discussion
steve826
mgmt_685_session_31.pptxIndustry analysis
Agenda
Opening case
Two approaches for analysis of external linkages
Structural approach
Porter’s five forces framework
Strategizing based on structural analysis
Competitive positioning and strategic groups analysis
Process approach: zero-sum vs. positive-sum
Value net framework
National diamond framework
Other global frameworks
Case:
State of the entertainment industry
Video: The event that transformed the music industry
Opening case
Why is console gaming dying?
The survival of traditional console makers will depend on how they adapt to evolving business models and changing consumer tastes
Gaming consoles are being replaced more slowly and increasingly being used for streaming movies, rather than gaming, so console makers are unable to make money off the games.
Games developed by firms in social and mobile sectors are gaining popularity due to their social aspect, cheapness, and easy accessibility anywhere anytime of the day
Next-generation is no longer “next”. It is difficult to achieve significant improvements in already cutting-edge graphics to catch consumer attention
Approaches for analysis of external linkages
Structural Approach
emphasizes the imperatives and strategies for competitive positioning, i.e. how firms identify spaces over which they have control on and defend their position to capture most value.
Process approach
emphasizes the institutionalized rules of ownership, exchange, and governance that shape how firms strategize specific structures; the possibilities of cooperative as well as competitive relationships, and of national and global-level networks and support systems
Structural approach – Porter’s five forces framework
Porter’s five forces framework helps to analyze the structural attractiveness of an industry, in order to assess the profit potential of the firms holding intermediate positions within a value system
The objective of the five forces analysis is to improve value capture, as opposed to improving value creation
The analysis assumes that it is not possible to change participant behavior directly; the firms must strive to reposition themselves or change the industry structure in order to bring about a change in participant behavior
Intensity of rivalry among firms in the industry
Potential threat from substitute providers
Buyer bargaining power
Potential threat of entry from new firms
Supplier bargaining power
Structural analysis using Five Forces framework
Threat of Entry of New Firms
The concept of entry barriers implies that substantial costs, time and investment are required to enter an industry. The higher the entry barriers, the less likely are the new firms to enter the industry. Entry barriers depend on the sub-factors:
Ease of building supply
Access to difficult-to-trade resources, capabilities, and core competencies
Reachable capital requirements
Ease of building demand
Penetrability of the customer relationships of existing firms
Insufficient switching costs
Experience high exit barriers
Expected retaliation. Strong if existing firms:
Enjoy substantial resources and historical experience to fight back
Favorable regulatory policies
Rapid market renewal
Face slow industry growth
Structural analysis using five forces framework
Threat of Substitute Providers
Substitutes limit the potential profits of an industry by placing a ceiling on the prices firms in the industry can charge
The firms should be particularly attentive to those substitute products that:
show a trend of improving their price-performance ratio
generate high profits, that may become the basis for the substitute providers to drive cost and price reduction or performance improvement and differentiation
The position of the firms relative to the substitute providers is generally a matter of collective action by the industry participants. Product quality improvement, product availability, and product differentiation and advertising by a single firm may not be sufficient to improve the industry’s position against a substitute. However, heavy and sustained efforts by all participating firms can improve the industry’s collection position
Structural analysis using five forces framework
Bargaining Power of Buyers
Buyers’ forcefulness to bargain depends on:
Their need for superior terms of purchase, such as because of the low profitability of their industry, or because their purchases from our industry constitute a significant portion of their costs
Their leverage over our industry, such as because of their knowledge about our industry, or their power to negotiate, and integrate backward into our industry
Their ease of substitution, such as because the products offered by our industry are undifferentiated and standard, or because they do not involve much switching costs
Structural analysis using five forces framework
Bargaining Power of Suppliers
An industry may deal with several supplier groups, whose forcefulness to bargain on factors mirrors those of buyer groups:
Concept of suppliers includes not only the other firms providing intermediate inputs, equipment, and services, but also the labor
Its need for superior terms of sale, such as because of the low profitability of its industry, or because our industry’s purchases are not of great importance to it – such as because they constitute only a small portion of its overall revenues
Its leverage over our industry, such as because of its knowledge about our industry, or its power to negotiate, and integrate forward into our industry
Its difficulty of substitution, such as because the products it offers are proprietary and differentiated, or because they involve significant switching costs
Structural analysis using five forces framework
Intensity of Rivalry among Competitors
Rivalry among competitors means jockeying for position, using tactics that include price - and non-price competition. Intensity of rivalry among firms depends on:
The firms may improve their position in competitive rivalry by focusing their efforts on the fastest growing segments of the industry, or on market areas where they have an asymmetric advantage in terms of resources and capabilities and being able to differentiate; they may also try to avoid confronting competitors with high exit barriers, so that they mitigate the threats of price warfare
Presence of numerous, equally balanced, or diverse competitors
Slow growth of the industry
High exit barriers
Strategizing based on structural analysis
Based on the structural analysis, a firm is able to craft a competitive strategy to create a defendable position against the five forces, using three possible approaches:
Better competitive positioning
The firm may assume the structure of the industry as given, and seek to find and move into positions or segments in the industry where the five competitive forces are the weakest
Exploiting evolution and disruptions in industry structure
Predicting the likely shifts in the structure of competitive forces through the different phases of industry evolution can help firms stay ahead
The firm may consider what aspects of the five competitive forces are under its control, and strive to actively shift the forces by managing those aspects
Influencing the balance of forces
Structural approach – Porter’s five forces framework
Limitations and Benefits of the framework
- Does not consider the independent effects of macro factors such as politics and new technologies
- Does not consider the independent effects of micro behavioral factors such as cognitions, emotions, and social relations, on the profit potential of an industry
- Does not consider the interactive effects of macro and micro factors
- One may however sub-group the industry based on differing macro influences and micro behaviors, and conduct separate analysis of each e.g. gaming industry may be sub-grouped into console gaming and online gaming
Compliance (Market Structures) and Competitive Business Strategies
There are two typologies of market structures – one based on the niche density (i.e. the number of competitors), and the other based on carrying capacity (i.e. the industry lifecycle)
Typology of market structures
Based on niche density
Monopoly
Oligopoly
Based on carrying capacity
Nascent market
Niche markets
Perfect competi-tion
Hyper-competition
Dominant firm
Fragmented market
Market Structures based on Niche Density, and Strategic Behaviors: Monopoly
Monopoly refers to a market structure with only one firm. The monopoly firm is largely free to decide its own price, output, and other product and service features
Monopolists are known to engage in a range of tactics, or games, to impede the entry and success of other entrants: “predatory pricing”, “essential facility denial”, “vaporware”
In the Internet era, new types of monopolies – referred to as creative monopolies – have emerged, who are actually helping to cut the monopoly power of suppliers, and transfer value back to the consumers (for example, Amazon)
Market Structures based on Niche Density, and Strategic Behaviors: Oligopoly
Oligopoly comprises of a few large firms that perceive one another as mutually inter-dependent. There exists an intense rivalry along several dimensions, such as price, quality, brand image, and market share. Success requires firms to consider the effects of their actions on the competitors’ behavior
It is best for a firm to strike a balance between industry level cooperation (to avoid profit eroding warfare) and firm level competition (to avoid giving up potential revenues and profits)
New evidence suggests that most oligopolistic markets tend to become ineffective because of collusive tendencies, and ripe for creative destruction by new firms
Market Structures based on Niche Density, and Strategic Behaviors: Niche Markets
Niche markets consist of market segments within the larger marketplace that emphasize a particular need, or geographic, demographic or product segment but that differ along some key dimensions from other market segments in the marketplace
Firms have two options for value differentiation in niche markets:
Market Structures based on Niche Density, and Strategic Behaviors: Perfect Competition
Perfect competition is characterized by the lack of significant fixed costs or investments, and running business largely on variable costs. The firms tightly monitor their variable costs, and compete on efficiency
Though basic economic theory considers perfect competition to be the ideal state for social welfare, it does not provide effective conditions for the growth of the firms or the industry. It often invites fly-by-night players to make a fast, extra buck by free riding on the public goods and social infrastructure.
A key insight is when the access to infrastructure, technology and knowledge is based on the pay per use model, more firms are likely to enter the market with limited risks of huge losses if they fail. Such pay per use model thus can engender several creative endeavors and promote innovation and growth.
Market Structures based on Industry lifecycle, and Strategic Behaviors: Nascent Competition Market
Nascent competition markets are usually spurred by technological innovation, newly emerging customer needs, and economic and sociological shifts. A distinguishing characteristic of the nascent competition market is the lack of any “rules of the game”, and a competitive race among the firms
The success requires winning the competitive race on several fronts: improving the functionality of the technology, forging advantageous relationships with channel partners, acquiring a core group of loyal customers, accessing patient venture capitalists and entrepreneurial human capital, and moving fast to develop a network of players who commit to the use of firm’s technology as the reliable, cost-effective and dominant one
Market Structures based on Industry lifecycle, and Strategic Behaviors: Hyper-competitive Market
Hyper-competitive market is turbulent and fast changing where the rules of game are continually shifting, spurred by the processes of globalization and information economy
The firms therefore seek to distribute up-front investment requirements, either across a network of firms or over time
A firm competing on the edge of hyper-competition thrives on the “guerilla advantage”
Market Structures based on Industry lifecycle, and Strategic Behaviors: Dominant Firm
Dominant firm structure comprises of a single large firm at the core, and several smaller firms at the periphery of the market
The dominant firm generally enjoys a competitive advantage based on the lower costs deriving from early entry and “learning-by-doing”, large economies of scale, and proprietary technology; the smaller firms focus on niches that are not profitable or attractive for the dominant firm, due to factors such as smaller scale, idiosyncratic resources and knowledge bases, and customized services of the smaller firms in their target markets
A special form of the dominant firm is the vertical dominance, where a dominant firm forms captive vertical relationships with vendors and distributors
Market Structures based on Industry lifecycle, and Strategic Behaviors: Fragmented
Fragmented structure is one where no firm has a significant market share to strongly influence market outcomes
While the products tend to be expensive and not very well developed, the success depends on keeping the costs low using a “bare bones” approach with low overheads, minimum wage employees, and tight cost control
A fragmented structure often arises when the government breaks-up a monopoly, or deregulates entry into an erstwhile monopoly market
Approaches for consolidating a fragmented market:
Mergers & Acquisitions
Codification and Franchising
Verticalization
Case: State of the entertainment industry
The comprehensive picture of modern entertainment industry highlights a few key points:
The amount of money and content in the entertainment industry has always trended upwards. The opportunity levels are tremendous. The real
challenge is for creators and companies to figure out how best to capture that opportunity - especially in the face of growing competition
For consumers, today is an age of absolute abundance in entertainment. More content is available in more ways than ever before
For the traditional middlemen, the internet represents both a challenge and an opportunity
For content creators, it is an age of amazing new opportunity. More people are making more money from creating content than ever before
Case: State of the entertainment industry
Music production and consumption are growing
Amount of music available to consumers is steadily growing
The overall sale of music (including albums, singles, digital tracks, etc.) exceeded 1.5 billion transactions in 2010
By 2010, the IFPI estimated the market to be worth $168 billion
Case: State of the entertainment industry
Changes in the music industry:
In the past, most music was recorded on CDs
Nowadays consumers prefer buying single tracks rather than CDs
In the past, there was a limited amount of music genres
Nowadays millions of songs of new music genres appear, therefore high-cost investments to produce a “rock-star” type album may not be a sustainable strategy for a producer
Case: State of the entertainment industry
The advantage that the music industry has over other creative industries is that music is a particularly pervasive product that can be associated with everything from soft drinks to cars to enterprise software/hardware. Therefore, the music industry has multiple opportunities to diversify its revenue streams:
Advertising deals
Live music/ concerts
Licensing revenues from TV, movies and video games
Merchandise sales
Case: State of the entertainment industry
New strategies in contemporary music business
Selling digital tracks directly to consumers
business-to-business transactions: corporate sponsorship of music; music licensing for software development; music licensing for online videos; music in video games
Video case: The event that transformed the music industry
Napster is a simple downloadable computer program that enables users to share the music for free
Napster dramatically changed peoples’ expectations of music to: ”cheap and easy”
Music artists got divided in two groups: Pro-Napster (Prince etc.) and Against-Napster (Metallica)
Napster shifted the bargaining power of suppliers and customers in the industry, and enabled new substitutes and new entrants
