Professional Documents
Culture Documents
Business Strategy
The Nature of Industry
7-2
Overview
I. Market Structure
II. Conduct
Pricing Behavior
Integration and Merger Activity
III. Performance
Dansby-Willig Index
Structure-Conduct-Performance Paradigm
7-3
Industry Analysis
Market Structure
Conduct
Pricing.
Advertising.
R&D.
Merger activity.
Performance
Profitability.
Social welfare.
Market Structure
Structural characteristics of a
market
The number of firms and the extent of overseas competition (e.g. from
within the single market or in global markets)
The market share of the largest businesses (measured by the
concentration ratio)
The nature of costs in the short and long run
The degree to which an industry is vertically integrated up and down
the supply chain (e.g. forward and backward vertical integration)
The extent of product differentiation / product branding
Price and cross price elasticity of demand
The number and size of buyers of the industrys product
The turnover of customers from one seller to another (also called
market churn) this is affected by brand loyalty and the effects of
advertising and marketing
Competition,
Competition,market
marketstructures
structuresand
andbusiness
businessdecisions
decisions
Market
Marketstructures
structures
The
Thefirm
firminincompetitive
competitivemarkets
markets
Perfect
Perfectcompetition
competition
Non-perfect
Non-perfectcompetition
competition
Monopoly
Monopoly
Oligopoly
Oligopoly
Monopolistic
Monopolistic
competition
competition
Market Structures
Degree of competition in the industry
High levels of competition Perfect
competition
Limited competition Monopoly
Degrees of competition in between
Market Structure
Determinants of market structure
Market
structure
Examples
Parts of
Perfect
agriculture are
competitio
reasonably
n
close
Monopolisti
c
Retail trade
competitio
n
Number
of
producer
s
Many
Type of
product
Power
of firm
over
price
Barrier
s to
entry
Non-price
competition
Standardized
None
Low
None
Low
Advertising and
product
differentiation
Many
Differentiated
Some
Oligopoly
Computers,
oil, steel
Few
Standardized
or
differentiated
Some
High
Advertising and
product
differentiation
Monopoly
Public utilities
One
Unique
product
Considerable
Very
high
Advertising
12
Market Structure
Perfect
Competition
Pure
Monopoly
Market Structure
Perfect
Competition
Pure
Monopoly
Market Structure
Pure
Monopoly
Perfect
Competition
Monopolistic Competition
Oligopoly
Duopoly Monopoly
Market Structure
Importance:
Degree of competition affects
the consumer will it benefit
the consumer or not?
Impacts on the performance
and behaviour of the company/companies
involved
Market Structure
Models a word of warning!
Market Structure
Characteristics of each model:
Market Structure
Characteristics: Look at these everyday products what type of
market structure are the producers of these products operating
in?
Electric
Guitar
Jazz
VodkaBody
Canon
SLR Camera
Bananas
Remember to
think about the
nature of the
product, entry and
exit, behaviour of
the firms, number
and size of the
firms in the
industry.
You might even
have to ask what
the industry is??
Perfect Competition
One extreme of the market structure spectrum
Characteristics:
Restaurants
Plumbers/electricians/local builders
Solicitors
Private schools
Plant hire firms
Insurance brokers
Health clubs
Hairdressers
Funeral directors
Estate agents
Damp proofing control firms
Oligopoly
Competition between the few
Oligopoly
Example:
Music sales
Oligopoly
Features of an oligopolistic market structure:
CI Telecome
https://www.youtube.com/watch?
v=u_uePM3Gsk4
Supermarkets
Oligopoly behaviour
On line shopping
Supermarket store website
Opening hours
brand / product range
Non food products
Sainsburys
Waitrose
Tesco
alibaba
https://www.youtube.com/watch?
v=9VTggkSykpI
Oligopoly behaviour
Non price competition
Price rigidity
L shape cost curve (flat
bottom!)
Collusion
Petrol
Hotel
DIY
Electrical Retailing
Package Holidays
Banks
Phone
Soft drinks
Price rigidity
Despite changes in costs of production,
oligopoly prices appear to remain at a
constant level
Consider petrol prices. Very rarely
different within a geographical area
collusion or market forces?
Pfizer vs Merck
https://www.youtube.com/watch?
v=M5LNPB-malY
Tactic collusion
This is not illegal
It is where competitive firms monitor each
others behaviour closely and refrain from
competing on price.
This is often seen as price leadership where
competitors follow the dominant firms
lead.
Cartels
Where a few firms dominate they could set
an agreement on price, quantities for supply,
service standards etc
The collusion restricts output
The collusion raises prices
The collusion raises abnormal profits
The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq,
Kuwait, the Socialist Peoples Libyan Arab Jamahiriya, Nigeria, Qatar, Saudi
Arabia, United Arab Emirates & Venezuela.
Duopoly
Market structure where the industry is dominated
by two large producers
Monopoly
Pure monopoly where only
one producer exists in the industry
In reality, rarely exists always
some form of substitute available!
Monopoly exists, therefore,
where one firm dominates the market
Firms may be investigated for examples of
monopoly power when market share exceeds 25%
Use term monopoly power with care!
Monopoly
Monopoly power refers to cases where firms influence
the market in some way through their behaviour
determined by the degree
of concentration in the industry
Influencing prices
Influencing output
Erecting barriers to entry
Pricing strategies to prevent or stifle competition
May not pursue profit maximisation encourages unwanted
entrants to the market
Sometimes seen as a case of market failure
Monopoly
Origins of monopoly:
Monopoly
Summary of characteristics of firms exercising
monopoly power:
Monopoly
Innovation - could be high because
of the promise of high profits, Possibly
encourages high investment in research and
development (R&D)
Collusion possible to maintain monopoly power
of key firms
in industry
High levels of branding, advertising
and non-price competition
Monopoly
Problems with models a reminder:
Contestable Markets
Theory developed by William J. Baumol,
John Panzar and Robert Willig (1982)
Helped to fill important gaps in market
structure theory
Perfectly contestable market the
pure form not common in reality but a
benchmark to explain firms behaviours
Contestable Markets
Key characteristics:
Firms behaviour influenced by the threat
of new entrants to the industry
No barriers to entry or exit
No sunk costs
Firms may deliberately limit profits made
to discourage new entrants entry limit
pricing
Firms may attempt to erect artificial barriers
to entry e.g
Contestable Markets
Over capacity provides the
opportunity to flood the market
and drive down price in the event
of a threat of entry
Aggressive marketing and branding
strategies to tighten up the market
Potential for predatory
or destroyer pricing
Find ways of reducing costs and
increasing efficiency to gain competitive
advantage
Contestable Markets
Hit and Run tactics enter the
industry, take the profit and get
out quickly (possible because of
the freedom of entry and exit)
Cream-skimming identifying
parts of the market that are high
in value added and exploiting
those markets
Contestable Markets
Examples of markets exhibiting
contestability characteristics:
Financial services
Airlines especially flights
on domestic routes
Computer industry ISPs, software,
web development
Energy supplies
The postal service?
Approaches to Studying
Industry
7-59
Conduct
Performance
Structure-Conduct-Performance
Market Structure:
Structure-Conduct-Performance
Industry concentration is measured by the four-firm sales
concentration ration (CR4).
Problem: CR4 = .6 (.15, .15, .15, .15) or
CR4 =.6 (.57. .01, .01, .01)
Which is more likely to exhibit monopoly power?
Alternative Measure: Herfindahl-Hirschman Index (HHI index)
61
Structure-Conduct-Performance
HHI = sum of market shares squared.
A monopolist (1 firm with 100% of market) the
10,000
HHI =
62
Structure-Conduct-Performance
Defining the relevant market:
63
Structure-Conduct-Performance
In 1982, the manufacturing sector was
divided into 450 such four-digit industries.
SIC Code
CR4
# of firms HHI
.94
.84
.66
.26
.06
39
71
2745
2602
67
2089
108
1591
584
1306
4161
18
64
EXHIBIT 1
CONCENTRATION RATIOSPERCENTAGE
OF TOTAL INDUSTRY SALES PRODUCED BY
THE LEADING FOUR FIRMS, AND HHI
Source: U.S. Bureau of the Census, 1992 Concentration Ratios in Manufacturing, 1996.
65
66
Entry
Entry Costs
Speed of Adjustment
Sunk Costs
Economies of Scale
Power of
Input Suppliers
Industry Rivalry
Network Effects
Reputation
Switching Costs
Government Restraints
Level, Growth,
and Sustainability
Of Industry Profits
Supplier Concentration
Price/Productivity of
Alternative Inputs
Relationship-Specific
Investments
Supplier Switching Costs
Government Restraints
Concentration
Price, Quantity,
Quality,
or Service Competition
Degree of
Differentiation
Switching Costs
Timing of Decisions
Information
Government
Restraints
7-67
Power of
Buyers
Buyer Concentration
Price/Value of Substitute
Products or Services
Relationship-Specific
Investments
Customer Switching Costs
Government Restraints
Delicensing 1993-94.
Decontrol
Free entry and exit of firms.
Allowing for FDI
Reducing of tariff on components .
Allowing FDI up to 100% (Hyundai)
Reduction in excise duty.
Producer and Seller Share of Passenger Cars and Jeeps Segment in Pre-Maruti Phase
Cars segment
Years
1960-61
1965-66
1970-71
1975-76
1980-81
HM
PS
MS
48.26
49
70.55
71
64.99
65
51.4
50
70
71
PAL
PS
MS
34.12
34
25.12
25
33.21
34
47.3
50
29
28
Jeeps
segment
SMPIL
PS
MS
18.62
17
4.47
4
1
1
n/a
n/a
n/a
n/a
SIPANI
PS
MS
n/an/a
n/a
n/a
n/a
n/a
*
n/a
1
1
M&M
PS
MS
100
100
100
100
100
100
100
100
100
100
32.38
36.82
29.55
*
*
39
42
17
*
*
1988-89
PS
MS
17.48
23.37
59.41
*
*
N.A
N.A
N.A
*
*
1991-92
PS
MS
12.4
11.4
72.8
*
*
15.72
11.29
69.77
*
*
Market Share Behaviour of Car Segment during the era of liberalisation (Per cent)
Producer
1993-94
1995-96
1998-99
2000-01
Maruti Udyog ltd.
66.08
69.96
69.61
48.61
Hyundai motors
n/a
n/a
4.72
17.17
Telco
n/a
6.63
1.26
7.41
Hindustan motors
14.45
8.67
6.44
6.55
Daewoo motors
n/a
5.61
3.25
5.77
Honda Siel car Ind.
n/a
n/a
5.71
4.07
Fiat India auto
n/a
n/a
3.03
n/a
Ford India
n/a
n/a
2.07
5.39
General motors
n/a
n/a
2.84
n/a
Premier auto ltd.
11.97
4.58
0.99
n/a
Maestro motors
7.27
0.22
n/a
n/a
Mercedes Benz
n/a
n/a
n/a
0.01
Pal-Peugeot
n/a
2.83
n/a
n/a
Others
0.24
1.9
0.65
5.01
Source: CMIE Market Shares And Financial Aggregates.
Price Range
Less than Rs. 3,00,000
Between Rs. 3,00,0005,00,000
Between Rs. 5,00,00010,00,000
Between Rs. 10,00,00025,00,000
Cars priced above Rs.
25,00,000
Major players
Maruti, Hyundai
Maruti, Hyundai, Daewoo, Telco
Maruti, Hyundai, Daewoo, Fiat, General Motors, Ford,
Hindustan motors (Mitsubishi
Honda Siel, Hyundai
Mercedes Benz
MODELS
M800
Omni
Total
Lower B
3.4 3.65 mm
Upper B
3.65 4 mm
Lower `C
4.0-4.2 mm
Upper-C
4.2-4.5 mm
Miscel
Luxury
'D' more than
5000 mm
SALES
1999- 2000
189,061
82,427
271,488
%MS
30.7
13.4
44.1
SALES
2000 -01
151,866
60,239
212,105
%
MS
26.3
10.4
36.7
24.9
10.3
35.2
SALES
2002 %
03
MS
112,421
40,667
153,088
23.1
8.3
31.4
Zen
Alto
80,801
-
13.1
60,908
24,193
10.5
4.4
66,528
27,107
11.3
4.6
51,844
21,072
10.7
4.3
Wagon R
Uno
Santro
Matiz
Total
Indica
Palio
Total
Esteem
Accent
Siena/Wk
Ikon
Corsa/Swn
Indigo
5,903
16,095
69,546
38,821
211,166
54,995
54,995
16,031
6,209
4,597
6,259
306
1.0
2.6
11.3
6.3
34.3
8.9
8.9
2.6
1.0
0.7
1.0
0.1
19,200
7212
64,876
45,870*
222,259
43,823
43,823
12,176
16,085
2,057
18,023
5,318
3.3
1.3
11.2
7.9
38.4
7.6
7.5
2.1
2.8
0.4
3.1
0.9
25,829
3,306
69,327
13,250
205,347
64,325
17,148
81,473
11,831
17,797
880
14,374
6,781
4.4
0.5
11.8
2.2
35.1
11.0
2.9
13.9
2.0
3.0
0.1
2.4
1.1
26,616
710
69,976
400
170,618
59,448
20,732
80,180
8,649
16,578
2,559
12,048
5,157
2,146
5.5
0.1
14.4
35.0
12.2
4.3
16.5
1.7
3.4
0.5
2.4
1.1
0.4
Total
Cielo/Nex
Astra
City
Lancer
Baleno/Altu
Total
Ambass
Versa
33,492
3,158
2,737
9,772
8,300
1,947
27,636
18,227
5.4
0.5
0.4
1.6
1.3
0.3
4.5
2.9
53,659
2,000*
2,946
10,011
7,335
3,059
25351
19,781
9.3
0.3
0.5
1.7
1.3
0.5
4.3
3.4
51,663
100
1,984
9,596
6,540
1,093
19.313
13,034
1,332
8.8
-0.3
1.6
1.1
0.1
3.3
2.2
0.2
47,137
-1,035
10,000
4,152
380
15,567
11,433
1,592
9.2
-0.2
2.1
0.9
-3.2
2.4
0.3
893
0.1
650*
0.1
1,123
1,520
0.1
0.2
787
1,022
0.2
0.2
2,227
0.3
1,288
0.3
Skoda Octavia
722
0.1
5,171
1.1
Mondeo
505
409
--
Mercedes
Accord
Sonata
p e r c e n tag e
10
w/vop
sc/vop
Time
60
16
50
14
40
anual growthrate(in%)
30
gos
20
pbit/sales(%)
12
10
8
pbit/sales
6
4
10
2
0
g8F8W 8F8W 8F7W
FFW
FW
FW
%F`W
oFW
FW
F?W
NFW
FW
FW
-FhW
-10
years
time
Executive Summary
Project Objective
Project in-scope
In-scope
Global
US
Strategic Consulting
This involves services in the area of Finance, Planning, Marketing and Organizational strategy
Definition Includes:
Strategic planning
Financial strategy
Organizational strategy
Marketing and branding strategy
IT strategy
Operations Consulting
HR Consulting
IT services
Key Findings
The US is the largest business consulting market in the world, with an average annual growth rate of
15%
Implication: Onsite Billing rates will see an increase hence the approach is go for a service mix with a suitable
offshore component also
Region-specific consulting companies and Systems Integrators are competing intensely with the global
majors
Implication: Clients will have to work towards articulating the vision and business purpose to get the best of
the pull factor
The industry is facing a supply crunch and thus firms are short staffed
Implication: Traditional IT systems Integrator firms will strengthen their offerings by investing or buying firms
in the US
Today, client pull is affecting the dynamics of the marketplace to a greater extent then ever before
Implication: A single provider may not be able to deliver the entire gamut of services. In-house capabilities
have to be built.
Implication: Since competition is coming from new entrants, the established firms are pressurized to better their
value proposition. The client can use this to its advantage to negotiate on billing rates
The top management consulting firms have entered into alliances with various companies across
industries to extend their technology and business capabilities
Implication: Clients need to make sure that they get the best pricing for an end-to-end consulting plus
implementation engagement
Executive Insight
Executive Insight
Traditional- A Predictive path to the future can be paved from the experience
of the past
The New Approach- Strategy is a coherent and evolving portfolio of
initiatives to drive shareholder value and long-term performance (you are
what you do opposed to you are what you say)
@Mckinsey & Co.
MARKET
CHARACTERISTICS
Market Overview
Market Growth (CAGR- 7.1%)
Strategic
Economic
Operational
Risk Mgmt.
HR
Technology
Market Size
Global Market Size : 2003-2007
Current Strategy consulting market is estimated to be around $300 Billion and is expected to grow at a CAGR of
7.1%. It is the fastest growing in the professional services market
Threat of
New Entrants
Moderate to High
(5.75)
Bargaining Power
of Suppliers
Rivalry
Among
Firms
Moderate (4.25)
Moderate (5.0)
Threat of
Substitute
Products
Bargaining Power
of Buyers
Moderate (4.7)
Low to moderate(4)
Overall Scores
Low
Economies of Scale
Medium
5X
High
AVG.
5.75
Government policy
Exit barriers
Capacity increment size
Capital Requirements
Product Differentiation
Maturity
X
X
Diversity of firms
Industry growth
Product Differentiation
Threat of Substitutes
Overall Scores
Low
Medium
5X
Power of Buyers
Concentration of buyers
Importance of industrys product to
buyers
AVG.
X
4.71
Profitability of buyers
Power of Suppliers
High
4.25
X
X
Emergence of a large number of boutique consulting firms can benefit Chevron in terms of
specialized services at competitive prices. This will also reduce the dependence on a single
consulting firm
The trend has shifted to short term higher impact assignments from long term open ended
assignments Chevron can follow this approach to reduce risk and increase the quantifiable benefits.
Moderate (4.7)
Threat of
Substitute Products
Chevron can perform some of the operational strategy and strategic planning work in house
The consultant team with the right mix of industry experts and B-school graduates will improve the
success and costs of the engagement
Moderate (4.25)
Rivalry Among
Firms
Moderate (5)
With the emergence of IT strategy firms are bundling consulting with implementation services. This
will be a good bargain for Chevron
SWOT Analysis
Strengths
Strategic
Services are essential for the client
Firms are growing through the acquisition route
thereby improving their service line
Consulting firms have struck cross-industry
alliance networks to enable effective
implementation
The role of consulting firms has extended from
just providing thought leadership to actual
execution (end-to- end solutions)
Competitive
Small, niche players have built a reputation for
specialized consultancy services
Managerial
Recruitment of industry experts has increased
relative to fresh B-School graduates
Firms have quickly adapted to global delivery
models
Industry practices of the consulting firms have
matured over the years
Weaknesses
Strategic
Consulting firms criticized for overuse of
buzzwords and a lack of innovation in services
Lack of accountability for the returns on the
consulting investment.
Long Open-ended engagements with no clear
deliverables
High dependence on individual expertise and Clevel Relationships
Competitive
Boutique firms competing on price with the big
league
Managerial
High rates of Attrition across levels due to a
competition of talent among firms
Unresponsive large firms & lack of (small) client
focus
Failure in executing engagements requiring
highly unique expertise
SWOT Analysis
Opportunities
Strategic
Increased spending on Financial and
Organizational strategy
High growth emerging regional markets
Historically under-performing country markets
experiencing accelerating services uptake
Favorable economic conditions in 2007 2008
lead to more discretionary spending on strategy
consulting
Vast amount of M&A activity help drive revenue
growth
Competitive
Emergence of new firms with specialized
services
Managerial
SOX related IT strategy and Planning Consulting
on the rise
Client demand for Innovative project staffing
models and creative billing arrangements
Threats
Strategic
Customer buying patterns changing with
traditional strategic Planning being performed inhouse
Executive Management exercising more caution
on spending to mitigate risk
Engagement durations reducing (< 6 mths) as
clients are looking at more impact based
specialized assignments
Maintain high margins
Competitive
Traditional SI firms acquiring boutique firms to
gain market share
Big league in threat from Offshoring firms
initiating a price battle
Managerial
Pressure on Billing rates as Consultant salaries
show a rapid increase.
Recruitment and retention of domain experts
Competitive Dynamics
Landscape
Industry majors like Mckinsey, BCG are involved in Strategy development but the emergence of
boutique firms is heating up the competitive landscape
Systems Integration firms like Accenture, Deloitte and Bearing point are in the strategy implementation
space. At the same time they are also entering the strategy development space (increase in backward
integration)
Business Models
Formed during the second wave of the development of the consulting industry
Vast project experience and the ability to share and exploit knowledge
Challenges
Ways to build lasting relationships with clients to withstand periods of low work demand
Need for more experienced resources in contrast to the existing pyramid model
Client internal consulting teams taking over implementation tasks (e.g.Shell, Siemens)
Trends
Emergence of the Internet posing a threat to the internal research and knowledge
building capacities of strategy consultancies(Offshoring of Research services has
reduced entry barriers)
Skill gap between strategy consultants and their clients are narrowing (firms
recruiting inhouse consultants)
Clients are more demanding and have evolved into smarter buyers of consulting
services (Recruitment of former strategy consultants)
Price sensitivity due to competition (small specialized players, IT integrators,
alternative pricing-performance based)
Executive Insight
Corporate strategy
Unit strategy
Strategy under uncertainty
Growth strategy
Traditional- A Predictive path to the future can be paved from the experience of the past
The New Approach- Strategy is a coherent and evolving portfolio of initiatives to drive shareholder value
and long-term performance (you are what you do opposed to you are what you say)
Market opportunities
Capabilities
Management Passion
@Mckinsey &Co.
Strategy
Branding
Organization
Strategic Planning
Strategic Vision
Portfolio Management
Business Unit and Corporate strategy
Post merger Integration (PMI)- Planning, Organization, Execution and Change Management
Corporate strategy (effective strategy inspires and informs the actions of the executive team and mobilizes
employees)
Core growth
Growth through adjacencies
Customer Loyalty
Customer segmentation
Marketing
Pricing
Product management
Sales/Channel management
M&A strategy
Acquisition screening
Strategic due diligence
Merger integration
Organization (Leadership)
Pricing Model
Pricing
Structure
Cost Based Pricing
Thank You