Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
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l ; o r c c r t s t i t t gI n ( l l l s t r \ I t r o l i r r t l r r l i t r
CHAPTER 3
a Corporatestrategyis concerned
with decidingwhich industries
the firm should
be engagedin and how it shouldallocate
its resources
amongthem.Such
decisions
requireassessment
of the attractiveness
of differentindustries
in
termsof their profit potential.Themainobjectiveof this chapteris to
understand
how the competitive
structureof an industrydetermines
its
profitability.
o Business
strategyis concerned
with establishing
competitive
advantage.
Byanalyzing
customerneedsand preferences
and the waysin whichfirms
competeto servecustomers,
we identifythe generalsources
of competitive
advantagein an industry- what we callkeysuccess
factors.
PART II
THE TOOLS OF S
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. Suppliers
l.::::_"1:":.,,-.$@. Competitors
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Government
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CHAPTER 3
INDUSTRY
ANALYSIS:
THE FUNDAMENTALS
" a."
If the purposeof strategyis to help a company to survivear-rdmake money,the starting point for industry analysisis a simplequestion:what detenninesthe level of profit
in an industry?
As alreadynoted, businessis about the creation of value for the customer,either
by production (transforminginputs into outputs) or commerce (arbitrage).Value is
createdwherr the price the customeris willing to pay for a product exceedsthe costs
incurred by the firnr. Br.rtvalue creatior.rdoes not translatedirectly into profit. The
s u r p l u so f v a l u e o v e r c o s t i s d i s t r i b u t e cbl e t w e e nc u s t o m e r sa n d p r o d u c e r sb y t h e
forcesof conrpetition. Tl-restronger is competition among producers,the more of
tl.resurplusis receivedby customersin consumersurplus (the differencebetweenthe
price they actuallypay and the maximum'rprice they would l.ravebeen willing to pay)
anclthe less is the surplus receivedby producers (as prodwcersurplus or economic
rcnt). A singlesupplier of bottled water at an all-night rave can charge a price that
fully exploitsthe dancers'thirst. If there lre many suppliersof bottled water, then, in
the absenceof collusion,corxpetitionci.lr.rscs
the price of bottled water to fall toward
t l t ec o s to f s u p p l y i u gi t .
The sr-rrplus
earneclby proclucersover and abclvethe minimum costsof production
i s n o t e n t i r e l y c a p t u r e d i n p r o f i t s . W h e r e a n i n d u s t r y l r a s p o w e r f u l s u p p l i e r snronopolisticsuppliersof cornponentsor erlployeesunited by a strong labor union a substantialpart of tlre surplusmay be appropriatedby thesesuppliers(the profits of
suppliersor premiurn wagesclf union r.rrembers).
The profitsearneclby the firms in an industry are thus deterrninedby three factors:
The valr-re
of the product to customers.
T h e i n t c r r s i t yo f c o r n p e t i t i o r r .
The bargainingpower of the proclucersrelativeto their suppliers.
Indr"rstry
analysisbrings all thrcc fr.rctors
into a singleanalytic framework.
T H E T O O L S O F S T R A T E G YA N A L Y S I S
Products
and Personal
Household
22.7
P h ar m a c e u t i lcsa
Tobacco
Products
FoodConsumer
rities
Secu
D i v e r s i f i eFdi n a n c i a l s
Beverages
M i n i n gC
, r u d eO i l P r o d u c t i o n
Refining
Petroleum
M e d i c aPl r o d u c tasn d E q u i p m e n t
C o m m e r c iB
a la n k s
FoodServices
i cn, d
S c i e n t i f iP
c ,h o t o g r a p h a
C o n t r oEl q u i p m e n t
Apparel
ComputerSoftware
P u b l i s h i nP
g ,r i n t i n g
lT Services
re
Healthca
aq
l uipment
E l e c t r o n i cEsl,e c t r i cE
Retailers
Specialty
Chemicals
E n g i n e e r i nCgo, n s t r u c t i o n
TruckLeasing
Trucking,
and Defense
Aerospace
OfficeEquipment
Computers,
Furniture
and Servtces
AutomotiveRetailing
Foodand Grocery
Wholesalers:
G e n e r aMl e r c h a n d t s e r s
Pipelines
I n d u s t r i a ln d F a r mE q u i P m e n t
O i la n dG a sE q u i p m e natn d S e r v i c e s
U t i l i t i e sG: a sa n d E l e c t r i c
E n e r gP
y roduction
Foodand DrugStores
and Parts
MotorVehicles
Resorts
Hotels,Casinos,
lnsurancL
e l: f ea n d H e a l t h
P a c k a g i nagn dC o n t a i n e r s
RealEstate
I n s u r a n cP
e :r o p e r tayn dC a s u a l t Y
22.3
21.6
19.6
18.9
18.3
1 7. 5
1 7. B
1 7. 3
1 7. 2
1 55
15 . 3
15.0
ColgateProcter& Gamble,Kimberley-Clark,
Palmolive
n J o h n s o nM, e r c k
P f i z e Jr ,o h n s o &
Universal
American,
Altria,Reynolds
SaraLee,Conagra
PepsiCo,
M o r g a nS t a n l e yM, e r r i lLl y n c hG, o l d m a nS a c h s
AmericanExpress
GeneralElectric,
Anheuser-Busch
Coca-Cola,
DevonEnergy
Petroleum,
Occidental
E x x o n M o bC
i l ,h e v r o nC, o n o c o P h i l l i p s
M e d t r o n i cB, a x t eIrn t e r n a t i o n a l
C i t i g r o u pB, a n ko f A m e r i c a
M c D o n a l d 'Y
s ,u mB r a n d s
, a n a h eAr ,l i g e n t
E a s t m aK
n o d a kD
B
t\
F
F
5
J.
lc
=
=
P
s pparel
N i k eV
, EJ o n e A
Oracle,CA
Microsoft,
, annett
R .R .D o n n e l l e&y S o n sG
E D 5C
, o m p u t eSr c i e n c eSsc, i e n cAep p l i c a t i o nI nst l
, e l l p o i n tH, C A ,M e d c o
U n i t e dH e a l t hG r o u pW
c,hirlpool
E m e r s oE
nl e c t r iW
HomeDepot,Costco,Lowe's
Du Pont
Dow Chemical,
F l o ur ,J a c o b E
s ngineering
YRCWorldwide,RyderSystem
Martin
Lockheed
Boeing,UnitedTechnologies,
DellComputer
IBM, Hewlett-Packard,
Leggett& Platt,Steelcase
A u t o N a t i o nU, n i t e dA u t oG r o u p
CHS
Supervalu,
Sysco,
s oldings
W a l - M a r tT, a r g e tS, e a r H
P l a i nAs l l - A m e r i c aPni p e l i n eE,n t e r p r i sPer o d u c t s
Deere,lllinoisToolWorks
Caterpillar,
r ughes
HalliburtoB
n ,a k eH
DominionResources
DukeEnergy,
C o n s t e l l a t iE
o n e r g yO, N E O K
Albertson's
Walgreen,
Kroger,
n ontrols
G M , F o r dJ, o h n s o C
M a r r i o tItn t e r n a t i o n aHla, r r a h 'Es n t e r t a i n m e n t
Metlife,NewYorkLife
llinois
Owens-l
Container,
Smurfit-Stone
Group
Cendant,HostMarriott,SimonProperty
, e r k s h i rHea t h a w a y
A m e r i c a Inn t l .G r o u p B
A/(
1
2
14.4
13.9
13.5
13.5
13.1
13.0
13.0
12.9
12.0
11 . 8
1 1. 7
1 1. 7
1 1. 6
11.3
11.3
1'1.0
11 . 0
10.8
10.7
10.4
10.6
10.0
9.8
9.7
8.6
8.6
8.5
8.3
N
E
Ai
CHAPTER 3
INDUSTRY
ANALYSIS:
THE FUNDAMENTALS
(cont'd)
-olgate-
n a nS a c h s
B u i l d i nM
g a t e r i a lG
s ,l a s s
Metals
FoodProduction
Forest
and PaperProducts
S e m i c o n d u c taonr sd E l e c t r o nC
i co m p o n e n t s
Telecommu
nications
N e t w o rakn dC o m m u n i c a t i oEn qs u i p m e n t
Entertainment
Airlines
8.3
8.0
7.2
6.6
5.9
4.6
1.2
0.4
(22.0)
O w e n sC o r n i n gU, S GA
, rmstronH
g oldings
A l c o aU
, SS t e e lN
, ucor
A r c h eD
r a n i e lM
s i d l a n dT, y s o nF o o d s
International
Paper,
Weyerhaeuser
I n t e lT
, e x alsn s t r u m e n tS
s ,a n m i n a - S C l
Verizon,AT&1,Sprint-Nextel
Motorola,CiscoSystems,
Lucent
TimeWarner,Walt Disney,
NewsCorp.
A M R ,U A L ,D e l t aA i r l i n e s
Nofes:
1 MedianROEfor eachindustry
averaged
across
the 7 years1999-2005.
2 Industries
with fiveor fewerfirmswereexcluded.
Alsoomittedwereindustries
that weresubstantially
redefined
during
19 9 9- 2 0 0s .
Intl
rplications
-A,Medco
reedMartin
ler
:riseProducts
K5
rtertarnment
linois
rpertyGrouP
athaway
differentiatedproducts with price-insensitiveconsumersand each new product receivesmonopoly privilegesin the form of 17-yearpatents.The food industry produces commodity products wirh slow-growing demand and overcapacity,and is
squeezedby powerful retail customers.
These industry patterns tend to be fairly consistentacrosscountries. Figure 3.2
shows return on capital for a number of global industries.
Particularly high rates of profit often result from industry segmentsdominated by
a single firm. These niche markets provide attractive havensfrom the rigors of fierce
competition.StrategyCapsule3.1 offers some examples.
The underlying theory of how industry structure drives competitive behavior and
determinesindustry profitability is provided by industrial organization (Io) economics. The two referencepoints are the tbeory of monopoly and the theory of
perfectcompetition which form end points of the spectrum of industry structures.
Monopoly exists where an industry comprisesa single firm protected by high barriers
to entry. The monopolist can appropriate in profit the full amount of the value it
creates.At the other extreme,perfect competition exists where there are many firms
supplying an identical product with no restrictions on entry or exit. Here, rhe rate of
profit falls to a level that just covers firms' cost of capital. In the real world, industries
fall betweenthesetwo extremes.The US market for chewing tobacco is close to being
a monopoly; the Chicago grain markets are closeto being perfectly competitive. Mosr
manufacturing industries and many serviceindustries tend to be oligopolie.s:they are
dominatedby a small number of major companies.Table3.2 identifiessome key points
on the spectrum. By examining the principal structural featuresand their interactions
for any particular industry, it is possible to predict the type of competitive behavior
likely to emerge and the resulting level of profitability.
PART II
Utilities
Telecomservices
Transportation
Energy
Materials
Overall average
Retailing
Consumerdurablesand apparel
Foodretailing
e
f
Capitalgoods
Automobilesand components
*
e
Technology
hardwareand equipment
Hotels,restaurants,
leisure
:P
Food,beverages,tobacco
::
Healthcare
equipmentand services
Semiconductors
=i
Commercial
services
Media
f>
=5
Computersoftwareand services
Householdand personalproducts
EP
=R
Pharmaceuticals
Fi
t
t
i
D
C
h
d
y<
it:
sn
m
(d
ab
po
of
tre
m(
thr
De
Mc
CHAPTER3
\
e
6
S
=
=x
::
:=
- d
S>
:=
r>
=F
> N
i n g t o b a c c oa n d s n u f f ) ,w i t h b r a n d ss u c ha s
S k o a lC
, o p e n h a g e nL ,o n gC u t , a n d R e dS e a l .
Despiteits association
with a bygoneera of
cowboysand farm workers,chewingtobacco
hasbeena growth marketoverthe pasttwo
d e c a d ew
s i t h a s u r p r i s i n g l ya r g en u m b e ro f
youngconsumers.
UST's
long-established
brands,
i t s d i s t r i b u t i otnh r o u g ht e n s o f t h o u s a n d os f
s m a l lr e t a i lo u t l e t s a
, n d t h e u n w i l l i n g n e sosf
majortobaccocompanies
to enterthis market
( d u et o t h e p o o r i m a g ea n d s o c i a u
l nacceptabilityof the product)havemadeUST'smarket
position
unassailable.
Restrictions
on advertising
of smokeless
tobaccoproductshavefurtherbuttressedUST'smarketdominanceby makingit
moredifficultfor would-beentrantsto establish
theirbrands.
_ o
! r
8=
"Fromthe
of collagensausage
skins("casings").
'Banger'to
British
the Chinese
LapCheong,
from
the FrenchMerguezto the South American
Chourizo,
Devrohasa casingto suitall product
types."lts overallworld marketshareis around
600/o,
risingto 94o/o
in the UKmarketand 83%in
Australia.
In recentyearsits ROIChasaveraged
'1
8% and its returnon equity30%.
InternationalGameTechnology(lcT)basedin
RenoN
, e v a d ai ,s t h e w o r l d ' sd o m i n a n tm a n u facturerof slot machines
for casinosand other
e s t a b l i s h m e nt ht sa t a l l o wg a m b l i n gm a c h i n e s .
Witha continuous
flow of newgamingmachines
* 2005saw172new productslaunched,
including Megabucks,PersianPrincess,
and Lucky
- IGT has over 70o/ool
Larry'sLobstermania
t h e U Sm a r k e ts h a r ea n d m a r k e tl e a d e r s h iion
s e v e r aEl u r o p e a cno u n t r i e si ,n c l u d i n gt h e U K .
With heavyinvestmentin R&D,new product
saturation,tight controlover distributionand
servicing,
anda policyof leasingratherthanselling machines,
IGT'smarketleadership
appears
well-entrenched.
During2004-6,lGTearnedan
averageROEof 25%.
sources: www. ustinc.com,www.devro.com, www.igt.com
PART II
Oligopoly
Duopoly
Monopoly
Concentration
Manyfirms
A few firms
Twofirms
Oneflrm
Entryand ExitBarriers
No barriers
Product
Differentiation
lnformation
Avaihbility
significant
barriers
Highbarriers
flomogeneous
product(Commodity)
Potential
for productdifferentiation
No impediments
to information
flow
lmperfectavailability
of information
The price customersare willing to pay for a product depends,in part, on the availability of substituteproducts.The absenceof closesubstitutesfor a producr, as in rhe
caseof gasolineor cigarettes,meansthat consunrersJre comperrtively insensitiveto
Porter'sfive forcesof competition framework
Bargainingpower
INDUSTRY
COMPETITORS
Threatof
substitutes
Rivalryamong
existingfirms
t-".
I
power
Bargaining
buyers
lof
ffi
SUBSTITUTES
CHAPTER 3
SUPPLIER
POWER
Factorsdeterminingpower of suppliers
relativeto producers;sameas those
determiningpower of producersrelative
to buyers- see"BuyerPower" box
ntr
)ni
)n
yers
'key
vailr the
/e to
THREAT
OF ENTRY
o Capitalrequirements
a Economies
of scale
. Absolutecost
advantages
. Productdifferentiation
o Accessto distribution
channels
a Governmentand legal
barriers
o Retaliation
by
producers
established
INDUSTRY
RIVALRY
r
o
o
a
Concentration
Diversityof competitors
Productdifferentiation
Excesscapacityand
exit barriers
a Costconditions
THREAT
OF
SUBSTITUTES
a Buyerpropensityto
substitute
o Relativepricesand
performanceof
substitutes
BUYERPOWER
PriceSensitivity
o Costof product
relativeto total cost
o Product
differentiation
. Competition
betweenbuyers
Bargaining Power
I Sizeand concentration
of buyersrelativeto producers
o Buyers'switching
costs
o Buyers,information
. Buyers,
abilityto
backwardinteorate
price (i.e., demand is inelastic with respect to price). The existence of close substitutes meansthat customerswill switch to substitutesin responseto price increasesfor
the product (i.e., demand is elasticwith respect to price). The internet has provided
a new source of substitute competition that has proved devastatingfor a number of
establishedindustries.Tiavel agencies,newspapers,and telecommunication providers
have all suffered devastatingcompetition from internet-basedsubstitutes.
The extent to which substitutesdepressprices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, is dependent on
their price-performance characteristics.If city-center to city-center travel between
\Tashingtonand New York is 50 minutes quicker by air than by train and the average
traveler values time at $30 an hour, the implication is that the train will be competitive at fares of $25 below those charged by the airlines. The more complex the product and the more difficult it is to discern performance differences,the lower the extent
of substitutionby customerson the basisof price differences.The failure of low-priced
imitations of leading perfumesto establishsignificantmarket sharereflectsconsumers'
difficulty in recognizing the performance characteristicsof different fragrances.
T H E T O O L S O F S T R A T E G YA N A L Y S I S
If an industry earnsa return on capital in excessof its cost of capital, it will act as a
magnetto firms clutsidethe industry.If the entry of new firms is unrestricted,the rate
of profit will fall toward its competitivelevel.The US bagelindustry faced a flood of
new entrantsin the late 1990s that causeda sharp decline in profitability.' Why is it
that my wife, a psychotherapist,earnsmuch lessthan our niece,a recentlyqualified
medical doctor? Barriersto entry are one factor.In psychotherapythere are multiple
accreditingbodiesand limiteclstatelicensir.rg,
helrcethe entry barriersto psychotherapy are much lower than in medicine.
Threat of entry rather then actualentry rnaybe suflicientto enslrrethat established
firms constraintheir pricesto the competitive level. Only American Airlines offers a
direct servicebetweenDallas-Fort\Worthand Sar.rta
Barbara,California, for example.
Yet, Americanmay be unwilling to exploit its rr.ronopoly
power to the full if Southwest
or another airline car.reasilyextend its routesto cover the sametwo cities.An indust r y w h e r e n o b a r r i e r st o e n t r y o r e x i t e x i s t i s c c t n t e s t a b l ep:r i c e sa n d p r o f i t s t e n d
towards the competitivelevel, regardlessof the number of firms within the industry.a
C o n t e s t a b i l i t yd e p e n d so n t h e a b s e n c eo f s r . r n kc o s t s- i n v e s t m e n t sw h o s e v a l u e
cannot be recoveredon exit. An absenceof sunk cclstsnrakesan industry vulnerable
to "hit-and-run" entry wheneverestablishec'l
linrs raisetheir prices above the comp e t i t i v el e v e l .
In most irrdustries,however,new entrantscarlnot enter on equal ternrswith those
of establishecl
firn.rs.A barricr to entry is any advantagethat establishecl
firnrs have
over entrants.The height of a b:rrrier to entry is usurlly nrelsureclas the unit cost
disadvautage
faceclby would-beentrxllts.The prirrcipll sourcesof brrricrs to eutry rre
cliscussed
below.
The capitalcostsof getting establishedin an industry can
be so largeas to discourageall but the largestcor.npanies.
TI-reduopoly of Boeingand
Airbus in Iarge passengerjets is protecteclby tl-rel-rugecapital costs of establishing
. i m i l a r l yw i t h t h e
R & D , p r o d u c t i o n ,a n d s e r v i c ef a c i l i t i e sf o r s r . r p p l y i r trhge s ep l a n e s S
businessof launchingcommercialsatellites:the costsof developingrocketsar-rdlaunch
facilitiesmake new er-rtryhighly unlikely.In other industries,entry costscan be modest. One reasonwhy the e-commerceboon-rof the late 1990s ended in fir-rancial
disasterfor most participantsis that the initial setupcostsof new internet-based
ventures
were typically very low. Acrossthe servicesectormore generally,startupcoststend to
be low. For example,startLlpcostsfor a franchisedpizzaoutlet begin at $141,000 for
a D o m i n o ' s ,$ 2 5 0 , 0 0 0f o r a P a p aJ o h n ' s ,a n d $ 1 . 1 n - r i l l i o nf o r a P i z z aH u r . '
.
CHAPTER 3
Airbus had committed to the project, then Boeing was effectively excluded from the
superjumbo segment of the market.
SA
ate
of
sit
ied
ple
.erred
lie.
/est
Lus:nd
fy.
LIue
rble
)m-
IOSC
30st
are
can
and
11ng
Lthe
rnch
roddisures
Ldto
) for
g lnthat
high
'.^pa'
:lesa
;tate)urce
Lnchrmbo
Cnce
- / t t r : r s s t o ( l h a n t ' r e l s o l I ) i s t r i l t u t , i o t r F o r m a n y n e w s u p p l i e r so f c o n s u m e r
goods, the principal barrier to entry is likely to be gaining distribution. Limited
capacitywithin distribution channels(e.g.,shelfspace),risk aversionby retailers,and
the fixed costsassociatedwith carrying an additional product result in retailers being
reluctant to carry a new manufacturer'sproduct. The battle for supermarketshelf
spacebetween the major food processors(typically involving "slotting fees" to reserveshelf space)further disadvantagesnew entrants. One of the most important economic impacts of the internet has been allowing new businessesto circumvent barriers
to distribution.
(ittverurnental
PART II
For most industries,the major determinant of the overall state of competition and
the generallevel of profitability is competition among the firms within the industry.
- sometimesto the extent that prices
In some industries,firms compete aggressively
are pushed below the level of costsand industry-widelossesare incurred. In other
industries,price competiticlnis rnutedand rivalry focuseson advertising,innovation,
and other nonprice dimensions.The intensity of competition between established
firms is the result of interactionsbetweensix factors.Let us look at each of them.
t
Sellerconcentrationrefersto the number and size distribution of
firms cornpeting within a market. It is most commonly rneasuredby the concentration
ratio: the cornbir-red
nrarket share of the leading producers.For example, the fourfirm concentrationratio (CR4) is tl-rernarket shareof the four largestproducers.In
marketsdominated by a singlefirn-r(e.g.,Microsoft in PC operatingsystems,or UST
in the US smokelesstobacc<-l
market). the dominant firm can exerciseconsiderable
discretionover the prices it charges.\Wherea market is dominated by a small group
of leadingcompanies(an oligopoly), price competition may also be restrained,either
by outright collusion,or more commonly through "parallelism"of pricing decisions.rr
Thus, in rnarkets dorninated by twcl companies, such as alkaline batteries (Duracell
and Energizer),color film (Kodak and Fuji), and soft drinks (Coke and Pepsi),prices
tend to be similar and competition focuseson advertising,promotion, and product
development. As the number of firn.rssupplying a market increases,coordination
of pricesbecomesmore difficult, and the likelihood that one firm will initiate pricecutting increases.However, despitethe common observationthat the elimination of
a competitor reducesprice competition, while the entry of a new competitor stimulatesit, systematicevidenceof the impact of seller concentration on profitability is surprisingly weak. Richard Schrnalensee
concludedthat: "The relation, if any, between
profitability
is weak statistically and the estimated effect is
seller concentration and
u s u a l l ys m a l l . " r a
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CHAPTER 3
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INDUSTRYANALYSIS:
THE FUNDAMENTALS
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T H E T O O L S O F S T R A T E G YA N A L Y S I S
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industry melrnsproducing four million carsa year,a level that is achievedby only six
of tl.renineteeninternationalauto companies,the outcclmeis a battle for market share
as eacl.rfirm tries to achievecritical mass.
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CHAPTER 3
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* The more critical an industry's product to the quality of the buyer's product
or service,the lesssensitiveare buyers to the prices they are charged. The
buying power of personal computer manufacturers relative to the
manufacturers of microprocessors(Intel and AMD) is limited by the vital
importance of these components to the functionality of PCs.
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Once we understandhow industrystructuredrivescompetition,which, in turn, detertnines industry profitability, wc can apply this analysis,first to forecastingindustry
profitability ir.rtlre future, ancl sec<lncl
to dcvising strategiesfor changing industry
structure.
The 6rst stagc of industry analysisis to iclentify the key elementsof tl-reindustry's
structure. Irr principle, this is a sirnpletask. It reqr.rires
identifying who are the main
players- the proclucers,the cllstomers,the suppliers,ar-rdthe producersof substitute
goocls- ther-rexanriningsome of the key structural characteristicsof each of these
grollps that will cleterrninecompetition anclbargainingpower.
In rnost rnanufacturir-rg
industricsthe identity of the different groups of players
is usr-rallystraightforwarcl,in cltlrer industries- particularly in service industriesbuilding a picture of tl.reir.rdustrynray be more difficult. Considerthe supply of television prograrnming.There are a nurnberof different typesof player and establishing
which are buyers, which are sellers,and where the ir-rdustrybclundarieslie is not
simple.In terms of industry clefinition,do we considerall forn-rsof TV distribution or
identify separateindustriesfor broadcastT! cableT! and satelliteTV? In terms of
identifyingbuyersand sellers,we seethat there the industryhasquite a cornplexvalue
chain with the producers of the individual shows, networks that put together program schedules,and local broadcastingand cable con-rpanies
that undertake final
m
cl
te
rh
cc
ve
CHAPTER 3
distribution. For the distribution companies there are two buyers - viewers and
advertisers.Some companiesare vertically integrated acrossseveralstagesof the value
chain - thus, networks such as Fox and NBC not only create and distribute program
schedules,they are also backward integrated into producing some TV shows and they
are forward integrated into local distribution through ownership of local TV stations.
Sorting out the different players and their relationships therefore involves some
'$7hich
critical issuesof industry definition.
activities within the value chain do we
'Sfhat
include in the industry?
are the horizontal boundaries of the industry in terms
ofboth products and geographicalscope?Sfe shall return to some ofthese issuesof
industry definition in a subsequentsection.
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can use industry analysisto understand why profitability has been low in some
industries and high in others but, ultimately, our interest in industry analysis is not
to explain the past, but to predict the futwre.Investment decisions made today will
commit resourcesto an industry for a decadeor more - hence, it is critical that we are
able to predict what industry profitability is likely to be in the future. Currenr
profitability tends to be a poor indicator of future profitability. However, if an
industry's profitability is determined by the srrucure of that industry, then we can
use observationsof the structural trends in an industry to forecast the likely changes
in competition and profitability. Given that changesin industry structure tend to
be long term and are the result of fundamental shifts in customer buying behavior,
technologg and firm strategies,we can use our current observationsto identify emerging structural trends.
To predict the future profitability of an industry,our analysisproceedsin three stages:
Examine how the industry's current and recent levels of competition and
profitability are a consequenceof the industry's present structure.
Identify the trends that are changing the industry's structure. Is the industry
consolidating?Are new playersseekingto enter?Are the industry's products
becomingmore differentiatedor more commoditized?Does it look as though
additions to industry capacity will outstrip the industry's growth of demand?
i Identify how these structural changeswill affect the five forces of competition
and resulting profitability of the industry. Compared with the present, does it
seem as though the changesin industry structure will causecompetition to
intensify or to weaken? Rarely do all the structural changesmove competition
in a consistentdirection - typically,some factorswill causecomperition to
increaselothers will causecompetition to moderate.Hence, determiningthe
overall impact on profitability is likely to be a matter of judgment.
StrategyCapsule 3.2 discussesthe future profitability of the US casino industry.
During the past 20 years industry profitability has been undermined by two
major forces: increasinginternational competition and acceleratingtechnological
change.Despite widespread optimism that the "TMT" (technology,media, and
telecommunication)boom of the late 1990s would usher in a new era of profitability,
the reality was very different. Digital technologies and the internet both increased
competitive pressuresthrough lowering entry barriers and causing industries to converge.(SeeStrategyCapsule3.3.)
t o e c o n o m i cd e v e l o p m e n t T
. h e r e s u l tw a s t h e
t i n u a t i o no f t h e U Sc a s i n ob o o m t h a t h a d b e g u n
19
. e t w e e n1 9 9 1a n d 2 0 0 5 ,
d u r i n g t h e m i d - 1 9 9 0 sB
i n g o f c a s i n o si n M i s s i s s i p pai n d s e v e n o t h e r
tha
t h e i n s t a l l e db a s eo f g a m i n gm a c h i n e si n c r e a s e d
res
f r o m 1 8 4 , 0 0 0 t o 8 2 9 , 0 0 0 m a c h i n e s ,w h i l e U S
n e w c a s i n o so n I n d i a n r e s e r v a t i o n sB. y 2 0 0 6
stol
e x p e n d i t u r eo n g a m b l i n g r e v e n u e sr o s e f r o m
t h e r e w e r e s o m e 1 2 0 c a s i n o so n I n d i a n r e s e r -
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des<
C a e s a r ' sB
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ou r i n g 2 0 0 3 - 5 , w h i l e M G M M i r a g e
o f 1 4 . 8 o /d
(Bellagio,New York New York, Luxor,Excalibur,
M G M G r a n d )e a r n e da n a v e r a g eR O Eo f 1 2 . 6 % .
ofe
c r u i s es h i p s ) .
anal
D u r i n g 2 0 0 6 - 7 , g e o g r a p h i c a el x p a n s i o no f
g a m b l i n g s e e m e ds e t t o c o n t i n u ew i t h s e v e r a l
a n d m o r e p e r m i s s i v ea p p r o a c h e st o g a m b l i n g
i n C a l i f o r n i a ,W a s h i n g t o n S t a t e , F l o r i d a ,a n d
Oklahoma.
new
n e w c a s i n o si n l n d i a n r e s e r v a t i o nisn C a l i f o r n i a
T h e m o s t v i s i b l es i g n o f e x p a n s i o nw a s t h e
i n g c o m p e t i t i o na n d d e c l i n i n gm a r g i n s ?
Thr
A f u r t h e r s o u r c eo f n e w c o m p e t i t i o nw a s
the internetA
" l t h o u g hi l l e g a li n t h e U S ,i n t e r n e t
g a m b l i n g ( e s p e c i a l l yp o k e r ) t h r o u g h n o n - U S
c o m p l e x e si n L a s V e g a s . B e t w e e n 1 9 9 6 a n d
i n t e r n e t g a m b l i n g c o m p a n i e sg r e w m a s s i v e l y
d u r i n g2 0 0 0 - 5 .
c a s i n o s "i n V e g a si n c l u d e dt h e M G M G r a n d ,t h e
g a m b l i n go p p o r t u n i t i e fsa r o u t s t r i p p i n gg r o w t h
i n d e m a n d , w h a t w o u l d t h e i m p l i c a t i o n sb e
d e p e n d o n h o w t h e l e a d i n gc a s i n oc o m p a n i e s
P r i c ec o m p e t i t i o n w a s a l s o e v i d e n t i n t e r m s
a n o t h e r m e r g e r w a v e . F o r m e ri n d u s t r y l e a d e r
M i r a g e a c q u i r e dt h e n u m b e r 4 i n t h e i n d u s t r y ,
e x p a n s i o nw a s o u t s i d e t h e t r a d i t i o n a lc e n t e r s
i n L a sV e g a sa n d A t l a n t i c C i t y ,N J .T h e m u n i c i -
p a l i t i e sa n d s t a t e g o v e r n m e n t ss a w g a m b l i n g
a s a n e w s o u r c eo f t a x r e v e n u ea n d a s t i m u l u s
.c
al
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CHAPTER3
INDUSTRYANALYSIS
THE FUNDAMENTALS
nelicens-
en other
ening of
By 2006
a n e w d i s t r i b u t i o nc h a n n e lf o r e x i s t i n gg o o d s
and services:books (Amazon), airline tickets
e l e c t r o n i cb u s i n e s s e w
s ere not fundamentally
most spectacular
an reser-
W e b v a n . c o m ,K o z m o . c o m , a n d B o o . c o m a l l
l biggest
b u r n e dt h r o u g h h u n d r e d so f m i l l i o n so f d o l l a r s
rantucket
of venturecapitaland, in severalcases,achieved
I of 2005,
i nc a s i n o s
r 459,000
boatsand
ansionof
S o w h a t a r e t h e t r u e i n d u s t r i a le c o n o m i c s
analysis
tell us about the likelyprofit potentialof
shown below:
new internet-basedbusinesses?
th several
California
gambling
..:.tJ
['f""r..lLll:'
rrida,and
t Suppliers
of web
software;ownersof
main portalshave
s i g n i f i c a nbta r g a i n i n g
power
iition was
S,internet
h non-US
massivelY
I I'i:i
y ano new
ng growth
:ations be
u c hw o u l d
companies
etitivesitu-
Capitalcostsof entry
arelow
B r a n d as n d
reputationnot
significant
barriers
rxperienced
stry leader
rvhileMGM
re industry,
:ompanles,
inated the
c Entertain-
: 1 1l l
r Pricetransparency
and
low searchcostsallow
verylow switchingcost
and high buyerprice
sensitivity
"Bricksand
mortar"
distribution
c h a n n e las r e
ctose
substitutes
T H E T O O L S O F S T R A T E G YA N A L Y S I S
t o b e h i g h l y c o m p e t i t i v ea n d , o n a v e r a g e ,w i l l
\t i"rrlcrlicsio Allrr
Understanding how the structural characteristicsof an industry determine the intensity of competition and the level of profitability provides a basis for identifying
opportunitiesfor changingindustry structureto alleviatecompetitivepressures.The
first issueis to identify the key structuralfeaturesof an industry that are responsible
for depressingprofitability. The secondis to considerwhich of thesestructural features
are amenableto changethrough appropriatestrategicinitiatives.For example:
The remarkableprofit revival in the world steelindustry since2002 owes
much to the rapid consolidationof the industry,led by Mittal Steel.''
t
a
t.
, l,.rl ;irr; nil &n rlu si,l"iu:s:[\il-tt:l'r' l,rt[] rarv thc Prountlarics
In our earlier discussionof the structure of the television broadcastingindustry,
I noted that a key challengein industry analysisis defining the relevant industry. The
Standard Industrial Classification(SIC) offers an official guide, but this provides
limited practicalassistance.
SupposeJaguar,a subsidiaryof Ford Motor Company,is
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CHAPTER3
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I have argued that the key to defining industry boundaries is identifying the relevant
market. By focusing on the relevant market, we do not lose sight of the critical relationship among firms within an industry: competition. But how do we define markets?
A market's boundariesare defined by swbstitwtability.There are two dimensionsto
this - substitutability on the demand side and the supply side. Let us consider once
more the market within which Jaguar competes.Starting with the demand side, if customers are unwilling to substitute trucks for cars on the basis of price differences,
w e w a n t o u r c o m p e t i t i v ea n a l y s i st o a n s w e r .
For decisionsrelating to marketing strategy -
i n c l u d i n gp r o d u c t d e s i g n ,p r i c i n g ,a d v e r t i s i n g ,
c u s t o m e r sa n d c u s t o m e rg r o u p s i s l i k e l yt o b e
particularlyrevealing.
a n a l y s i so f f a i r l y b r o a d l y d e f i n e d i n d u s t r i e s
h a s t w o v i r t u e s .F i r s t ,i t a l l o w s u s t o c o n s i d e r
c o m p e t i t i o n i n t w o m a r k e t s s i m u l t a n e o u s l y-
S w a t c h ' s$ 3 9 . 9 5 P a m p a sR i d e r .E a c hm o d e l b y
S e c o n d ,i t t a k e s a c c o u n t o f s u p p l y - s i d es u b -
p r o d u c e da t t h e s a m e p l a n t s u s i n g m a n y o f
i n c l u d i n gS w a t c h ,O m e g a ,L o n g i n e sa, n d T i s s o t .
questions of
a d v a n t a g e ,i t i s u s e f u l t o c o n s i d e rt h e g l o b a l
watch industry- though probably excluding
s h a r p l y w i t h P o r t e r ' s i n d u s t r y a n a l y s i st h a t
e x a m i n e sc o m p e t i t i o na t a m u c h h i g e r l e v e lo f
d e m a n d c o n d i t i o n sa n d p r o d u c t i o n i s c l o s e r
to the jewelry industry than to the watch
aggregation.
i nd ustry.
Strategles(Oxford: Butterworth-Heinemann.2007).
CHAPTER 3
ffi#ilil
tionthat
answer.
:rategyrertising,
market
between
c specific
elyto be
mediumveforces
ndustries
consider
reously
)r inputs,
s i d es u b cdelsare
manyof
e parent
6 brands,
ndTissot.
forreallong broad
rmpetitive
heglobal
excluding
termsof
is closer
he watch
ningBusiness
7\.
Again,
uxury
narket
But this fails to take account of substitutability on the supply side. If manufacturers
find it easyto switch their production from luxury cars to family sedansro sporrs cars
and the like, such supply-sidesubstitutability would suggesrthat Jaguar is competing
within the broader automobile market. The ability of Toyota, Nissan, and Honda to
penetrate the luxury car market suggeststhat supply-side substitutability between
mass-marketautos and specialty autos is moderately high. Similarly, the automobile
industry is frequently defined to include vans and light trucks, since these can be
manufactured at the same plants as automobiles (often using the same platforms and
engines).So too with "major appliance" manufacturers.They tend to be classifiedas
a single industry, not becauseconsumersare willing to substitute between refrigerators and dishwashers,but becausethe manufacturerscan use the samemanufacturing
plants and distribution channelsfor different appliances.
The sameconsiderationsapply to the geographicalboundaries of markets. Should
Jaguarview itself as competing in a single global market or in a series of separate
national or regional markets?The criterion here again is substitutability.If cusromers
are willing and able to substitute cars available on different national markets, or if
manufacturers are willing and able to divert their output among different countries
to take account of differencesin margins, then a market is global. The key test of the
geographicalboundaries of a market is price: if price differencesfor the same product between different locations tend to be eroded by demand-sideand supply-side
substitution, then these locations lie within a single market.
In practice, drawing the boundaries of markets and industries is a matter of judgment that dependson the purposesand context of the analysis.If Ford is considering
the pricing and market positioning of its Jaguar cars, it must take a micro-level
approach that definesmarkets around each model, in each country, and in relation to
differentcategoriesof customer(e.g.,distinguishingbetweensalesto car rental companiesand salesto individual consumers).In considering decisionsover investments
in fuel cell technology,the location of engine plants, and which new products to
develop over the next five years, Ford will view Jaguar as one part of its auto and
light truck businessand will define its market as global and extending acrossits full
range of models. The longer term the decisions are that it is considering, the more
broadly it will wish to consider its markers, since substitutability is higher in the long
run than in the short term.
Second, the precise delineation of the boundaries of a market or industry is
seldom critical to the outcome of our analysisso long as we remain wary of external
influences.The market in which an offering competes is a continuum rather than a
bounded space.Thus, we may view the competitive market of Disneyland, Anaheim
as a set of concentric circles. Closest is Universal Studios Tour. Slightly more distant
competitors are Sea\World and Six Flags.Further still might be a trip to Las Vegas,or
a skiing weekend. Beyond these would be the broader entertainmenr market that
might include cinemas,the beach, or playing video games.
For the purposes of applying the five forces framework, industry definition is not
'We
critical.
define an industry "box" within which industry rivals compete, bur
becausewe include competitive forces outside the industry box - notably entrants
and substitutes- the preciseboundariesof the industry box are not greatly important.
'Whether
we view Harley-Davidson as competing in the "retro" segmentof the heavyweight motorcycle industry, in rhe heavyweight motorcycle industry, or in the motorcycle industry as a whole is not critical to the outcome of our analysis.Even if we
define Harley's market narrowly, we can still take into account competition from
PART II
T H E T O O L S O F S T R A T E G YA N A L Y S I S
The five forces framework allows us to determine an industry's potential for profit.
But how is industry profit shared between the different firms competing in that
industry? As we have noted in our discussionof industry dynamics, comperirion
between industry participantsis ultimately a battle for competitive advar-rtage
in which
firms rival one another to attract customersand rnaneuver for positional advantage.
Let us look explicitly at the sourcesof competitive advantagewithin an industry.
In subsequentchapterswe develop a more comprehensiveanalysisof competitive
advantage.Our goal here is to identify those factors within the firm's market environment that determine the firm's ability to survive and prosper - its key success
factors.z2In StrategyCapsule3.5, Kenichi Ohmae of McKinsey's Tokyo office discusseskey successfactors in forestry and their link with srrategy.
Like Ohmae, our approachto identifyingkey success
factorsis straightforwardand
colnmonsense.To survive arrd prosper in an industrS a firm must meet two criteria:
first, it must supply what customerswant to buy; second,it must survivecompetition.
Hence, we may start by askingtwo questions:
'What
do our customerswant?
What does the firm need to do to survivecompetition?
To answer the first question we need to look more closely at customersof the
industry and to view them not so muclt as a sourceof bargainingpower, and henceas
a threat to profitability,but more as the basicrationalefor the existenceof the industry and as the underlyingsourceof profit. This irnpliesthat the firm must identify who
its customersare, what are their needs,and how they choose between competing
offerings. Once we have identified the basisof custorners'preference,this is merely the
startingpoint for a chain of ar-ralysis.
F'orexample,if consumers'choice of supermarkets is basedprimarily on which chargesthe lowest pricesand if the ability to charge
low prices dependson low costs,the key issuesconcern the deterrninantsof costs
among supermarkets.
The secondquestionrequiresthat the firm examinesthe basisof competition in the
industry. How intenseis competition and what are its key dimensions?Thus, in the
luxury car market, consumersselectprimarily on the basisof prestige,design,quality, and exclusiveness.
However, thesequalitiesare an insufficientbasisfor success.
In this intensely competitive market, survival requires a strong financial position
(to financenew product development)and coststhat are sufficientlylow to allow a
company to cover its cost of capital.
A basic framework for identifying key successfactors is presentedin Figure 3.7.
Application of the framework to identify key successfactors in three industriesis
outlined in Thble 3.3.
Key successfactorscan also be identifiedthrough the direct modeling of profitability. In the sameway that the five forces analysismodels the determinants of industrylevel profitability, we can also artempr to model firm-level profitability in terms of
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CHAPTER 3
INDUSTRYANALYSIS:
THE FUNDAMENTALS
ider
and
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:riesis
fitabillustryrms of
A s a c o n s u l t a nf a
t c e dw i t h a n u n f a m i l i abr u s i nessor industry,I makea point of first asking
t h e s p e c i a l i s ti n
s t h e b u s i n e s s" ,W h a t i s t h e
secretof success
in this industry?"Needless
to
get
so
say,I seldom an immediateanswer,and
I p u r s u et h e i n q u i r yb y a s k i n go t h e rq u e s t i o n s
from a varietyof anglesin orderto establish
as
quicklyas possible
somereasonable
hypotheses
as to key factorsfor success.In the course
of these interviewsit usuallybecomesquite
obviouswhat analyses
will be requiredin order
By first
to proveor disprovethesehypotheses.
identifying
the probablekeyfactorsfor success
andthenscreening
them by proofor disproof,it
is oftenpossible
for the strategist
to penetrate
veryquicklyto the coreof a problem.
Travelingin the United Stateslast year,I
foundmyselfon one occasion
sittingin a plane
nextto a directorof one of the biggestlumber
companies
in the country.ThinkingI mightlearn
something
usefulin the courseof the five-hour
flight,I askedhim."Whatarethe keyfactorsfor
success
in the lumberindustry?"
Tomy surprise.
"Owninglargeforests
hisreplywas immediate:
andmaximizing
the yieldfrom them."Thefirst
of thesekeyfactorsis a relatively
simplematter:
purchase
of forestland.Buthissecondpointrequiredfurtherexplanation.
Accordingly,
my next
question
was:"Whatvariable
or variables
do you
controlin orderto maximizethe vieldfrom a
qiventract?"
Source.'Kenichi
Ohmae,
Ihe
Mind
of
the
strategist
( H a r m o n d s w o r t h :P e n g u i n , ' 1 9 8 2 ) : 8 5 .@ 1 9 8 2 . R e p r i n t e db y
permissionof McGraw-Hill ComDanres.
PART II
TAB
Prereouisites
for success
Analysisof demand
: Who are our customers?
": What do they want?
Stee
Analysisof competition
o What drivescompetition?
0 What arethe main
dimensionsof comoetition?
r How intenseis competition?
e How can we obtaina superior
competitiveposition?
KEYSUCCESS
FACTORSp
Fashi
clothi
Superm
CHAPTER 3
TAllLFl
INDUSTRY
Steel
I
O
o
O
Low price
Productconsistency
R e l i a b i l iot yf s u p p l y
S p e c i f itce c h n i c a l
<nori{ir:tinnc
H O WD OF I R M S
S U R V I VCEO M P E T I T I O N ?
(Analysis
of competition)
o Commodityproducts,
highfixed
excess
capacity,
capactty,
extt
costs,excess
barriera
s ,n ds u b s t i t u t e
c o m p e t i t i om
n e a ni n t e n s e
pricecompetition
and
{^r
<noriel <teel<
-,,-l:--l
^.^{;+^1.;l;+,,
LyLilLdr PrvrIrduilrLy
f-n<+ offiriannr:nd
financialstrengthessential
Fashion
clothing
t.
SE
ned
ly'
11-
lrs
)rs
O Diversity
of customer
nrofprpnrcc
3SS
'ed
ess
ul-'t
on
for
an
reors
ril-
in formc
of garmenttype,
style,quality,color
a C u s t o m ew
r si l l i n gt o
p a yp r e m i u mf o r
brand,style,
and quality
exclusivity,
o M a s sm a r k eht i g h l y
pricesensitive
Superma
rkets O Low prices
O Convenient
location
O W i d er a n g eo f
productsadaptedto
lnrrl
at-
THE FUNDAMENTALS
rn
ne
ANALYSIS:
nro{oronro<
produce;
O Fresh/quality
goodservice;
easeof
p a r k i n gp; l e a s a n t
ambience
o Lowbarriersto entryand
exit,low seller
c o n c e n t r a t i oann, d b u y i n g
powerof retailchains
i m p l yi n t e n s ceo m p e t i t i o n
O Differentiation
canyield
s u b s t a n t iparl i c ep r e m i u m ,
i sr a p i d
butimitation
o Intensityof price
c o m p e t i t i odne p e n dos n
n u m b ea
r n d p r o x i m i toyf
competitors
B a r g a i n i npgo w e ra c r i t i c a l
d e t e r m i n a no tf c o s to f
hnrrnh+-in
nnndc
KEYSUCCESS
FACTORS
O Costefficiency
requires:
l a n t sl,o w l a r g e - s c apl e
costlocation,rapid
capacityadjustment
O Alternatively,
high
technology,
small-scale
p l a n t sc a na c h i e vleo w
c o s t st h r o u g hf l e x i b i l i t y
a n d h i g hp r o d u c t i v i t y
O D i f f e r e n t i a t itohnr o u g h
technical
specifications
quality
and service
O Combiningdifferentiation
with low costs
O Differentiation
requires
to
speedof response
c h a n g i n fga s h i o n ss,t y l e ,
r e p u t a t i o na,n d q u a l i t y
O Costefficiency
requires
m a n u f a c t u ri ne l o w w a g e
countries
O Lowcostsrequire
operational
efficiency,
scale-efficient
stores,large
purchases,
low
aggregate
wagecosts
O Differentiation
requires
largestores(to allow
w i d ep r o d u c rt a n g e ) ,
c o n v e n i e nl ot c a t i o n ,
f a m i l i a r i twyi t h l o c a l
customerpreferences
PART II
i n d i v i d u afll i g h t s .
its Expenses/ASMs
- Wage ratesand benefit levels.
- Fuelefficiencyof aircraft.
-
Productivityof employees(determined
partly by their job flexibility).
Load factors.
Levelof administrativecost.
tacc
ASMs
RPMs
ASMs
Exoenses
ASMs
C Revenue/RPMs
- Intensityof competition on routesflown.
- Ef{ectiveyield managementto permit
superiorpunctuality,convenience,comfort, and
market conditions.
-
Superiorcustomerservice.
O Load factors
- Competitiveness
of prices.
- Efficiencyof route planning (e,9.,
through hub-and-spokesystems).
-
B u i l d i n gc u s t o m e rl o y a l t yt h r o u g h q u a l i t y
of service,frequent-flierprograms.
Sumn
In Chapt
derstand
criticalin
chapteI
proachtc
in ordert
and to id
age. The
five force
the struc
intensity
realizes.,
petition
CHAPTER 3
ntv
Salesmix of oroducts
l{or
!i
Returnon Sales
3;r
rlBryWf$fqFwrySsgqqff41
Maximizebuyingpowerto
minimizecostof goods
purchased
nined
nesnave
actorsas
fitability.
lvewithnpetitive
re a fare
through
rfort,and
rmpanies
icingand
nt routes.
ht to cut
:tivity,rerithother
efits.
Avoidingmarkdownsthrough
tight inventorycontrol
a customerserviceo qualitycontrol
Sales/Capital l'
Employed g
!8ffi
Maximizeinventoryturnover
throughelectronicdata
interchange,
closevendor
relationships,
fast delivery
Minimizecapitaldeployment
throughoutsourcingand leasing
Summarv
InChapter
1, we established
that profoundunderstanding
of the competitiveenvironmentis a
critical
ingredient
of a successful
strategy.In this
chapter,
we have developeda systematicapproach
to analyzing
a firm'sindustry
environment
inorderto evaluate
profitpotential
that industry's
andto identifythe sources
of competitive
advantage.Thecenterpiece
of our approachis Porter's
fiveforces
of competitionframework,which links
thestructure
of an industryto the competitive
intensity
within it and to the profitabilitythat it
realizes.
Althougheveryindustryis unique,competition
and profitabilityare the resultof the
PART II
T H E T O O L S O F S T R A T E G YA N A L Y S I S
theory,the relationships
it positsare straightforward and consistent
with commonsense.
However,the reallearningaboutindustryanalysis,
and
aboutthe Porterframeworkin particular,
derives
from its application.ltis onlywhen we applythe
Porterframeworkto analyzing
competition
and
diagnosing
the causes
of highor low profitability
in an industrythat we areforcedto confrontthe
complexities
and subtleties
of the model.What
industry(or industries)
doesa companycompete
in?Wheredo the industry's
boundaries
lie?How
wide a rangeof substitutes
do we consider?
How
do excesscapacity,cost structures,and exit
barriersinteractwith one another?
I urgeyou to put the toolsof industryanalysis
to work- not just in yourstrategic
management
coursework,
but also in your interpretation
of
everyday
business
events.Whatwill be the impact
of Linux,Apache,andotheropen-source
software
on Microsoft'shugelyprofitablesalesof operating systemsand serversoftware?What are the
prospectsfor the fixed-linetelecom providers
currentlybatteredby wirelessand internettelephony?ls your cousin'splan to leaveher law
firm to take up the positionof legal counsel
with a majorairlinea good ideagiventhe dil
ferent competitivecircumstances
of the two
industries?
Throughpracticalapplications
of the Porter
framework,we shall also becomeawareof its
limitations.
In the nextchapterwe shallconsider
someof theselimitationsand look to waysin
whichwe canextendand augmentour analysis
with additionalconcepts,
tools,and frameworks,
SelI'-StudyQuestions
The major forcesshapingthe businessenvironment of the fixed-linetelecomindustry are
technologyand governmentpolicy.The industry has been influencedby fiber-optics(greatly
increasingtransmissioncapacity),new modesof telecommunication(wirelessand internet
telephony),deregulation,and privatization.Using the five forcesof competition framework, show
how each of these developmentshas influenced competition in the fixed-line telecom industry.
From Thble 3.1, selecta high-profit industry and a low-profit industry.From what you know
of the structureof your selectedindustry,use the five forcesframework to explain why
profitability has been either high or low
With referenceto StrategyCapsule3.1, use the five forcesframework to explain why the US
smokelesstobacco industry is so profitable (asindicatedby the profitability of its dominant firm).
Despitehigh fuel costs,profitability in the world airline industry increasedsubstantially
during 2005 and 2006 - even while fuel costswere rising sharply.\X/hy?
!7al-Mart (like Carrefour,Ahold, and Metro) competesin severalcountriesof the world,
yet most shopperschoosebetweenretailerswithin a radius of a few miles. For the purposes
of analyzingprofitability and competitive strategy,should lfal-Mart consider the discount
retailing industry to be global, national, or local?
What do you think are key successfactorsin:
a)
b)
Noter
1 B. Eil
with i
/htt..
PEST
2 M.E.
Analy
Press
"How
Busine
3 "For f
Hole,
4 'iflJ. B
Marke
York: I
Micha
of Indr
Econor
5 'Annua
6 "Brand
Journal
R.D.B
Consun
Strateg,
Indiana
8 In Octo
America
to monc
(http://ra
9 M. Liebr
7
Journal t
argues tt
to be suJ
giving th
10 See for e
(Cambrir
H.M.M
Rates of
Economi
11 W S. Cor
Pouter (C
J. L. Sieg
Entry anr
Industria,
12 G. S. Yip.
60 (Septe
13 F. M. Sch
Structure
CHAPTER 3
Notes
rtheimpact
'cesoftware
s of operat'hat
are the
n providers
rternettelelve her law
gal counsel
venthe difof the two
f the Porter
awareof its
hallconsider
l to ways in
our analysis
frameworks.
-l
I
are
3,T::''
I
rrk,show
industry.
u know
hvl
I
I
rtheuS I
antfirm).
I
rlly
I
;i:h.,
II
.nurr,
II
I
II
19ti2):tl5-93.
60(September-October
13 F.M. Scl.rerer
andD. R. Ross,lndustrialMarket
Structure
andEconomicPerformance.3rd
edn (Boston: