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Industrial Analysis
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Origin
Influenced by Industrial Organization & Economics
1980 Michael Porters Competitive Strategy
Positions in the economic marketplace
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Concept
External Appraisal
Threats &
Opportunities
Key SuccessFactors
Internal Appraisal
Strengths &
Weaknesses
DistinctiveCompetencies
Creation
ofStrategy
Implementation ofStrategy
Choice
ofStrategy
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Concept
Strategies are generic, specifically common, identifiable
positions in the market place.
The marketplace is economic and competitive
The strategy formation process is there fore one of selection of
these generic positions based on analytical calculation.
Analysts play a major role in the process, feeding the results oftheir calculations to managers who officially control the
choices.
In effect market structure drives deliberate positional strategies
that drive organizational structure.
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Evolution
First Wave
Military Maxims
Succesive Waves
External Analysis Porters Model of Competitive Analysis
Internal Analysis
Value Chain
Generic Strategies
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Military Maxims
Sun Tzu 400 B.C
Selection of optimal strategy
Being informed of enemy strength
and place of battle
Attention to position strategies
Do not fight in dispersive ground
If weaker in number then be
capable of withdrawing
If equal in strength then engage
the enemy
Extrapolated to business and
market
Clausewitz - 1780 - 1831
Aftermath of Napoleonic wars
Organization in a chaotic situation
Strategy depends on basic building
blocks
For the large company
Planning is crucial
Give up the crumbs
Preserve strengths
For the small company
Attack when the enemy retreats
Be inconspicuous
Respond quickly
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Five Forces Model
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IndustryCompetitors
Intensity ofIntensity of
RivalryRivalry
SuppliersSuppliers
Threat of
Substitute Products
and /or Services
BuyersBuyers
PotentialPotential
EntrantsEntrants
Threat of New
Entrants
Bargaining Power
of Buyers
SubstitutesSubstitutes
Bargaining Power
of Suppliers
Five Forces Model
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Five Forces Model
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Five Forces - Explained
Provides a framework to analyze the forces that reduce theprofits of an industry
Focuses on whether or not a force is sufficiently strong to
reduce or eliminate the profit of an industry
Focuses on an industry as a whole not on individual firms
The stronger these forces are, the more likely the profits willbe less for the particular industry
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1 - Threat ofNew Entrants
Barriers to entry caused by
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Learning Curve
Cost disadvantages
Government policy
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1 - Threat ofNew Entrants
Some industries are harder to enter than others. The Pharmaceutical Industry, with all of its risks and high-price
patents, is almost impossible for new firms to get in on the hugeprofit margins.
A pizza shop has a very low barrier to entry - almost anyone with anoven and some pepperoni can start one.
Some industries can create barriers to entry by havingcustomers dedicated to their brand. For example fizzy, syrupy water. It takes a small capital investment,
but big soft drink companies have squeezed out potential
competitors with huge marketing campaigns.
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2 - Bargaining Power ofBuyers
Buyer purchases large volumes relative to the seller sales
Buyer purchases are a significant portion of the buyerstotal costs
The product it purchases from the industry are standardor undifferentiated
Face few switching costs
Product is unimportant to the quality of the buyersproducts or services
Buyer has full information
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2 - Bargaining Power ofBuyers
Buyers with weak bargaining power are favorable. If you sell super-computers and you have very few customers,
those customers wield a lot of power.
Sometimes losing one sale can make or break the
business.
Another factor that affects buyer power is differentiation. Commodities like oats or pulp for paper have strong buyers
because it makes no difference which supplier they choose
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3 - Bargaining Power ofSuppliers
Few suppliers supplier concentration
Not obliged to contend with other substituted products
Industry is not an important customer of the suppliergroup
Suppliers product is an important input to the buyers
business The supplier groups products are differentiated or it has
built up switching costs
The supplier group poses a credible threat of forwardintegration
The supplier group poses a credible threat of backwardintegration
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3 - Bargaining Power ofSuppliers
Suppliers with low bargaining power are good for
business.
For example, in the coffee industry, the growers have very low
bargaining power. They are poor, fiercely competitive and usually
rely heavily on their buyers. A lb. of Green coffee costs the same
today as it did in the late 60's.
Oligopolies/Monopolies within supplier groups can lead
to high bargaining power.
A strong supplier would be Intel. What would happen if Dellstopped selling "Intel Inside"? Computer buyers would take their
money somewhere else. Dell is in a very weak position and this is
one reason why the computer assembly business has its pitfalls.
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4 - Threat ofSubstitutes
Relative Price of substitute
Relative Quality of substitute
Switching costs to buyers
A substitute product for butter is margarine. A substitute for
sugar is aspartame. This is a product that is not quite the same,
but the customer can get the same value from it. When butter
prices soar, people can simply choose margarine, so the butter
producers are not free to set their prices wherever they want. If
there was a good alternative to gasoline, would the prices wouldfluctuate so much?
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5 - Intensity ofRivalry
Numerous or equally balanced competitors
Slow industry growth
High fixed or storage costs
Lack of differentiation
Capacity Diverse competitors
High strategic stakes
High exit barriers
Brand Identity
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5 - Intensity ofRivalry
It is pretty obvious that it is unwise to enter an industry that is
already hugely competitive.
As a North American firm, is it smart to enter the running shoe
manufacturing industry when you know that there are already many
developing countries who can drive down their costs due to cheaper
labor costs? Of course not.
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SWOT Analysis
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SWOT Analysis
Environmental Variables
1. Societal ChangesChanging customer preferences
Population trends2. Governmental Changes
New legislationNew enforcement priorities
3. Economic ChangesInterest rates
Real incomeExchange rates
4. Supplier ChangesChanges in input costsSupply changesChanges in number of suppliers
5. Competitive ChangesAdoption of new technologies
Price changesNew productsCompetitors
6. Market ChangesNew uses of productsNew marketsProduct obsolesce
Internal Variables
1. MarketingProduct quality
Product linesMarket shareAdvertising
2. R&DProduct R&D capabilitiesProcess R&D capabilities
3. MISSpeed & responsivenessQuality of informationExpandability
4. Management TeamSkillsExperience
5. Operations
Production capacityProduction cost structureInventory controlEfficiency
6. FinanceFinancial & operating leverageBalance Sheet
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Assumptions & Premise
Strategy formulation should be a deliberate process of
conscious thought
Responsibility for that of control must rest with CEO
The model of strategy formation must be kept simple and
informal
Strategies should be one of a kind
The design process is complete when strategies appear fully
formulated as perspective
Strategies should be explicit
Finally strategy formulation is followed by implementation
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Critique
By passes learning
Can any organization be really sure of its strengths before it tests them?
Structure follows strategy. Really! No organization can wipe the slate clean when it changes its strategy.
Explicit strategy promotes inflexibility Organizations have to cope with uncertainties.
Organizations must function during the strategy formulation process.
Detaching thinking from acting
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