Strategy Lecture 3 PDF

Lecture 3 – Industry Analysis & Evolution Prof. Dr. Eva Niesten Use Edusign QR code to register attendance LECTURE 3 – Industry Analysis and Evolution What is an industry? What is a market?...

Lecture 3 – Industry Analysis & Evolution Prof. Dr. Eva Niesten Use Edusign QR code to register attendance LECTURE 3 – Industry Analysis and Evolution What is an industry? What is a market? Why industry analysis? 1. Industries Defined Substitutes, new entrants, buyer and supplier power, industry rivalry 2. Porter’s Five Forces The role of complements 3. Industry & Competitive Segmentation and strategic groups Analysis Industry life cycle (ILC) 4. Industry Evolution Industry decline & growth 5. Innovation in ILC Innovation diffusion & dominant design Incumbent’s curse  3.1 Industries Defined From environmental to industry analysis Source: Rothaermel, Strategic Management  3.1 Industries Defined What is an Industry? Those firms with whom you compete for customers (and employees!), and whom you “obviously” ► Key criterion: benchmark against in terms of cost, product quality, □ Supply side: are etc. manufacturers able to switch production between types of Attributes of products of competitors: cars? They have similar product performance characteristics They have similar occasions for use They are sold in the same geographic markets  3.1 Industries Defined An industry is a group of firms producing products and services that are essentially the same (e.g., the automobile industry and the airline industry) A market is a group of customers for specific products or services that are essentially the same (e.g., the market for luxury cars in Germany, the market for family cars in the US) ► INDUSTRY □ Standard Industrial Classification (SIC) code 37 (transportation equipment) 371 (motor vehicles and equipment) 3711 (automobile industry) ► MARKET □ Entry-level/cheap segment 3.1 Industries Defined Product Motor vehicles and equipment? Automobile industry? Luxury? Geographical market Global? Regional (EU)? National?  (Net sales – cost goods sold – operating 3.1 Industries Defined expenses – debt payments - taxes)/Net sales Net Margin 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html There are significant differences across industries High net profit margins: 1. Banks: 30.89% 2. Banks (regional): 29.67% 3. Oil and gas (production): 28.26% 4. Tobacco: 27.52% 5. Oil and gas (distribution): 23.59% 3.2 Industry Analysis Industry attractiveness 3.2 Industry Analysis Industry attractiveness Inelastic Demand: For goods without any close substitutes, consumers are comparatively insensitive to prices. Elastic Demand: For goods that have close substitutes, consumers are sensitive to prices. Examples: energy drinks vs. coffee; videoconferencing vs. business travel; email vs. express mail (Rothaermel, 2021, p. 89) 3.2 Industry Analysis Industry attractiveness Large capital-intensive investments create economies of scale Advantages other than those arising from scale: Access to low-cost resources & economies of learning Brand recognition and customer loyalty for incumbents Shelf space Licenses, environmental regulation etc. Aggressive price-cutting, increased advertising, sales promotion, litigation 3.2 Industry Analysis Industry attractiveness Lower number of buyers and bigger purchases → more bargaining power Low switching costs → more bargaining power Buyers with more information → more bargaining power Buyers’ capacity to produce inputs Large part of buyer’s cost structure, gives them bargaining power commodities, high competition → wish to exercise bargaining power 3.2 Industry Analysis Industry attractiveness Number and size distribution of firms competing in a market: concentration ratio The more similar competitors are, the more likely are collusive pricing practices Commodities: competition on price Highly differentiated products: competition based on quality, brand, service Firms with high fixed costs (e.g., airlines) will compete aggressively on price  3.2 Industry Analysis Industry rivalry Source: Rothaermel, Strategic Management 3.2 Industry Analysis Industry attractiveness Return on Equity of Food Consumer Products is 21.7% in comparison to 5.9% for Food Production (Archer Daniels Midland, Tyson Foods, Smithfield Foods). Large companies in the Food Consumer Products industry: PepsiCo, Kraft Foods, General Mills. Some of their well-known brands: 3.2 Industry Analysis Industry attractiveness Why do you think the Return on Equity is much higher for the industry ‘Food Consumer Products’ in comparison to ‘Food Production’? Can you identify reasons using Porter’s Five Forces? Economies of scale Brand recognition Threat of Entry Customer loyalty Shelf space Buyer power versus supplier power Differentiated products versus commodities 3.2 Industry Analysis Industry attractiveness – data collection 3.2 Industry Analysis Industry attractiveness – data collection 3.2 Industry Analysis Industry attractiveness – data collection United States: CR3: Three-firm concentration ratio: 70.5%: a high concentration 3.2 Industry Analysis Industry attractiveness – data collection France: CR4: Four-firm concentration ratio: 61.2%: a medium concentration 3.2 Industry Analysis Industry attractiveness – data collection United Kingdom: CR4: Four-firm concentration ratio: 45.4%: a medium concentration High concentration: above 70% Medium concentration: 40-70% Low concentration: below 40% 3.3 Industry and Competitive Analysis The role of complements Critique on Porter’s Five Forces: role of complements? 3.3 Industry and Competitive Analysis The role of complements Complements increase the value of an industry’s product, while substitutes reduce it. Some examples of complements: Who dominates this market? The software or hardware Personal computers and software producers? Video game consoles and video games Smartphone and applications Who dominates this market? Printers and ink The console or game Cars and gasoline producers? 3.3 Industry and Competitive Analysis The role of complements How is the value shared between the producers of different complementary products? Bargaining power and its deployment: Achieve monopolization, differentiation and network effects Encourage competition, commoditization and excess capacity in the production of the complementary product 3.3 Industry and Competitive Analysis The role of complements The availability of complementary products is a major source of network effects – “the value of the product or service increases with the number of users” (Rothaermel, 2021, p. 85) 3.3 Industry and Competitive Analysis Segmentation and strategic groups Segmentation is important if competition varies across the different submarkets within an industry such that some are more attractive than others. SEGMENTATION 1. Identify key segmentation variables: price differentials are good indicators of market segments 2. Construct a segmentation matrix: contains 2 segmentation variables 3. Analyze segment attractiveness: using Porter’s five forces with substitutes and new entrants coming from other segments (i.e., barriers to mobility) 4. Identify the segment’s key success factors: high-price vs. economy product 5. Select segment scope: segment specialist or compete in multiple segments?  3.3 Industry and Competitive Analysis Segmentation and strategic groups Step 1: Identify key segmentation variables  3.3 Industry and Competitive Analysis Segmentation and strategic groups Step 2: Construct a segmentation matrix Step 3: Use Porter’s 5 forces to determine segment attractiveness 3.3 Industry and Competitive Analysis Segmentation and strategic groups Step 4: Identify segment’s key success factors (economy vs. high-price) Step 5: Segment specialist or compete in both? Strategic group: set of companies competing within a segment Source: Rothaermel, Strategic Management  3.4 Industry Evolution Industry Life Cycle Introduction: Low sales, low market share, few customers Novel technology, small scale of production, lack of experience → high costs & low quality Affluent, innovation- oriented and risk- tolerant customers Source: Rothaermel, Strategic Management  3.4 Industry Evolution Growth: Industry Life Cycle Accelerating market share: technical improvements and efficiency open mass market Shakeout - Maturity: Increasing market saturation: demand is for replacement Decline: Industry is challenged by new industries that produce technologically superior substitute products Source: Rothaermel, Strategic Management 3.4 Industry Evolution Launch: Sales are low, high start-up costs, losses Industry Life Cycle Growth: Rapid sales growth, profit and positive cash flow after passing break-even point Shake-out: Lower rate of sales growth and sales peak Maturity: Sales decrease, lower profits. Cash is higher than profits: most capital spending has occurred Decline: Sales, profits and cash decline 3.4 Industry Evolution Industry Decline Decline of European newspaper industry from 37% in 2012 to 21% in 2022 (lower income from subscriptions) 3.4 Industry Evolution Industry Decline Income for newspapers in the form of newspaper advertising is going down too: 42.23 billion USD in 2017 worldwide to (expected) 19.51 billion USD in 2029 3.4 Industry Evolution Industry Growth Newspapers and advertising in newspapers are replaced by digital banner advertising (desktop and mobile): increase in billion USD worldwide from 75.30 in 2017 to (expected) 227.40 in 2029. 3.4 Industry Evolution Industry Growth Newspapers and advertising in newspapers are replaced by social media advertising: increase in billion USD worldwide from 51.32 in 2017 to (expected) 345.70 in 2029. 3.5 Innovation in ILC What drives ILC? Consumer differences in education, age, income, aversion to technology uncertainty, interest in technology, confidence in using technology  3.5 Innovation in ILC Crossing the chasm: each stage of the ILC is dominated by a different customer group. Companies must understand these different customer groups to survive during industry evolution. Source: Rothaermel, Strategic Management 3.5 Innovation in ILC Apart from consumer demand, what do you think drives the changes in an industry life cycle? New knowledge and technologies Knowledge creation and knowledge diffusion Product innovation Competition between technologies Emergence of a dominant design Process innovation  3.5 Innovation in ILC Rate of technological change accelerated dramatically over past 100 years It took 84 years for half the US population to own a car, 28 years to own a TV, 6 years to own a MP3 player Early innovations provided the infrastructure for later innovations to diffuse more rapidly Source: Rothaermel, Strategic Management 3.5 Innovation in ILC  3.5 Innovation in ILC Dominant designs do not have to be technologically superior Example of a dominant design: QWERTY 1870s: Remington typing machines sold at a discount if typists attended typing course. Switching to NON-QWERTY decreased words per minute by 80% Increasing returns to adoption: utility does not only depend on technology but also on number of other users  3.5 Innovation in ILC Growth Stage in ILC Network effects and complements (iPhone & apps) can help companies win competition in the growth stage of the industry life cycle and help them set the standard or dominant design. Source: Rothaermel, Strategic Management 3.5 Innovation in ILC The World’s Biggest Companies by Market Capitalization 1912 $ bn. 2018 $ bn. US Steel 0.74 Apple 876 Standard Oil NJ (Exxon) 0.39 Alphabet 737 J&P Coates 0.29 Microsoft 658 Pullman 0.20 Amazon 567 Royal Dutch Shell 0.19 Facebook 511 Anaconda 0.18 Tencent 496 General Electric 0.17 Berkshire Hathaway (1839) 488 Singer 0.17 Alibaba 441 American Brands 0.17 Johnson & Johnson (1866) 376 Navistar 0.16 JP Morgan Chase (1799) 371 British American Tobacco 0.16 De Beers 0.16 3.5 Innovation in ILC The World’s Biggest Companies by Market Capitalization Largest companies in the world by market capitalization in 2023 (in billion US dollars) Source: Statista, 2024 3.5 Innovation in ILC The Incumbent’s Curse New entrants introduce innovative, successful technologies. Incumbents do not survive. Incumbents fail for different reasons: - Companies’ organizational structures facilitate incremental innovations - Radical innovations are competence destroying for incumbents  3.5 Innovation in ILC Incumbents: Incremental and disruptive innovation New entrants: Architectural and radical innovation Source: Rothaermel, Strategic Management What’s Next? Get ready for the next session □ The next session is a lecture in which we will analyze the case of the automobile industry’s evolution □ Watch the video tutorial on industry analysis in Excel available on K2 □ Anticipate our case study discussion by watching and reading the materials on K2 □ Upload your answer to the case study question(s) in advance into the dedicated space on K2  SKEMA BUSINESS SCHOOL Thank you! Questions?