Lecture 4 - Industry Analysis and Strategic Positioning Flashcards
(21 cards)
What are the three levels of analysis we use to assess profitability?
Describe the PESTEL framework in terms of the industrial environment. How does the macro environment impact the firm?
- The industry environment lies at the core of the macro environment
- The macro environment impacts the firm through its effect on the industry environment
- Each of these can help drive the profitability of the industry
Political
Economic
Social
Technological
Environmental
Legal
What are the three main determinants of industry profitability?
Three key influences:
- The value of the product to customers
- The intensity of competition
- Relative bargaining power at different stages of the value chain
What are the sources of competition in the five forces framework?
Firms need to position themselves appropriately within the value chain to gain competitive advantage.
Three sources of horizontal competition
- from substitutes
- from entrants
- from established rivals
Two sources of vertical competition
- power of suppliers
- power of buyers
What are the structural determinants of competition, what are the principal drivers that affect porter’s 5 forces?
Supplier/buyer power
- Supplier’s/buyer’s price sensitivity
- Relative bargaining power
Industry rivalry
- Concentration
- Diversity of competitors
- Product differentiation
- Excess capacity and exit barriers
- Cost conditions
Substitute competition
- Buyer’s propensity to substitute
- Relative prices and performances of substitutes
Threat of entry
- Capital requirements
- Economies of scale
- Absolute cost advantage
- Product differentiation
- Access to distribution channels
- Legal/regulatory barriers
- Retaliation
What is it about the industry that affects competition from substitutes?
Extent of competitive pressure from producers of substitutes depends on:
- Buyer’s propensity to substitute
- The price-performance characteristics of substitutes
What is it about the industry that prevents new entrants from entering?
Entrants’ threat to industry profitability depends upon the height of barriers to entry
The principle sources of barriers to entry is:
- Capital requirements
- Economies of scale
- Absolute cost advantage (patents)
- Product differentiation
- Access to channels of distribution
- Legal and regulatory barriers
- Retaliation
What affects the extent to which buyers are able to depress profitability?
The extent to which buyers are able to depress profitability depends on:
Buyer’s price sensitivity
- Does the item comprise a big percentage of the buyer’s total costs?
- Whether purchased item is a commodity or differentiated?
- How intense is competition between buyers?
- Is the item critical to the quality of the buyer’s own output
Relative bargaining power
- Size and concentration of buyers relative to sellers
- Buyer’s information
- Ability to backward integrate? (can buyer go back to the source?)
The extent to which industry profitability is depressed by aggressive price competition depends upon:
The extent to which industry profitability is depressed by aggressive price competition depends upon:
- Concentration (number and size distribution of firms)
- Diversity of competitors (difference in goal, cost strategies, etc.)
- Product differentiation
- Excess capacity and exit barriers (Chinese sell their excess steel in Europe)
- Cost conditions
- Extent of scale economies
- Ratio of fixed to variable costs
What structural changes in the automobile auto industry caused profitability to decline between ’60 and ‘99
What are the ways we can apply the 5 forces analysis?
Forecasting Industry Profitability
- If we can forecast changes in industry structure, we can predict likely impact on competition and profitability
- Past profitability is a poor indicator of future profitability
Strategic Planning
- Once we know which structural features of an industry support profitability and which depress profitability, we can choose a favourable positioning within the industry
Strategies to improve industry profitability
- Which of the structural variables, that are depressing profitability, can we change by individual or collective strategies?
What are the key factors for success?
Pre-requisites for success
- What do customers want?
- Analysis of demand
- Who are our customers?
- What do they want?
- How does the firm survive competition?
- Analysis of competition
- What drives competition?
- What are the main dimensions of competition?
- How intense is competition?
- How can we obtain a superior competitive position?
Explain coopetition and how it is related to complements in the 5 forces framework.
Introducing complements: the suppliers of complements create value for the industry and can exercise bargaining power
Coopetition
- Firms often cooperate and compete at the same time to create and capture value
- Shorter product life cycle
- Convergence of multiple technologies
- Increasing costs of conducting R&D
- Multiple resource requirements often do not reside within a single firm
- Firms in the same industry often cooperate to share such resources
- Then go on to compete to divide the created value jointly
Such collaborative activity has been called coopetition
What are the differences dynamic competition and porter’s positioning framework?
Porters framework assumes:
- Industry structure drives competitive behaviour
- Industry structure is (fairly) stable
But, competition also changes industry structure
- Schumpeterian competition – a “perennial gale of creative destruction” – market leaders overthrown by innovation
- Hyper-competition – “intense and rapid competitive moves … continuously creating new competitive advantages and destroying existing competitive advantages
- Implication:
Within 5 forces
INDUSTRY STRUCTURE drives COMPETITIVE STRATEGY
Under dynamic competition
COMPETITIVE STRATEGY drives INDUSTRY STRUCTURE
What are strategic groups?
A strategic group is a group of firms in an industry, following the same or a similar strategy along the strategic dimensions (Porter)
Identifying strategic groups:
- Identifying principal strategic variables which distinguish firms (e.g. product range, geographical breadth, choice of distribution channels, level of product quality, degree of vertical integration, choice of technology etc)
- Position each firm in relation to these variables
- Identify cluster
[If profitability is driven by industrial positioning, we would assume strategic groups should have similar profitability. However, other factors may affect profitability such as:
- Different countries
- Different factors
- Different operations]
Explain what value creation, consumer and producer surplus are graphically.
Name two sources of competitive advantage
Sources of competitive advantage
- Cost advantage (similar product at lower cost)
- Differentiation advantage (price premium from unique product)
What was Porter’s generic strategies on competitive advantage?
Porters generic strategies
Firms that adopt both cost leadership and differentiation strategies end up being “stuck in the middle”
This would reduce performance and should be avoided
Name sources of competitive cost advantages
Sources of competitive advantage in cost
- Economies of scale
- Specialisation & division of labour
- Economies of learning
- Increased dexterity, improved organisational routines
- Production techniques
- Process innovation, reengineering business processes
- Product design
- Standardised designs & components, design for manufacture
- Input costs
- Location advantage, low cost units, bargaining power
- Capability utilisation
- Ratio of fixed to variable costs
- Speed of capacity adjustment
- Residual efficiency
- Organisational slack, motivation and culture, mgmt. efficiency
Explain the nature of product differentiation as a method of competitive advantage
DEFINITION: “providing something unique that is valuable to the buyer beyond simply offering a low price”
KEY ISSUE: Creating value for the customer
TANGIBLE DIFFERENTIATION
Observable, product characteristics:
Size, colour, materials etc.
Performance
Packaging
Complementary services
INTANGIBLE DIFFERENTIATION
Unobservable and subjective characteristics that appeal to the customer’s image, status, identity and desire for exclusivity
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer
Explain how innovation can change the economics of an industry?
Innovation could change the economics of the industry
- Southwest airlines, Easyjet and Ryan changed the economies of scale and scope in the airline industry
- Zara’s system of design, manufacture and distribution changed the conventional model in retailing
- Metro international is a Swedish company that publishes the Metro Newspaper free to commuters – 56 daily editions, countries and 15 languages, 17 million daily readers
By changing the underlying business model of the industry, the company can compete more effectively and are no longer defined by porters framework.
Michael Porter does not account for the effect of a firm changing the business model of an industry therefore producing a competitive advantage on differentiation and cost
