Post on 03-Nov-2014
description
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Industry & Competitor Analysis
Industry & Competitor Analysis Tools
9/24/12
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Industry & Competitor Analysis
Elements of Strategic Management
Elements of Strategic Management
Implementation• Business plan• Resource allocation• Organizational
design/∆
Arenas
Vehicles M&A 4C
Differentiators
Staging &
Pacing Economic
Logic
External Analysis (OT)
• PESTEL• 5 Forces• Game theory
Internal Analysis (SW)
• Value chain• VRINE• Corporate value
Strategy
StructurePeople
ProcessesRewards
Symbols
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Industry & Competitor Analysis
Industry & Competitor AnalysisAgenda
PESTEL framework for analyzing the macro environment (beyond the industry).
Industry Analysis: What determines the overall profitability of an industry? How will it change over time? How can firms use this information to
formulate strategy? Competitor analysis & game
theory. How do we predict our rivals actions?
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Industry & Competitor Analysis
Analysis of Macro Environment (PESTEL)
Technological
Economic Socio-Cultural
Legal
Political
Environmental
Industry
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Industry & Competitor Analysis
Econ 101 RecapMonopoly
Numerous firms.No market power: Price-takers on identical products.
Free entry & exit.Long-run: Economic profits driven to zero. (Good for consumers & society, bad for firms)
One firm.Market power: Choose price to maximize profit subject to demand.
No entry or exit.Long-run: Positive economic profits. (Good for firm, bad for consumers & society)
A few firms. Outcome depends on how firms compete: Bertrand:
Competition on price. Quantity adjusts to demand.
Cournot: Competition on quantity. Price adjusts to demand.
Collusion: Firms choose price cooperatively.
Perfect Competition
Oligopoly
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Industry & Competitor Analysis
If concentration were the main factor, what would we
see?
Industry Concentration
Ind
ustr
y P
rofi
tab
ilit
y
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Industry & Competitor Analysis
0%
1%
2%
3%
4%
5%
6%
0% 20% 40% 60% 80% 100%
Ind
us
try
Me
dia
n R
OS
8-Firm Concentration Ratio
Book publishing
Process-control instruments
Flour
Alkalies & chlorine
Why does this diverge from expectations?
What factors explain performance differences across industries.
Industry Concentration v. Profitability 24 Industries
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Industry & Competitor Analysis
Competitive Positioning I: Porter’s
Generic Strategies
Low Cost Uniqueness
Cost Leadership
Differentiation
Focused Low Cost
Focused Differentia
tion
Broad Marke
t
Narrow
Market
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Industry & Competitor Analysis
Trends Affect Industries Differently
Technological
Economic Socio-Cultural
Legal
Political
Environmental
Industry Environment
Industry Environment
Buyer Power
Supplier Power
Entry Barriers
Substitute
Products
Rivalry
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Industry & Competitor Analysis
Concentration is only one Element of Profitability
Potential
RivalrySupplier Power
Entry Barriers
Substitute
Products
Buyer Power
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Industry & Competitor Analysis
Threat of Entryis Highest When:
Low economies of scale/capital requirements
Undifferentiated product Incumbents cannot retaliate easily
Restrict access to distribution channels or suppliers
Limit pricing
No critical proprietary knowledge/technology
No network externalities No government/legal barriers
Buyer Power
Supplier Power
Entry Barriers
Substitute
Products
Rivalry
Entry Barriers
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Industry & Competitor Analysis
Note on Entry Barriers Two types of entry barriers:
Structural: Inherent natural advantages that incumbents have simply by their incumbency – no action is required.
Strategic: Active entry-deterring behavior by incumbents (e.g., pre-emptive capacity expansion or “limit pricing”).
Opposite effects on industry profits: Structural barriers tend to increase industry
profits since they keep out entrants at no additional cost.
Strategic barriers may decrease industry profits, since they impose costs on incumbents (e.g., reduced margins from limit pricing, or costs of excess capacity).
Always know which type of barrier you’re talking about!
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Industry & Competitor Analysis
Buyer Poweris Highest When:
Buyers are large and concentrated/little rivalry
Undifferentiated products reduce switching costs
Buyer can backward integrate (in-source) Buyers know the cost structure Product represents a large % of buyers’
total costs Product has little impact on the quality of
the buyers’ final outputBuyer Power
Supplier Power
Entry Barriers
Substitute
Products
Rivalry
Buyer Power
Supplier Power
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Industry & Competitor Analysis
Supplier Poweris Highest When:
Buyer Power
Supplier Power
Entry Barriers
Substitute
Products
Rivalry
Buyer Power
Supplier Power
Suppliers are large and concentrated/little rivalry
Differentiated products increase switching costs between vendors and/or substitute products
Suppliers can forward integrate Focal industry represents a small % of
suppliers’ business
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Industry & Competitor Analysis
Threat of Substitutesis Highest When:
Substitute product/service is comparable or superior (in the price/performance relationship)
Low switching costs for buyers (redesign, retooling, etc.)
Buyers are highly price sensitive
Buyer Power
Supplier Power
Entry Barriers
Substitute
Products
Rivalry
Substitute
Products
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Industry & Competitor Analysis
Rivalry Can Be a Blast
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Industry & Competitor Analysis
Intra-Industry Rivalryis Fiercest When:
Large number of competitors in industry. Industry is stagnant or declining. Opportunity to spread fixed or sunk
costs: Excess capacity Large fixed cost investment. High storage costs for product.
Competitors’ costs differ. Product is undifferentiated. Buyers have low switching costs. Exit barriers are high.
Buyer Power
Supplier Power
Entry Barriers
Substitute
Products
RivalryRivalry
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Industry & Competitor Analysis
Note on Meaning of “Rivalry”
“Rivalry” here mainly means intensity of competition that erodes margins.
The focus is mainly on price competition since it directly erodes margins.
In most cases, differentiation-based competition protects or increases margins resulting in greater industry profitability.
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Industry & Competitor Analysis
How can you use the 5-forces model?
Market entry/exit based on forecasts of prices, costs, & profits.
Positioning: Find ways to mitigate the greatest threats among the 5 forces (supply chain, switching costs, entry barriers, etc.)
Industry evolution: Anticipate & prepare for changes in the 5 forces.
Industry transformation: Find ways to change the 5 forces to your advantage (new business models, etc.).
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Industry & Competitor Analysis
Industry & Competitor AnalysisAgenda
PESTEL framework for analyzing the macro environment (beyond the industry).
Industry Analysis: What determines the overall profitability of an industry? How will it change over time? How can firms use this information to
formulate strategy? Competitor analysis & game
theory. How do we predict our rivals actions?
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Industry & Competitor Analysis
Can you beat the prisoner’s dilemma?
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Industry & Competitor Analysis
Is this a Prisoner’s Dilemma?
RedC D
BlueB
A N
$500
$50
$550
$55
$1000
$1100
$100
$110
Prisoner’s Dilemma? • Dominant strategies?• Nash equilibrium?• Pareto inefficient?
TwoOneYes
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Industry & Competitor Analysis
Sequential/Extended Form Games
Apple 100Samsung 50
Apple 50Samsung 75
Apple 50Samsung -50
Apple 25Samsung -25
Continue Collaborating
Samsung Competes
Samsung drops out
Samsung stays in
Apple ++Samsung +
Apple +Samsung ++
Apple +Samsung --
Apple -Samsung -
Apple
Samsung
Outsource chip
Add capability Samsung
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Industry & Competitor Analysis
Behavioral Approach to Anticipating Rivals’ Responses
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Industry & Competitor Analysis
Using Resources to Predict rivals’ actions: timing & magnitude
Motivation/Perceived
Threat
Rival’s Response
(e.g., lag, order,magnitude)
Awarenessof Rival
Ability toRespond
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Industry & Competitor Analysis
ResourceSimilarity
Market Commonali
ty
Rival Cognition
Awareness & Motivation: How to stay under the radar…
Is firm in same
league?
Do the mkts overlap?
Is firm viewed as a
threat?
Motivation/Perceived
Threat
Rival’s Response
(e.g., lag, order,magnitude)
Awarenessof Rival
Ability toRespond
Resource Strength
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Industry & Competitor Analysis
Elements of Strategic Management
Elements of Strategic Management
Implementation• Business plan• Resource allocation• Organizational
design/∆
Arenas
Vehicles M&A 4C
Differentiators
Staging &
Pacing Economic
Logic
External Analysis (OT)
• PESTEL• 5 Forces• Game theory
Internal Analysis (SW)
• Value chain• VRINE• Corporate value
Strategy
StructurePeople
ProcessesRewards
Symbols