Today: Industry Analysis

Administrative issues
Current Events
Porter’s Five Forces Framework
How To Analyze Industry Environments
Walmart Case Analysis
Team assignment
Assign new case: RCA Records
WEBSITE:
www.sba.pdx.edu/faculty/stephens/ss.html
The External Environmental
Think in terms of Opportunities and Threats -
the “O” and “T” of TOWS

Relate Strategic Objectives to “O” and “T”
increased sales and/or market share
new product offerings
processing technology innovation

Continually scan to identify “O’s” and “T’s”
The External Environmental
The General Environment
Demographic: age, ethnicity, household
size, occupation
Economic: income distribution, inflation,
interest rates, exchange rates, urbanization
Political/Legal: consumer and
environmental protection, unions
The External Environmental
The General Environment
Social and Cultural: conservatism/
liberalism, nesting, materialism
Technological: e-tailing, intranets, diffusion
rates
Global: nationalism, transnational
corporations, cultural differences
The External Environmental
The Industry Environment

The following factors in an Industry…
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Threat of Substitute Products

...Determine Intensity of Competitive Rivalry
The External Environmental
Threat of New
Entrants
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Threat of Substitute
Products
Competitive
Rivalry
The Industry Environment
The External Environmental
Threats of New Entrants decreases if barriers to
entry are high...
Economies of Scale are high
Product Differentiation is high
Capital Requirements are high
Switching Costs are high
Access to Distribution Channels is limited
Cost Disadvantages Independent of Scale are high
Government Policy is restrictive
Expected Retaliation is high
Threat
of
New
Entrants

The External Environmental
Suppliers are likely to be powerful if:
Supplier industry dominated by a few firms
Suppliers’ products have few substitutes
Buyer is not important customer
Suppliers’ product is an important input
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Supplier poses credible threat to forward integration
Bargaining
Power of
Suppliers


The External Environmental
Buyers are likely to be powerful if:
They are concentrated or purchases are large relative to
seller’s sales
Purchase accounts for a significant fraction of supplier’s
sales
Product unimportant to quality
Products are undifferentiated
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer has full information
Buyer presents a credible threat to backward integration
Bargaining
Power
of
Buyers

The External Environmental
The keys to evaluating Substitute Products are:
Products with improving price/performance tradeoffs
relative to present industry products


For example:
 Electronic security systems in place of security guards
 Email and fax machines in place of overnight mail
delivery
Threat of
Substitute
Products

The External Environmental
Future objectives: goals
and risks, ability to
achieve
Current strategy:
competitive advantages
Retaliation: How will
competitor(s) respond to
your actions?

Assumptions: Can
competitor(s) adapt to
changing environment?
Capabilities: relative
strengths and
weaknesses?
Understanding Competitors
Barriers to Entry & Exit
If some industries are more profitable, why
don’t many companies enter?
Barriers to entry

If some industries are so unprofitable, why
don’t most companies leave?
Barriers to exit
Barriers To Entry
Costs new entrants have to bear to
enter the industry

A barrier to entry
increases the expected costs of entry for
new entrants
or limits their potential market share

Barriers To Entry
Factors Increasing Costs:
Economies Of Scale
Capital Requirements
Absolute Cost Advantages
Learning Curve / Experience Curve
Barriers To Entry: Economies of
Scale
Lower unit cost with large production

Economies of scale can arise from
Fixed costs
Distribution and marketing
Barriers To Entry: Capital
Requirements
The higher the capital requirement, the
higher the barrier?

Barriers To Entry: Absolute Cost
Advantages
An incumbent’s absolute cost advantage
may be an entry barrier (variable costs)
Proprietary technology
Government subsidiaries
Scarce resources, such as least cost supplies,
locking up shelf space or distribution channels,
or hiring best engineers.
Barriers To Entry: Learning
Curve / Experience Curve
What is the learning curve/experience
curve?
Costs decline as a function of past cumulative
output

Barriers To Entry: Market Share
and Other
Factors Limiting Market Share
Product Differentiation
Advertising / Brand Image
Access To Distribution
Expected Retaliation
Other Factors
Government Policy
Reputation
Exit barriers?
 Closing costs can be very high
 Sometimes, it is cheaper to lose money now (by remaining
open), than to close, reopening only when market
conditions are better.
– Reputation effects
– Taking a charge against earnings
– Start-up costs
– Organizational learning.
 Differentiate fixed costs and sunk costs
– If costs are not sunk, barriers are low (i.e. airline industry)
– If costs are sunk, barriers are high (i.e. auto plant)
Two ways around barriers to entry
 Fly under the radar!
– Find a small market niche, and develop your skills there
– Gradually expand out of the niche towards more lucrative
customers

 Operate the toll gate!
– Work upstream or downstream of the market, and integrate into
the lucrative market.
Entry and Sustainable
Competitive Advantage
A Paradox
Long-run profitable industries are those with significant
entry barriers
An entry barrier is an industry condition that makes
entry attractive
Solution to the paradox
The question is not whether there should be entry, but
who should enter
In other words, the key determinant of entry decisions is
the presence of a sustainable competitive advantage.
It may well pay to incur large entry costs, if a firm can
create a sustainable competitive advantage over
incumbents or potential future entrants.
What do we mean by buyer
power?
Preferences
How consumer tastes are distributed and how strong
those tastes are
Related to consumer branded goods

Bargaining Power
the consumer’s ability to exercise monopoly power
Related to industrial markets
Supplier Power
Suppliers affect our ability to achieve a
competitive advantage through:
the strength of their bargaining power

Suppliers can be broadly defined as the supplier of
any input:
Labor
Management
Technology
Physical Materials
Why don’t businesses “switch” suppliers
more often?
 Inertia—
– before remote controls, people didn’t “channel surf”

 Switching costs:
– Changing your major as a freshman is a whole lot less traumatic than
changing it next spring. (sunk costs)

 Idiosyncratic assets
– If you are a one of a kind buyer, your suppliers are few

 Search costs
– how do you find a new, reputable supplier?
A Supplier Matrix
Buyer is vulnerable Mutual
Dependence
Anonymous market
transactions
Buyer wields
monopsony power
Importance
of the
supplier in
the buyer’s
input base
Importance of the buyer in the supplier’s customer base
High
High
Low
Low
From: Oster, Sharon, 1999. Modern Competitive Analysis. P.43
How do we identify substitutes?
Substitutes are products that fulfill the same
function but are different products
Beer vs. wine
Air conditioner vs. fans Industries Evolve Over Time As
The Relationships Between The
Five Forces Change

time
d
e
m
a
n
d

A Sixth Force -
Presence of “Complementors”
Complementors
Industry Participants whose businesses enhance the value of yours
The Opposite of Substitutes
The Emergence of “Networks” of Organizations
Examples
Computer Manufacturers & Software Makers
Consumer Electronics & Entertainment Companies
The Central Issue
How to get “complementors” to make strategic investments which
mutually benefit both companies
How to increase the size of the pie rather than compete over the slices
Some Important Points About
Industry Analysis
The four external forces are interrelated to one
another
Changes in one force will cause subsequent
changes in other forces
Firm actions will help to shape the industry
environment
Often the most important thing to understand
about an industry is understanding how the forces
are “linked” together.
Some linkages to think about
 The threat of substitutes suggests
– That there is a “hole in the barrier to entry”
– buyers have more power because they can go elsewhere

 The power of suppliers suggests that
– You as a buyer are weak
– You don’t have alternatives
» No substitutes
» No new applicants

 What does competitive rivalry mean to barriers to entry?

The Uses of Industry Analysis
Static Analysis -
How Do We Explain Current Rivalry and
Profitability?

Dynamic Analysis -
Where Is The Industry Headed In The Future?
Next Time: Internal Analysis
Current Events
Case Analysis: RCA Records
Read Chapter 4
Team Time


WEBSITE:
www.sba.pdx.edu/faculty/stephens/ss.html
Questions for RCA Records
How are industry changes affecting
traditional record companies, new entrants,
artists, and retailers?
Describe RCA’s business strategy.
Where do you envision the music industry
in three to five years?
What, if anything, should RCA do
differently?