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Industry Analysis

Industry Analysis

Industry analysis facilitates


 assessment of industry and firm performance
 identification of factors that affect performance

 determination of the effect of changes in the


business environment on performance and
 identification of opportunities and threats
(SWOT analysis)
Industry Analysis

 Industry analysis helps with assessing generic


business strategies
 Porter’s five forces framework is rooted in
microeconomics
 Value net (Brandenburger and Nalebuff)
supplements the five forces framework to analyze
strategy
The Five-Forces Framework

 Michael Porter’s Five-Forces framework


identifies the economic forces that affect
industry profits
 The five forces are
 Internal rivalry
 Entry
 Substitutesand complements
 Supplier power
 Buyer power
The Five-Forces Framework
Porter’s model of 5 competitive forces is
one of the most often How easy or hard it is for new entrants to
used business start and compete? Any barriers to their
entry?
Potential New Entrants
strategy tools
How strong is the rivalry among existing
players? Does only one player dominate?

Intra- Bargaining
Bargaining Industry Rivalry Power of the
Power of Suppliers Strategic Business Buyers
Unit
How strong is the position of the How strong is the position
suppliers? Are there many? Few? of the buyers? Can we sell
Monopoly? in large volumes? Do we
need to discount heavily?
Source:
Substitute Products
Michael E. Porter “Forces and Services
Governing Competition in How easy or hard it is for
a new product or service to replace what already exists?
Industry (Harvard Business
Review, Mar.-Apr. 1979)
Internal Rivalry

 Internal rivalry is the competition for


market share among the firms in the
industry
 Competition could be on price or some non-
price dimension
 Price Competition erodes the price cost
margin and profitability
Internal Rivalry

 Competition on non-price dimension can


drive up costs.
 Non-price competition does not erode
profits as severely as price competition if
customers are willing to pay a higher price
for the improvements.
Internal Rivalry

Price competition heats up when


 There are many sellers
 Some firms have cost advantage over others

 There is excess capacity in the industry

 Products are undifferentiated and switching


costs are low
 Prices and sale terms are easily observable
Internal Rivalry

Other conditions that facilitate intense price


competition
 Large and infrequent sales orders
 Absence of “facilitating practices”

 Absence of a history of cooperative pricing

 Strong exit barriers

 Industry demand is elastic


Entry

 Entry hurts the incumbents by


 by cutting into the incumbents’ market share and
 by intensifying internal rivalry and leads to a
decline in price cost margin
 Barriers to entry can be
 exogenous (nature of the industry) or
 endogenous (incumbents’ strategic choices)
Factors that Affect the Threat of Entry

 Minimum efficient scale relative to the size of the


market
 Government policies that favor the incumbents
 Brand loyalty of consumers and value placed by
consumers on reputation
 Entrants’ access to critical resources such as raw
material, technical know how and distribution
network
Factors that Affect the Threat of Entry

 Steepness of the learning curve


 Network externalities that give the
incumbents the benefit of a large installed
base
 Incumbents’ reputation regarding post-entry
competitive behavior
Substitutes and Complements

 Availability of substitutes erode the demand


for the industry’s output
 Complements boost industry demand
 When the price elasticity of demand is large,
pressure from substitutes will be significant
 Changes in demand can in turn affect
internal rivalry and entry/exit
Supplier Power

 Supplier has indirect power if upstream


market is competitive. It sells to the highest
bidder.
 Supplier has direct power if
 the upstream industry is concentrated or
 the customers are locked into the relationship
with suppliers due to relationship specific assets
Buyer Power

 Buyer power is analogous to supplier power


 Buyers have indirect power in competitive
markets
 Buyer concentration or relationship specific
assets can lead to direct power
 Buyer power relative to upstream is
analogous to supplier power relative to
downstream
Supplier Power

The factors that determine supplier power are


 Competitiveness of the input market
 Relative concentration the industry
 Relative concentration of upstream and
downstream firms
 Purchase volume by downstream firms
 Availability of substitute inputs
 Extent of relationship specific investments
 Threat of forward integration by suppliers
 Suppliers’ ability to price discriminate
Some Strategies to Cope with the Five Forces

 To outperform its rivals firms can


 develop a cost advantage or
 a differentiation advantage

 Firms can seek an industry segment where


the five forces are less severe
 Firms can try to change the forces
Some Strategies to Cope with the Five Forces

 Facilitating strategies to reduce internal


rivalries
 Moves that increase switching costs for the
customers
 Pursuing entry deterring strategies
 Tapered integration to reduce
buyer/supplier power
Generic
GenericStrategies
Strategiesand
andIndustry
IndustryForces
Forces
Generic Strategies
Industry
Force Cost
Differentiation Focus
Leadership

Entry Ability to cut price in Customer loyalty can Focusing develops core
retaliation deters potential discourage potential competencies that can act
Barriers entrants. entrants. as an entry barrier.

Large buyers have less Large buyers have less


Buyer Ability to offer lower price power to negotiate power to negotiate
Power to powerful buyers. because of few close because of few
alternatives. alternatives.
Suppliers have power
because of low volumes,
Supplier Better able to pass on
Better insulated from but a differentiation-
supplier price increases to
Power powerful suppliers. focused firm is better able
customers.
to pass on supplier price
increases.
Customer's become
Threat of Can use low price to Specialized products &
attached to differentiating
defend against core competency protect
Substitutes attributes, reducing threat
substitutes. against substitutes.
of substitutes.
Rivals cannot meet
Better able to compete on Brand loyalty to keep
Rivalry price. customers from rivals.
differentiation-focused
customer needs.
Criticisms
 Although Porter theory is renowned, it has a number of critics.
 Porter developed this paper based on case studies and these
tend to only apply to developed economies.
 Porter argues that only outward-FDI is valuable in creating
competitive advantage, and inbound-FDI does not increase
domestic competition significantly because the domestic firms
lack the capability to defend their own markets and face a
process of market-share erosion and decline. However, there
seems to be little empirical evidence to support that claim.
 The Porter model does not adequately address the role of
MNCs. There seems to be ample evidence that the diamond is
influenced by factors outside the home country.
Five Forces and Value Net

 The Five-Forces Framework tends to view


other firms - competitors, suppliers or
buyers - as threats to profitability
 In the value net model (Coopetition)
interactions between firms can be positive or
negative
Cooperative Interactions Among Firms

 Setting industry standards that facilitate industry


growth
 Lobbying for regulation or legislation that favors
the industry
 Cooperation with buyers/suppliers
 to improve product quality
 to improve productive efficiency

 to improve inventory management


The Value Net Concept

 The value net consists of


 Suppliers

 Customers

 Competitors and

 Complementors (producers of complementary goods and


services)
 The value net complements the five forces
approach by considering opportunities posed by
each force.
The DVD Hardware Market:
A Five-Forces Analysis

 Internal rivalry was intense. Brand name was the


main source of differentiation
 It was easy for consumer electronics firms to enter.
 Satellite TV could be a substitute. Streaming over
the internet was another possibility.
The DVD Hardware Market:
A Five-Forces Analysis

 Movie studios (upstream) and big retailers


(downstream) had power.
 DVD hardware makers, according to this
analysis, had reason to be pessimistic.
 DVD format’s success can be attributed to
firms working together (value net).
The DVD Hardware Market: The Value Net

 In the beginning DIVX was a major threat.


 DVD manufacturers cut prices on some
models and advertised heavily.
 Other members of the value net chipped in
to increase the size of the DVD “pie.”
 Movie studios released popular titles in DVD format and
priced them moderately
 Retailers promoted the DVD hardware and software
Commercial Airframe Manufacturing

 Boeing and Airbus compete globally.


 Fringe players in aircraft with capacity less
than 125 seats are excluded from the
analysis.
 The market share (by revenue) of the fringe
players is small.
 There are no meaningful submarkets.
Commercial Airframe Manufacturing:
Internal Rivalry

 Boeing delivered its first commercial aircraft in


1958.
 Airbus is younger.
 Boeing enjoys economies of scope due to its
defense business.
 Airbus gets government subsidies.
 Stable market shares and reduced incentive for
price wars
 Historically there has been little product
differentiation
Commercial Airframe Manufacturing:
Internal Rivalry

 Airbus developed the double-decker mega


plane.
 Boeing abandoned competing with its Sonic
Cruiser.
 Airliners exhibit loyalty to suppliers
 Economic slowdown has reduced the
demand for aircraft.
Commercial Airframe Manufacturing: Entry

Major barriers to entry are:


 Huge development costs
 Experience-based advantages

 Buyer reluctance to buy from startups

 Customer loyalty to current suppliers


Commercial Airframe Manufacturing: Substitutes

 Small plane manufacturers cut into demand


for Boeing and Airbus planes in regional
routes.
 As demand for air travel increases airlines
switching back to larger planes in regional
routes.
 Other forms of transportation could be
substitutes (High speed rail) for “regional
jets.”
Commercial Airframe Manufacturing:
Supplier Power

 Parts market is competitive


 Part suppliers deal directly with airlines.
But Boeing’s Global Airlines Inventory
Network (GAIN) gains leverage over
suppliers.
 Jet engine suppliers are not numerous and
enjoy direct power.
 Unionized labor has significant supplier
power.
Commercial Airframe Manufacturing:
Buyer Power

 Buyers for aircraft are either airlines or


leasing companies. Neither have buyer
power.
 Each order could be of the order of 15% of
annual sales revenue for the manufacturer.
 Buyers may cancel orders during economic
downturns.
Five-Forces Analysis of the Commercial Aviation
Industry
Professional Sports: Market Definition

 Major sports leagues in the U. S.


 MLB

 NBA

 NFL

 NHL

 Five force analysis is also applicable to


major sports leagues elsewhere
Professional Sports: Internal Rivalry

 Sports leagues require competitive balance


to keep the contests interesting
 Athletic competition does not imply
business competition
 Internal rivalry is low within leagues as
teams follow rules and share revenue
 Teams do not compete in the labor market
Professional Sports: Entry

 Each league has rules for admitting new


teams.
 Current owners need to be compensated
when new teams are added.
 Incumbent owners can veto new franchises
in their geographic market.
 Starting an entire new league is risky.
Professional Sports:
Substitutes and Complements

 Teams compete in the local markets with


other forms of entertainment
 Elasticity of substitution is quite low
 Important complements
 Television

 Sports betting
Professional Sports: Supplier Power

 Unionized players
 For new players NCAA has been a benign
supplier
 Cities spend tax dollars to build facilities to
attract sports teams.
 As municipal finances get tighter,
subsidizing teams becomes more difficult.
Professional Sports: Buyer Power

 Television networks and sports cable


systems compete with each other for
broadcasting rights
 In negotiations regarding broadcast rights
leagues have the upper hand against
 television networks
 local television and

 radio.
Five-Forces Analysis of Professional
Sports Leagues