Industry Analysis review Figures 3.3, p.65 from your textbook. Complete an Industry Analysis for two different industries then compare these industries by

  review Figures 3.3, p.65 from your textbook. Complete an Industry Analysis for two different industries then compare these industries by answering the following questions.

  1. Detail Porter’s Five Forces framework with a graphic representation, like Figure 3.3, (p.65), and a written explanation in relation to the Five Forces for both industries. 
  2. Use the results from Porter’s Five Forces framework to explain the reasons why profitability is what it is in the two different industries expressed as high, intermediate, or low. 
  3. Explain the structural features of that industry that generate either high or low profitability.      
  4. How are structural changes likely to impact competition and profitability in these industries? Is this industry attractive for investment? Why or why not?

Your well-written paper should meet the following requirements:

  • Be 4 to 5 pages in length, which does not include the required title and reference pages, which are never a part of the content minimum requirements. 
  • Use  APA style guidelines.
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CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 3

Industry Analysis:

The Fundamentals

          • Introduction / Objectives
          • From environmental analysis to industry analysis
          • Analyzing industry attractiveness
          • Applying industry analysis to forecast industry profitability
          • Using industry analysis to develop strategy
          • Defining industries: Where to draw the boundaries
          • Identifying Key Success Factors

          Industry Analysis: the Fundamentals

          Copyright (© 2019 John Wiley & Sons, Inc.

          OUTLINE

          1

          17

          • To understand how industry structure drives competition, which determines the level of industry profitability.
          • To assess industry attractiveness
          • To use evidence on changes in industry structure to forecast future profitability
          • To formulate strategies to change industry structure to improve industry profitability
          • To identify Key Success Factors

          The Objectives of Industry Analysis

          Copyright (© 2019 John Wiley & Sons, Inc.

          INTRODUCTION / OBJECTIVES

          2

          18

              THE INDUSTRY

              ENVIRONMENT

              Suppliers

              Competitors

              Customers

                        Social structure

                          The national/ international economy

                          Technology

                          Government

                          & Politics

                          The natural environment

                          Demographic structure

                          Social structure

                          The Macro Environment impacts the firm through its effect on the Industry Environment

                          At the Core of the Macro Environment is the Industry Environment

                          Copyright (© 2019 John Wiley & Sons, Inc.

                          FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS

                          3

                          Profitability of Selected US Industries (median ROCE)

                          Copyright (© 2019 John Wiley & Sons, Inc.

                          ANALYZING INDUSTRY ATTRACTIVENESS

                          HIGH PROFITABILITY %LOW PROFITABILITY%
                          Tobacco59.9Food and Drug Stores10.2
                          Computer Software29.8Utilities: Gas and Electric9.6
                          Household, Personal Care25.2Telecom Services9.5
                          Semiconductors22.5Agricultural Processing9.5
                          Pharmaceuticals21.3Petroleum9.2
                          Entertainment20.7Insurance9.1
                          Aerospace, Defense19.9Food Retailing9.1
                          Beverages19.2Trucking9.1
                          Chemicals, Specialty18.2Hotels, Casinos9.0
                          Food Processing18.0Motor Vehicle Parts9.0
                          Medical Products17.5Electrical Power6.0
                          Engineering/Construction16.8Motor Vehicles5.7
                          Restaurants/Catering16.6Airlines5.1

                          3 key influences:

                          The value of the product to customers

                          The intensity of competition

                          Relative bargaining power at different stages of the value chain

                          The Determinants of Industry Profitability

                          Copyright (© 2019 John Wiley & Sons, Inc.

                          ANALYZING INDUSTRY ATTRACTIVENESS

                          5

                                  Product

                                  Differentiation

                                  Information

                                  availability

                                  Many firms

                                  A few firms

                                  Two firms

                                  One firm

                                  No barriers

                                  Significant barriers

                                  High barriers

                                  Homogeneous

                                  Product

                                  Potential for product differentiation

                                  Perfect

                                  Information

                                  Imperfect availability of information

                                  The Spectrum of Industry Structures

                                      © 2019 Robert M. Grant www.contemporarystrategyanalysis.com

                                      Concentration

                                      Entry and Exit

                                      Barriers

                                      Perfect

                                      Competition

                                      Oligopoly

                                      Duopoly

                                      Monopoly

                                      ANALYZING INDUSTRY ATTRACTIVENESS

                                      6

                                      2

                                      Porter’s Five Forces of Competition Framework

                                        SUPPLIERS

                                        POTENTIAL

                                        ENTRANTS

                                        SUBSTITUTES

                                        BUYERS

                                        INDUSTRY

                                        COMPETITORS

                                        Rivalry among

                                        existing firms

                                        Bargaining power of suppliers

                                        Bargaining power of buyers

                                        Threat of

                                        new entrants

                                        Threat of

                                        substitutes

                                                    Copyright (© 2019 John Wiley & Sons, Inc.

                                                    ANALYZING INDUSTRY ATTRACTIVENESS

                                                    7

                                                    INDUSTRY RIVALRY

                                                    Concentration

                                                    Diversity of

                                                    competitors

                                                    Product differentiation

                                                    Excess capacity and

                                                    exit barriers

                                                    Cost conditions

                                                    THREAT OF ENTRY

                                                    • Capital requirements
                                                    • Economies of scale
                                                    • Absolute cost advantage
                                                    • Product differentiation
                                                    • Access to distribution

                                                    channels

                                                    • Legal/ regulatory barriers
                                                    • Retaliation

                                                    SUBSTITUTE

                                                    COMPETITION

                                                    Buyers’ propensity

                                                    to substitute

                                                    Relative prices &

                                                    performance of

                                                    substitutes

                                                    BUYER POWER

                                                    Buyers’ price sensitivity

                                                    Relative bargaining

                                                    power

                                                    SUPPLIER POWER

                                                    Buyers’ price sensitivity

                                                    Relative bargaining

                                                    power

                                                    The Structural Determinants of Competition

                                                    Copyright (© 2019 John Wiley & Sons, Inc.

                                                    ANALYZING INDUSTRY ATTRACTIVENESS

                                                    7

                                                    Extent of competitive pressure from producers of substitutes depends upon:

                                                    • Buyers’ propensity to substitute
                                                    • The price-performance characteristics of substitutes.

                                                    Threat of Substitutes

                                                    Copyright (© 2019 John Wiley & Sons, Inc.

                                                    ANALYZING INDUSTRY ATTRACTIVENESS

                                                    8

                                                    Entrants’ threat to industry profitability depends upon the height of barriers to entry.

                                                    The principal sources of barriers to entry are:

                                                    • Capital requirements
                                                    • Economies of scale
                                                    • Absolute cost advantage
                                                    • Product differentiation
                                                    • Access to channels of distribution
                                                    • Legal and regulatory barriers
                                                    • Retaliation

                                                    Threat of New Entry

                                                    Copyright (© 2019 John Wiley & Sons, Inc.

                                                    ANALYZING INDUSTRY ATTRACTIVENESS

                                                    9

                                                        Buyer’s price sensitivity

                                                        Relative bargaining power

                                                        Importance of item in relation

                                                        to buyers’ total costs.

                                                        Differentiation of the

                                                        purchased item

                                                        Intensity of competition

                                                        among buyers

                                                        Whether item is critical to the

                                                        quality of buyers’ own output

                                                        Size and concentration of

                                                        buyers relative to sellers.

                                                        Buyer’s information .

                                                        Ability to backward integrate.

                                                        NOTE: analysis of supplier

                                                        power is symmetric

                                                            Bargaining Power of Buyers

                                                            Copyright (© 2019 John Wiley & Sons, Inc.

                                                            The extent to which buyers are able to depress

                                                            profitability in an industry depends upon:

                                                            ANALYZING INDUSTRY ATTRACTIVENESS

                                                            12

                                                            The extent to which industry profitability is depressed by aggressive price competition depends upon:

                                                            Concentration (number and size distribution of firms)

                                                            Diversity of competitors (differences in goals, costs strategies, etc.)

                                                            Product differentiation

                                                            Excess capacity and exit barriers

                                                            Cost conditions

                                                            • Ratio of fixed to variable costs
                                                            • Extent of scale economies

                                                            Rivalry Between Established Competitors

                                                            Copyright (© 2019 John Wiley & Sons, Inc.

                                                            ANALYZING INDUSTRY ATTRACTIVENESS

                                                            10

                                                            Perform a Five Forces Analysis to understand why the industry’s current level of profitability is what it is

                                                            Identify the changes in industry structure that are likely to occur over the next few years. E.g.

                                                            Is new entry likely?

                                                            Will concentration increase as a result of mergers and acquisitions?

                                                            Will additions to industry capacity outpace the growth in demand?

                                                            Will innovation create new substitutes?

                                                            Use the Five Forces Framework to predict the impact of these structural changes on competition and profitability

                                                            Applying Five-Forces Analysis to Forecast Industry Profitability

                                                            Copyright (© 2019 John Wiley & Sons, Inc.

                                                            APPLYING INDUSTRY ANALYSIS TO FORECAST INDUSTRY PROFITABILITY

                                                            Strategies to Improve Industry Profitability

                                                            Which of the structural variables that are depressing profitability can we change by individual or collective strategies?

                                                            Strategic Positioning

                                                            • Once we know which structural features of the industry support profitability and which depress profitability, we can choose a favorable positioning within the industry.

                                                            Using Industry Analysis to Develop Strategy

                                                            Copyright (© 2019 John Wiley & Sons, Inc.

                                                            USING INDUSTRY ANALYSIS TO DEVELOP STRATEGY

                                                            What industry is Ferrari in?

                                                            • The Motor Vehicle industry (SIC 371)
                                                            • The Automobile industry (SIC 3712)
                                                            • The sports car industry
                                                            • Is its industry global, regional (Europe) or national (Italy)?

                                                            Key criterion: SUBSTITUTABILITY

                                                            • On the demand side : are buyers willing to substitute between types of cars and across countries
                                                            • On the supply side : are manufacturers able to switch production between types of cars and across countries

                                                            We may need to draw industry boundaries differently for different types of decision

                                                            Drawing Industry Boundaries

                                                            Copyright (© 2019 John Wiley & Sons, Inc.

                                                            DEFINING INDUSTRIES

                                                            15

                                                                        What drives competition?

                                                                        What are the main

                                                                        dimensions of competition?

                                                                        How intense is competition?

                                                                        How can we obtain a

                                                                        superior competitive position?

                                                                          Analysis of demand

                                                                          Who are our

                                                                          customers?

                                                                          What do they want?

                                                                          KEY SUCCESS FACTORS

                                                                          Analysis of competition

                                                                          • What drives competition?
                                                                          • What are the main dimensions of competition?
                                                                          • How intense is competition?
                                                                          • How can we obtain a superior competitive position?

                                                                          What do customers want?

                                                                          How does the firm survive competition

                                                                          Pre-requisites for success

                                                                          Identifying Key Success Factors

                                                                          Copyright (© 2019 John Wiley & Sons, Inc.

                                                                          IDENTIFYING KEY SUCCESS FACTORS

                                                                          17

                                                                          KSFs in Steel, Fashion Clothing, and Supermarkets

                                                                          IDENTIFYING KEY SUCCESS FACTORS

                                                                          Copyright (© 2019 John Wiley & Sons, Inc.

                                                                          WHAT DO CUSTOMERS WANT?HOW FIRMS SURVIVE COMPETITION?KEY SUCCESS FACTORS
                                                                          SteelLow price
                                                                          Product consistency
                                                                          Reliability of supply
                                                                          Specific technical specifications for special steels
                                                                          Strong price competition and cyclical demand require low costs and financial strengthCost efficiency requires either large plants in low-cost locations, or hi-tech, flexible, mini-mills close to customers
                                                                          Quality and service differentiation
                                                                          Fashion clothingDemand segmented by garment type, style, quality, color
                                                                          Price premium for brand, style, exclusivity, and quality
                                                                          Mass market highly price sensitive
                                                                          Intensely competitive due to low entry barriers, low seller concentration, and strong retail buying power
                                                                          Differentiation can yield substantial price premium, but imitation rapid
                                                                          Combining differentiation with low-costs
                                                                          Key differentiation variables: design, speedy to fashion trends, brand reputation, quality
                                                                          Cost efficiency requires low labor costs
                                                                          Super-marketsLow prices
                                                                          Convenient location
                                                                          Wide product range adapted to local tastes
                                                                          Fresh produce, good service, pleasant ambience, easy parking
                                                                          Markets localized
                                                                          Intensity of price competition depends on number and proximity of competitors
                                                                          Bargaining power essential to low input costs
                                                                          Low-costs require operational efficiency, efficient supply chain, buying power, low wage costs.
                                                                          Differentiation requires wide product range (hence, large stores), convenient location, easy parking

                                                                              Profitability = Yield x Load factor – Unit Cost

                                                                              Income Revenue RPMs Expenses

                                                                              ASMs RPMs ASMs

                                                                              =

                                                                              x

                                                                                Price competitiveness.

                                                                                Efficiency of route

                                                                                planning.

                                                                                Flexibility and

                                                                                responsiveness.

                                                                                Customer loyalty.

                                                                                Meeting customer

                                                                                requirements.

                                                                                Wage rates.

                                                                                Fuel efficiency of

                                                                                planes.

                                                                                Employee

                                                                                productivity.

                                                                                Load factors.

                                                                                Administrative

                                                                                overhead.

                                                                                Strength of competition on routes.

                                                                                Responsiveness to changing market conditions

                                                                                % business travelers.

                                                                                Achieving differentiation advantage

                                                                                NOTE: ASM = Available Seat Miles; RPM = Revenue Passenger Miles

                                                                                Identifying KSFs Through Modeling Profitability: The Airline Industry

                                                                                Copyright (© 2019 John Wiley & Sons, Inc.

                                                                                IDENTIFYING KEY SUCCESS FACTORS

                                                                                18

                                                                                ROCE

                                                                                Return on Sales

                                                                                Sales/Capital

                                                                                Employed

                                                                                    Sales mix of products

                                                                                    Avoiding markdowns through

                                                                                    tight inventory control

                                                                                    Max. buying power to minimize

                                                                                    cost of goods purchased

                                                                                    Max. sales/sq. foot through:

                                                                                    *location *product mix

                                                                                    *customer service *quality control

                                                                                    Max. inventory turnover through

                                                                                    electronic data interchange, close

                                                                                    vendor relationships, fast delivery

                                                                                    Minimize capital deployment

                                                                                    through outsourcing & leasing

                                                                                    Identifying KSFs by Analyzing Profit Drivers: Retailing

                                                                                    © 2019 Robert M. Grant

                                                                                    www.contemporarystrategyanalysis.com

                                                                                    IDENTIFYING KEY SUCCESS FACTORS

                                                                                    19

                                                                                    7

                                                                                    Forecasting Industry Profitability

                                                                                    • Past profitability a poor indicator of future profitability.
                                                                                    • If we can forecast changes in industry structure we can predict likely impact on competition and profitability.

                                                                                    Strategies to Improve Industry Profitability

                                                                                    Influencing industry structure by individual or collective strategies

                                                                                    Positioning the firm to shelter from the forces of competition

                                                                                    Defining Industry Boundaries

                                                                                    Key criterion: substitution

                                                                                    Industry definition depends upon the strategic issues being considered

                                                                                    Key Success Factors

                                                                                    Gateway to the analysis of competitive advantage

                                                                                    Summary

                                                                                    Copyright (© 2019 John Wiley & Sons, Inc.

                                                                                    INDUSTRY ANALYSIS: THE FUNDAMENTALS

                                                                                    From Environmental Analysis to Industry Analysis:

                                                                                    • The industry is the core of a firm’s external environment. Political, economic, social, and technological forces impact the firm through its industry :

                                                                                    14

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