dealing with uncertainty and rapid structural change
©2012 Robert M. Grant & Judith Jordan
11
Criticisms of the five forces of competition framework
Two major lines of critique:
it omits important variables and cannot be applied to the dynamic and complex realities of many industries without significant modification
the premise on which the model is based is flawed and not supported by strong empirical evidence
©2012 Robert M. Grant & Judith Jordan
12
Does industry matter?
A number of studies seem to show that industry environment is a relatively minor determinant of a firm’s profitability
This points to the need to dig deeper, for example, by analysing competition between firms within particular market segments or by looking more closely at the competitive behaviour of individual firms.
| % of variance in firms’ ROA explained by: | |||
| Industry effects | Firm effects | Unexplained variance | |
| Schmalensee (1985) | 19.6% | 0.6% | 79.9% |
| Rumelt (1991) | 4.0% | 44.2% | 44.8% |
| McGahan & Porter (1997) | 18.7% | 31.7% | 48.4% |
| Hawawini et al. (2003) | 8.1% | 35.8% | 52.0% |
| Roquebert et al. (1996) | 10.2% | 55.0% | 32.0% |
| Misangyi et al. (2006) | 7.6% | 43.8% | n.a. |
©2012 Robert M. Grant & Judith Jordan
13
Segmenting the market for mobile phones
©2012 Robert M. Grant & Judith Jordan
14
14
Identifying key success factors
©2012 Robert M. Grant & Judith Jordan
15
15
