The national/ The natural =... environment 2 economy i THE INDUSTRY ENVIRONMENT Demographic structure Technology © Suppliers © Competitors © Customers Government and politics Social structure e FIGURE 3.1 From environmental analysis to industry analysis(ABLE 3.1 The profitab of U.S. industries, 1999-2007 Industry Median ROE 1999-2007 (%) Leading companies Household and personal products Pharmaceuticals Petroleum Tobacco Food consumer products Securities and investment banking Mining, crude oil production Medical products and equipment Beverages Food services Sciemtific, photographic, and control equipment Diversified financials Commercial banks Apparel Electronics, electrical equipment Oil and gas equipment and services Computer software Aerospace and defense Specialty retailers Chemicals Computers, office equipment 26.0 21.0 20.1 19.7 19.5 18.4 18.0 77 17.2 16.6 15.6 15.5 14.8 14.4 14.3 14.3 14.0 13.9 138 13.8 13.5 Procter & Gamble, Kimberley-Clark, Colgate-Palmoli. Pfizer, Johnson & Johnson, Merck ExxonMobil, Chevron, ConocoPhillips Altria, Reynolds American, Universal PepsiCo, Sara Lee, Conagra Morgan Stanley, Merrill Lynch, Goldman Sachs Occidental Petroleum, Devon Energy Medtronic, Baxter International Coca-Cola, Anheuser-Busch McDonald's, Yum Brands Eastman Kodak, Danaher, Aligent General Electric, American Express Citigroup, Bank of America Nike, VE Jones Apparel Emerson Electric, Whirlpool Halliburton, Baker Hughes Microsoft, Oracle, CA Boeing, United Technologies, Lockheed Martin Home Depot, Costco, Lowe's Dow Chemical, DuPont IBM, Hewlett-Packard, Dell ComputerTABLE 8.1 (Conririuecd) Median ROE Industry 1999-2007 (%) Leading companies Heattheare 334 United Health Group, Wellpoint, HCA, Medco. Industrial and farm equipment 13.1 Caterpillar, Deere, illinois Tool Works Hotels, casinos, resorts 127 Marriow international, Harrah's Entertainment Publishing, printing 125 F. R. Donnelley & Sons, Gannett Engineering, construction 1a Flour, Jacobs Engineering LT. services| 124 EDS, Computer Sciences, Science Applications Int General merchandisers 123 WalMart, Target, Sears Holdings “Trucking, truck leasing 122 YRC Worldwide, Ryder System Metals 118 Alcoa, U-S. Steel, Nucor Wholesalers: food and grocery 113 Sysco, Supervalu, CHS. Energy production 112 Constellation Energy, ONEOK Pipelines 112 Plains All-American Pipeline, Enterprise Products| Packaging and containers 10.9 Smurfit-Stone Container, Owans-llingis Automotive retailing and services 107 AutoNation, United Auto Group Utilities: gas and electric 10.6 DU.Ke Eneray, Dominion Resources Food and drug stores 10.6 Kroger, Walgreen, Albertson's Furniture 10.4 Legaett & Platt, Steelcase Real estate, 99 Cendant, Host Mariott, Simon Property Group Building materials, glass 99 ‘Owens Corning, USG, Armstrong Holdings: Insurance: property and casualty 95 American Intl, Group, Berkshire Hathaway Motor vehicles and parts 23 GM, Ford, Johnson Controls Insurance’ life and health 24 Metlife, New York Life Forest and paper products 73 International Paper, Weyerhaeuser Food production 65 Archer Daniels Midiand, Tyson Foods Semiconductors and electronic components 62 Intel, Texas Instruments, Sanmina-Scl Network and communications equipment 59 Motorola, Cisco Systems, Lucent Telecommunications 58 Verizon, ATEq, Sprint-Nextel Entertainment 27 Time Warnes, Walt Disney, News Corp. Airlines oe AMR, UAL, Delta Airlines Nore: Median ROE for each industry averaged across the seven years 1999-2007, Inclustries with five oF fewer firms were excluded. Also omitted were industries that were substantially redefined during 1999-2007 source: Data from Fortune 1000 by industry,TABLE 3.2 The spectrum of industry structures Perfect Oligopoly Duopoly Monopoly Competition Concentration Many firms A few firms ‘Two firms One firm Entry and exit barriers No barriers Significant barriers High barriers Product Homogeneous Potential for product differentiation differentiation product (Commodity) Information No impediments Imperfect availability of information availability ‘to information flow‘SUPPLIERS. Bargaining power| of suppliers INDUSTRY COMPETITORS POTENTIAL | __ Threat of Threat of SUBSTITUTES ENTRANTS ~new entrants Substitutes Rivalry among existing firms Bargaining power Jof buyers BUYERS, J FIGURE 3.2 Portet’s five forces of competition frameworkSUPPLIER POWER Factors determining power of suppliers relative to producers; same as those power of producers relative to buyers ~ see “Buyer Power” box THREAT OF SUBSTITUTES ‘© Buyer propensity to substitute © Relative prices and performance of substitutes: ‘THREAT OF ENTRY © Capital requirements © Economies of scale © Absolute cost, advantages © Product differentiation © Access to distribution channels ‘© Government and legal barriers © Retaliation by established producers INDUSTRY RIVALRY © Concentration © Diversity of competitors © Product differentiation © Excess capacity and exit barriers BUYER POWER Price Sensitivity Bargaining Power © Cost of product, ‘© Size and concentration relative to total cost of buyers relative to producers © Product ‘© Buyers’ switching costs differentiation ‘© Buyers’ information © Competition ‘© Buyers’ ability to between buyers backward integrate FIGURE 3.3 The structural determinants of the five forces of competition30 25 20 15 10 Return on sales Return on investment — Cash flow/investment Market | Growth Less tha % O-5%to0 N0to5% 5% to 10% Over 10% Source: R. D. Buzzell and B. T. Gale, The PIMS Principles (New York: Free Press, 1987): 56-7. © 1987 The Free Press. Reproduced by permission of Simon & Schuster. FIGURE 3.4 The impact of growth on profitability257 ROI (%) ROS 0% 1% -35% 36% 50% = 61% 75% over 75% Percentage of employees unionized Source: R, D. Buzzell and B. T. Gale, The PIMS Frinciples (New York: Free Press, 1987): 56-7. © 1987 The Free Press. Reproduced by permission of Simon & Schuster FIGURE 3.5 The impact of unionization on profitabilityPrerequisites for success How does the firm survive competition? What do customers ‘want? Analysis of demand Analysis of competition © Who are our customers? ‘© What drives competition? © What do they want? © What are the main dimensions of competition? © How intense is competition? © How can we obtain a superior competitive position? KEY SUCCESS FACTORS | FIGURE 3.6 Identifying key success factorsTABLE 3.3 Identifying key success factors steel, fashi 22 clothing, and supermarkets Steel Fashion clothing Supermarkets, What do customers want? (Analysis of demand) Low price Product consistency Reliability of supply. ‘Specific technical specifications for special steels Diversity of customer preferences in terms of garment type, style, quality, color Customers willing to pay premium for brand, style, exclusivity, and quality Mass market highly price sensitive Low prices Convenient location Wide range of products adapted to local preferences Freshyquality produce: good service; ease of parking; pleasant ambience How do firms survive competition? (Analysis of competition) ‘Commodity products, excess capacity, high fixed costs, excess capacity, exit barriers, and substitute competition mean intense price competition and cyclical profitability Cost efficiency and financial strength essential, Low barriers to entry and exit, low seller concentration, and buying power of retail chains imply intense competition Differentiation can yield substantial price premium, but imitation is rapid Intensity of price competition depends on number and proximity of competitors Bargaining power a critical determinant of cost of bought-in goods Key success factors Cost efficiency requires: large scale plants, low-cost location, rapid capacity adjustment Alternatively, high technology, small-scale plants can achieve low costs through flexibility and high productivity Differentiation through technical specifications and service quality Combining differentiation with low costs. Differentiation requires speed of response to changing fashions, style, reputation, and quality Cost efficiency requires manufacture in low wage countries Low costs require operational efficiency, scale-efficient stores, large aggregate purchases, low wage costs Differentiation requires large stores (to allow wide product range), convenient location, familiarity with local customer preferencesSales mix of products Avoiding markdowns through Retum on Sales tight inventory control Maximize buying power to minimize cost of goods purchased Maximize sales/sq. ft. through: @ location ‘© product mix © customer service @ quality control Maximize inventory turnover Sales/Capital through electronic data Employed interchange, close vendor relationships, fast delivery Mi ize capital deployment ‘through outsourcing and leasing FIGURE 3.7 Identifying key success factors through analy case of retailing profit drivers: the