BUSI1171

Industry analysis

Dr. A M Solarino
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The framework

Structure Conduct Performance

External Internal Efficiency and

environment: environment: effectiveness
• Pestle • Organization • Economic
• Industry • (Strategy) performance
analysis • (Differentiation )
• (Collusion)
• (Market power)

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From Environmental Analysis to Industry Analysis

The business environment of the firm consists of all the

external influences that affect its decisions and
performance.
Macro trends shape business opportunities in the long
term.
Industry level determinants shape business
opportunities in the near term.
customers, suppliers, and (potential) competitors

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Analysing Industry Attractiveness
ROI % (2021)
Software (System and Application) 32.07% profitability is neither random nor
Software (Entertainment) 18.32% the result of entirely industry-
specific influences
Computers 19.92%
Drugs and pharma 17.06% it is determined by the systematic
influences of the industry’s
Healthcare Support and Services 26.98%
structure.
Oil and Gas Industry 4.64%
Household Products 24.60%
Soft Beverages Industry 20.19%
Online Retail Industry 11.19%

yahoo.finance 5
2020 and covid…
revenues in the Hotels & Hospitality industry (US)

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Analysing industries

Industry

all firms producing a similar good

or service
Market

the firms in the industry

a set of products produced by those
firms
a geographical area where
customers and competitors are
located
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Defining Markets: Substitution in Demand and Supply

A market’s boundaries are defined by substitutability.

Demand Substitutability
Supply Substitutability

What’s jaguar market?

Is it a global market or a series of
local different markets?
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Market structure

Monopoly Oligopolies Perfect

competition

1 single firm Few firm Many firms

supplying an
High entry barriers Moderate- high entry identical product
A monopolist can & exit barriers
No restrictions
appropriate in profit Products can be on entry or exit.
the full amount of the Heterogeneous or
value it creates Homogenous

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Market concentration

Concentration ratio (CR)

(top X firm revenues / industry
revenues)

CR1—share of the biggest firm

CR5—share of the 5 biggest
firms

CMA 2020

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Concentration vary by product line

FT.com
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Porter’s 5 forces

For business these can: generate

opportunities, pose
threats
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Threats of New Entrants

Depends on nature and height of barriers to entry:

• absolute cost barriers
• product differentiation
• economies of scale
• excess capacity But also barriers to exit!
• reaction of established firms
• extent of vertical integration
• contracts with suppliers or customers
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Bargaining power of suppliers

Suppliers have more power when:

• Supply industry has few large firms
• Suppliers sell differentiated products
• Suppliers can integrate vertically forward
• Many small customers
• High switching costs for customers
• Customers buy small volume of products

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Bargaining power of buyers

Buyers have more power when:

• number of buyer is small
• buyers see products as undifferentiated
• Buyers are under pressure for margins
• products are a significant % of buyer's costs
• Buyers can integrate vertically backwards
• Buyers have low switching costs

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Threats of substitutes

Goods or services:
• produced by a different industry
• carrying out the same function for customers but
providing the same/ similar level of utility

• Phone vs skype
• Train vs short-medium distance flights
• OEM vs 3D printing
• Cinema vs Theatre
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Industry Rivalry
Competition more intense when:

1. large number of competing firms

2. firms are of similar size/market share

3. market is growing slowly

4. low product differentiation

5. capacity added in large increments

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Industry Rivalry

Competition can be based on policies relating to:

• price (but cartels and price leadership)
• product
• promotion
• place
Or strategies relating to:
» mergers & acquisitions
» innovation
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A sixth force

Complementary products
goods or services that are compatible with, or complementary to, the goods
or services produced and sold in a given industry.

Where products are close complements, they have little value to customers
individually – customers value the whole system.

Tourism industry and the airline industry

PC software and Hardware (Wintel)
Electric cars?
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Does industry matter?

“Firm effects” combine business unit and corporate effects.

The rows do not sum to 100% because other sources of variance are not reported 21
 A 7th force: The government

• Regulate! And De-regulate JULY 26 2021

• Change of government priorities

• Subsidies and price caps (milk;

UK energy market)

• Tax breaks
The big question is:
• Technology comes first, public
How predictable a government is?
policy comes later.
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Local environment

Central authorities delegate authority to local governments

(provinces, states, regions, counties etc.,)

• Local tax breaks

• Incentives
• Licenses etc…

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How is industry profit shared between the different
firms competing in that industry?
Key success factors
• What do our customers want?
• What does the firm need to do to survive competition?

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Identifying key success factors

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Identifying Key Success Factors

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A Framework for Competitor Analysis
OBJECTIVES
What are competitor’s current goals?
Is performance meeting there goals?
How are its goals likely to change?

STRATEGY PREDICTIONS
How is the firm competing?
• What strategy changes
ASSUMPTIONS will the competitor
What assumptions does the competitor initiate?
hold about the industry and itself?
• How will the competitor
RESOURCES & CAPABILITIES respond to our strategic
What are the competitors’ key initiatives?
strengths and weaknesses? 27
 Segmentation Analysis: The Principal Stages
Identify segmentation variables
• Identify key variables Reduce to 2 or 3 variables
and categories. Identify discrete categories for
each variable
• Construct a segmentation matrix

• Analyze segment attractiveness

• Identify KSFs in each segment Potential for economies

of scope across segments
• Analyze benefits of Similarity of KSFs
broad vs. narrow scope. Product differentiation benefits
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of segment focus
 Segmentation and Key Success Factors in the U.K. Bicycle Industry
SEGMENT
Low price bicycles sold primarily through
department and discount stores, mainly under
the retailer’s own brand (e.g., Argos)
Children’s bicycles (and tricycles) sold primarily
through toy retailers (discount toy stores,
department stores, and specialist toy stores).
Medium-priced bicycles sold primarily under
manufacturer’s brand name and distributed
mainly through specialist bicycles stores;
High-priced bicycles for enthusiasts.
Specialty bikes (TQX, cargo bikes)
KEY SUCCESS FACTORS
* Low-costs through global sourcing of components
& low-wage assembly.
* Supply contract with major retailer.
Leading competitors: Chinese assemblers,
*Cost efficiency through large scale operation and either low
wages or automated manufacturing.
*Reputation for quality (durability, reliability) through effective
marketing to dealers and/or consumers.
* International marketing & distribution.
Leading competitors: Raleigh, Giant, Peugeot, Fuji
*Quality of components and assembly, Innovation in
design (e.g. minimizing weight and wind resistance).
*Reputation (e.g. through success in racing, through effective
brand management).
*Strong dealer relations. e.g. Bianchi, 29
Miscellaneous
Market Commonality & Resource Similarity

Strategic actions/response
• Significant commitment (e.g., R&D
plan, a new product launch)

Tactical actions/response
• Short term (price changes)
• Market based
• Easy to reverse
Firms are less inclined to attack a
firm that is likely to retaliate
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BUSI1171

Global value chain and the

global factory model

Dr. A M Solarino
The framework
External – Internal interface

Structure Conduct Performance

External Internal Efficiency and

environment: environment: effectiveness
• Pestle • Organization • Economic
• Industry • (Strategy) performance
analysis • (Differentiation )
• (Collusion)
• (Market power)

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How do we explain this?

Actuators which
move flaps on
wings (Sheffield)
Globalisation

Globalisation refers to growing

economic dependence among
countries as reflected in the
increasing cross-border flows of
three types of entities: goods and
services, capital and know-how.
Gupta and Govindarajan (2004:1)

……and people!
Location and Ownership/Control Decisions:

1. Where is an activity best

located?

2. What is the best means of

control of each activity in the
system?

Governance Decisions:
“Orchestration”
Global/Local

Even if the core product is

global, it is likely that the bulk of
value added will lie in marketing
or associated services, both of
which are intrinsically local.
(Scott, 2001, Heartland)

Even big web players localise

their National sites (e.g. Yahoo!,
Amazon).
 Apple’s dispersion of value added activity

The smile curve - both

ends of the value chain
command higher values
added to the product than
the middle part of the value
chain.

https://www.youtu
be.com/watch?v=
Cw3V2x5u54Y
From the news: Huawei’s legal Dispute in the US and
the impact on its supply chain
Offshoring Outsourcing

Performing or sourcing any part of an Outsourcing is the market

organisation’s activities at or from a procurement of formerly in-house
location outside the company’s home
produced goods and services from
country. Companies create captive
centres offshore where the legally independent supplier firms.
employees work for them, or
outsource offshore where the
employees work for the outsourcing NB: This is a “make or buy”
provider. internalisation decision about control.
The global factory as a planning unit

“The concept of the firm…. does not The true nature of the firm is not a
depend on the ramifications of stock legal entity but as a planning unit
ownership or on the mere existence (Blois 1972).
of the power to control, although
extensive stock ownership may, and
probably should, be an important The global factory is a system under
consideration in any attempt to apply which effective managerial planning
it. On the other hand, long term extends across the whole network.
contracts, leases, and patent licence
agreements may give an equally
effective control” (Penrose 1959, pp
20-1).
Knowledge Internalisation
The key to planning, orchestrating
and organising the global factory is
knowledge internalisation.
This can be broadly equated with
“vertical” and “horizontal” networks.
“Two distinct forms of internalisation
were identified: operational
internalisation, involving intermediate
products flowing through successive
stages of production and the
distribution channel; and knowledge
internalisation – the internalisation of
the flow of knowledge emanating
from R&D” (Buckley and Casson
2009, p 1567).
Network Co-ordination

“Learning”
HORIZONTAL

“Value Chain”
(Multi-stage activity
co-ordination)
VERTICAL

Source: Buckley 2004b p259

The Strategies of the Global Factory
“New Strategies”

1. Fine-slicing
Locating (ever more finely defined) activities in least cost location.

2. Outsourcing and offshoring

Using contracts rather than ownership
“You don’t have to own a facility to control it”

3. Control of whole “global factory” through knowledge internalisation.

Globally Distributed Operations

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Key elements of the global factory
Flexibility – the ability to reallocate resources quickly and smoothly in
response to change.

Response to:
(a) increasing volatility arising from globalisation;
(b) opposition to monopoly including internal monopoly.

Resilience
Systems are resilient if they can absorb shocks.
Firms can survive downturns, crises and panics.

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The Strategies of the Global Factory

1. Fine-slicing
Locating (ever more finely defined) activities in least cost location.

2. Outsourcing and offshoring

Using contracts rather than ownership
“You don’t have to own a facility to control it”

3. Control of whole “global factory” through knowledge internalisation.

4. “Outsource operations, internalise knowledge”.

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Role of Headquarters

Controlling Intelligence

“Orchestration”

Focal Firm as the “Impresario”

[Strategies of linked/subcontracting/subordinate firms?]

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Next Week:

Guest lecture
In class discussion of the Samsonite Case

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