Structural Analysis of

Industry

Hadi Satyagraha, Ph.D.

 Fortune Global500:
◦ Industry profitability
◦ Firm profitability
 Essence of Strategy
 Industry Environment:
◦ The 5 Forces Model
 Role of Government
 RoR RoA

Pharmaceutical 15.5% 10.8%

Beverages 9.3% 8.4%

General Merchand 2.9% 3.0%

Airlines -5.8% -3.9%

Why?????
 RoR RoA

Pharmaceutical 9-30% 3-17%

Beverages 1-21% 0-16%
General Merchand -3-8% -10-12%
Airlines -20-2% -13-1%

Why?????
5 Forces Firm
Strategy

Industry Firm
Profit Profit
Organization:
Environment:
People
System Strategy Macro
Industry
Resources
 Coping with competition to stay alive and well

 Choosing to perform value-creating activities

differently than rivals do:

Primary activities Support Activities

Design IT
Produce Human Resources
Market Finance
Deliver Managerial Skills
After Sales Network
 Threats of
New
Entrants

Rivalry
Bargaining Bargaining
among
Power of Power of
Existing
Suppliers Buyers
Firms

Threats
Of
Substitutes
 New entrants can bring new capacity, resources,
capabilities gain share reduce profitability:
 Sari Wangi Tea, Kecap Bango, Molto
 Korean cars
 PC industry
 Barriers to entry:
◦ Economies of scale
◦ Product differentiation:
 Kretek cigarette industry
 Coffee
◦ Capital requirements
◦ Switching costs
◦ Access to distribution channels:
 Softdrink industry
 Barriers to entry:
◦ Cost disadvantage independent of scale:
 Patents: Viagra (pharmaceutical)
 Raw materials access: Freeport (mining)
 Favorable locations: hotel, real estate, restaurant
 Government policy:
 Subsidies
 License requirements, etc.
 Expected retaliation
◦ Formula versus Pepsodent (toothpaste)
 Entry deterring price
 Experience and scale
Rivalry can bring down profitability
 Equally balanced rivals rivalry up:
◦ Kretek cigarette industry
◦ Diapers industry P&G and Kimberly-Clark
 Slow industry growth rivalry up
 High fixed costs rivalry up:
◦ Airlines industry
 Lack of differentiation/switching cost:
◦ Airlines industry
 Large numbers of competitors:
◦ Fragmented, difficult coordination
 Similarity of competitors:
◦ Ease of coordination
 Variability of demand:
◦ Increases rivalry
 High exit barriers:
◦ Asset specificity
 Suppliers can raise price  reduce
profitability
 Number of suppliers:
◦ Concentration of suppliers
 Importance of customers
◦ unimportant
 Importance of suppliers
 Differentiation or switching costs
 Forward integration potential:
◦ Bogasari in instant noodle industry
◦ Indonesian plywood industry
 Buyers can bring down price profitability
 Concentration of buyers:
◦ Carrefour, Walmart (retailing)
◦ CSD industry
 Importance of input
 Low profit
 Differentiation or switching costs
 Backward integration potential:
◦ Canning industry: Indomilk, Nestle, Frisian Flag
 Substitutes can bring down prices  reduce
profitability
 Price-performance ratio:
◦ Aluminium versus steel can
◦ Plastic versus metal
◦ Fibre optics versus metal wire
◦ Kereta api versus travel (new toll road)
 Profitability of producers
 Influence all five forces and affects
profitability favorably or unfavorably
 Through regulations:
◦ National car policy: Timor
◦ Purchasing policy: local contents
◦ Fuel subsidy
◦ Safety standards: airlines industry
◦ Tax incentives/disincentives: real estate
◦ Automotive Luxury Tax: 200% for engine size
> 3,000cc
◦ etc
 Cola Industry Cola Industry

Apple
Apple

Apple

Cola Industry
Cola Industry
 Industry structure constantly undergoing
modest adjustment and occasionally changes
abruptly.
 Causes of changes:
◦ Shifting threats of entry:
 Expiration of patents
 Cheaper rivals: PC Industry
◦ Changing power of suppliers and buyers:
 Bottlers in CSD industry
◦ Shifting threats of substitution: non carbonated
drinks
◦ New bases of rivalry in line with product life cycle
 Competitive strategy is
◦ Taking offensive or defensive action to create a
defensible position against the five competitive
forces:
 Positioning firm so capabilities can deal with the five
forces
◦ Influencing the balance of forces
◦ Anticipating shifts in the factors underlying the
forces
 X

x Bottlers

Water
Juice
Tea
Milk
 √

X
Intel
Microsoft

Cellphones
Playstation
 CSD Industry:
◦ Bargaining power of buyers/bottlers increasing
◦ Threats of substitutes increasing
 PC Industry:
◦ New entrants
◦ Commoditization of PC
 Acquiring Buyers (forward integration):
◦ Coke acquired bottlers (Amatil), restaurants
 Acquiring Sustitutes (diversification):
◦ Coke acquired Minute Maid (orange juice), Ades
(mineral water), tea
 Acquiring Suppliers (backward integration):
◦ Indomilk into canning industry
◦ Sampoerna, Djarum, Gudang Garam into packaging