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New Venture Strategies

New Venture Strategies. Session # 4 - 7. Industry structure and strategy. PIRNAY Fabrice 2002 - 2003. Le « menu du jour ». 1. What is an industry ? 2. Drawing the structure of a given industry. 1. What is an industry ?. 1.1. Industry Boundaries 1.2. Industry Life Cycle.

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New Venture Strategies

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  1. New Venture Strategies Session # 4 - 7 Industry structure and strategy PIRNAY Fabrice 2002 - 2003 NVS 2002-2003

  2. Le « menu du jour » 1. What is an industry ? 2. Drawing the structure of a given industry NVS 2002-2003

  3. 1. What is an industry ? 1.1. Industry Boundaries 1.2. Industry Life Cycle NVS 2002-2003

  4. 1.1. Industry Boundaries NVS 2002-2003

  5. 1.1. Industry Boundaries • What is an industry? • Collection of firms whose products (or services) are perfect or near perfect substitutes • Similarity of products/services is key • Importance of industry boundaries • Helps managers understand arena of competition • Enables identification of competitors • Helps managers identify key success factors • Provides basis to evaluate firm goals NVS 2002-2003

  6. 1.1. Industry Boundaries • Problems with industry definition • Industries evolve • Structure and firms change over time • At what level of aggregation? • For example, beer vs. craft beer segment • Industries emerge from industries • For example, electronics industry of 60’s is now multiple industries -- TV, VCR, computers • Domestic versus global in scope NVS 2002-2003

  7. 1.1. Industry Boundaries Question : What industry is BMW in ? • world auto industry ? • European auto industry ? • world luxury car industry ? • world sports car industry ? NVS 2002-2003

  8. 1.1. Industry Boundaries • An industry is a group of companies offering products or services that are close substitutes for each other • Key criterion: SUBSTITUTABILITY • On the demand side: are buyers willing to substitute between types of cars (across countries) ? • On the supply side: are manufacturers able to switch production between types of cars (across countries) ? • Drawing Industry Boundaries: Identifying the Relevant Market NVS 2002-2003

  9. The Spectrum of Industry Structures Perfect Competition Oligopoly Duopoly Monopoly Concentration Many firms A few firms Two firms One firm Entry and Exit Barriers No barriers Significant barriers High barriers Product Differentiation Homogeneous Product Potential for product differentiation Information Perfect Information flow Imperfect availability of information NVS 2002-2003

  10. The Spectrum of Industry Structures Fragmented Many firms, no dominant firm Few firms, shared dominance(oligopoly) Consolidated One firm or one dominant firm (monopoly) NVS 2002-2003

  11. 1.2. Industry Life Cycle NVS 2002-2003

  12. 1.2. Industry Life Cycle Four Major Stages: • Emergence • Growth • Maturity • Decline NVS 2002-2003

  13. 1.2. Stages of the Industry Life Cycle Maturity Shakeout Decline • Demand takes off • prices fall • barriers to entry low • rivalry low • No new demand • barriers to entry high • rivalry increases • prices down • cost cutting • industry consolidation • usually oligopolies Demand • Growth slows • rivalry increases • excess capacity • price drops • firms exit • Growth slow • buyers unsure • high prices • barriers about • knowledge, standard setting Growth • Demand falls • rivalry increases • price cuts • exit barriers are key Embryonic Time NVS 2002-2003

  14. 1.2. Industry Life Cycle I. Emergence : • New product or concept • How to enter and refrain subsequent entry? Consequence : • Fixing the price level • Convince or educate prospective customers • Determine the segment to enter • Generate barriers to entry (price, segment, preemption actions and investments,…) NVS 2002-2003

  15. 1.2. Industry Life Cycle II. Growth : • The rate of growth is increasing • The analysis of diffusion is critical • Entry starts to occur Consequence : • Build capacity • Innovate entry option • Create new segment • Develop partnerships and strategic alliances • « Take the money and run » NVS 2002-2003

  16. 1.2. Industry Life Cycle III. Maturity : • Rate of growth is declining • Development of a replacement market • Increasing market segmentation Consequences: • Effort for differentiation • Develop market niches • Reduce costs • Manage exit NVS 2002-2003

  17. 1.2. Industry Life Cycle IV. Decline : • Big variations across segments possible Consequence: • Manage the withdraw NVS 2002-2003

  18. NVS 2002-2003

  19. 1.2. Industry Life Cycle Limitations of Life Cycle • it is just a generalization • tends to focus on sales, market share, and investment in the industry • Life cycle model can help to anticipate industry change, but it is dangerous to assume any pre-determined pattern of industry development NVS 2002-2003

  20. 2. The structure of a given industry NVS 2002-2003

  21. 2. The structure of a given industry • How to describe industry structure? • Industry size / growth • Industry life cycle • Industry concentration (Is the industry dominated by a few players?) • The industry structure is a product of and defines the rules of competition • Industry structures constantly change • Transformation can just as easily undermine industry attractiveness as enhance it • Opportunities and threats arise from changes in industry structure NVS 2002-2003

  22. 2. The structure of a given industry 2.1. The B.C.G. Matrix 2 2.2. The Five Forces Model (M. PORTER) 2.3. The Strategic Groups NVS 2002-2003

  23. 2.1. The B.C.G. Matrix 2 Many Fragmented Specialization Number of Approaches to Achieve Advantage Volume Stalemate Few Small Large Size of the Advantage NVS 2002-2003

  24. Fragmented Specialization ROI ROI Share Share Volume Stalemate ROI ROI Share Share 2.1. The B.C.G. Matrix 2 Many Number of Approaches to Achieve Advantage Few Small Large Size of the Advantage NVS 2002-2003

  25. NVS 2002-2003

  26. 2.2. The “Five Forces” Model (PORTER) The “Five Forces” : I. Threat of New Entrants II. Intensity of Competitive Rivalry III.Bargaining Power of Suppliers IV. Bargaining Power of Buyers V.Availability of Substitute Products NVS 2002-2003

  27. 2.2. The “Five Forces” Model (PORTER) The Model : AVAILABILITY OF SUBSTITUTE PRODUCTS RIVALRY AMONG COMPETING SELLERS Competitive forces arising from the jockeying for better market position and a competitive advantage. BARGAINING POWER OF BUYERS BARGAINING POWER OF SUPPLIERS THREAT OF NEW ENTRANTS NVS 2002-2003

  28. I. Threat of New Entrants AVAILABILITY OF SUBSTITUTE PRODUCTS RIVALRY AMONG COMPETING SELLERS Competitive forces arising from the jockeying for better market position and a competitive advantage. BARGAINING POWER OF BUYERS BARGAINING POWER OF SUPPLIERS THREAT OF NEW ENTRANTS NVS 2002-2003

  29. I. Threat of New Entrants New Entrants... • Bring more capacity to industry • Can 'shake up' industry NVS 2002-2003

  30. I. Threat of Entrants Depends Upon … • Entry Barriers • Entry barriers stem from... • Economies of scale • Product differentiation • Capital requirements • Switching costs • Access to distribution channels • Cost advantages not related to scale • Proprietary technology • Access to raw materials • Favorable locations • Government subsidies NVS 2002-2003

  31. I. Threat of Entrants Depends Upon … • Entry Barriers (Cont.) • Government policy • Regulation restricting capacity, players • Standards; safety, anti-pollution • Testing; delays • Expected Retaliation of Industry Incumbents NVS 2002-2003

  32. II. Intensity of Competitive Rivalry AVAILABILITY OF SUBSTITUTE PRODUCTS RIVALRY AMONG COMPETING SELLERS Competitive forces arising from the jockeying for better market position and a competitive advantage. BARGAINING POWER OF BUYERS BARGAINING POWER OF SUPPLIERS THREAT OF NEW ENTRANTS NVS 2002-2003

  33. II. Intensity of Competitive Rivalry • The Intensity of Competitive Rivalry Is Greatest When... • There are numerous, or equally balanced competitors • Industry growth is slow • Incumbents have high fixed costs • Buyers have minimal switching costs • Capacity is augmented in large increments NVS 2002-2003

  34. II. Intensity of Competitive Rivalry • The Intensity of Competitive Rivalry Is Greatest When... (Cont.) • Competitors are diverse • Family owned businesses • Foreign owned competitors • Competitors have high strategic stake in industry • Industry has high exit barriers • Specialized assets---low liquidation value • Fixed costs of exit---unions, suppliers, warranties • Emotional barriers • Government restrictions NVS 2002-2003

  35. Exit Barriers Low, Stable Returns Low, Stable Returns Low, Stable Returns Low, Risky Returns Low, Risky Returns Low, Stable Returns Low, Risky Returns Low High Low, Stable Returns Low High, Stable Returns High, Stable Returns High, Stable Returns High, Stable Returns High, Risky Returns High, Risky Returns Entry Barriers High II. Intensity of Competitive Rivalry Effects of Entry Barriers and Exit Barriers on Industry Profits NVS 2002-2003

  36. II. Intensity of Competitive Rivalry Four firm Concentration ratio (CR4) - Add the market shares held by the 4 largest companies in the industry (= % of total industry sales accounted by the 4 largest firms) - Minimum theoretically near 0 - Maximum = 100% (or 1.00) • Logging = 18% • Cigarettes = 85% NVS 2002-2003

  37. II. Intensity of Competitive Rivalry Herfindahl Index (HI) - a measure of the balance in an industry HI = 10,000 * (The Sum of (the square of each firms market share)) Example: 3 firms with market shares of 0.50, 0.25, 0.25 HI = 10,000 ((0.50)^2+(0.25)^2+(0.25)^2) = 3750 • = 0 Perfectly Competitive • = 10,000 Monopoly • > 1,800 Industries with reduced rivalry NVS 2002-2003

  38. III. Bargaining Power of Suppliers AVAILABILITY OF SUBSTITUTE PRODUCTS RIVALRY AMONG COMPETING SELLERS Competitive forces arising from the jockeying for better market position and a competitive advantage. BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF NEW ENTRANTS NVS 2002-2003

  39. III. Bargaining Power of Suppliers Suppliers Affect Industry By... • Raising prices • Reducing quality NVS 2002-2003

  40. III. Bargaining Power of Suppliers • Suppliers Are Most Powerful When... • Supplier industry is concentrated, or dominated by a few large firms • Buying industry is fragmented • Substitutes are not available • The industry is not an important customer of suppliers • The suppliers' product is an important input to the buyer's business NVS 2002-2003

  41. III. Bargaining Power of Suppliers • Suppliers Are Most Powerful When... (Cont.) • The supplier can vertically integrate forward • Suppliers are unified • Trade associations • Cartels • Trade unions NVS 2002-2003

  42. IV. Bargaining Power of Buyers AVAILABILITY OF SUBSTITUTE PRODUCTS RIVALRY AMONG COMPETING SELLERS Competitive forces arising from the jockeying for better market position and a competitive advantage. BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF NEW ENTRANTS NVS 2002-2003

  43. IV. Bargaining Power of Buyers Buyers Affect Industry By... • Forcing prices down • Bargaining for higher quality • Bargaining for more favorable terms • Playing competitors off against each other NVS 2002-2003

  44. IV. Bargaining Power of Buyers • Buying Groups Are Most Powerful Under the Following Circumstances... • Buyers are concentrated and/or large compared to industry • Industry is fragmented • The product purchased from industry is undifferentiated • Buyers face few switching costs • Buyers earn low profits • Buyers can integrate backwards • Buyers have full information NVS 2002-2003

  45. V. Availability of Substitute Products AVAILABILITY OF SUBSTITUTE PRODUCTS RIVALRY AMONG COMPETING SELLERS Competitive forces arising from the jockeying for better market position and a competitive advantage. BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF NEW ENTRANTS NVS 2002-2003

  46. V. Availability of Substitute Products • Firms Are Not Only Competing Against Firms in Their Own Industry, but Also Firms in Industries Producing Substitute Products. • Substitutes limit profits in normal times • Substitutes reduce bonanza in boom times • May be countered by industry collectives NVS 2002-2003

  47. V. Availability of Substitute Products • Forms of substitution: • Product-for-product • Substitution of need • Generic substitution • Doing without NVS 2002-2003

  48. The Case of Business - Research Industry Potential Entrants (Future Business Professors) 1. High entry barriers 2. Low return on investment Low threat of entry Rivalry (Business Professors) Low rivalry due to: 1. Strong growth of demand 2. Relatively few rivals 3. Significant differentiation 4. Low exit barriers Buyers (Students and Executives) 1. High demand 2. Relatively many buyers 3. Limited substitutes at present 4. Some backward integration Suppliers (Students and Executives) 1. Suppliers are the buyers 2. Low differentiation Low bargaining power of suppliers Low bargaining power ofbuyers Moderate threat from substitutes Substitutes (Experience and non-university education) 1. Excess demand for professors’ services 2. Price-performance ratio difficult to measure NVS 2002-2003

  49. The implications of the five forces model • It makes it possible to diagnose the competitive forces and characterize the position of a company. • To a large extent, the forces influences the rules of the game of the competitors and the strategies which are potentially available. • To an extent, it determines the profit potential of the industry. NVS 2002-2003

  50. The limitations of the five forces model • Does not foretell the future, nor does it eliminate uncertainty for any organization. • Does notguarantee organizational effectiveness. • Is static and ignore innovation • Is dynamic only to a limited extent, e.g. the industry conditions take on punctuated equilibrium. • Can it be applied to complex business landscape and/or hypercompetitive business environment? NVS 2002-2003

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