Quản trị kinh doanh - Industry analysis: The fundamentals

Industry Analysis: The FundamentalsThe objectives of industry analysisFrom environmental analysis to industry analysisPorter’s Five Forces FrameworkApplying industry analysisIndustry & market boundariesIdentifying Key Success FactorsOUTLINEThe Objectives of Industry AnalysisTo understand how industry structure drives competition, which determines the level of industry profitability.To assess industry attractivenessTo use evidence on changes in industry structure to forecast future profitabilityTo formulate strategies to change industry structure to improve industry profitabilityTo identify Key Success FactorsTHE INDUSTRYENVIRONMENT Suppliers Competitors CustomersSocial structureThe national/ international economyTechnologyGovernment& PoliticsThe natural environmentDemographic structureSocial structureFrom Environmental Analysis to Industry AnalysisThe Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on the Industry Environment.Profitability of US IndustriesPharmaceuticals 26.8 Gas & Electric Utilities 10.5Tobacco 22.0 Food and Drug Stores 10.3Household & Personal Products 20.5 Motor Vehicles & Parts 9.8Food Consumer Products 20.3 Home Equipment 9.5Medical Products & Equipment 18.8 Railroads 9.0Beverages 18.8 Hotels, Casinos, Resorts 8.0Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6Commercial Banks 16.0 Building Materials, Glass 7.0Publishing, Printing 14.3 Metals 6.0Petroleum Refining 14.3 Semiconductors &Apparel 14. 3 Electronic Components 5.8Computer Software 13.5 Insurance: Property & Casualty 5.3Electronics, Electrical Equipment 13.3 Food Production 5.3Furniture 13.3 Telecommunications 3.5Chemicals 12.8 Forest and Paper Products 3.5Computers, Office Equipment 11.8 Communications Equipment (4.0)Health Care 11.5 Airlines (34.8)Median return on equity (%), 1999-2002 Long-term Profitability of US Industries: EVA and ROA, 1986-97Industry EVA/CE ROA Industry EVA/CE ROATobacco 9.4 14.4 Paper and products (1.5) 5.2Computer software Broadcasting and & services 5.9 10.4 publishing (1.5) 6.0Personal care Cars & trucks (1.5) 2.2 products 2.8 8.0 Healthcare services (1.7) 3.3 Medical products 2.7 9.5 Machine tools, hand tools (1.7) 6.0 Printing & Appliances and home advertising (2.0) 2.3 furnishings (1.9) 3.4Food processing 2.5 8.5 Telephone equipment & Drugs & research 0.7 7.6 services (2.1) 7.0Beverages 0.2 5.6 Plastics & products (2.6) 5.3Textiles (0.1) 7.4 Computers & peripherals (3.1) 3.1Fashion retailing (0.4) 9.3 Electrical products (3.3) 4.6Building materials (0.6) 5.6 Aerospace & defense (3.3) 4.8Metals (1.0) - Railroads (3.4) 3.8Telecom services (1.2) 4.6 Airlines (4.1) 1.0Discount retailing (1.2) 6.4 Steel (6.4) 2.3 Semiconductors Cable television (7.2) (3.3)& components (1.3) 6.0 Electronics (9.2) 3.5 Average (1.1) 5.6Source: Hawawini et al, Strategic Management Journal (January 2003) The Determinants of Industry Profitability3 key influences:The value of the product to customersThe intensity of competitionRelative bargaining power at different levels within the value chain.The Spectrum of Industry StructuresConcentrationEntry and ExitBarriersProductDifferentiationInformationPerfect CompetitionOligopolyDuopolyMonopolyMany firmsA few firmsTwo firmsOne firmNo barriersSignificant barriersHigh barriersHomogeneousProductPotential for product differentiationPerfectInformation flowImperfect availability of informationPorter’s Five Forces of Competition FrameworkSUPPLIERSPOTENTIALENTRANTSSUBSTITUTESBUYERSINDUSTRYCOMPETITORSRivalry amongexisting firmsBargaining power of suppliersBargaining power of buyersThreat ofnew entrantsThreat ofsubstitutesTHREAT OF ENTRYCapital requirementsEconomies of scaleAbsolute cost advantageProduct differentiationAccess to distribution channelsLegal/ regulatory barriersRetaliationSUBSTITUTECOMPETITION Buyers’ propensity to substitute Relative prices & performance of substitutesBUYER POWER Buyers’ price sensitivity Relative bargaining powerINDUSTRY RIVALRYConcentrationDiversity of competitorsProduct differentiationExcess capacity & exit barriersCost conditionsBUYER POWER Buyers’ price sensitivity Relative bargaining power The Structural Determinants of CompetitionThreat of SubstitutesExtent of competitive pressure from producers ofsubstitutes depends upon:Buyers’ propensity to substituteThe price-performance characteristics of substitutes.The Threat of Entry Entrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are:Capital requirementsEconomies of scaleAbsolute cost advantageProduct differentiationAccess to channels of distributionLegal and regulatory barriersRetaliationBargaining Power of BuyersBuyer’s price sensitivityRelative bargaining power Cost of purchases as % of buyer’s 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? Size and concentration of buyers relative to sellers. Buyer’s information . Ability to backward integrate. Note: analysis of supplierpower is symmetricRivalry Between Established Competitors The extent to which industry profitability is depressed by aggressive price competition depends upon:Concentration (number and size distribution of firms)Diversity of competitors (differences in goals, cost structure, etc.)Product differentiationExcess capacity and exit barriersCost conditionsExtent of scale economiesRatio of fixed to variable costs Profitability and Market Growth Less than -5% -5% to 0 0 to 5% 5% to 10% Over 10%Return on salesCash flow/ InvestmentReturn on investmentANNUAL RATE OF GROWTH OF MARKET DEMANDROI (%)The Impact of Unionization on Profitability Percentage of employees unionized None 1%-35% 35%-60% 60-75% >75%ROI (%) 25 24 23 18 19ROS (%) 10.8 9.0 9.0 7.9 7.9ROI = Return on InvestmentROS = Return on Sales Applying Five - Forces AnalysisForecasting Industry ProfitabilityPast profitability a poor indicator of future profitability.If we can forecast changes in industry structure we can predict likely impact on competition and profitability. Strategies to Improve Industry ProfitabilityWhat structural variables are depressing profitabilityWhich can be changed by individual or collective strategies? Drawing Industry Boundaries : Identifying the Relevant Market What industry is BMW in:World Auto industryEuropean Auto industryWorld luxury car industry?Key criterion: SUBSTITUTABILITYOn the demand side : are buyers willing to substitute between types of cars and across countriesOn the supply side : are manufacturers able to switch production between types of cars and across countriesMay need to analyze industry at different levels for different types of decision Pre-requisites for success What drives competition? What are the main dimensions of competition? How intense is competition? How can we obtain a superior competitive position?Analysis of demand Who are our customers? What do they want?KEY SUCCESS FACTORSAnalysis of competition What drives competition? What are the main dimensions of competition?How intense is competition?How can we obtain a superior competitive position?What do customers want?How does the firm survive competitionPre-requisites for successIdentifying Key Success FactorsIdentifying Key Success Factors Through Modeling Profitability: The Airline Industry Profitability = Yield x Load factor - Unit Cost Income Revenue RPMs Expenses ASMs RPMs ASMs ASMs =x- 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. Strength of competition on routes. Responsiveness to cha- anging market conditions % business travelers. Achieving differentia- tion advantageASM = Available Seat Miles RPM = Revenue Passenger MilesROCEReturn on SalesSales/Capital EmployedSales mix of productsAvoiding markdowns throughtight inventory controlMax. buying power to minimizecost of goods purchasedMax. sales/sq. foot through:*location *product mix*customer service *quality controlMax. inventory turnover through electronic data interchange, closevendor relationships, fast deliveryMinimize capital deploymentthrough outsourcing & leasingIdentifying Key Success Factors by Analyzing Profit Drivers: RetailingSUMMARY: What Have We Learned?Forecasting Industry ProfitabilityPast profitability a poor indicator of future profitability.If we can forecast changes in industry structure we can predict likely impact on competition and profitability. Strategies to Improve Industry ProfitabilityWhat structural variables are depressing profitability?Which can be changed by individual or collective strategies?Defining Industry BoundariesKey criterion: substitutionThe need to analyze market competition at different levels of aggregation (depending on the issues being considered) Key Success FactorsStarting point for the analysis of competitive advantage