Lecture 2: Industry Analysis

RSM 392: Strategic Management

Porter’s 5 Forces Framework

Professor Stefan Dimitriadis

RSM392: Strategic Management 1

Lecture 2: Industry Analysis

Housekeeping items
• Remember the seat you’ve selected – it’s yours for the rest of
the semester.

• Remember to bring your name card to class.

• If you haven’t already filled out the online assignment, please

do, there’s still time.

RSM392: Strategic Management 2

Lecture 2: Industry Analysis

Agenda
• Quick recap
• Industry analysis
• Implications of industry structure

• Assignment write-ups

RSM392: Strategic Management 3

Lecture 2: Industry Analysis

Where we are in the course

Topic Case
Introduction LEGO
Industry analysis module
Mapping the business landscape
Dynamics of the business landscape Cola Wars Continued: Coke and Pepsi in 2010
Business strategies module
Low cost Wal*Mart Stores
Differentiation Cirque du Soleil
Midterm
Maximizing multiple objectives Sustainability at IKEA Group
Mobile Telecommunications: Two Entrepreneurs in
Strategy in emerging markets
Africa
The Walt Disney Company:
Corporate strategy
The Entertainment King
Strategy Implementation
Incentives for workers and managers Lincoln Electric
Organizational culture and communication Keeping Google “Googley”
Conclusion RSM392: Strategic Management 4
Lecture 2: Industry Analysis

Recap: What is strategy about?

• Strategy is the integrated set of choices that positions a
business in its industry so as to generate superior financial
returns over the long run.

• Strategy involves creating a sustainable competitive advantage.

• This requires making trade-offs and selecting activities with the

right fit, creating a whole that is larger than the sum of its parts
and difficult to imitate.

RSM392: Strategic Management 5

Lecture 2: Industry Analysis

Value creation and capture

Willingness to pay

Price
Value
creation
Value
capture

Cost

“Average”

RSM392: Strategic Management 6

Lecture 2: Industry Analysis

Industry analysis
• The starting point for forming a strategy is industry analysis.

• Industry analysis involves understanding the structure of an

industry and how that structure influences the average
profitability of firms in an industry.

• It is impossible to define a unique and valuable set of activities

without knowing what others in the environment are doing.

RSM392: Strategic Management 7

Lecture 2: Industry Analysis

Evidence on determinants of profitability

Macro and other factors "Concrete" (company or

34% business unit) factors
39%

Year Industry factors

3% 20%
Corporate Parent
4%

Note: See Wernerfelt, B., and Montgomery, C. 1986. What is an attractive industry? Management Science 32(10): 1223-1230.
These figures based on meta-analysis of subsequent academic studies.
8
Lecture 2: Industry Analysis

Defining the industry and industry environment

Beyond the industry env.:
• Macroeconomic conditions
• Government
Customers • Innovation ecosystem

Substitutes Industry (current rivals)

Potential rivals

Suppliers

RSM392: Strategic Management 9

Lecture 2: Industry Analysis

Industry patterns
• On the surface, industries look very different.

• There is substantial variance in their returns to investments and

their profitability.

• And these differences persist over the long-term.

RSM392: Strategic Management 10

Lecture 2: Industry Analysis

Average Return on Invested Capital in U.S. Industries, 1992–2006

 Lecture 2: Industry Analysis

Profitability of Selected U.S. Industries

 Lecture 2: Industry Analysis

Profitability of Selected U.S. Industries

 Lecture 2: Industry Analysis

Profitability of Selected U.S. Industries

Lecture 2: Industry Analysis

• Despite the surface differences between industries, there are

common factors across all industries that can explain why, in
the long run, some industries are more profitable than others.

• As a strategist analyzing the external environment of your firm,

what sort of factors should we consider in formulating a
strategy?

RSM392: Strategic Management 15

Lecture 2: Industry Analysis

Porter’s Five Forces Framework

Threat of
new entry

Supplier Rivalry among Buyer

power existing competitors power

Threat of
substitutes

When the 5 forces are low then industry average profits will be high and
it’s an “attractive” industry.
16
 Lecture 2: Industry Analysis

Effect of the Five Forces on Industry Profitability

Power of Power of Barriers to Rivalry Threat of
buyers suppliers entry intensity substitutes

VCC
framework

WTP

Price

Value
capture

Cost

Courtesy of Prof. Matthew Lee (NYU)

Lecture 2: Industry Analysis

Value is created and divided at three levels

Customers

5 Forces determine:
- How much value is
created.
- How that value is Industry companies
divided.

Suppliers

18
 Lecture 2: Industry Analysis

“Profit pool” analyses combine size and margin to show full picture of
industry value chain

Top 5: 70% ~5K >10K Fragmented except

Number of rivals
at top end
Entry barriers HIGH LOW MED MED
Bargaining power HIGH LOW LOW LOW/MED

Source: Bain & Company, The Global Diamond Industry 2018 19

Courtesy of Prof Matt Lee (NYU)
Lecture 2: Industry Analysis

Porter’s Five Forces Framework

Threat of
new entry

Supplier Rivalry among Buyer

power existing competitors power

Threat of
substitutes

20
 Lecture 2: Industry Analysis

Factors Affecting the Threat of New Entrants into an Industry

Barriers to entry
Supply-side economies Cost of production falls as quantity produced increases,
1 These exist in most industries.
of scale which gives incumbent firms an advantage.

Benefits derived from consumption increase with the Social media has these kinds of barriers to entry. Facebook
Demand-side
2 number of consumers, which gives incumbent an advantage is more valuable if others are using it, making it harder for
economies of scale
by making their product more valuable. others to enter.
The higher the investments required to setup production the
3 Capital investments Think of oil drilling or space exploration.
more difficult it will be to enter the industry.
The more costly it is for consumers to switch between Think of companies that use specific operating systems
4 Switching costs products within an industry, the harder it will be for a new like Windows or Linux, it is costly for them to switch to new
entrant to succeed. operating systems.
Incumbent advantages include the accumulation of
Biomedical companies like Novartis or Pfizer have these
5 Incumbent advantages experience, developing proprietary technology and patents,
kinds of advantages.
as well as developing a strong brand.
The ability to get your product or service to buyers is key. When airline tickets were sold through travel agents, the
Access to distribution
6 The more difficult this is to do, the higher the barrier to distribution network was much more constrained than it is
networks
distribution networks. today.
The government can constrain competition through
The Canadian government subsidizes companies
7 Government regulation regulation and licensing, it can also increase competition
developing clean technologies.
through subsidies.
 Lecture 2: Industry Analysis

Factors Affecting the Threat of New Entrants into an Industry

Barriers to entry
Supply-side economies Cost of production falls as quantity produced increases,
1 These exist in most industries.
of scale which gives incumbent firms an advantage.

Benefits derived from consumption increase with the Social media has these kinds of barriers to entry. Facebook
Demand-side
2 number of consumers, which gives incumbent an advantage is more valuable if others are using it, making it harder for
economies of scale
by making their product more valuable. others to enter.
The higher the investments required to setup production the
3 Capital investments Think of oil drilling or space exploration.
more difficult it will be to enter the industry.
The more costly it is for consumers to switch between Think of companies that use specific operating systems
4 Switching costs products within an industry, the harder it will be for a new like Windows or Linux, it is costly for them to switch to new
entrant to succeed. operating systems.
Incumbent advantages include the accumulation of
Biomedical companies like Novartis or Pfizer have these
5 Incumbent advantages experience, developing proprietary technology and patents,
kinds of advantages.
as well as developing a strong brand.
The ability to get your product or service to buyers is key. When airline tickets were sold through travel agents, the
Access to distribution
6 The more difficult this is to do, the higher the barrier to distribution network was much more constrained than it is
networks
distribution networks. today.
The government can constrain competition through
The Canadian government subsidizes companies
7 Government regulation regulation and licensing, it can also increase competition
developing clean technologies.
through subsidies.
 Lecture 2: Industry Analysis

Factors Affecting the Threat of New Entrants into an Industry

Barriers to entry
Supply-side economies Cost of production falls as quantity produced increases,
1 These exist in most industries.
of scale which gives incumbent firms an advantage.

Benefits derived from consumption increase with the Social media has these kinds of barriers to entry. Facebook
Demand-side
2 number of consumers, which gives incumbent an advantage is more valuable if others are using it, making it harder for
economies of scale
by making their product more valuable. others to enter.
The higher the investments required to setup production the
3 Capital investments Think of oil drilling or space exploration.
more difficult it will be to enter the industry.
The more costly it is for consumers to switch between Think of companies that use specific operating systems
4 Switching costs products within an industry, the harder it will be for a new like Windows or Linux, it is costly for them to switch to new
entrant to succeed. operating systems.
Incumbent advantages include the accumulation of
Biomedical companies like Novartis or Pfizer have these
5 Incumbent advantages experience, developing proprietary technology and patents,
kinds of advantages.
as well as developing a strong brand.
The ability to get your product or service to buyers is key. When airline tickets were sold through travel agents, the
Access to distribution
6 The more difficult this is to do, the higher the barrier to distribution network was much more constrained than it is
networks
distribution networks. today.
The government can constrain competition through
The Canadian government subsidizes companies
7 Government regulation regulation and licensing, it can also increase competition
developing clean technologies.
through subsidies.
 Lecture 2: Industry Analysis

Factors Affecting the Threat of New Entrants into an Industry

Barriers to entry
Supply-side economies Cost of production falls as quantity produced increases,
1 These exist in most industries.
of scale which gives incumbent firms an advantage.

Benefits derived from consumption increase with the Social media has these kinds of barriers to entry. Facebook
Demand-side
2 number of consumers, which gives incumbent an advantage is more valuable if others are using it, making it harder for
economies of scale
by making their product more valuable. others to enter.
The higher the investments required to setup production the
3 Capital investments Think of oil drilling or space exploration.
more difficult it will be to enter the industry.
The more costly it is for consumers to switch between Think of companies that use specific operating systems
4 Switching costs products within an industry, the harder it will be for a new like Windows or Linux, it is costly for them to switch to new
entrant to succeed. operating systems.
Incumbent advantages include the accumulation of
Biomedical companies like Novartis or Pfizer have these
5 Incumbent advantages experience, developing proprietary technology and patents,
kinds of advantages.
as well as developing a strong brand.
The ability to get your product or service to buyers is key. When airline tickets were sold through travel agents, the
Access to distribution
6 The more difficult this is to do, the higher the barrier to distribution network was much more constrained than it is
networks
distribution networks. today.
The government can constrain competition through
The Canadian government subsidizes companies
7 Government regulation regulation and licensing, it can also increase competition
developing clean technologies.
through subsidies.
 Lecture 2: Industry Analysis

Factors Affecting the Threat of New Entrants into an Industry

Barriers to entry
Supply-side economies Cost of production falls as quantity produced increases,
1 These exist in most industries.
of scale which gives incumbent firms an advantage.

Benefits derived from consumption increase with the Social media has these kinds of barriers to entry. Facebook
Demand-side
2 number of consumers, which gives incumbent an advantage is more valuable if others are using it, making it harder for
economies of scale
by making their product more valuable. others to enter.
The higher the investments required to setup production the
3 Capital investments Think of oil drilling or space exploration.
more difficult it will be to enter the industry.
The more costly it is for consumers to switch between Think of companies that use specific operating systems
4 Switching costs products within an industry, the harder it will be for a new like Windows or Linux, it is costly for them to switch to new
entrant to succeed. operating systems.
Incumbent advantages include the accumulation of
Biomedical companies like Novartis or Pfizer have these
5 Incumbent advantages experience, developing proprietary technology and patents,
kinds of advantages.
as well as developing a strong brand.
The ability to get your product or service to buyers is key. When airline tickets were sold through travel agents, the
Access to distribution
6 The more difficult this is to do, the higher the barrier to distribution network was much more constrained than it is
networks
distribution networks. today.
The government can constrain competition through
The Canadian government subsidizes companies
7 Government regulation regulation and licensing, it can also increase competition
developing clean technologies.
through subsidies.
 Lecture 2: Industry Analysis

Factors Affecting the Threat of New Entrants into an Industry

Barriers to entry
Supply-side economies Cost of production falls as quantity produced increases,
1 These exist in most industries.
of scale which gives incumbent firms an advantage.

Benefits derived from consumption increase with the Social media has these kinds of barriers to entry. Facebook
Demand-side
2 number of consumers, which gives incumbent an advantage is more valuable if others are using it, making it harder for
economies of scale
by making their product more valuable. others to enter.
The higher the investments required to setup production the
3 Capital investments Think of oil drilling or space exploration.
more difficult it will be to enter the industry.
The more costly it is for consumers to switch between Think of companies that use specific operating systems
4 Switching costs products within an industry, the harder it will be for a new like Windows or Linux, it is costly for them to switch to new
entrant to succeed. operating systems.
Incumbent advantages include the accumulation of
Biomedical companies like Novartis or Pfizer have these
5 Incumbent advantages experience, developing proprietary technology and patents,
kinds of advantages.
as well as developing a strong brand.
The ability to get your product or service to buyers is key. When airline tickets were sold through travel agents, the
Access to distribution
6 The more difficult this is to do, the higher the barrier to distribution network was much more constrained than it is
networks
distribution networks. today.
The government can constrain competition through
The Canadian government subsidizes companies
7 Government regulation regulation and licensing, it can also increase competition
developing clean technologies.
through subsidies.
 Lecture 2: Industry Analysis

Factors Affecting the Threat of New Entrants into an Industry

Barriers to entry
Supply-side economies Cost of production falls as quantity produced increases,
1 These exist in most industries.
of scale which gives incumbent firms an advantage.

Benefits derived from consumption increase with the Social media has these kinds of barriers to entry. Facebook
Demand-side
2 number of consumers, which gives incumbent an advantage is more valuable if others are using it, making it harder for
economies of scale
by making their product more valuable. others to enter.
The higher the investments required to setup production the
3 Capital investments Think of oil drilling or space exploration.
more difficult it will be to enter the industry.
The more costly it is for consumers to switch between Think of companies that use specific operating systems
4 Switching costs products within an industry, the harder it will be for a new like Windows or Linux, it is costly for them to switch to new
entrant to succeed. operating systems.
Incumbent advantages include the accumulation of
Biomedical companies like Novartis or Pfizer have these
5 Incumbent advantages experience, developing proprietary technology and patents,
kinds of advantages.
as well as developing a strong brand.
The ability to get your product or service to buyers is key. When airline tickets were sold through travel agents, the
Access to distribution
6 The more difficult this is to do, the higher the barrier to distribution network was much more constrained than it is
networks
distribution networks. today.
The government can constrain competition through
The Canadian government subsidizes companies
7 Government regulation regulation and licensing, it can also increase competition
developing clean technologies.
through subsidies.
Lecture 2: Industry Analysis

Porter’s Five Forces Framework

Threat of
new entry

Supplier Rivalry among Buyer

power existing competitors power

Threat of
substitutes

28
 Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Suppliers

Supplier Bargaining Power

Supplier industry is highly The more concentrated the industry, the fewer
1
concentrated. options for bargaining down the price.
 Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Suppliers

Supplier Bargaining Power

Supplier industry is highly The more concentrated the industry, the fewer
1
concentrated. options for bargaining down the price.
High switching costs for consumer High switching costs locks firms into using a
2
industry. particular supplier.
 Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Suppliers

Supplier Bargaining Power

Supplier industry is highly The more concentrated the industry, the fewer
1
concentrated. options for bargaining down the price.
High switching costs for consumer High switching costs locks firms into using a
2
industry. particular supplier.

Supplier industry offers highly Highly differentiated products make it less likely to
3
differentiated product. find alternatives within the supplier industry.
 Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Suppliers

Supplier Bargaining Power

Supplier industry is highly The more concentrated the industry, the fewer
1
concentrated. options for bargaining down the price.
High switching costs for consumer High switching costs locks firms into using a
2
industry. particular supplier.

Supplier industry offers highly Highly differentiated products make it less likely to
3
differentiated product. find alternatives within the supplier industry.

No substitutes for the supplier’s

4 Firms cannot find alternatives in other industries.
product.
 Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Suppliers

Supplier Bargaining Power

Supplier industry is highly The more concentrated the industry, the fewer
1
concentrated. options for bargaining down the price.
High switching costs for consumer High switching costs locks firms into using a
2
industry. particular supplier.

Supplier industry offers highly Highly differentiated products make it less likely to
3
differentiated product. find alternatives within the supplier industry.

No substitutes for the supplier’s

4 Firms cannot find alternatives in other industries.
product.
Threat of forward integration by The supplier can enter the focal firm’s industry and
5
supplier. become a competitor.
Lecture 2: Industry Analysis

Porter’s Five Forces Framework

Threat of
new entry

Supplier Rivalry among Buyer

power existing competitors power

Threat of
substitutes

34
Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Buyers

Buyer Bargaining Power
The product being sold isn’t highly Buyers have more bargaining power if the product is
1
differentiated. highly standardized, as in the case of commodities.
Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Buyers

Buyer Bargaining Power
The product being sold isn’t highly Buyers have more bargaining power if the product is
1
differentiated. highly standardized, as in the case of commodities.

The more interchangeable the products of services, the

2 There are few switching costs.
more power buyers will have.
Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Buyers

Buyer Bargaining Power
The product being sold isn’t highly Buyers have more bargaining power if the product is
1
differentiated. highly standardized, as in the case of commodities.

The more interchangeable the products of services, the

2 There are few switching costs.
more power buyers will have.

The closer you get to a monopsony, the more power

3 Buyers are few.
buyers will have to dictate terms.
Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Buyers

Buyer Bargaining Power
The product being sold isn’t highly Buyers have more bargaining power if the product is
1
differentiated. highly standardized, as in the case of commodities.

The more interchangeable the products of services, the

2 There are few switching costs.
more power buyers will have.

The closer you get to a monopsony, the more power

3 Buyers are few.
buyers will have to dictate terms.

Buyers can threaten to integrate If buyers can organize and begin producing the good
4
backward. themselves, this will increase their power.
Lecture 2: Industry Analysis

Factors Affecting the Bargaining Power of Buyers

Buyer Bargaining Power
The product being sold isn’t highly Buyers have more bargaining power if the product is
1
differentiated. highly standardized, as in the case of commodities.

The more interchangeable the products of services, the

2 There are few switching costs.
more power buyers will have.

The closer you get to a monopsony, the more power

3 Buyers are few.
buyers will have to dictate terms.

Buyers can threaten to integrate If buyers can organize and begin producing the good
4
backward. themselves, this will increase their power.

If the purchase represents a large proportion of the

5 The buyer is price sensitive. buyer’s budget, they will spend more effort bargaining
and negotiating.
Lecture 2: Industry Analysis

Porter’s Five Forces Framework

Threat of
new entry

Supplier Rivalry among Buyer

power existing competitors power

Threat of
substitutes

40
Lecture 2: Industry Analysis

Factors Affecting the Threat of Substitutes

Threat of Substitutes

The cheaper the substitute the more Cooking at home rather

The substitute is cheaper than the
1 pressure it puts on the industry than going out to a
industry product.
product. restaurant.
Lecture 2: Industry Analysis

Factors Affecting the Threat of Substitutes

Threat of Substitutes

The cheaper the substitute the more Cooking at home rather

The substitute is cheaper than the
1 pressure it puts on the industry than going out to a
industry product.
product. restaurant.

The easier it is to switch, the more The cost might be minimal

There are few switching costs
2 the cheaper alternative will put if you already have a well-
between substitutes.
pressure on profits. stocked kitchen.
Lecture 2: Industry Analysis

Factors Affecting the Threat of Substitutes

Threat of Substitutes

The cheaper the substitute the more Cooking at home rather

The substitute is cheaper than the
1 pressure it puts on the industry than going out to a
industry product.
product. restaurant.

The easier it is to switch, the more The cost might be minimal

There are few switching costs
2 the cheaper alternative will put if you already have a well-
between substitutes.
pressure on profits. stocked kitchen.

The substitute product quality is

The closer the match in quality the For example, Blue Apron or
3 equal or superior to the industry
more pressure on profits. Hello Fresh meal kits.
product quality.
Lecture 2: Industry Analysis

Porter’s Five Forces Framework

Threat of
new entry

Supplier Rivalry among Buyer

power existing competitors power

Threat of
substitutes

44
Lecture 2: Industry Analysis

Factors Affecting Rivalry among Competitors

Rivalry

If the product isn’t very different, rivals must

1 Product isn’t differentiated.
compete on price.
Lecture 2: Industry Analysis

Factors Affecting Rivalry among Competitors

Rivalry

If the product isn’t very different, rivals must

1 Product isn’t differentiated.
compete on price.

There are many competitors and they are This reduces the potential for coordination
2
roughly equal in size. and moderation of competition.
Lecture 2: Industry Analysis

Factors Affecting Rivalry among Competitors

Rivalry

If the product isn’t very different, rivals must

1 Product isn’t differentiated.
compete on price.

There are many competitors and they are This reduces the potential for coordination
2
roughly equal in size. and moderation of competition.

Rivals must take others’ market share in

3 Industry growth is slow
order to grow.
Lecture 2: Industry Analysis

Factors Affecting Rivalry among Competitors

Rivalry

If the product isn’t very different, rivals must

1 Product isn’t differentiated.
compete on price.

There are many competitors and they are This reduces the potential for coordination
2
roughly equal in size. and moderation of competition.

Rivals must take others’ market share in

3 Industry growth is slow
order to grow.

High exit barriers tend to slow the reduction

4 Exit barriers are high of industry overcapacity, which pushes firms
to compete on price.
Lecture 2: Industry Analysis

Steps to a 5 Forces Analysis

1. Define the industry
2. Identify the players
3. Assess the strength of each force
4. Assess recent & future changes in each force

RSM392: Strategic Management 49

Lecture 2: Industry Analysis

The Five Forces Overview Threat of substitutes

• Price of substitute
• Value of substitute
• Switching costs

Power of suppliers Intensity of rivalry Power of buyers

• Supplier concentration • Market growth • Price sensitivity

• Supplier differentiation • Differentiation • Cost of switching
• Switching costs • Number of competitors • Backward integration
• Substitutes for supplier • Barriers to exit

Barriers to entry

• Economies of scale
(Dem/Sup)
• Capital requirements
• Distribution channels
• Customer switching costs 50
 Lecture 2: Industry Analysis

Five Forces Exercise: Global Airline Industry

Threat of substitutes

ROTMAN AIR

Power of suppliers Intensity of rivalry Power of buyers

Barriers to entry
Lecture 2: Industry Analysis

Ignoring the 5 Forces: The case of Global Crossings

Threat of substitutes

• None
Top-line growth: • At the time, wireless not
• Late 1990s saw sharply increasing viable option
demand for internet and global
telephony.

• Demand for mass and rapid data
transmission.

Power of suppliers Intensity of rivalry Power of buyers

Initial analysis: Great!
• Inputs are cables • Few • Telecommunications
• GC makes massive investments
• IPO in 1998, by 1999 valued at companies 
• Boats for laying of cables • Outdated technology
$38 billion, valuing the company
• Internet service providers
more than Ford! • For which there are many 
manufacturers. 

Threat of entry
• Relatively high barriers
• Large investments needed to
lay transoceanic cables

Lecture 2: Industry Analysis

Ignoring the 5 Forces: The case of Global Crossings

Threat of substitutes

• None
Top-line growth: • At the time, wireless not
• Late 1990s saw sharply increasing viable option
demand for internet and global
telephony.

• Demand for mass and rapid data
transmission.

Power of suppliers Intensity of rivalry Power of buyers

Initial analysis: Great!
• Inputs are cables • Few • Telecommunications
• GC makes massive investments
• IPO in 1998, by 1999 valued at companies 
• Boats for laying of cables • Outdated technology
$38 billion, valuing the company
• Internet service providers
more than Ford! • For which there are many 
manufacturers. 
On closer look…
• Data transmission is essentially a Threat of entry
commodity…
• There are no real switching costs • Relatively high barriers
for buyers End result • Low switching
• This increases the payoff to entry • GC filed for bankruptcy • Large investments needed to
in 2002 lay transoceanic cables costs
• Low
 differentiation
Lecture 2: Industry Analysis

Possible Responses to Threats to Profitability

• Performing industry analysis helps firms form strategic

responses to reduce threats to profitability.
Threat Possible response

Create switching costs.

New entrants Develop a reputation for retaliation.
Invest heavily to exploit economies of scale.
Lecture 2: Industry Analysis

Possible Responses to Threats to Profitability

• Performing industry analysis helps firms form strategic

responses to reduce threats to profitability.
Threat Possible response

Create switching costs.

New entrants Develop a reputation for retaliation.
Invest heavily to exploit economies of scale.
Use standard, instead of proprietary, products in
Bargaining power of suppliers
production. Secure multiple sources.
Lecture 2: Industry Analysis

Possible Responses to Threats to Profitability

• Performing industry analysis helps firms form strategic

responses to reduce threats to profitability.
Threat Possible response

Create switching costs.

New entrants Develop a reputation for retaliation.
Invest heavily to exploit economies of scale.
Use standard, instead of proprietary, products in
Bargaining power of suppliers
production. Secure multiple sources.
Build customer loyalty. Target small customers.
Bargaining power of buyers
Differentiate the product.
Lecture 2: Industry Analysis

Possible Responses to Threats to Profitability

• Performing industry analysis helps firms form strategic

responses to reduce threats to profitability.
Threat Possible response

Create switching costs.

New entrants Develop a reputation for retaliation.
Invest heavily to exploit economies of scale.
Use standard, instead of proprietary, products in
Bargaining power of suppliers
production. Secure multiple sources.
Build customer loyalty. Target small customers.
Bargaining power of buyers
Differentiate the product.
Target consumers of substitutes with new products.
Substitutes
Lecture 2: Industry Analysis

Possible Responses to Threats to Profitability

• Performing industry analysis helps firms form strategic

responses to reduce threats to profitability.
Threat Possible response

Create switching costs.

New entrants Develop a reputation for retaliation.
Invest heavily to exploit economies of scale.
Use standard, instead of proprietary, products in
Bargaining power of suppliers
production. Secure multiple sources.
Build customer loyalty. Target small customers.
Bargaining power of buyers
Differentiate the product.
Target consumers of substitutes with new products.
Substitutes

Differentiate the product. Create switching costs. Target

Rivalry among existing competitors less-competitive market segments.
 Lecture 2: Industry Analysis

Company responses to industry forces: Disintermediation in the U.S.

Skincare Industry
Customization makes product less
Top-line growth: Threat of substitutes substitutable
• $5.6B industry*
• +13% yoy (2018)* • Increasing foreign imports
• Strongest growth among beauty (esp. from Asia)
products**
Direct-to-consumer model bypasses retailers
Why? Macro factors: Growth in disposable income,
aging population, growing awareness of skin cancer
 Functionality focus
to differentiate

Power of suppliers Intensity of rivalry Power of buyers

• Chemical inputs largely • 7 major manufacturers • Consolidated retailers

commoditized but increasingly  • High end: department stores 
fragmented • Low end: drugstores

Barriers to entry
• Relatively low
• Contract manufacturing

• NPD Group U.S. Prestige Beauty Total Measured Market, Jan-Dec 2018
** Euromonitor International Beauty Survey Key Insights, 2018
 Source: provenskincare.com
 Lecture 2: Industry Analysis

Company responses to industry forces: Microprocessors

Direct marketing to consumers reduces
desktop manufacturer power Example of Intel ad from 1994:
Power of suppliers https://www.youtube.com/watch?v=MP1R45LdOrQ

• Limited.
• Main input is
silicone, a  Intensity of rivalry Power of buyers Power of (buyers’) buyers
commodity.
• Duopoly • Differentiated PC • End-customers
manufacturers 
Threat of substitutes

• None 
• Quantum
computing?
Maybe in the

Barriers to entry • 2007: Original iPhone uses existing
future? third-party chips
• Sophisticated technological
knowledge • 2010: Apple develops in-house A4 chip for
• Extensive patenting original iPad
“We have to get people to care. If people don't
care about what's inside their computers, then  • 2018: Apple A12X (iPad Pro) reaches
we're in a tough spot. Nearly 20 years ago, we performance of current x86 chipset
created "Intel Inside." At the time, buying a
computer was confusing. It still is, but we think
we make it easier by showcasing our
technology.” Apple enters mobile
(Deborah Conrad, Intel Chief Marketing Officer) (ARM) chip production
Lecture 2: Industry Analysis

Porter on the framework

• https://www.youtube.com/watch?v=mYF2_FBCvXw

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Lecture 2: Industry Analysis

What the five forces do not help explain:

• How much value is created by the industry value chain.

• Who captures more value within the industry.

• Short-term industry conditions, industry analysis usually only

used in projects oriented to the longer-term

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Common pitfalls
• Using the firm as the level of analysis.

• Failing to define the industry clearly (it’s not just SIC codes).

• Ignoring industry changes – they aren’t static!

• Ignoring the full range of substitutes

• Giving equal weight to all forces – just one bad force can negate everything
else…

• “Attractiveness” of an industry doesn’t explain why firms choose to enter or not

(think airline industry).
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Wrap-up and takeaways

• At what level does Porter intend us to use the Five Forces?
• industry!

• If we do a Five Forces analysis, what do we learn?

• it helps us understand whether an industry’s incumbents are
likely to capture a large proportion of the value created

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For next class

• For next class – read & prepare Case Questions: Coke vs. Pepsi
• If your assignment is due, submit it online before class.

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Lecture 2: Industry Analysis

Assignment
• 1-2 Pages (Max)
• Double spaced.
• Sentence format. (No bullets)
• Submit on Quercus before the BEGINNING of class on Monday.
(email it to me if you’re having trouble with Quercus)

• EVERYONE should be prepared.

• I WILL cold call starting next week…
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Lecture 2: Industry Analysis

Last thoughts
• Slides will be posted online.

• READ carefully Porter’s article.

• These slides are not a substitute…

• Enjoy your week!

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Lecture 2: Industry Analysis

Thanks, see you next week!

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Lecture 2: Industry Analysis

Defining an industry
• Industry is defined as a group of firms that produce products or services that are
perceived by customers as meeting the same needs. E.g. Apple and Samsung
are part of the smartphone industry.
• Every industry exists in an industry environment, which is made up of suppliers,
customers, substitutes, and potential rivals.
• Suppliers are organizations that firms in the industry PAY for goods and
services.
• Buyers are organizations that PAY firms in the industry for goods and services.
• Rivals are firms in same industry and potential rivals are those who could enter
the industry.
• Substitutes are products/services that could be alternatives to the industry’s
products.
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Key concepts
• Value created is the difference between a customer’s willingness to pay and the supplier’s
opportunity cost for supplying it.
• Value capture is the amount of value created that is obtained by the firm, also defined as the
difference the firm’s price and cost, i.e. it’s profit.
• Willingness to pay is the maximal price that a consumer of a product is willing to pay for it.
• Substitutes: two products are considered substitutes when a rise in the price of one increase the
demand for the other.
• Complementary goods are those products whose demand increases along with that of another
good.
• Economies of scale are the decline in the cost of production per unit as the volume grows.
• Barriers to entry are the characteristics of an industry that make it more difficult for new entrants to
compete.
• Switching costs are the additional costs a consumer incurs in moving from one vendor’s products
or services to another vendor’s products or services.

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Further reading (if you’re interested)

• Proven’s story
• https://techcrunch.com/2018/02/22/proven-wants-to-sell-ai-distilled-custom-
skincare/
• Details on the Global Crossings scandal
• https://www.marketwatch.com/story/anatomy-of-global-crossings-failure
• https://www.washingtonpost.com/archive/business/2002/01/29/global-
crossing-files-for-bankruptcy/fffcad1b-f522-479a-a9d4-659e74165b05/
• https://knowledge.wharton.upenn.edu/article/factors-behind-global-crossings-
failure/
• Intel’s direct to consumer strategy:
• https://www.forbes.com/2010/05/18/intel-marketing-creators-project-vice-cmo-
network-deborah-conrad.html#3e90d9b054ab

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