Chapter 3
Industry Analysis
Gordon Walker
McGraw-Hill/Irwin
Copyright © 2004 McGraw Hill Companies, Inc. All rights reserved.
PowerPoint Presentation by Charlie Cook
How Are Industries Defined?
• Products in the industry are functionally
similar.
– Example: Air conditioners cool the air in a building
in a functionally similar way that is different from
a fan, which is a substitute.
• Products in the industry compete directly by
influencing demand.
– Changes in the value or price of a firm’s product
affect demand for competing firms’ products.
3–2
Industry Analysis
• Identifying industry competitors
– Firms whose products provide value in functionally
equivalent ways.
– Firms that compete directly through changes in
product value and price.
– Firms that face the same common factors of
economic interdependence in an industry.
• Identifying substitute producers
– Firms whose products are functionally different
from an industry’s products but compete to
provide value to the same industry buyers.
3–3
What Determines Firm Profitability?
• Macroeconomic factors
– The overall state of the economy
• Industry factors
– Business environment and competitive conditions
specific to an industry
• The firm’s market position
– The degree to which a firm is strategically
benefited by the position it holds within an
industry
3–4
Relative Contributions of Industry and
Business Unit to Economic Performance
Manufacturing Sector
Transportation Sector
Services Sector
Percentage Contribution of
Business Segment, Industry
and Other Factors to Business
Return on Assets 1980–1994
(U.S. data).
Figure 3.3
3–5
Economies of Scope
Economies of
Scope
Reduce costs
Enhance value
Generalist Strategy
Specialist Strategy
3–6
Industry Development over Time
More
Less
Early
Industry Development
Late
3–7
Forces Influencing Firm Performance
• The potential for entry into the industry by
new firms
•
•
•
•
The strength of competition
The power of buyers
The power of suppliers
The strength of substitutes for the industry’s
products
• The strength of complements of the industry’s
products
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Porter’s Five Forces Framework
Competition for
dominance in
the industry
Source: Michael Porter, Competitive Strategy
(New York: Free Press, 1980), p. 4.
Figure 3.1
3–9
The Effect of Industry Forces on
Value, Cost, and Price
Table 3.1a
3–10
The Effect of Industry Forces on
Value, Cost, and Price (cont’d)
Table 3.1b
3–11
Rivalry’s Effects on Competition
• Perfect competition
– No firm makes a profit above its capital cost, since
rivalry has driven the market price down to
marginal cost.
• Oligopolistic competition
– Localized competition occurs among a few similar
firms within and across market segments.
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Rivalry and Economic Performance
• Characteristics of increased rivalry that lead
to low economic performance:
–
–
–
–
–
–
Many competitors
A common set of buyers for all firms
The same value offered by all firms
The same cost structure in all firms
Relatively costless entry
Relatively costless exit
• The combination of these conditions
produces a state of perfect competition.
3–13
Buyer Power
• Buyer power is increased by:
– The availability of competing products with the
same value and price
– Buyer concentration (few buyers)
– Low market growth
– Low importance of the product to the buyer
– High importance of selling product to buyer
– Supplier need to fill capacity by selling to buyer
– Credible threat of vertical (backward) integration
by the buyer
3–14
Supplier Power
• Supplier power is increased by:
– Supplier concentration (few suppliers)
– Growth in supplied industry (buyer demand)
– Low percentage of supplier volume bought by
customer (size of buyer relative to supplier)
– The strategic importance of supplier to buyer
– The strategic importance of buyer to supplier
– Low threat of backward integration by buyer
3–15
What Factors Raise Entry Barriers?
• High barriers to imitation
–
–
–
–
Property rights
Dedicated assets
Causal ambiguity
Learning curve and development costs
• High customer switching costs
• Lower prices by firms in the industry
– Limit pricing
3–16
Substitutes
• The threat of substitutes increases when:
– A firm has a low buyer surplus (value minus price)
relative to the substitute.
– A firm’s customers have low switching costs.
• Defenses against substitutes:
– Increase the buyer’s surplus
– Raise buyer’s switching costs
3–17
The Value Net
Cooperation for
mutual gain
Adapted from: Adam Brandenburger and Barry Balebuff,
Co-opetition (New York: Doubleday, 1996), p. 17.
Figure 3.2
3–18
Industry Forces Increasing Profits
• Coordination among competitors
– Cooperative pricing (not price-fixing) to avoid price
competition
» Readily available pricing information
» Comparable value-cost profiles for competitors
– Establishing interfirm partnerships
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Industry Forces Increasing Profits
• Cooperation between buyers and suppliers
– Sharing information
» Operating (e.g., logistics)
» Strategic (e.g., technology development
– Sharing resources and capabilities
» Quality management techniques
3–20
Cooperative Pricing Example
• Price leadership requires:
– Observable prices
– Common buyers
– Strategic discipline
– A small number of firms
» Common history of competition
» Comparable market positions
– Adherence to antitrust law
– Cooperative output levels
– Interfirm partnerships
3–21
What Are Complements?
• Complementary products
– Are products, not in the same industry, whose
patterns of demand are systematically positively
correlated and move in tandem.
– Create a reciprocal expansion of demand.
– Example: Skis and ski boots, sails and sailboats,
tires and automobiles.
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Strategic Groups
• Strategic groups are a level of analysis
between the firm and the industry.
• Characteristics of strategic groups:
– Firms within an industry that have similar cost and
value drivers compared to firms in other groups.
– Firms which compete in the same segment or
across segments for the same customers.
– Firms that take a similar approach to competing in
an industry.
3–23
Mobility Barriers and Strategic Groups
• Mobility barriers for strategic groups
– Are actions taken by stronger and more profitable
competitors to protect their segments from entry
by rival firms in the industry.
– Prevent the movement of firms from one strategic
group to another.
– Are created by entry-deterring behavior of firms in
a group (e.g., isolating mechanisms specific to the
group or limit pricing).
– Are similar to barriers to entry to the industry.
3–24
Strategic groups in the Chain Saw Industry in 1978
(Classic Example of a Products Industry)
Stihl
Husqvarna
Jonsereds
Partner
Solo
(quality, technology)
Value
High
Homelite
McCullough
Beaird-Poulan
Remington
Echo
Roper
Low
High
Cost
Low
(higher price in professional market and lower price in mass market)
3–25
The Internet Brokerage Industry:
Selected Firms (Fall 2000)
Table 2.1a
3–26
The Internet Brokerage Industry:
Selected Firms (Fall 2000)
Table 2.1b
3–27