l2 - industrial analysis

8/6/2019 L2 - Industrial Analysis

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Industrial Analysis


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Origin

Influenced by Industrial Organization & Economics

1980 Michael Porters Competitive Strategy

Positions in the economic marketplace


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Concept

External Appraisal

Threats &

Opportunities

Key SuccessFactors

Internal Appraisal

Strengths &

Weaknesses

DistinctiveCompetencies

Creation

ofStrategy

Implementation ofStrategy

Choice

ofStrategy


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Concept

Strategies are generic, specifically common, identifiable

positions in the market place.

The marketplace is economic and competitive

The strategy formation process is there fore one of selection of

these generic positions based on analytical calculation.

Analysts play a major role in the process, feeding the results oftheir calculations to managers who officially control the

choices.

In effect market structure drives deliberate positional strategies

that drive organizational structure.


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Evolution

First Wave

Military Maxims

Succesive Waves

External Analysis Porters Model of Competitive Analysis

Internal Analysis

Value Chain

Generic Strategies


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Military Maxims

Sun Tzu 400 B.C

Selection of optimal strategy

Being informed of enemy strength

and place of battle

Attention to position strategies

Do not fight in dispersive ground

If weaker in number then be

capable of withdrawing

If equal in strength then engage

the enemy

Extrapolated to business and

market

Clausewitz - 1780 - 1831

Aftermath of Napoleonic wars

Organization in a chaotic situation

Strategy depends on basic building

blocks

For the large company

Planning is crucial

Give up the crumbs

Preserve strengths

For the small company

Attack when the enemy retreats

Be inconspicuous

Respond quickly


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Five Forces Model


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IndustryCompetitors

Intensity ofIntensity of

RivalryRivalry

SuppliersSuppliers

Threat of

Substitute Products

and /or Services

BuyersBuyers

PotentialPotential

EntrantsEntrants

Threat of New

Entrants

Bargaining Power

of Buyers

SubstitutesSubstitutes

Bargaining Power

of Suppliers

Five Forces Model


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Five Forces Model


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Five Forces - Explained

Provides a framework to analyze the forces that reduce theprofits of an industry

Focuses on whether or not a force is sufficiently strong to

reduce or eliminate the profit of an industry

Focuses on an industry as a whole not on individual firms

The stronger these forces are, the more likely the profits willbe less for the particular industry


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1 - Threat ofNew Entrants

Barriers to entry caused by

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Learning Curve

Cost disadvantages

Government policy


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1 - Threat ofNew Entrants

Some industries are harder to enter than others. The Pharmaceutical Industry, with all of its risks and high-price

patents, is almost impossible for new firms to get in on the hugeprofit margins.

A pizza shop has a very low barrier to entry - almost anyone with anoven and some pepperoni can start one.

Some industries can create barriers to entry by havingcustomers dedicated to their brand. For example fizzy, syrupy water. It takes a small capital investment,

but big soft drink companies have squeezed out potential

competitors with huge marketing campaigns.


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2 - Bargaining Power ofBuyers

Buyer purchases large volumes relative to the seller sales

Buyer purchases are a significant portion of the buyerstotal costs

The product it purchases from the industry are standardor undifferentiated

Face few switching costs

Product is unimportant to the quality of the buyersproducts or services

Buyer has full information


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2 - Bargaining Power ofBuyers

Buyers with weak bargaining power are favorable. If you sell super-computers and you have very few customers,

those customers wield a lot of power.

Sometimes losing one sale can make or break the

business.

Another factor that affects buyer power is differentiation. Commodities like oats or pulp for paper have strong buyers

because it makes no difference which supplier they choose


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3 - Bargaining Power ofSuppliers

Few suppliers supplier concentration

Not obliged to contend with other substituted products

Industry is not an important customer of the suppliergroup

Suppliers product is an important input to the buyers

business The supplier groups products are differentiated or it has

built up switching costs

The supplier group poses a credible threat of forwardintegration

The supplier group poses a credible threat of backwardintegration


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3 - Bargaining Power ofSuppliers

Suppliers with low bargaining power are good for

business.

For example, in the coffee industry, the growers have very low

bargaining power. They are poor, fiercely competitive and usually

rely heavily on their buyers. A lb. of Green coffee costs the same

today as it did in the late 60's.

Oligopolies/Monopolies within supplier groups can lead

to high bargaining power.

A strong supplier would be Intel. What would happen if Dellstopped selling "Intel Inside"? Computer buyers would take their

money somewhere else. Dell is in a very weak position and this is

one reason why the computer assembly business has its pitfalls.


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4 - Threat ofSubstitutes

Relative Price of substitute

Relative Quality of substitute

Switching costs to buyers

A substitute product for butter is margarine. A substitute for

sugar is aspartame. This is a product that is not quite the same,

but the customer can get the same value from it. When butter

prices soar, people can simply choose margarine, so the butter

producers are not free to set their prices wherever they want. If

there was a good alternative to gasoline, would the prices wouldfluctuate so much?


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5 - Intensity ofRivalry

Numerous or equally balanced competitors

Slow industry growth

High fixed or storage costs

Lack of differentiation

Capacity Diverse competitors

High strategic stakes

High exit barriers

Brand Identity


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5 - Intensity ofRivalry

It is pretty obvious that it is unwise to enter an industry that is

already hugely competitive.

As a North American firm, is it smart to enter the running shoe

manufacturing industry when you know that there are already many

developing countries who can drive down their costs due to cheaper

labor costs? Of course not.


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SWOT Analysis


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SWOT Analysis

Environmental Variables

1. Societal ChangesChanging customer preferences

Population trends2. Governmental Changes

New legislationNew enforcement priorities

3. Economic ChangesInterest rates

Real incomeExchange rates

4. Supplier ChangesChanges in input costsSupply changesChanges in number of suppliers

5. Competitive ChangesAdoption of new technologies

Price changesNew productsCompetitors

6. Market ChangesNew uses of productsNew marketsProduct obsolesce

Internal Variables

1. MarketingProduct quality

Product linesMarket shareAdvertising

2. R&DProduct R&D capabilitiesProcess R&D capabilities

3. MISSpeed & responsivenessQuality of informationExpandability

4. Management TeamSkillsExperience

5. Operations

Production capacityProduction cost structureInventory controlEfficiency

6. FinanceFinancial & operating leverageBalance Sheet


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Assumptions & Premise

Strategy formulation should be a deliberate process of

conscious thought

Responsibility for that of control must rest with CEO

The model of strategy formation must be kept simple and

informal

Strategies should be one of a kind

The design process is complete when strategies appear fully

formulated as perspective

Strategies should be explicit

Finally strategy formulation is followed by implementation


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Critique

By passes learning

Can any organization be really sure of its strengths before it tests them?

Structure follows strategy. Really! No organization can wipe the slate clean when it changes its strategy.

Explicit strategy promotes inflexibility Organizations have to cope with uncertainties.

Organizations must function during the strategy formulation process.

Detaching thinking from acting

l2 - industrial analysis

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