Industry Analysis

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Industry Analysis
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Introduction

• Industry analysis takes two broad forms
• Porters Five Forces Analysis
• Brandenberger and Nalebuffs Value Net
• Outcome
• assessment of industry and firms performance
• identification of key factors affecting
  performance
• show how changes in business environment affect
  performance
• assess effectiveness of generic business
  strategies

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Introduction (cont.)

• Limitations
• restricted view of demand and growth
• conducted at the industry rather than firm level
• limited role for government
• qualitative rather than quantitative
• difficult to combine results with different
  combinations of high, medium and low into
  an overall assessment
• The five forces analysis is an organizing
  framework not a set of principles

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Five-Forces Analysis overview
Entry
Internal Rivalry
Supplier Power
Buyer Power
Internal Rivalry
Substitutes and Complements
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Internal Rivalry

• Jockeying for market share
• Define the market
• assess methods of competition price and
  non-price
• price rivalry is intense when
• there are many sellers
• products of different sellers are relatively
  homogeneous
• there are low consumer switching costs
• terms of sale/prices are unobservable prices
  slow to adjust
• sales orders are large and infrequent
• there is excess capacity
• there is little history of facilitating practices
• erodes profits by driving down prices

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Internal Rivalry (cont.)

• Non-price rivalry
• advertising
• product proliferation
• RD
• Erodes profits by raising costs
• Rivalry is intense
• when consumers are motivated to shop around and
  can do so
• when cost increases cannot be passed on in prices

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Five-Forces Analysis overview
Entry
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Entry

• Profits attract entry which erodes profits
• steals incumbents market share
• increases internal rivalry
• Entry is affected by
• economies of scale and scope
• consumer attitudes to reputation and brand
  loyalty
• ease of access to key inputs
• technology locations distribution channels

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Entry (cont.)

• Entry is affected by
• experience curve
• network externalities
• advantage to firms with large installed base
• government regulation protecting incumbents
• expectations regarding post-entry competition
• exit costs
• if entry creates specific assets that are
  unrecoverable

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Five-Forces Analysis overview
Substitutes and Complements
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Substitutes and Complements

• Distinct from entry
• may be in related but not identical industries
• new substitutes can be really problematic
• render existing products obsolete
• gain from learning economies
• influenced by and take advantage of changes in
  fashion

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Substitutes and complements

• Substitutes erode profits
• Complements boost demand
• Factors to consider
• availability
• product performance characteristics
• price/value characteristics
• little threat/opportunity if priced too high
  relative to value
• price elasticity of industry demand
• if high the increased prices drive away consumers

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Five-Forces Analysis overview
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Supplier and Buyer Power

• Supplier power looks at strength of an industrys
  suppliers
• can they erode profits through their pricing
  policies?
• An industrys suppliers have power if
• they are concentrated
• their customers are locked in through specific
  investments
• Need not relate to importance of the input
• for example if major input is produced
  competitively

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Supplier and buyer power

• Buyer power is similar
• ability of an industrys customers to erode
  profits
• by negotiating tough prices
• by demanding specific product design
• Supplier and buyer power have many features in
  common

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Supplier and buyer power

• Supplier (and buyer) power is affected by
• concentration
• a highly concentrated supplying or buying
  industry exercises more power
• purchase volume price discounts to large buyers
• availability of substitutes
• relationship-specific investment
• threat of forward integration
• ability to price discriminate

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Coping with the Five Forces

• Identifies threats to profitability for all firms
  
• How to circumvent?
• position to outperform rivals
• develop a cost or differentiation advantage
• identify particular industry segment that is less
  competitive
• change the five forces
• create switching costs (tie-in sales warranty
  policy..)
• entry-deterring strategies
• forward/backward integration to limit
  supplier/buyer power

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Coopetition and the Value Net

• Brandenberger and Nalebuff identify a weakness in
  the five forces analysis
• views all firms as threats to profitability
• But interaction can be positive as well as
  negative
• firms increasingly cooperative
• with suppliers/buyers
• with direct competitors
• Cooperation can take many forms

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Coopetition

• Efforts to set technology standards
• HDTV DVD
• Promote favorable regulatory environment
• Cooperation with suppliers
• to improve quality
• to improve efficiency JIT
• Cooperation with buyers to reduce inventory costs

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The Value Net

• Looks at suppliers, customers, competitors,
  complementary firms
• assesses threats and opportunities
• is there unexplored potential for profitable
  cooperation?
• example of DVDs
• five-forces analysis predicts intense brand
  rivalry
• but the value net introduces the possibility of
• cooperation among manufacturers to boost
  acceptance
• cooperation with suppliers to boost supplies of
  discs

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