MSc Session 2 External Analysis

7/23/2019 MSc Session 2 External Analysis

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Strategy Analysis SMM880MSc Management

Session 2: External Analysis

Dr. Sam Kamuriwo



2

Agenda• Recap from last session• Reaings for t!is session• Sources of pro"t at inustry le#el• Macro le#el in$uences on inustry structure• Segmentation• Strategy group analysis• %imitations of &orter's "#e forces framewor(•

)ompetiti#e interaction• )ase Discussion• )onclusion



3

Recap



(Intended) Strategy

S t r at e g

yF or m ul at i o

n

Profound understanding ofthe external environment:

O!ective Appraisal ofthe internal environment:

"ough choices

A#A$%"I&A$ "OO$S

S t r at e

g yAn al y si s

Goals & Resource Allocation

Value creation andcapture

Scope and competitiveadvantage

Strategy 'xecutionRealized

Strategy



"o main purposes of strategy*

+ni,ue valuecreation

Internal

Alignment



Internal alignment

6

• Are measures aligned ith strategy-

• .easures reliale and controllale-

• Is scorecard emedded in a roadersystem of goal setting/ accountaility andreards

• Is a formali0ed monitoring system in place/ith set regular revies



7

Readings for thissession

Re,uired Readings:1 &ontemporary Strategy Analysis &hapter 2:

Industry analysis: "he Fundamentals3 &ontemporary Strategy Analysis &hapter 4:

Further topics in Industry and competitiveanalysis

2 Ready to 'at &ase



8

Sources of pro5t at industry level



9

"he goal of external analysis*analyse sources of pro5t



!

"6R'A" OF '#"R% •

&apital re,uirements• 'conomies of scale• Asolute cost advantage• Product di7erentiation• Access to distriution channels• $egal8 regulatory arriers• Retaliation

S+9S"I"+"'&O.P'"I"IO#

• 9uyers propensity

to sustitute• Relative prices ;

performance of sustitutes

9+%'R PO<'R• 9uyers price

sensitivity

• Relative argainingpoer

I#=+S"R%RI>A$R%

• &oncentration• Product

di7erentiation• =iversity of competitors• 'xcess capacity ; exit arriers•

&ost conditions

S+PP$I'R PO<'R• Suppliers price

sensitivity


'ach Industry has a

di7erent +nderlyingstructure



R'A" OF '#"R% ost of entry modest

Industry attracts entrepreneurs

S+9S"I"+"'&O.P'"I"IO#

• car8rail !ourneys ?3@miles

• >ideo conferencing

9+%'R PO<'R• $imited argaining

poer/ ut pricesensitive and easysitching

I#=+S"R%

RI>A$R% • .ultiple

competitors• $o product

di7erentiation• 'xcess capacity• 6igh exit arriers• 6igh ratio of

5xed to varialecosts

S+PP$I'R PO<'R• Airline

manufacturers• $aour unions• Airports

'g Industry pro5t

potential8attractiveness eg Airlines



2

.acro level inBuences on industrystructure



9ut hat drives industrystructure change-

3

• The Industry Environment lies at the core of the Macro Environment.

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

Environment.

Porter’s 5 forces

1. Buyer power

2. Supplier

power

3. Rivalry

4. Entry barriers

5. Substitutes



'xample: "he 'levator and

'scalator Industry• &olitical*Economic c!anges:

• glo+al s!ift to emerging worl economies : ,D&

•

S!ort term- meium an long term outloo( in west anemerging economies "scal austerity- +an(ing-

construction/

"

#e marCet Installations-

.aintenance-




'scalator Industry• Social )!anges

• Massi#e ur+anisation trens in )!ina etc.

•

Ageing glo+al population increasing of o#er 1 in mostcountries/

#

Implications-




'scalator Industry• 3ec!nology:

• Mature inustry- incremental inno#ations to energy an

cost e4ciencies

• %ow an !ig! en re5uirements mean t!at a range of

proucts across a cost spectrum re5uire

6

Implications-




'scalator Industry• %egal

• Safety norms in Europe ue to ageing lifts

7

Implications-



8

R'A" OF '#"R% cale advantages of incuments

eep relations ith service netorC

ood and cheap manufacturers

hina

9+%'R PO<'R• ma!ority of

customersfragmented utsome may e large

• &onversion ratio of

ne e,uipmentinstallment contract

I#=+S"R%

RI>A$R% • &R4 ratio EHG• 3 price 5xing

5nes in 'urope• =i7erentiation on

energy eJciencyand reputationand tracC record

S+PP$I'R PO<'R• $argely outsourced• Suppliers

fragmented• 6igh supplier

competition

Structure changes eg 'levator ; 'scalator

industry

"6R'A" OF S+9S"I"+"'S• $o

6. 7ncreasinglyopen sourceesign

2. RD increasein energye4ciency

6. Europeepresse

2. Emerging

mar(ets +oom

6. Demograp!icstren in europe

2. 9r+aniation inemergingmar(ets

6. Safetylegislation ineurope



Application exercise@ thin gauge plastic ags ere used yshoppers in the +K last year As part of ane government policy to reduce aste/the government ill on @ Octoer 31@

introduce a @p charge for each single useplastic carrier ag for all retailers ith 3@or more employees <hat ill e the mostimpactful change in competitive forces for

producers of thin ag plastics-

9



2!

Segmentation



6o important is the industry to

pro5taility-• A num+er of stuies seem to s!ow t!at inustry en#ironmentis a relati#ely minor eterminant of a "rm's pro"ta+ility

• 3!is points to t!e nee to ig eeper- for example- +yanalysing competition +etween "rms ithin particularmarCet segments/ strategy groups or +y loo(ing moreclosely at t!e competitive ehaviour of individual 5rms.

G of variance in 5rms ROA explained

y: Industry

e7ectsFirme7ects

+nexplained variance

Schmalensee (1M@) 1MHG HG MMGRumelt (1MM1) 4G 443G 44G.cDahan ; Porter

(1MM)

1G 21G 44G

6aaini et al.

(32)

1G 2@G @3G

Ro,ueert et al.

(1MMH)

13G @@G 23G

.isangyi et al.

(3H)

HG 42G na

2



22

;' industry: marCet segment revealsdi7erences in opportunities

.odernisation#e Installation .arCet .aintenance

$ 100( 0 inc!ina

$ %ow margins$ Europe

epresse$ 7ncreasinglyopen sourceesign rat!erproprietary

$ Europe$ m units$ ;0 <60yrs$ Safety

$ Energy$ )ost ri#ers

$ &ro"ta+ility = ensity$ Most lucrati#e margins$ >ig! con#ersion rate$ ?ut #aria+le in emerging



23

Strategy Droups



&ompetitor matrix: strategygroups

2"

%asy oordering

'ustomerservice ood (uality ood variety

oodpresentation

ne) venture platorm 6 7 7 # #

*nline platorms 9 # # 9 3

'asual dining c+ains # 3 3 2 6

,raditional caterers 3 6 7 # 9

-ocal restaurants 2 3 # " 3



2#

$imitations of Porters 5ve forces



26

"6R'A" OF '#"R% •

&apital re,uirements• 'conomies of scale• Asolute cost advantage• Product di7erentiation• Access to distriution channels• $egal8 regulatory arriers• Retaliation

S+9S"I"+"'&O.P'"I"IO#

• 9uyers propensity

to sustitute• Relative prices ;

performance of sustitutes

9+%'R PO<'R• 9uyers price

sensitivity


I#=+S"R%

RI>A$R% • &oncentration• Product

di7erentiation• =iversity of competitors• 'xcess capacity ; exit arriers•

&ost conditions

S+PP$I'R PO<'R• Suppliers price

sensitivity


&omplements N the missing

force- &omplements



$imiting assumptions of @forces• An industry consists of a set of unrelated

uyers/ sellers/ sustitutes andcompetitors that interact at arms length

• "he ealth accrue to players that are aleto erect arriers against competitors andpotential entrants ie the source ofadvantage is structural advantage

• +ncertainty is suJciently lo that youcan accurately predict participantsehaviour and choose a strategy

accordingly 27



28

&ompetitive Interaction



29

&ompetitive Interactions•At t!e micro le#elanalysis : to !oneyour a+ility to

analyse ini#iualcompetitors

•)ompetitor analysisin#ol#esunerstaning w!atactions are in t!e+est- rational

interests of a



&ompetitive Reaction N

retaliation vs accommodation

3!

6o to reactto an

aggressivemove y a

competitor-

retaliation

accommodate



'conomics of retaliation and

accommodation

3

• ?A currently $iesa route wit! ;00passengers an6000 seats per

ay ;0capacityutilisation/

• )urrent fare =

600 perpassengerBmarginal cost perpassenger 8

• EasyCet plans to

enter route wit! a

retaliation

accommodate

• let easyCet "ll itspassengers: ropin pro"t = 6008/

600 = F200

• rop prices to;0: reuction inpro"ta+ility =;00600;0/ =26000



32

PR'=I&"IO#S

• <hat strategy changes ill the competitorinitiate-

• 6o ill the competitorrespond to our strategic

initiatives-

O9'&"I>'S

<hat are competitors current goals-

Is performance meeting these goals-

6o are its goals liCely to change-

S"RA"'D%

6o is the 5rm competing-

ASS+.P"IO#S

<hat assumptions does the competitor

hold aout the industry and itself-

R'SO+R&'S ; &APA9I$I"I'S

<hat are the competitors Cey

strengths and eaCnesses-

ameorC for competitor analysis: predisposi



33

&ase =iscussion



3"

R"' Industry &aseReady to 'at &ereal Industry•G!y !as t!e inustry +een so successful@•G!at are t!e inustry's signi"cantsegments@

•G!at !as c!ange@•G!at s!oul KelloggHs o@



3#

&onclusion•

7nustry Structure is useful for explainingpro"ta+ility iJerences A)RSS inustries

•?ut falls s!ort at explaining pro"t

iJerences G73>7L inustries w!ic! aremore ominant

•?ut external analysis still important+ecause it allows us to unerstan:• >ow macro le#el in$uences c!ange inustrystructure to present emerging opportunities ant!reats

• >ow "rm strategies are c!anging inustrystructure as t!ey position t!emsel#es for uni5ue#alue creation



36

Readings next

session1 )ontemporary Strategy Analysis: )!apter 2. %oo(ing insie for competiti#e a#antageB

?arney- . 6FFN. )reating )ompetiti#e A#antageB &.,!emawat

an . Ri#(in. >?S Lote O F;F8012



37

Appendix



38

"hreat of entry• #e entrants ring ne capacity anddesire to gain marCet share

• "he threat of entry puts on a cap on

the pro5t potential of the industry• "he threat of entry depends onarriers to entry and on the reactionfrom existing competitors thatentrants can expect



39

"hreat of entry• 9arriers to entry:• Supply side economies of scale N forcesaspirants either to come in at a largescale or to accept a cost disadvantage

•

=emand side ene5ts of scale N netorCe7ects increases illingness to pay forthe incuments and discourages entry

• &ustomer sitching costs• &apital re,uirements N huge upfrontinvestments

• Incumency advantages independent ofsi0e N eg proprietary technology(patents)

• +ne,ual access to distriution channels

•



"!

"hreat of entry• 'xpectations aout the reaction ofexisting competitors:

• Incuments tracC record of pastresponses against ne entrants

• Incuments possess sustantialresources to 5ght acC

• Incuments seem liCely to cut prices(fear of marCet share loss or excess

capacity availale)• Sloing industry groth means thatnecomers must gain volume fromincuments



"

"he poer of suppliers• Supplier groups (eg ra materials/laour) more poerful if:•More concentrate t!an t!e inustry it

sells to• 7ncum+ents face switc!ing costs inc!anging suppliers

•Supplier proucts iJerentiate•

Lo su+stitutes to w!at t!e supplier grouppro#ies•Supplier group can crei+le t!reaten/ toforwar integrate

•

Supplier ser#es ot!er inustries



"2

"he poer of customers• &ustomers (or customer groups) arepoerful if:• )oncentrate or +uys in #olume relati#e to t!e sie of

a single #enor• &roucts are uniJerentiate• 3!ey face few switc!ing costs in c!anging #enors• 3!ey can crei+ly t!reaten/ to integrate +ac(wars

• "hey are price sensitive:•

&roucts purc!ase are a signi"cant fraction of itsexpeniture

• Earns low pro"ts• Puality of little eJect• prouct of little eJect to o#erall +uyer's costs



"3

"he threat of sustitutes• A Sustitute performs the same or asimilar function as an industrysproduct ut y a di7erent means•Su+stitutes place a ceiling on t!e pricest!at companies in an inustry can c!arge

•Su+stitutes more powerful if Q priceperformance traeoJ attracti#e



""

Rivalry among existing

competitors• =egree of rivalry depends on the asisand intensity of competition• &rouct lac(s iJerentiation• ixe costs are !ig! an marginal costs low• %arge increments in supply o#ercapacity an price

cutting• &rouct is peris!a+le

• Price competition liCely if:• )ompetitors are numerous an roug!ly e5ual in sie an

power• 7nustry growt! is slow• Exit +arriers are !ig!• Ri#als committe to t!e +usiness +ut !a#e i#erse

approac!es



9randed versus Private lael cost

structureRaw materialsuppliers .2T.6F=0.16

&ereal company#er!ea .Manufacturing .2Distri+ution .6Mar(eting .;Margin .

2.82 ,rocer.N862 of N.20

N.20

?rane )ereals

Raw materialsuppliers

.N8T.6=0.N

)ereal company

#er!ea .N8Manufacturing .;Distri+ution .00Mar(eting .00Margin .0;

6.oo w!olesaler.6160 of 6.16/

6.16,rocer.2F6 of 6.F0/

6.F6

&ri#ate la+el cereals

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MSc Session 2 External Analysis

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