Strategy: A View from the Top Chapter 4 Analyzing an Industry

1. Strategy: A View from the TopChapter 4 Analyzing an Industry Katelyn Reed Venessa Rodriguez Kristen Hodge Monica Longer

2. What is an Industry? • Defined in terms of four dimensions: 1. Products 2. Customers 3. Geography 4. Stage in the production-distribution

3. Industry Structure and Proter’s Five Forces Model

5. Industry Evolution • Entry barriers can fall • Deregulation • Or rise • Brand Identity • Mac vs. PC • Models of Industry Evolution • Help explain how and why industries change

6. Four Trajectories of Change • Radical • Industry threatened with obsolescence of core activities and core assets at the same time • Ex. Travel clients turned to internet-based service profiders • Progressive • The most common type of change. • Occurs when neither form of obsolescence is imminent • Ex. Long-haul trucking industry

7. Four Trajectories of Change Cont. • Creative • The core assets are threatened, but the core activities keep their value. • Ex. Movie studios having to produce multiple blockbusters • Intermediating • The core activities are threatened, but the core assets keep their value. • Ex. Museums are losing power as educators to more modern communication methods

8. Four Trajectories of Change Cont. Core Activities Core Assets

9. Industry Structure, Concentration, and Product Differentiation • Changes of Industry Structure • Vertical to horizontal • Ex. The multimedia industry • Started with 3 vertically integrated distinct businesses, evolved into 5 primarily horizontal segments • Those 5 businesses compete in 5 segments: content, packaging, the network, distribution, and display devices • Strategic advantage for a company is determined by their relative positions within one of the 5 segments • Vertical integration is probably going to become an important strategy again when economies of scale and scope become critical to success and a principle driver behind another round of industry consolidation.

10. Industry Structure, Concentration, and Product Differentiation • Changes in the degree of industry concentration • Industry structures are concentrated when economies of scale are important, market share & total unit costs are inversely related. • Rule of Three and Four • “Many stable markets will have only three significant competitors and the market shares of these competitors will roughly be proportioned as four-to-two-to-one, reflecting a concentration level of approximately 70% of total industry sales for the three competitors.“

11. Industry Structure, Concentration, and Product Differentiation • Studies have shown as markets mature, they occasionally become less concentrated. • This suggests the relationship between relative share and const position is less pronounced for mature markets than it is for immature markets. • Provides an explanation on why larger companies lose market share as the industry matures. • Their cost advantage diminishes over time. • In fragmented industries, which have a low degree of concentration, no single company has a major market share. • They are highly differentiated, or a commodity status.

12. Product Life Cycle Analysis • The product life cycle model • Based on the theory of diffusion of innovations and its logical counterpart, the pattern of acceptance of new ideas. • Considered the best known model of industry evolution. • Suggests that an industry goes through 4 stages • Introduction, Growth, Maturity, Decline • The different stages are defined by changes in the growth rate of industry sales • Reflects the result of first and repeat adoptions of a product/service over time.

13. Product Life Cycle Analysis • Evolution of an industry or product class depends on: • Competitive strategies or rival firms, changes in customer behavior, and legal and social influences. • Introduction stage • High level of uncertainty • Competitors don’t know which segments to target or how. Customers aren’t familiar with the new product/service, benefits of it, or how much they should pay for it.

14. Product Life Cycle Analysis • Growth Stage • Less uncertain and have more intense competition • Largest number of rivals, competitive shakeouts occur at the end of the growth stage • Mature Stage • Industries are relatively stagnant in terms of sales growth. • Product development can create growth spurts in specific segments • Technological breakthroughs alter market development and competitive order

15. Product Life Cycle Analysis • Declining Stage • Industries are considered unattractive, but strategies can produce profits. • Problems with the Product Life Cycle Analysis • Has little predictive value • Industry growth doesn’t always follow an S-shaped pattern • Doesn’t acknowledge that companies can affect the growth curve through strategic actions (ex, increasing the pace of innovation or repositioning their offerings)

16. New Patterns • Competition for standards is usually between the developer of one standard and another group that favors a different standard. • Winning standard gives its adopters a large share of future profits • Winning standard is decided by market share

17. C.K. Prahalad’s Model of Industry Evolution • 3 Phases • Competition is focused mainly on ideas, product concepts, technology choices, and the building of a competency base. • Primary goal: learn more about the future potential of the industry and the key factors that will determine success or failure • Competition is more about building a viable coalition of partners that will support a standard against competing formats. • Vigorously compete in phase 3 • The battle for market share for end products and profits.

18. Methods for Analyzing an Industry • Strategic Segmentation • The process of dividing an industry/market into relatively homogenous, minimally overlapping segments that benefit from distinct competitive strategies • Linked with strategic targeting and positioning for competitive advantage

19. Figure 4-4 *Companies using segmentation, targeting, and positioning compete in Red Oceans.*

20. Competitor Analysis • Market boundaries are no longer well defined • Not all about market share • Customer & competitor profiles constantly changing • New questions must be asked. • Ex. Do consumer companies compete at the business unit level, at the corporate level, or both?

21. Analyzing Immediate Competitors • Who are our firm’s direct competitors now and in the near term? • What are their major strengths and weaknesses? • How have they behaved in the past? • How might they behave in the future? • How will our competitors’ actions affect our industry and company?

22. Assign Roles • Assign Roles to competitors • Leaders • Challengers • Followers • Nichers Assigning labels provides insight into the competitive dynamics.

23. Leaders & Challengers • Leaders • Focus on expanding total demand • Important to defend market share • Challengers • Concentrate on single target

24. Followers & Nichers • Followers • Imitation • Compete in a few segments • Nichers • Focus on narrow piece of market • Geographic areas, specialty products or services

25. Strategic Groups • Strategic Groups • A set of firms that face similar threats & opportunities, which are different from the threats & opportunities faced by other sets of companies in the same industry • Ex. Fast food chains • Rivalry is more intense

26. Analyzing Product/Market Scope • The group of product-market combinations that a firm serves makes up its product/market scope. • Four analytical techniques give insight into the attractiveness of a company’s product/market scope. • Market Analysis • Growth Vector Analysis • Gap Analysis • Profit Pool Analysis

27. Market Analysis • Used to quantify the attractiveness of a particular industry/segment. • Also useful for developing a better understanding of the key success factors and core competencies a company will need to succeed in achieving its strategic objectives.

28. Market Analysis Continued • Assess 7 things • The actual and potential size of the market • Market and segment growth • Market and segment profitability • The underlying cost structure and trends • Current and emerging distribution systems • The importance of regulatory issues • Technological changes

29. Growth Vector Analysis • Four types of growth: • Concentration- within current market scope. • Market Development- adding new customer segments. • Product/technology development- adding new products. • Diversification- change in both customer segments and products/technology.

30. Growth Vector Analysis Continued • When analyzing potential growth directions, it is useful to perform a similar analysis on key competitors to determine: • Growth potential • Competitive position • Potential for improvements • Intentions • If product markets are evolving

31. Growth Vector Analysis Continued

32. Gap Analysis • Gap analysis is the process of comparing an industry’s market potential to the combined current market penetration by all competitors. It can lead to additional paths of growth. • Plotting growth vectors often reveals where industry sales are below their potential (a gap).

33. Gap Analysis Continued • Types of gaps: • Product line gaps: the unavailability of product versions for specific applications or usage occasions. • Distribution gaps: overlooked customer segments that have difficulty accessing the product. • Usage gaps: underdeveloped applications for the product. • Competitive gaps: opportunities to displace competitors that offer weak product entries or questionable performance.

34. Gap Analysis Continued

35. Profit Pool Analysis • Profit Pool- the total amount of profit earned at all points along the industry’s value chain. • Important to recognize the difference in revenues and profits. • Automobile industry • Revenue: car manufacturing and distribution • Profit: leasing, insurance and loans • Analysis of profit pool helps executives understand how the industry is evolving, why profit pools form where they have, and how the profit distribution is likely to change.

36. Profit Pool Analysis Continued • Mapping a profit pool: • Define the pool’s boundaries • Estimate its overall size • Allocate profits to the different value chain activities • Verify the results