Industry analysis
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Industry analysis

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    Industry analysis Industry analysis Presentation Transcript

    • INDUSTRY ANALYSIS Porter’s Five Industry Forces
    • Industry Environment
      • A set of factors that directly influences a company and its competitive actions and responses.
      • Interaction among these factors determine an industry’s profit potential.
      • Threat of new entrants
      • Power of suppliers
      • Power of buyers
      • Product substitutes
      • Intensity of rivalry
    • Five Forces Model of Competition
      • Identify current and potential competitors and determine which firms serve them.
      • Conduct competitive analysis.
      • Recognize that suppliers and buyers can become competitors.
      • Recognize that producers of potential substitutes may become competitors.
    • PORTER’S FIVE FORCES Threat of new entrants Bargaining power of suppliers THE INDUSTRY Current competitors Bargaining power of customers Threat of substitute products or services
    • Threat of Potential Entrants
      • New Entrants bring new capacity, desire to gain market share & Substantial resources
      • Prices down; Incumbents cost inflation & reducing Profitability
      • Two Important Factors:
        • Barriers to Entry
        • Expected Retaliation from Existing Competitors
    • Threat of Potential Entrants
      • Entry Barriers
        • Economies of scale
        • Product Differentiation
        • Capital requirements
        • Switching costs
        • Access to distribution channels
        • Absolute cost advantages
          • i.e., access to necessary inputs
        • Government policy
      • Expected retaliation
    • Barriers to Entry
      • Economies of Scale:
        • Decline in unit cost of a product as the absolute volume per period increases
        • Deter entry by forcing the entrant to come in at large scale or small scale with cost disadvantage
        • Maruti 800
        • Reliance mobile phone
        • Entire Functional Area or Particular Operations
        • Diversification into the related area
    • Product Differentiation
      • Brand Identification and Customer Loyalties
      • Basis of Past Advertising, Customer Service, Product Differences or being first into Industry
      • Entrants to spend heavily to overcome existing customer Loyalties
      • Pepsi & Coke in India
      • Mineral Water vis-à-vis Bisleri
    • Capital Requirements
      • Large Financial Resources requirement
      • Capital in terms of Production Facilities, Customer credit, Inventories, or covering start-up losses
      • Xerox – Renting copiers rather selling outright
    • Switching Costs
      • One time costs facing the buyer of switching from one supplier’s product to another
      • Switching costs may include Employee retraining costs, cost of new ancillary equipment, cost & time in testing or qualifying new source, need for technical help, product redesign
    • Access to Distribution Channels
      • Acceptance of the product by established firms
      • Price Breaks, Cooperative advertising allowance, or like reducing profitability
      • More Limited wholesale or retail channels, tougher entry into that industry
    • Cost Disadvantages Independent of Scale
      • Proprietary product knowledge
      • Favorable Access to Raw Materials
      • Favorable Locations
      • Government Subsidies
      • Learning or Experience Curve
    • Expected Retaliation
      • Reaction of Existing Competitors
      • Likelihood:
        • A history of vigorous retaliation
        • Established firms with substantial resources to fight back
        • Firms with great commitment to industry
        • Slow Industry Growth
    • PORTER’S FIVE FORCES Threat of new entrants Bargaining power of suppliers THE INDUSTRY Current competitors Bargaining power of customers Threat of substitute products or services
    • Intensity of Rivalry Among Existing Competitors
      • Rivalry Occurs because one or more competitors either feels the pressure or sees the opportunity to improve position
      • Price Competition are highly unstable & leave industry worse off from profitability standpoint
      • Advertising Battles well expand the demand or enhance levels of product differentiation for betterment
      • Numerous or Equally Balanced Competitors
        • Numerous Firms
        • Relatively Few firms & Relatively balanced
        • Domination by one or very few firms
      • Slow Industry Growth
        • High competition for Firms seeking expansion
        • More Volatile than rapid growth markets
      • High Fixed or Storage Costs
        • Strong pressures for firms to fill capacity
        • Rapid Price Cutting
        • Product once produced is very difficult or costly to store
      • Lack of Differentiation or Switching Costs
        • Commodity based implies buyer is largely based on price and service
        • Result is Intense Price & Service Competition
      • Diverse Competitors:
        • Diversity in goals lead to different strategies for competing
        • No set of Rules of the Game
      • High Strategic Stakes:
        • High Stakes in achieving success leads to greater Rivalry
        • MNC’s Foray into new countries & markets
        • Corporate Strategy Fit
    • High Exit Barriers
      • Specialized Assets
      • Fixed Costs of Exit
      • Strategic Interrelationships
      • Emotional Barriers
      • Government & Social Restrictions
    • PORTER’S FIVE FORCES Threat of new entrants Bargaining power of suppliers THE INDUSTRY Current competitors Bargaining power of customers Threat of substitute products or services
    • Pressure from Substitute Products
      • Limit the Profit Potential
      • Products that can perform the same FUNCTION
      • Substitute Products:
        • Are Subject to trends improving the Price Performance Trade Off with Industry’s Product
        • Are produced by Industries earning high Profits
    • PORTER’S FIVE FORCES Threat of new entrants Bargaining power of suppliers THE INDUSTRY Current competitors Bargaining power of customers Threat of substitute products or services
    • Bargaining Power of Buyers
      • Purchases large volumes relative to seller sales
      • Product represents significant fraction of buyer’s cost
      • Product are standard or undifferentiated
      • Few switching costs
      • Earns Low Profits
      • Buyers pose threat of backward integration
      • Industry’s product is unimportant to quality of buyer’s products or services
      • Buyer has full Information
    • PORTER’S FIVE FORCES Threat of new entrants Bargaining power of suppliers THE INDUSTRY Current competitors Bargaining power of customers Threat of substitute products or services
    • Bargaining Power of Suppliers
      • Dominated by few players
      • No substitute products available
      • Industry not important customer of supplier group
      • Supplier’s product is an important input to buyer’s business
      • Supplier’s group’s products are differentiated or high switching costs
      • Credible threat of Forward Integration
    • Threat of New Entrants
      • Barriers to entry
      • Economies of scale
      • Product differentiation
      • Capital requirements
      • Switching costs
      • Access to distribution channels
      • Cost disadvantages independent of scale
      • Government policy
      • Expected retaliation
    • Bargaining Power of Suppliers
      • A supplier group is powerful when:
      • it is dominated by a few large companies
      • satisfactory substitute products are not available to industry firms
      • industry firms are not a significant customer for the supplier group
      • suppliers’ goods are critical to buyers’ marketplace success
      • effectiveness of suppliers’ products has created high switching costs
      • suppliers are a credible threat to integrate forward into the buyers’ industry
    • Bargaining Power of Buyers
      • Buyers (customers) are powerful when:
      • they purchase a large portion of an industry’s total output
      • the sales of the product being purchased account for a significant portion of the seller’s annual revenues
      • they could easily switch to another product
      • the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry
    • Threat of Substitute Products
      • Product substitutes are strong threat when:
      • customers face few switching costs
      • substitute product’s price is lower
      • substitute product’s quality and performance capabilities are equal to or greater than those of the competing product
    • Intensity of Rivalry
      • Intensity of rivalry is stronger when competitors:
      • are numerous or equally balanced
      • experience slow industry growth
      • have high fixed costs or high storage costs
      • lack differentiation or low switching costs
      • experience high strategic stakes
      • have high exit barriers
    • Effective Competitive Strategy
      • Positioning the firm so that its capabilities provide the best defense against existing array of competitive forces
      • Influencing the balance of forces through strategic moves
      • Anticipating change in factors underlying forces & responding to them
    • Internal Environmental Analysis
      • Resources – Capabilities – Core Competencies – Discovering Core Competencies – Competitive Advantage - Strategic Competitiveness