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TRANSCRIPT
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ANALYSIS OF INDUSTRIALAND OPERATINGENVIRONMENT
Dr. Sasmita Palo
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Strategy is a
choice
- Michael Porter
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External analysis
General Environment (macro factors)
Industry and CompetitiveEnvironment (micro factors)
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Industry Competition and the IO
Industry: A group of firms producing products
(goods and/or services) that aresimilar to each other.
Structure-Conduct-Performance(SCP) model The primary contribution of the
Industrial Organization (IO) economics
model Structure: Structural attributes of an
industry
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The Structure-Conduct-Performance Paradigm:
Basic Conditions: factors which shape the market of the
industry, e.g. demand, supply, political factorsStructure: attributes which give definition to the supply-side of the market, e.g. economies of scale, barriers toentry, industry concentration, product differentiation,vertical integration.
Conduct: the behavior of firms in the market, e.g. pricingbehavior advertising, innovation.
Performance: a judgment about the results of marketbehaviour, e.g. efficiency, profitability, fairness/incomedistribution, economic growth.
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Basic Conditions
Structure : no of firmsand concentration, entry conditions, level of verticalintegrationand diversification
Conduct: goals of the firm,, price andoutput decision, , degree of co-operation andinterdependence, anti
Performance: output, growth,profitability, employment and efficiency
Government
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Five Forces Framework
Translated and extended fromthe SCP model in 1980 by MichaelPorter.
A key proposition: The focal firms performance critically
depends on the degree ofcompetitiveness of the five forces
within an industry. The stronger and more competitive
these forces are, the less likely thefocal firm is able to earn above-
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Defining Industry
Business strategists have turned the SCPmodel from IO economics upside down, bydrawing on its insights to help firmsperform better.
This transformation is the heart of this.
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What is a 5 Forces Analysis?
Based on premise that:
competition in an industry is rooted in the underlyingeconomics, competitive forces or structures thatcollectivelydetermine theprofit potentialof the industry.
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Two Key QuestionsTwo Key Questions
1. How structurally attractive is
the industry?2. What is the companys relative
position within the industry?
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Source: Michael Porter, How Competitive Forces Shape Strategy, Harvard Business Review, March-April 1979, andViewers Guide, Michael Porter on Competitive Strategy, Nathan/Tyler, 1988.
Rivalry AmongExisting
Com etitors
BargainingPower
BargainingPower
Threat ofNew Entrants
Threat ofSubstitutes
Determinants of Buyer PowerBargaining leverageBuyer concentration vs. industryBuyer volumeBuyer switching costsPrice/total purchasesProduct differences
Brand identityDeterminants ofSubstitution ThreatRelative price performanceof substitutesSwitching costsBuyer propensity to substitute
Determinants of Supplier PowerDominated by few companiesDifferentiation of product (inputs) causeshigh switching costsFew substitute inputsSupplier concentrationImportance of volume to supplier
Cost relative to total purchases in theindustryThreat of forward integration relative to
threat of backward integration by firms in theindustry
Entry BarriersEconomies of scaleProprietary product differencesBrand identityCapital requirementsAccess to distributionGovernment policyExpected retaliation
Rivalry DeterminantsIndustry growthDemand conditions(overcapacity)Exit barriers (corporate stakes,
high fixed costs)
Product differencesBrand identityConcentration and balance
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Potential Competitors are companies thatare not currently competing in an industry buthave the capability to do so if they choose.Barriers to new entrants include:
Risk of Entry by Potential Competitors
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Scale-based low cost advantages(economies ofscale)- as firms expand output unit costs fall via:Cost reductions through mass productionDiscounts on bulk purchases of raw material andstandard partsCost advantages of spreading fixed and
marketing costs over large volumeNon-scale-based low cost advantages (proprietarytechnology / know-how / access to raw materials andchannels / good locations).
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Government Policy
Ex ected retaliation
Barriers toEntry
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Industry Competitive StructurevNumber and size distribution of companiesvConsolidated versus fragmented industries
Demand ConditionsvGrowing demand tends to moderate competition and reduce rivalry
vDeclining demand encourages rivalry for market share and revenue
Cost ConditionsvHigh fixed costs profitability leveraged by sales volume
Lack of Differentiation ot low switching cost
High strategic stakes
Height of Exit Barriers prevents companies from leavingindustryvHigh fixed costs of exitvWrite-off of investment in assetsvLow scrap value
Rivalry Among Established CompaniesCompetitive Rivalry refers to the competitivestruggle between companies in the same industryto gain market share from each other. Intensity of
Emotional attachment toindustry
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Five Forces Framework:Intensity of Rivalry among Competitors
Conditions leading to a high degree ofrivalry:The more concentrated an industry is, the
fewer the competitors are, and the morelikely that competitors will recognize theirmutual interdependence and so restraintheir rivalry.
Competitors of similar size, market
influence, and product offerings vigorouslycompete with each other.
In big ticket industries where products
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Red Ocean
Blue Ocean
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Industry Buyers may be the consumers or end-userswho ultimately use the product or intermediariesthat distribute or retail the roducts. These bu ers
Bargaining Power of Buyers
1. Buyers concentration ratio is high
2. Buyers purchase in large quantities.v Buyers have purchasing power as leverage for price
reductions.
3. The industry is dependant on the buyers.v Buyers purchase a large percentage of a companys total
orders.
4. Switching costs for buyers are low.v Buyers can play off the supplying companies against each
other.5. Buyers can purchase from several supplyingcompanies at once.
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Suppliers are organizations that provide inputs suchas material and labor into the industry. Thesesu liers are most owerful when:
Bargaining Power of
1. The product supplied is vital to the industry andhas few substitutes.
2. The industry is not an important customer tosuppliers.
v
Suppliers are not significantly affected by the industry.3. Switching costs for companies in the industry are
significant.v Companies in the industry cannot play suppliers against each
other.
4. Suppliers poses a credible threat to integrate
forward into the buyers industry
b i d
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Substitute Products are the products fromdifferent businesses or industries that can
satisf similar customer needs.
Substitute Products
1. The existence of close substitutes is astrong competitive threat.
v Substitutes limit the price thatcompanies can charge for their product.
Substitutes are a weak competitive force ifan industrys products have few closesubstitutes.
v Other things being equal, companies inthe industry have the opportunity to
raise prices and earn additional profits.n Substitutes are particularly threatening:
If substitutes are superior to existingproducts in quality and function.
If switching costs are low.
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Interpreting Industry
The collective strength of these forcesdetermines the ultimate profit
potential of an industry.The stronger each of these forces the
more limited industries are in theirability to raise prices and increase
profits
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In general,a firm is likel to be more rofitable if:
the less intense is the rivalry in its industry; the less danger of potential entrants & the
higher the barriers to entry; the less numerous and less aggressive the firms
that sell substitute products, and the morenumerous and more aggressive the firms thatsell complementary products;
the weaker the bargaining power ofclients/customers; and
the weaker the bargaining power of suppliers.
In industry and competitive analysis, firmsexamine their positions along these linesand seek ways to change conditions to be
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High entry barriers
UnattractiveUnattractive
IndustryIndustry
Suppliers and buyershave strong positions
Strong threatsfrom substituteproducts
Intense rivalryamongcompetitors
Low profit
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Five Forces Framework: Lessons fromthe Five Forces Framework
Not all industries are equal in termsof their potential profitability.
The task for strategists is to assessthe opportunities (O) and threats (T)underlying each competitive forceaffecting an industry, and then
estimate the likely profit potential ofthe industry.
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Summary
Industry Analysis is a powerful toolfor analyzing industry structures Identify profit opportunity
Identify suitable position strategy BUT less emphasis on choice & innovation
Static model
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Concept of sixth force
Role of a complementor
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STRATEGIC GROUP
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Three Strategic Groups in the Global AutomobileIndustr
Figure
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Critical Evaluation of Comp.
Innovation and industry structure
Company differences
Competitive changes during anindustrys evolution
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Implications of Strategic Groups
1.Intensity of competition among thecompanies within the group.
2.Each Strategic Group can have different
competitive forces and may face adifferent set of opportunities and threats.
3.Competition between the groups
Mobility Barriers
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Competitive Advantage
Performing activities better than competitors
Activities that create value in eyes ofconsumers
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The process of identifying keycompetitors; assessing theirobjective, strategies, strengths and
weaknesses & reaction patterns; andselecting which competitors to attackor avoid.
Competitive Analysis
(Source: Principles of Marketing by: Philip Kotler and Gary Armstrong
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Steps in the Process:
IdentifyingCompetitors
AssessingCompetitors
SelectingCompetitors
to Attack orAvoid
Firms face a wide rangeof competitionBe careful to avoidcompetitor myopia
Methods of identifyingcompetitors:
Industry point-of-viewMarket point-of-view
(Source: Principles of Marketing by: Philip Kotler and Gary Armstrong
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Sources of Competitive
COSTADVANTAGE
DIFFERENTIATION
COMPETITIVE
Similar
atlow
er
Pricefrom
unique
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Porters Generic Strategies
SOURCE OF COMPETITIVE ADVANTAGE
Low cost Differentiation
Industry-wide COSTDIFFERENTIATION
COMPETITIVE LEADERSHIP
SCOPESingle Segment F O C U S
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CompetitiveAdvantages(Sources of Rates of Profit
in Excess of the Competitive
AvoidCompetito
Be BetterThan
Attractive
Attractive Cost
AdvantagDifferentiati
on
Attractive
Strategic
Entry
Barriers
Mobility
Barriers
Mechanism
Sou rces of Compet iti veAdvanta ge
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Competi tiv e Advant ages asthe Sour ce of Super ior
Competitive advantages work in two basic ways
avoiding competitors
outperforming competitors (ie. productivityand efficiency/distinctive competencies)
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Sour ces of SuperiorPr ofita bilit y
A business can achieve a higher rate of profit(or potential profit) over a rival in one of twoways:
supplying an identical product/service at
a lower cost (cost-based advantage) supplying a differentiated product/service
in such a way that the customer is willingto pay a price premium that exceeds thecost of the differentiation
(differentiation-based advantage) These two sources of competitive
superiority define fundamentally different
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Market Share
Low High
Profitabilit
Low
High
Differentiation-based
Low CostLeadership
Stuck-in-the-Middle
Market Share-ProfitabilityRelationship:
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Porters Generic Strate ies
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ANALYSIS OF COMPETITOR
ENVIRONMENT
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FUTURE AGENDACURRENT STRATEGYASSUMPTIONSCAPABILITIES
Competitor Analysis
Competitor Analysis Components
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Competitor Analysis Components
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The Competitive Profile
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Thank ou