Profitability Differences Across Selected Industries

Transcription

1 When an dustry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the dustry that keeps it reputation tact. Warren Buffett Profitability Differences Across Selected Industries Pharmaceuticals Prepackaged software Semiconductors Women's clothg stores Dental equipment Eatg places Drug stores Petroleum / natural gas Race track operations Truckg except local Engeerg services Computer system design Cable TV service Motor vehicles Scheduled airles Operatg Income / Assets, (%) Source: Jan W. Rivk based on Compustat 1

2 Strategy s big question Why do some firms earn more than others? (a) Why are some dustries more profitable than others? (b) Why are some firms with an dustry more profitable than others? The Managerial Problem To craft an effective strategy, you must take account of the external environment (the landscape) To decide whether to put your firm an environment (entry) To decide whether to extricate your firm from an environment (exit) To position your firm to succeed a given environment To assess the effect of a major change (e.g., deregulation) To shape the environment But the environment is enormously complex You need structured ways of thkg about the environment that capture the richness of the real busess world but separate signal from noise 2

3 Some (Complementary) Solutions Supply / demand diagrams Industry structure analysis (Five Forces) Value net Ecological metaphors From Supply / Demand to the Five Forces What determes the long-run supply / demand balance? Entry barriers and tensity of rivalry affect whether firms will add capacity response to excess demand Exit barriers affect whether firms will retire capacity response to excess supply What determes the effect of a supply / demand imbalance on profitability? In dustries with tense rivalry or powerful buyers, small amounts of excess capacity tend to lead to big price wars In dustries with powerful suppliers, the benefits of excess demand may accrue to the suppliers Supply / demand analyses say little about what determes the position and shape of the two curves 3

4 Industry Analysis: Factors to Consider Bargag Power of Suppliers Differentiation of puts Switchg costs Presence of puts Supplier concentration Importance of volume to supplier Cost relative to total purchases Impact of puts on cost or differentiation Threat of forward tegration Threat of New Entry Economies of scale Proprietary product differences Brand identity Switchg costs Rivalry Among Existg Competitors Industry growth Fixed costs / value added Overcapacity Product differences Brand identity Capital requirements Access to distribution Absolute cost advantages Government policy Expected retaliation Switchg costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers Threat of Substitutes Relative price performance of s Switchg costs Buyer propensity to Bargag Power of Customers Buyer concentration Buyer volume Buyer switchg costs Buyer formation Ability to tegrate backward Substitute products Price / total purchases Product differences Brand identity Impact of quality / performance Buyer profits Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985) Typical Uses of Industry Analysis Understand current profitability levels Identify forces that must be countered order to achieve superior profitability Test decision to enter an dustry Test decision to exit an dustry Assess effect of a major change (e.g., deregulation) Identify ways to alter dustry structure 4

5 The Value Net A player is your competitor with respect to customers if customers value your product less when they have the other player s product as well Competitors Customers Firm A player is your complementor with respect to customers if customers value your product more when they have the other player s product as well Complementors A player is your competitor with respect to suppliers if it is less attractive for a supplier to provide resources to you when it is also supplyg the other player Suppliers A player is your complementor with respect to suppliers if it is more attractive for a supplier to provide resources to you when it is also supplyg the other player Source: Adam Brandenburger and Barry Nalebuff, Co-opetition (New York: Currency Doubleday, 1996) Expanded Industry Analysis Threat of New Entry Bargag Power of Suppliers Rivalry Among Existg Competitors Bargag Power of Customers Threat of Substitutes Availability of Complements 5

6 Degree of Rivalry Concentration and balance Industry growth Fixed (or storage costs)/value added Product differences Brand identity Switchg costs Intermittent over-capacity Diverse stakes Exit barriers Entry Barriers Economies of scale Absolute cost advantages Product differences Brand identity Switchg costs Capital requirements Access to distribution Learng curve Access to necessary puts Low cost product design Government policy Expected retaliation 6

7 Power of Buyers Intrsic Strength Buyer concentration Buyer volume Switchg costs Buyer formation Ability to backward tegrate Substitute products Price Sensitivity Price/Total purchase Product differences Brand identity Impact on quality/performance Buyer profits Decision maker s centives Power of Suppliers Supplier concentration Substitute suppliers Supplier volume Product differences Brand identity Switchg costs Low buyer formation Threat of forward tegration 7

8 Threat of Substitution Product function not form Threat depends on Relative price/performance Switchg costs The Power of Complementors Relative concentration Relative buyer or supplier switchg costs Ease of unbundlg Rate of growth of the pie 8

9 Some Common Long-Run Dynamics Bargag Bargag Power of Power of Suppliers Suppliers Concentration or Concentration or fragmentation of suppliers fragmentation of suppliers Forward tegration Forward tegration Improvement supplier Improvement supplier formation formation Surge or decle supply Surge or decle supply Emergence of Emergence of puts puts New means for coordatg New means for coordatg with suppliers with suppliers Threat of New Entry Decle economies of scale + customer heterogeneity fragmentation of market to niches Escalation of sunk costs concentration Emergence of switchg costs entry deterred Rivalry Among Existg Competitors Shift dustry growth Change mix between fixed and variable costs Emergence of domant design or product Consolidation Fragmentation / new entry Bargag Power of Customers Concentration or fragmentation of buyers Backward tegration Improvement buyer formation Surge or decle demand Emergence of new distribution channels New means for coordatg with customers Shifts customer tastes Threat Threat of of Substitutes Substitutes Emergence Emergence of of new new Improvement Improvement or or decle decle relative relative price price performance performance of of Increase Increase buyer buyer comfort comfort with with Change Change barriers barriers to to entry entry market market Availability of Complements Emergence of new complements Change barriers to entry complement market Source: Jan W. Rivk Public Sources of Information about the Busess Landscape Industry studies Books Investment analysts Market research Busess school cases Trade associations Busess press General publications (e.g., Wall Street Journal, Fortune) Specialized dustry trade journals Local newspapers Onle services (e.g., Bloomberg, OneSource, Compustat) Government sources Antitrust, legal, or tax documents Census or IRS data Regulatory bodies Industry and company directories Thomas Register Dun & Bradstreet Company sources Annual reports SEC filgs Public relations/promotional material Internet sites Company histories 9

10 Issues with the Five-Forces Framework Industry defition Completeness (e.g., import competition) Consistency (e.g., import strategic variety) Duplication (e.g., switchg costs) Symmetry (e.g., buyer substitution vs. supplier substitution, complements) The role of formational conditions The need for macroenvironmental analysis Long-run focus vs. change shocks cycles trends Product rather than resource focus From Industries to Landscapes Landscape is broader than dustry Landscape cludes firms, stitutions, and other players which often are not viewed as part of an dustry Landscape cludes networks of firms (from different dustries) whose profits may be terdependent (e.g. Microsoft-Intel) 10

11 Steps Landscape Analysis Defe the landscape: what is, what is out Identify the players e.g., who are the customers, really? Who are the competitors? Assess the relationships among players See Porter (1979, 1980) for some factors to consider Sniff-test Is assessment le with actual profitability? Are more profitable players better positioned vis-a-vis competitive forces? Assess recent and future changes Steps Landscape Analysis (cont.) Purpose Common steps Identify forces that must be countered order to achieve superior profitability Ppot most threateng force and seek ways to counter (e.g., build switchg costs, fd new sources of supply) Test decision to enter Consider effect of entry on structure; choose relative position; select entry vehicle; compare costs of entry to benefits Test decision to exit Identify options for improvg structure or relative position; select exit vehicle; compare costs of exit to benefits Assess effects of a major change Consider how change will affect each force Identify ways to alter structure Assess consolidation, backward tegration, forward tegration, vestments that raise entry costs, entry to market, etc. 11

12 Common Pitfalls Landscape Analysis Failg to defe the landscape clearly A clear defition is more important that the right defition Confusg transient effects with structural forces Ignorg changes structural forces Assumg that competitive forces cannot be altered Confusg evidence of a force with its underlyg cause e.g., blamg customer power on customer price sensitivity rather than explorg root causes of price sensitivity Ignorg the full range of s Payg equal attention to all the forces Lessons Industries or landscapes are neither created equal nor stay equal The concept of extended competition provides a comprehensive framework for assessg structural attractiveness A firm s strategy can crease or decrease its exposure to competitive forces Other thgs beg equal, a firm should seek to trigger actions that improve structural attractiveness But it isn t enough to look at just structural attractiveness: competitive position must also be considered 12

13 Conclusion Envisiong the busess landscape Adaptg to the busess landscape Shapg the busess landscape 13