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Industry Analysis
Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants. It is a market assessment tool designed to provide a idea of the complexity of a particular industry to a business. Scanning of Environment is complete only with Industry Analysis and Competition Analysis
Objectives
To understand how industry structure drives competition, which determines the level of industry profitability. To assess industry attractiveness
INDUSTRY ANALYSIS
INDUSTRY PRACTICES
Distribution, pricing, promotion, methods of selling, service/field support, R&D, legal tactics FMCG - rely on carrying & forwarding agent (C&A) - Industry practice Textiles - Wholesalers - Semi wholesalersretailers + retail showrooms (few players)
INDUSTRY ANALYSIS
INDUSTRY STRUCTURE
No. of players Total market size Relative share of the players Nature of competition : Monopoly, oligopoly, Perfect competition Different practices followed by various players Barriers in the industry - Entry Barriers - Mobility Barriers - Exit Barriers
INDUSTRY ANALYSIS
EMERGING TRENDS Industry life cycle, rate of growth, changes in buyer needs, innovations in products/ processes, entry & exit of firms, changes in regulatory environment governing the industry
A few firms
Two firms
One firm
Significant barriers
High barriers
Information
Structure-Conduct-Performance Paradigm
Positive correlation between concentration ratio (CR4) and price/profitability. Why? Higher advertising to sales ratio Correlated with superior profitability. Why? Multi-market contact correlated with higher prices/profitability. Tool for antitrust.
Con..
Industry cyclicality Factors affecting sensitivity of earnings to Industry cyclicality
Sensitivity of sales of the firms product Operating leverage Financial leverage
Table 17.6 Operating Leverage of Firms A and B Throughout the Business Cycle
Sector Rotation
Portfolio is adjusted by selecting companies that should perform well for the stage of the business cycle
Peaks natural resource extraction firms Contraction defensive industries such as pharmaceuticals and food Trough capital goods industries Expansion cyclical industries such as consumer durables
Sales Growth
Rapid & Increasing Stable Slowing Minimal or Negative
SUPPLIERS
Bargaining power of suppliers INDUSTRY COMPETITORS POTENTIAL Threat of ENTRANTS new entrants Threat of Rivalry among existing firms SUBSTITUTES substitutes
BUYERS
THREAT OF ENTRY
Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distribution channels Legal/ regulatory barriers Retaliation
Concentration Diversity of competitors Product differentiation Excess capacity & exit barriers Cost conditions
INDUSTRY RIVALRY
SUBSTITUTE COMPETITION
Buyers propensity to substitute Relative prices & performance of substitutes
SUPPLIER POWER
Suppliers price sensitivity Relative bargaining power
Threat of Substitutes
Cost of purchases as % of buyers 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?
25
20
15
10
0
Return sales Return onon sales Return investment Return onon investment Cash flow/Investment Cash flow/ Investment
-5
-5% to 0 0 to 5% 0 to 5% 5% to 10% > 10% Over 10% Less than -5% < -5% -5% to 0 5% to 10% ANNUAL RATE OF GROWTH OF MARKET DEMAND
25 20
Profitability (%)
Strategies to Improve Industry Profitability What structural variables are depressing profitability Which of these variables can be changed by individual or collective strategies?
On the supply side : are manufacturers able to switch production between types of cars and across countries
We may need to analyze industry at different levels of aggregation for different types of decision
Identifying Key Success Factors Through Modeling Profitability: The Airline Industry
Profitability = Yield x Load factor - Unit Cost
Income ASMs
Revenue RPMs
RPMs ASMs
Expenses ASMs
Strength of
competition on routes. Responsiveness to chaanging market conditions % business travelers. Achieving differentia- tion advantage
Price competitiveness.
Efficiency of route planning. Flexibility and responsiveness. Customer loyalty. Meeting customer requirements.
Wage rates.
Fuel efficiency of planes. Employee productivity.
Load factors.
Administrative overhead.
Return on Sales
ROCE
Max. sales/sq. foot through: *location *product mix *customer service *quality control Sales/Capital Employed Max. inventory turnover through electronic data interchange, close vendor relationships, fast delivery Minimize capital deployment through outsourcing & leasing
Ford Case
Why has profitability in the auto industry declined from 10% from 1965-1972 to 4% today? How is the structure of the industry likely to change in the next five years? Is the industry going to be more or less profitable in the next five years? Which companies are going to be more profitable? What should Ford in the next five years?