Coleman Crook, Jessica Crumpton, Ashton Davis, Sarah Ellens, Kevin Levesque.

Industry AnalysisChapter 2

Introduction and Objections

• Industry environment/Industry analysis• Frameworks used to analyze environment and understand how

industry features influence competition and profitability• Forecast changes and develop strategies for the future• Understand the value and challenges of analysis (Porter’s 5 forces

framework)• Analyze competition and customer requirements for industry

advantage

Case: The Mobile Phone Industry • Significant growth in the 90’s• Move from market of professionals to everyday consumers• Industry changes due to technological boom• Vast differentiation between software, hardware, services, etc• Smartphone introduction and takeover

Case Continued

• Competition and technology lowering prices• Depressing Profitability• Outsourcing causing new market entry • Major uncertainties• Product differentiation• Balance of bargaining power

Environmental Analysis to Industry Analysis

• Business environment = all external influences affection a firms decisions and performance

• Organize information by using systems • Example: PEST

PEST• Political- Government appointed policies (TSA)• Economic- Recession (Sales)• Social- Everyday opinions of people (9-11)• Technological- new technology that might change market

(Wifi)

Basic Principles • To make a profit a firm must create value for the customer-

understand the customer• To create value- acquire goods and services from suppliers-

understand suppliers and maintain relationships with them• Ability to generate profit depends on competition with firms

competing for the same value-creating opportunities

The core of the firm’s business environment is formed by it’s relationships with 3 sets of players;

1) Customers2) Suppliers3) Competitors

This is industry environment

Profit: Demand and Competition

• What determines profit?• Value for the consumer• Consumer surplus=More surplus received my customers

(Frozen, ice)• Producer surplus= Less received by consumers (Surface 2)

Profit• Determined by:• 1) Value of the product to customers• 2) Intensity of competition• 3) Bargaining power of the producers relative to their suppliers• Southwest/Airline Profit (-11.3)

Porters Five ForcesSuppliers

Industry Competitors

SubstitutesPotential Entrants

Buyers

Level of Competition

Bargaining Power of the Suppliers

The relationship between producers and suppliers is similar to that of producers and buyers.

Key Issues:• Ease to which firms in the industry can switch

between different input suppliers• Relative bargaining power of each party

Forecasting industry ProfitabilityTo predict the figure of profitability to an industry analysis occurs in 3 Stages:

• Examine how the industry’s current and recent levels of competition and profitability are a consequence to the present structure.

• Identify trends that are changing in the industry structure• Are new players entering?• Are products becoming more differentiated?

• Identify how these structural changes will affect the five forces of competition and result in profitability of the industry.• Change in industry structure cause competition to

weaken or intensify?

Positioning the Company

Understanding the competitive forces that a firm faces within its industry allows managers to position the firm where competitive forces are the weakest.

Effective positioning requires the firm to anticipate changes in the competitive forces likely to impact the industry

Strategies to Alter Industry Structures

The first issue is to identify the key structural features on an industry that are responsible for depressing profitability.

The second is to consider which of these structural features are amenable to change through appropriate strategic initiates..

Defining the Industry

The first stage of industry analysis is to identify the key elements of the industry structure.

Industry is defined as a gro0up of firms that supplies the market.

Segmentation

• Process of dividing the market by characteristics that are likely to influence the consumers’ purchasing behavior.

• Evaluating competitive conditions

Segmentation Purpose

• Identify attractive segments

• Select strategies for different segments

• To determine how many segments to serve

Five Stages of Segmentation

1. Identify possible variables

2. Construct a segmentation matrix

3. Analyze segmentation attractiveness

4. Identify key success factors

5. Analyze the attraction of broad versus narrow scope

Additional Forces• Substitutes• Reduce value of a product

• Complements • Increases value of a product

Dynamic Competition

• Hyper competition• Intense and rapid competitive moves

• Competitive advantage• Destabilizing of industry structures

Key Success Factors• What do our consumers want?

• What does the firm need to do to survive competition?

How it Relates• Strategies to alter industry structure:• No assigned seats• Domestic only• No meals• Only Boeing 737

Positioning the Company

• 550 Boeing 737’s• No long distances, no need for more fuel capacity• Average Flight Distance: 653 miles • Average Flight Time : 1 hour 55 minutes