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Today: Industry Analysis. Administrative issues Current Events Porter’s Five Forces Framework How To Analyze Industry Environments Walmart Case Analysis Team assignment Assign new case: RCA Records WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html. The External Environmental.

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Today industry analysis l.jpg

Today: Industry Analysis

  • Administrative issues

  • Current Events

  • Porter’s Five Forces Framework

  • How To Analyze Industry Environments

  • Walmart Case Analysis

  • Team assignment

  • Assign new case: RCA Records

    WEBSITE:

    www.sba.pdx.edu/faculty/stephens/ss.html


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The External Environmental

Think in terms of Opportunities and Threats - the “O” and “T” of TOWS

Relate Strategic Objectives to “O” and “T”

  • increased sales and/or market share

  • new product offerings

  • processing technology innovation

    Continually scan to identify “O’s” and “T’s”


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The External Environmental

The General Environment

  • Demographic: age, ethnicity, household size, occupation

  • Economic: income distribution, inflation, interest rates, exchange rates, urbanization

  • Political/Legal: consumer and environmental protection, unions


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The External Environmental

The General Environment

  • Social and Cultural: conservatism/ liberalism, nesting, materialism

  • Technological: e-tailing, intranets, diffusion rates

  • Global: nationalism, transnational corporations, cultural differences


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The External Environmental

The Industry Environment

The following factors in an Industry…

Bargaining Power of Buyers

  • Bargaining Power of Suppliers

  • Threat of New Entrants

  • Threat of Substitute Products

    ...Determine Intensity of Competitive Rivalry


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The External Environmental

The Industry Environment

Threat of New Entrants

Bargaining Power of Suppliers

Competitive Rivalry

Bargaining Power of Buyers

Threat of Substitute Products


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The External Environmental

Threats of New Entrants decreases if barriers to entry are high...

  • Economies of Scale are high

  • Product Differentiation is high

  • Capital Requirements are high

  • Switching Costs are high

  • Access to Distribution Channels is limited

  • Cost Disadvantages Independent of Scale are high

  • Government Policy is restrictive

  • Expected Retaliation is high

Threat

of

New Entrants


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The External Environmental

Suppliers are likely to be powerful if:

  • Supplier industry dominated by a few firms

  • Suppliers’ products have few substitutes

  • Buyer is not important customer

  • Suppliers’ product is an important input

  • Suppliers’ products are differentiated

  • Suppliers’ products have high switching costs

  • Supplier poses credible threat to forward integration

Bargaining Power of Suppliers


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The External Environmental

Buyers are likely to be powerful if:

  • They are concentrated or purchases are large relative to seller’s sales

  • Purchase accounts for a significant fraction of supplier’s sales

  • Product unimportant to quality

  • Products are undifferentiated

  • Buyers face few switching costs

  • Buyers’ industry earns low profits

  • Buyer has full information

  • Buyer presents a credible threat to backward integration

Bargaining Power

of

Buyers


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The External Environmental

The keys to evaluating Substitute Products are:

  • Products with improving price/performance tradeoffs relative to present industry products

  • For example:

  • Electronic security systems in place of security guards

  • Email and fax machines in place of overnight mail delivery

Threat of Substitute Products


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Future objectives: goals and risks, ability to achieve

Current strategy: competitive advantages

Retaliation: How will competitor(s) respond to your actions?

Assumptions: Can competitor(s) adapt to changing environment?

Capabilities: relative strengths and weaknesses?

The External Environmental

Understanding Competitors


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Barriers to Entry & Exit

  • If some industries are more profitable, why don’t many companies enter?

    • Barriers to entry

  • If some industries are so unprofitable, why don’t most companies leave?

    • Barriers to exit


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Barriers To Entry

  • Costs new entrants have to bear to enter the industry

  • A barrier to entry

    • increases the expected costs of entry for new entrants

    • or limits their potential market share


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Barriers To Entry

  • Factors Increasing Costs:

    • Economies Of Scale

    • Capital Requirements

    • Absolute Cost Advantages

    • Learning Curve / Experience Curve


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Barriers To Entry: Economies of Scale

  • Lower unit cost with large production

  • Economies of scale can arise from

    • Fixed costs

    • Distribution and marketing


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Barriers To Entry: Capital Requirements

  • The higher the capital requirement, the higher the barrier?


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Barriers To Entry: Absolute Cost Advantages

  • An incumbent’s absolute cost advantage may be an entry barrier (variable costs)

    • Proprietary technology

    • Government subsidiaries

    • Scarce resources, such as least cost supplies, locking up shelf space or distribution channels, or hiring best engineers.


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Barriers To Entry: Learning Curve / Experience Curve

  • What is the learning curve/experience curve?

    • Costs decline as a function of past cumulative output


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Barriers To Entry: Market Share and Other

  • Factors Limiting Market Share

    • Product Differentiation

    • Advertising / Brand Image

    • Access To Distribution

    • Expected Retaliation

  • Other Factors

    • Government Policy

    • Reputation


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Exit barriers?

  • Closing costs can be very high

  • Sometimes, it is cheaper to lose money now (by remaining open), than to close, reopening only when market conditions are better.

    • Reputation effects

    • Taking a charge against earnings

    • Start-up costs

    • Organizational learning.

  • Differentiate fixed costs and sunk costs

    • If costs are not sunk, barriers are low (i.e. airline industry)

    • If costs are sunk, barriers are high (i.e. auto plant)


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Two ways around barriers to entry

  • Fly under the radar!

    • Find a small market niche, and develop your skills there

    • Gradually expand out of the niche towards more lucrative customers

  • Operate the toll gate!

    • Work upstream or downstream of the market, and integrate into the lucrative market.


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Entry and Sustainable Competitive Advantage

  • A Paradox

    • Long-run profitable industries are those with significant entry barriers

    • An entry barrier is an industry condition that makes entry attractive

  • Solution to the paradox

    • The question is not whether there should be entry, but who should enter

  • In other words, the key determinant of entry decisions is the presence of a sustainable competitive advantage.

    • It may well pay to incur large entry costs, if a firm can create a sustainable competitive advantage over incumbents or potential future entrants.


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What do we mean by buyer power?

  • Preferences

    • How consumer tastes are distributed and how strong those tastes are

    • Related to consumer branded goods

  • Bargaining Power

    • the consumer’s ability to exercise monopoly power

    • Related to industrial markets


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Supplier Power

  • Suppliers affect our ability to achieve a competitive advantage through:

    • the strength of their bargaining power

  • Suppliers can be broadly defined as the supplier of any input:

    • Labor

    • Management

    • Technology

    • Physical Materials


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Why don’t businesses “switch” suppliers more often?

  • Inertia—

    • before remote controls, people didn’t “channel surf”

  • Switching costs:

    • Changing your major as a freshman is a whole lot less traumatic than changing it next spring. (sunk costs)

  • Idiosyncratic assets

    • If you are a one of a kind buyer, your suppliers are few

  • Search costs

    • how do you find a new, reputable supplier?


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A Supplier Matrix

High

Importance of the supplier in the buyer’s input base

Low

Low

High

Importance of the buyer in the supplier’s customer base

From: Oster, Sharon, 1999. Modern Competitive Analysis. P.43


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How do we identify substitutes?

  • Substitutes are products that fulfill the same function but are different products

    • Beer vs. wine

    • Air conditioner vs. fans


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demand

time

Industries Evolve Over Time As The Relationships Between The Five Forces Change


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A Sixth Force - Presence of “Complementors”

  • Complementors

    • Industry Participants whose businesses enhance the value of yours

    • The Opposite of Substitutes

    • The Emergence of “Networks” of Organizations

  • Examples

    • Computer Manufacturers & Software Makers

    • Consumer Electronics & Entertainment Companies

  • The Central Issue

    • How to get “complementors” to make strategic investments which mutually benefit both companies

    • How to increase the size of the pie rather than compete over the slices


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Some Important Points About Industry Analysis

  • The four external forces are interrelated to one another

  • Changes in one force will cause subsequent changes in other forces

  • Firm actions will help to shape the industry environment

  • Often the most important thing to understand about an industry is understanding how the forces are “linked” together.


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Some linkages to think about

  • The threat of substitutes suggests

    • That there is a “hole in the barrier to entry”

    • buyers have more power because they can go elsewhere

  • The power of suppliers suggests that

    • You as a buyer are weak

    • You don’t have alternatives

      • No substitutes

      • No new applicants

  • What does competitive rivalry mean to barriers to entry?


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The Uses of Industry Analysis

  • Static Analysis -

    • How Do We Explain Current Rivalry and Profitability?

  • Dynamic Analysis -

    • Where Is The Industry Headed In The Future?


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Next Time: Internal Analysis

  • Current Events

  • Case Analysis: RCA Records

  • Read Chapter 4

  • Team Time

    WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html


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Questions for RCA Records

  • How are industry changes affecting traditional record companies, new entrants, artists, and retailers?

  • Describe RCA’s business strategy.

  • Where do you envision the music industry in three to five years?

  • What, if anything, should RCA do differently?


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