What you will learn in this Section ?

• Envisioning Strategy– Definition– Framework– Visual Models

• External Analysis– PEST– PEST Impact Analysis

• Industry and Competitive Analysis– Industry Structure– Evolution of Industries– Industry Supply Chain– Potential Industry Earnings– Porter’s 5 Forces Analysis– Competitive Intensity– Strategies for minimizing competitive

forces– Perceptual Map– Barriers to Entry/Incumbency advantages– DSIR effect

• Company Resources and Capabilities– ARC Analysis/HR– SWOT Analysis– Value Creating Processes/Core

Competencies– Strategic Gameboard– Balanced Scorecard– Change Management

© Sunil Mehrotra

Mnemonic 1

The environmentThe environment

International lawInternational law

GovernmentsGovernments

Standards bodiesStandards bodies

StakeholdersStakeholders

Supplier’s Supplier’s supplierssuppliers

Customer’s Customer’s customerscustomers

New entrantsNew entrants

CustomersCustomersSuppliersSuppliers

CompetitorsCompetitors

SubstitutesSubstitutes

OrganisationOrganisation

Visual Model

Industry Analysis

New Paradigm Consulting

Industry Definition/ Structure

CompetitorsSuppliers

Customers

© Sunil Mehrotra

The Firm

New entrant

The term industry is sometimes usedto define a very precise business activity(eg: semiconductors) or a more generic activity(eg:consumer goods).

Substitutes

Industry

There are 100s of industries

Industries are grouped into sectors

http://www.census.gov/econ/census02/guide/INDSUMM.HTMUS Census Bureau's Industry sector groupings

http://www.smartmoney.com/map-of-the-market/Interactive map of market performance by sector

Sector

Industry

company

Example:Sector: Retail TradeIndustry: General MdseCompany: Walmart

Some of the sectors:AgricultureMiningConstructionManufacturingWholesale TradeRetail TradeUtillities

Industries differ greatly

» Size» Growth rate» Profitability» Maturity» Competitive intensity» Markets and customer segments» Geography» Technology orientation

http://money.cnn.com/magazines/fortune/fortune500/2008/performers/industries/fastgrowers/Fortune 2008 Industry profile by growth rate, profitability, size, etc

Drilling down from Sector to Industry to

company

http://biz.yahoo.com/p/

Fortune's ranking of Industries by profits

Tobac

co P

rodu

cts,

Oth

er

Cigare

ttes

Perso

nal S

ervic

es

Bever

ages

- W

inerie

s & D

istille

rs

Cleanin

g Pro

duct

s

Applic

ation

Sof

twar

e

Aeros

pace

/Def

ense

- M

ajor D

ivers

ified

Proce

ssed

& P

acka

ged

Goo

ds

Auto

Parts

Sto

res

Divers

ified

Compu

ter S

yste

ms

Gas

Utili

ties

Inte

rnet

Ser

vice

Provid

ers

Recre

ation

al Veh

icles

Indu

stria

l Elec

trica

l Equ

ipmen

t

Lodg

ing

Oil &

Gas

Drill

ing &

Exp

lorat

ion

Oil &

Gas

Equ

ipmen

t & S

ervic

es

Insu

ranc

e Bro

kers

Dairy

Produ

cts

Educa

tion

& Tra

ining

Ser

vices

Perso

nal P

rodu

cts

Life

Insu

ranc

e

Truck

s & O

ther

Veh

icles

Aeros

pace

/Def

ense

Pro

duct

s & S

ervic

es

Heavy

Con

stru

ction

0

10

20

30

40

50

60

70

80

90

Industry Ranking

% ROE

Industry

% R

OE

Why are some industries more profitable than others?

Pharmaceutical and medicine manufacturing Retail trade Electronic computer manufacturing

0.000

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

180.000

200.000

Price Trends in 3 industries

Pharma, Retail, Computer manf.

1998-2006

Ind

ex

WHY ?

Industries grow/decline at different rates

http://www.visualizingeconomics.com/2007/07/02/gross-domestic-product-by-industry-winners-losers/

VISUAL SHOWING SECTORS AS % OF GDP 1975-2005....WINNERS AND LOSERS

Industry Map a snapshot

Industry Analysis for start-ups

• Is the industry that I am planning to enter a good one for starting a new company?

• Are the knowledge conditions in the industry favorable to a start-up?

• Are demand conditions in the industry favorable to a start-up?

• Is the industry at the right stage of the life cycle for a start-up?

• Is the industry structure favorable for a start-up?

Selecting the right industry for a start-up

• Don't start a business in a capital intensive industry.

• Don't start a business in an advertising intensive industry.

• Don't start a business in an industry in which the average sized firms are large.

• Don't start a business in a concentrated market.

What makes an industry attractive?

• Industry size

• Industry growth rates

• Industry profitability

• Pricing trends

• Competitive intensity

• Entry barriers

• Risk of reasonable returns

• Demand variability

• Opportunity for product differentiation

• Segmentation

• Distribution structure

• Technology development

Individual Assignment 1• For Walmart define:

–Industry sector and the NAICS two digit code

–Industry sub-sector and the NAICS code for it

–Industry and the NAICS code for it

• Draw a graph for the Industry showing–SIZE

–Growth rate

–Profitability

• Show Walmart's performance relative to industry in growth rate and profitability

Industry Evolution: Traditional View

Introduction Growth Maturity Decline

Revenue

OperatingIncome

Losses

Few competitors

Increasing sales and profits

New competitors appear

Saturation

Declining profits

Standardized features

Industry shakeout

Displaced by substitute products

Profitability falls

Only a few large scale players survive

Oligopoly•Few Firms•Strategic Interdependence•Profitability determined by behavior of incumbents

Most industries evolve towards

© Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm

Strategies differ at different stagesof the industry life-cycle

Introduction Growth Maturity Decline

Revenue

OperatingIncome

Losses

Few competitors

Increasing sales and profits

New competitors appear

Saturation

Declining profits

Standardized features

Industry shakeout

Displaced by substitute products

Profitability falls

Only a few large scale players survive

© Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm

Entrepreneurial Action• Open niches• Blind spots Focus on Growth

• Invest to grow• Leverage Factors of Production

Market power actions•Market share•Channels of distribution•Customer loyalty

http://online.onetcenter.org/find/indemand

Three major phases of industry evolution

“Cycle time” of evolution is driven by the pace and magnitude of marketplace discontinuities

Cycle-driving discontinuities include deregulation, technology, shifts in consumer preferences, globalization of markets, etc.

1

23

Mature/VerticallyIntegrated

RecombinantMarket Leaders

The New View:The Cycle of Industry Creative

Destruction

http://www.manyworlds.com/

FocusedNew

Entrants

The New View:The Cycle of Industry Creative

Destruction

IBM DEC SperryUnivac

Wang

Chips

Computer

OperatingSystem

ApplicationSoftware

Sales andDistribution

Superstores Retail

Word Wordperfect

Windows Apple

IBM HP Apple

INTEL

Direct

Others

Linux

Dell

The “mature” Computer Industry

The “recombinant” Computer Industry

AMD

Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001

Nappies 7-10?

Industry Definition-Sector/Industry/Company-SIC and NAICS codes

Measures of Industry Attractiveness-Government sources for Industry statistics-Visualizing Industry statistics/compare industries

Industry life-cycle and creative destruction-appropriate resource focus at each stage in the cycle

Mnemonic 4

• Industry size

• Industry growth rates

• Industry profitability

• Pricing trends

• Competitive intensity

• Entry barriers

• Risk of reasonable returns

• Demand variability

• Opportunity for product differentiation

• Segmentation

• Distribution structure

• Technology development

Individual Assignment 2

• Draw a life-cycle chart and position on the chart the following industries

– Discount merchandising industry

– Travel Agency industry

– Book publishing industry

• Explain how the “cycle of creative destruction” might apply to the CRS industry, that is how the industry was born, matured, and reconstituted.