Defining And Evaluating Industries
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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
Industry Analysis Visual Model The environment Governments Standards bodies New entrants Competitors Supplier’ Supplier’s suppliers
Suppliers
Organisation
Customers
Customer’ Customer’s customers
Substitutes
Stakeholders International law New Paradigm Consulting
Industry Definition/ Structure
w Ne
t an r t en
Competitors Suppliers
The Firm Customers
Substitutes
Industry The term industry is sometimes used to define a very precise business activity (eg: semiconductors) or a more generic activity (eg:consumer goods).
© Sunil Mehrotra
There are 100s of industries
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?
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
Industry Map
Industries are grouped into sectors http://www.census.gov/econ/census02/guide/INDSUMM.HTM US 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: Consumer cyclicals/Retail Industry: Retail Mdse Company: Walmart
How to define an industrythe basics • Basic industry definition http://www.oligopolywatch.com/2004/03/15.html
• SIC and NAIC codes..what are they? http://dor.wa.gov/content/aboutus/statisticsandreports/sic_vs_naics.aspx
• NAICS code hierarchy http://www.census.gov/epcd/ec97/industry/E452990.HTM
• SIC code hierarchy http://www.osha.gov/pls/imis/sic_manual.html
Why are some industries more profitable than others? Industry Ranking % ROE 90 80 70 60
% ROE
50 40 30 20 10 0 Foreign Regional Banks Management Services Telecom Services - Foreign Jew elry Stores Discount, Variety Stores Tobacco Products, Other Application Softw are Gas Utilities Oil & Gas Drilling & Exploration Personal Products
Industry
Fortune's ranking of Industries by profits
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
http://www.bea.gov/national/nipaweb/SelectTable.asp?Popular=Y http://www.census.gov/econ/census02/data/comparative/USCS_44.HTM http://biz.yahoo.com/p/sum_qpmd.htm l
Industry statistics visualized http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/gdp-by-industry-1998-2006 GDP 1998-2006 for the largest 100 industries http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/market-cap-roe-net-profti Market cap, ROE and Profit Margin for the top 100 industries http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/profitability-of-different-industrie Profitability of different industries, including those that are unprofitable
Industry Evolution: Traditional View Introduction
Growth
Maturity
Decline
Revenue
Operating Income
Losses Few competitors
Increasing sales and profits
Saturation
New competitors appear
Declining profits
Displaced by substitute products Profitability falls
Standardized features
Only a few large scale players survive
Industry shakeout
Most industries evolve towards © Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Oligopoly •Few Firms •Strategic Interdependence •Profitability determined by behavior of incumbents
A firm’s strategic focus should shift through the lifecycle Introduction Entrepreneurial Action • Open niches • Blind spots
Growth
Maturity
Focus on Growth • Invest to grow • Leverage Factors of Production
Decline Market power actions •Market share •Channels of distribution •Customer loyalty Revenue
Operating Income
Losses Few competitors
Increasing sales and profits
Saturation
New competitors appear
Declining profits Standardized features
Displaced by substitute products Profitability falls Only a few large scale players survive
Industry shakeout
http://online.onetcenter.org/find/indemand © Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
The New View: The Cycle of Industry Creative Destruction Sales and Distribution
Superstores
Application Software
Word
Operating System
Windows
Computer
IBM
Direct
Retail
Wordperfect Others
HP
Apple
Apple
Linux
Dell
Chips
INTEL IBM
DEC
Sperry Univac
AMD
Wang
The “mature” Computer Industry Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
The “recombinant” Computer Industry
The New View: The Cycle of Industry Creative Destruction 1
Mature/Vertically Integrated
Three major phases of industry evolution “Cycle time” of evolution is driven by the pace and magnitude of marketplace discontinuities
3 Recombinant Market Leaders
2 Focused New Entrants
Cycle-driving discontinuities include deregulation, technology, shifts in consumer preferences, globalization of markets, etc.
http://www.manyworlds.com/
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 3 •
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
•
•
•
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
Industry Analysis Visual Model The environment Governments Standards bodies New entrants Competitors Supplier’ Supplier’s suppliers
Suppliers
Organisation
Customers
Customer’ Customer’s customers
Substitutes
Stakeholders International law New Paradigm Consulting
Industry Definition/ Structure
w Ne
t an r t en
Competitors Suppliers
The Firm Customers
Substitutes
Industry The term industry is sometimes used to define a very precise business activity (eg: semiconductors) or a more generic activity (eg:consumer goods).
© Sunil Mehrotra
There are 100s of industries
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?
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
Industry Map
Industries are grouped into sectors http://www.census.gov/econ/census02/guide/INDSUMM.HTM US 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: Consumer cyclicals/Retail Industry: Retail Mdse Company: Walmart
How to define an industrythe basics • Basic industry definition http://www.oligopolywatch.com/2004/03/15.html
• SIC and NAIC codes..what are they? http://dor.wa.gov/content/aboutus/statisticsandreports/sic_vs_naics.aspx
• NAICS code hierarchy http://www.census.gov/epcd/ec97/industry/E452990.HTM
• SIC code hierarchy http://www.osha.gov/pls/imis/sic_manual.html
Why are some industries more profitable than others? Industry Ranking % ROE 90 80 70 60
% ROE
50 40 30 20 10 0 Foreign Regional Banks Management Services Telecom Services - Foreign Jew elry Stores Discount, Variety Stores Tobacco Products, Other Application Softw are Gas Utilities Oil & Gas Drilling & Exploration Personal Products
Industry
Fortune's ranking of Industries by profits
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
http://www.bea.gov/national/nipaweb/SelectTable.asp?Popular=Y http://www.census.gov/econ/census02/data/comparative/USCS_44.HTM http://biz.yahoo.com/p/sum_qpmd.htm l
Industry statistics visualized http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/gdp-by-industry-1998-2006 GDP 1998-2006 for the largest 100 industries http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/market-cap-roe-net-profti Market cap, ROE and Profit Margin for the top 100 industries http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/profitability-of-different-industrie Profitability of different industries, including those that are unprofitable
Industry Evolution: Traditional View Introduction
Growth
Maturity
Decline
Revenue
Operating Income
Losses Few competitors
Increasing sales and profits
Saturation
New competitors appear
Declining profits
Displaced by substitute products Profitability falls
Standardized features
Only a few large scale players survive
Industry shakeout
Most industries evolve towards © Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Oligopoly •Few Firms •Strategic Interdependence •Profitability determined by behavior of incumbents
A firm’s strategic focus should shift through the lifecycle Introduction Entrepreneurial Action • Open niches • Blind spots
Growth
Maturity
Focus on Growth • Invest to grow • Leverage Factors of Production
Decline Market power actions •Market share •Channels of distribution •Customer loyalty Revenue
Operating Income
Losses Few competitors
Increasing sales and profits
Saturation
New competitors appear
Declining profits Standardized features
Displaced by substitute products Profitability falls Only a few large scale players survive
Industry shakeout
http://online.onetcenter.org/find/indemand © Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
The New View: The Cycle of Industry Creative Destruction Sales and Distribution
Superstores
Application Software
Word
Operating System
Windows
Computer
IBM
Direct
Retail
Wordperfect Others
HP
Apple
Apple
Linux
Dell
Chips
INTEL IBM
DEC
Sperry Univac
AMD
Wang
The “mature” Computer Industry Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
The “recombinant” Computer Industry
The New View: The Cycle of Industry Creative Destruction 1
Mature/Vertically Integrated
Three major phases of industry evolution “Cycle time” of evolution is driven by the pace and magnitude of marketplace discontinuities
3 Recombinant Market Leaders
2 Focused New Entrants
Cycle-driving discontinuities include deregulation, technology, shifts in consumer preferences, globalization of markets, etc.
http://www.manyworlds.com/
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 3 •
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
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