defining and evaluating industries
DESCRIPTION
TRANSCRIPT
What you will learn in this Section ?
• Envisioning Strategy– Definition– Framework– Visual Models
• External Analysis– PEST– PEST Impact Analysis
• Industry and Competitive Analysis– Industry Structure– Evolution of Industries– Industry Supply Chain– Potential Industry Earnings– Porter’s 5 Forces Analysis– Competitive Intensity– Strategies for minimizing competitive
forces– Perceptual Map– Barriers to Entry/Incumbency advantages– DSIR effect
• Company Resources and Capabilities– ARC Analysis/HR– SWOT Analysis– Value Creating Processes/Core
Competencies– Strategic Gameboard– Balanced Scorecard– Change Management
© Sunil Mehrotra
Mnemonic 1
The environmentThe environment
International lawInternational law
GovernmentsGovernments
Standards bodiesStandards bodies
StakeholdersStakeholders
Supplier’s Supplier’s supplierssuppliers
Customer’s Customer’s customerscustomers
New entrantsNew entrants
CustomersCustomersSuppliersSuppliers
CompetitorsCompetitors
SubstitutesSubstitutes
OrganisationOrganisation
Visual Model
Industry Analysis
New Paradigm Consulting
Industry Definition/ Structure
CompetitorsSuppliers
Customers
© Sunil Mehrotra
The Firm
New entrant
The term industry is sometimes usedto define a very precise business activity(eg: semiconductors) or a more generic activity(eg:consumer goods).
Substitutes
Industry
There are 100s of industries
Industries are grouped into sectors
http://www.census.gov/econ/census02/guide/INDSUMM.HTMUS Census Bureau's Industry sector groupings
http://www.smartmoney.com/map-of-the-market/Interactive map of market performance by sector
Sector
Industry
company
Example:Sector: Retail TradeIndustry: General MdseCompany: Walmart
Some of the sectors:AgricultureMiningConstructionManufacturingWholesale TradeRetail TradeUtillities
Industries differ greatly
» Size» Growth rate» Profitability» Maturity» Competitive intensity» Markets and customer segments» Geography» Technology orientation
http://money.cnn.com/magazines/fortune/fortune500/2008/performers/industries/fastgrowers/Fortune 2008 Industry profile by growth rate, profitability, size, etc
Drilling down from Sector to Industry to
company
http://biz.yahoo.com/p/
Fortune's ranking of Industries by profits
Tobac
co P
rodu
cts,
Oth
er
Cigare
ttes
Perso
nal S
ervic
es
Bever
ages
- W
inerie
s & D
istille
rs
Cleanin
g Pro
duct
s
Applic
ation
Sof
twar
e
Aeros
pace
/Def
ense
- M
ajor D
ivers
ified
Proce
ssed
& P
acka
ged
Goo
ds
Auto
Parts
Sto
res
Divers
ified
Compu
ter S
yste
ms
Gas
Utili
ties
Inte
rnet
Ser
vice
Provid
ers
Recre
ation
al Veh
icles
Indu
stria
l Elec
trica
l Equ
ipmen
t
Lodg
ing
Oil &
Gas
Drill
ing &
Exp
lorat
ion
Oil &
Gas
Equ
ipmen
t & S
ervic
es
Insu
ranc
e Bro
kers
Dairy
Produ
cts
Educa
tion
& Tra
ining
Ser
vices
Perso
nal P
rodu
cts
Life
Insu
ranc
e
Truck
s & O
ther
Veh
icles
Aeros
pace
/Def
ense
Pro
duct
s & S
ervic
es
Heavy
Con
stru
ction
0
10
20
30
40
50
60
70
80
90
Industry Ranking
% ROE
Industry
% R
OE
Why are some industries more profitable than others?
Pharmaceutical and medicine manufacturing Retail trade Electronic computer manufacturing
0.000
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
180.000
200.000
Price Trends in 3 industries
Pharma, Retail, Computer manf.
1998-2006
Ind
ex
WHY ?
Industries grow/decline at different rates
http://www.visualizingeconomics.com/2007/07/02/gross-domestic-product-by-industry-winners-losers/
VISUAL SHOWING SECTORS AS % OF GDP 1975-2005....WINNERS AND LOSERS
Industry Map a snapshot
Industry Analysis for start-ups
• Is the industry that I am planning to enter a good one for starting a new company?
• Are the knowledge conditions in the industry favorable to a start-up?
• Are demand conditions in the industry favorable to a start-up?
• Is the industry at the right stage of the life cycle for a start-up?
• Is the industry structure favorable for a start-up?
Selecting the right industry for a start-up
• Don't start a business in a capital intensive industry.
• Don't start a business in an advertising intensive industry.
• Don't start a business in an industry in which the average sized firms are large.
• Don't start a business in a concentrated market.
What makes an industry attractive?
• Industry size
• Industry growth rates
• Industry profitability
• Pricing trends
• Competitive intensity
• Entry barriers
• Risk of reasonable returns
• Demand variability
• Opportunity for product differentiation
• Segmentation
• Distribution structure
• Technology development
Individual Assignment 1• For Walmart define:
–Industry sector and the NAICS two digit code
–Industry sub-sector and the NAICS code for it
–Industry and the NAICS code for it
• Draw a graph for the Industry showing–SIZE
–Growth rate
–Profitability
• Show Walmart's performance relative to industry in growth rate and profitability
Industry Evolution: Traditional View
Introduction Growth Maturity Decline
Revenue
OperatingIncome
Losses
Few competitors
Increasing sales and profits
New competitors appear
Saturation
Declining profits
Standardized features
Industry shakeout
Displaced by substitute products
Profitability falls
Only a few large scale players survive
Oligopoly•Few Firms•Strategic Interdependence•Profitability determined by behavior of incumbents
Most industries evolve towards
© Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Strategies differ at different stagesof the industry life-cycle
Introduction Growth Maturity Decline
Revenue
OperatingIncome
Losses
Few competitors
Increasing sales and profits
New competitors appear
Saturation
Declining profits
Standardized features
Industry shakeout
Displaced by substitute products
Profitability falls
Only a few large scale players survive
© Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Entrepreneurial Action• Open niches• Blind spots Focus on Growth
• Invest to grow• Leverage Factors of Production
Market power actions•Market share•Channels of distribution•Customer loyalty
http://online.onetcenter.org/find/indemand
Three major phases of industry evolution
“Cycle time” of evolution is driven by the pace and magnitude of marketplace discontinuities
Cycle-driving discontinuities include deregulation, technology, shifts in consumer preferences, globalization of markets, etc.
1
23
Mature/VerticallyIntegrated
RecombinantMarket Leaders
The New View:The Cycle of Industry Creative
Destruction
http://www.manyworlds.com/
FocusedNew
Entrants
The New View:The Cycle of Industry Creative
Destruction
IBM DEC SperryUnivac
Wang
Chips
Computer
OperatingSystem
ApplicationSoftware
Sales andDistribution
Superstores Retail
Word Wordperfect
Windows Apple
IBM HP Apple
INTEL
Direct
Others
Linux
Dell
The “mature” Computer Industry
The “recombinant” Computer Industry
AMD
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Nappies 7-10?
Industry Definition-Sector/Industry/Company-SIC and NAICS codes
Measures of Industry Attractiveness-Government sources for Industry statistics-Visualizing Industry statistics/compare industries
Industry life-cycle and creative destruction-appropriate resource focus at each stage in the cycle
Mnemonic 4
• Industry size
• Industry growth rates
• Industry profitability
• Pricing trends
• Competitive intensity
• Entry barriers
• Risk of reasonable returns
• Demand variability
• Opportunity for product differentiation
• Segmentation
• Distribution structure
• Technology development
Individual Assignment 2
• Draw a life-cycle chart and position on the chart the following industries
– Discount merchandising industry
– Travel Agency industry
– Book publishing industry
• Explain how the “cycle of creative destruction” might apply to the CRS industry, that is how the industry was born, matured, and reconstituted.