Industry Analysis Introduction n Industry analysis takes two

Industry Analysis

Introduction n Industry analysis takes two broad forms q q n Porter’s Five Forces Analysis Brandenberger and Nalebuff’s Value Net Outcome q q assessment of industry and firms performance identification of key factors affecting performance show changes in business environment affect performance assess effectiveness of generic business strategies

Introduction (cont. ) n Limitations q q restricted view of demand growth conducted at the industry rather than firm level limited role for government qualitative rather than quantitative n n difficult to combine results with different combinations of “high”, “medium” and “low” into an overall assessment The five forces analysis is an organizing framework not a set of principles

Five-Forces Analysis: overview Entry Supplier Power Internal Rivalry Substitutes and Complements Buyer Power

Internal Rivalry n n Jockeying for market share Define the market q assess methods of competition: price and non-price n price rivalry is intense when q there are many sellers q products of different sellers are relatively homogeneous q there are low consumer switching costs q terms of sale/prices are unobservable; prices slow to adjust q sales orders are large and infrequent q there is excess capacity q there is little history of facilitating practices n erodes profits by driving down prices

Internal Rivalry (cont. ) n Non-price rivalry q q q n n advertising product proliferation R&D Erodes profits by raising costs Rivalry is intense q q when consumers are motivated to shop around and can do so when cost increases cannot be passed on in prices

Five-Forces Analysis: overview Entry Supplier Power Internal Rivalry Substitutes and Complements Buyer Power

Entry n Profits attract entry which erodes profits q q n steals incumbents’ market share increases internal rivalry Entry is affected by q q q economies of scale and scope consumer attitudes to reputation and brand loyalty ease of access to key inputs n technology; locations; distribution channels

Entry (cont. ) n Entry is affected by: q q experience curve network externalities n q q q advantage to firms with large installed base government regulation protecting incumbents expectations regarding post-entry competition exit costs n if entry creates specific assets that are unrecoverable

Five-Forces Analysis: overview Entry Supplier Power Internal Rivalry Substitutes and Complements Buyer Power

Substitutes and Complements n Distinct from entry q q may be in related but not identical industries new substitutes can be really problematic n n n render existing products obsolete gain from learning economies influenced by and take advantage of changes in fashion

Substitutes and complements n n n Substitutes erode profits Complements boost demand Factors to consider q availability n q price/value characteristics n q product performance characteristics little threat/opportunity if priced too high relative to value price elasticity of industry demand n if high the increased prices drive away consumers

Five-Forces Analysis: overview Entry Supplier Power Internal Rivalry Substitutes and Complements Buyer Power

Supplier and Buyer Power n Supplier power looks at strength of an industry’s suppliers q n An industry’s suppliers have power if q q n can they erode profits through their pricing policies? they are concentrated their customers are locked in through specific investments Need not relate to importance of the input q for example if major input is produced competitively

Supplier and buyer power n Buyer power is similar q ability of an industry’s customers to erode profits n n n by negotiating tough prices by demanding specific product design Supplier and buyer power have many features in common

Supplier and buyer power n Supplier (and buyer) power is affected by q concentration n q q q a highly concentrated supplying or buying industry exercises more power purchase volume: price discounts to large buyers availability of substitutes relationship-specific investment threat of forward integration ability to price discriminate

Coping with the Five Forces n n Identifies threats to profitability for all firms How to circumvent? q position to outperform rivals n q q develop a cost or differentiation advantage identify particular industry segment that is less competitive change the five forces n n n create switching costs (tie-in sales; warranty policy; . . ) entry-deterring strategies forward/backward integration to limit supplier/buyer power

Coopetition and the Value Net n Brandenberger and Nalebuff identify a weakness in the five forces analysis q n views all firms as threats to profitability But interaction can be positive as well as negative q firms increasingly cooperative n n n with suppliers/buyers with direct competitors Cooperation can take many forms

Coopetition n Efforts to set technology standards q n n Promote favorable regulatory environment Cooperation with suppliers q q n HDTV; DVD to improve quality to improve efficiency: JIT Cooperation with buyers to reduce inventory costs

The Value Net n Looks at suppliers, customers, competitors, complementary firms q q assesses threats and opportunities is there unexplored potential for profitable cooperation? n n n example of DVDs five-forces analysis predicts intense brand rivalry but the value net introduces the possibility of q q cooperation among manufacturers to boost acceptance cooperation with suppliers to boost supplies of discs