2. Industry Analysis
• The first set of notes
– Described the use of supply chains to map
industry-market connections and to identify and
begin to analyze likely industries and markets.
– Introduced the value chain as the more or less
integrated collection of activities firms do to
transform inputs into outputs -- and value.
– And outlined some techniques for describing and
analyzing markets.
• This set of notes focuses on industries and
theories and tools for describing and
analyzing them.
3. The Supply Chain
Raw Primary Product Marketer/
Material Manufacturer Fabricator Producer Distributor Retailer
Extractor
Manufacturing Supply Chain
Rainmaker Practitioner Contractor
Service Supply Chain
4. Value Chain
• The value chain is really a cross-linked network of distinct
activities that affect the cost or performance of the others.
• Optimizing the links as well as the functions or activities so
that the entire chain supports a strategy can yield a powerful,
durable, hard-to-duplicate strategic advantage.
Human Resource Management
Inbound
Logistics
Operations Outbound
Logistics
Marketing/
Sales
After Sales
Service
Margin
Technology Development
Procurement
Infrastructure
5. Market Analysis: Perceptual Map
• Map the key products or services along the
dimensions that are most important to the buyers
and influencers.
Quality
Cost
6. Market/Industry Analysis:
Competitors Table
• Chart the competitors, noting how they
compete.
Market
Share
Quality Cost
Timeli-
ness
Notes
Competitor1 15% H H M
Competitor2 25% L L H v. aggressive
Competitor3 5% M M H
Competitor4 20% L L H quality slipping
Competitor5 15% M M H
7. Industry Analysis
• Industries are the circles in the supply chain
diagram.
• Each industry is a set of firms that operate
in the same space in a supply chain,
competing to control some of the space and
so capture value.
• Industries have structure, history/
trajectories and competitive dynamics that
set the context for new entrants.
• Industries also operate within the macro
environment -- where most analysis starts.
8. Scan the Environment
• In business terminology, the environment
consists of all the external forces that
impinge on the industry, its markets and its
firms.
• Needless to say, there are a lot of
potentially relevant factors.
• The following picture summarizes common
forces; the following tables list some
indicators of these forces.
10. Environmental Forces Indicators
ECONOMIC TECHNOLOGICAL
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment levels
Wage/price controls
Devaluation/revaluation
Energy availability & cost
Disposable & discretionary
income
Total federal spending for R&D
Total industry spending for R&D
Focus of technological efforts
Patent protection
New products
New technologies
New developments in
technology
transfer from lab to marketplace
Productivity improvements
11. POLITICAL-LEGAL SOCIOCULTURAL
Antitrust regulations
Environmental protection laws
Tax laws
Special incentives
Foreign trade regulations
Attitudes toward foreign
companies
Laws on hiring and promotion
Stability of government
Lifestyle changes
Career expectations
Consumer activism
Rate of family formation
Growth rate of population
Age distribution of population
Regional shifts in population
Life expectancies
Birth rates
Environmental Forces Indicators
12. Scan the Environment
• The challenge is to sort through the noise to
find the key strategic factors for your
organization or industry or market.
• This requires a constant process of scanning,
which is both art and science.
• As you conduct various analyses of your
industry or markets, keep track of the outside
forces that affect them, and especially the
trends and discontinuities -- the opportunities
and threats -- driven by these forces.
15. Tool: Force Field Analysis
O
r
g
a
n
i
z
a
t
i
o
n
Can be done for an
organization or an
industry.
Each arrow is a
force, with the
lengths indicating
relative strength.
16. Tool: External Strategic Factor
Analysis Summary
Opportunities:
Threats:
Total Weighed Score: 1.00
1 2 3
Weighted
Factors Weights Rating Score Comments
4 5
Notes:
1. List opportunities and threats (5-10 each) in column 1.
2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that
factor’s probable impact on the company’s strategic position. The total weights must sum to 1.
3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to
that factor.
4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4.
5. Use Column 5 (Comments) for rationale used for each factor.
6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells
how well the company is responding to the strategic factors in its external environment.
c
17. Tool: Industry ScenariosTool: Industry Scenarios
A tool for exploring the impact of major shifts in the
underlying context:
1. Examine possible shifts in environmental forces.
2. Identify uncertainties in each of the forces.
3. Identify causal factors behind the uncertainties.
4. Make range of assumptions about each causal factor.
5. Combine assumption into internally consistent
scenarios.
6. Analyze the industry situation under each scenario.
7. Determine sources of competitive advantage under
each scenario.
8. Predict competitor’s behavior under each scenario.
18. Industry Structure
• Once you understand some of the forces affecting
your industry, it is useful to look at the structure
of the industry, and especially the power relations
that define the interactions within the industry.
• Actually, it often works best to start with this
industry analysis and then examine how larger
trends might shape or change the picture.
• The key tool for defining industry structure is
Porter’s Five Forces Model -- the one Hamilton
presented in detail (see notes in course materials).
19. Tool: Porter’s Five Forces Model
(adjusted)
Threat from
Substitutes
Suppliers’
Power
Threat from
New Entrants
Buyers’
Power
Rivalry
of
Firms
Power of other
Stakeholders
20. Tool: Porter’s Five Forces Model,
(adjusted)
• Applying microeconomic theory, Porter highlights
the forces that affect a firms ability to raise
prices and earn profits.
• The stronger a force, the more it limits the
industry firms’ ability to set prices.
• Thus, strong forces are threats because they are
likely to reduce profits; weak forces are
opportunities because they may allow firms a chance
to earn greater profits.
• The pattern of forces shape an industry and
constrain firms within the industry -- but industry
structure is subject to change as the environment,
each force, and each participant’s strategy change.
21. Tool: Porter’s Five Forces Model,
Threat of Entry
• Industries that are hard to enter are cozy for
insiders, but also often attractive to outsiders
longing for the value being shared by so few.
• Barriers to entry make it harder for newcomers to
play.
– Fierce reaction by incumbents.
– Size of payoff/relation of supply to demand.
– Economies of scale:
• minimum efficient scale of production
• distribution or sales networks
– Pioneering brand advantages.
– Experience curve.
– Licenses or patents.
– Cost of exit.
22. Tool: Porter’s Five Forces Model,
Threat of Substitution
• Industries with few substitute products
are more attractive than those with many
substitutes.
• Effective substitutes can often provide
ways in for upstarts.
• The threat of substitutes is often the
weakest of the forces -- except during
times of high demand or fast change, when
interlopers may see opportunities.
23. Tool: Porter’s Five Forces Model,
Buyer Power
• Attractive industries feature disorganized,
small customers, with little purchasing and
negotiating power.
• Buyers gain power when:
– They are large, relative to the seller
(superstores).
– They are organized (eg., a coop).
– It is easy to switch to another supplier (eg.,
when products are standard).
– They could integrate backwards and so take
over a supplier.
24. Tool: Porter’s Five Forces Model,
Supplier Power
• Attractive industries feature small and
disorganized suppliers.
• Suppliers gain power when:
– They are large, relative to the buyers. (Alcoa).
– It is difficult for buyers to switch to
competing suppliers. (Custom products,
proprietary information).
– They pose a credible threat of integrating
forward and taking over the buyers’ functions.
25. Tool: Porter’s Five Forces Model,
Industry Rivalry
• Attractive industries are controlled by
monopolies or gentlemanly oligopolies.
– On the other hand, the more the players, and
the more equally matched, the closer the
industry approximates “perfect competition”
and minimum profits.
• Rivalry is reduced when:
– Power is concentrated (C4 Index )
– Competitors can truly differentiate.
– It is easy to exit.
– Demand is stable and predictable.
– Regulation takes the edge off.
26. Tool: Porter’s Five Forces Model,
Other Stakeholders’ Power
• Governments (if not in the environmental
scan), unions, creditors (if not a supplier),
advocacy groups (eg., environmentalists)
can all constrain industries.
– Regulated industries
– Teamsters
– Institutional investors
– Bottle bills
27. Industry Dynamics
• The weakness of Porter’s model is its static
nature. It provides a great snapshot of power
relations and is a great tool for focusing
research, but may not capture the direction of
change in an industry.
• Because most industries are dynamic, it is
critically important to stay alert to trends --
and more importantly sudden changes of
patterns or context (such as new technologies
or regulations) -- that might change everything.
28. Industry Dynamics
• At the simplest level, it is important to
remember that industries have life cycles.
– Newer industries are often fragmented, sellers’
domains with many niches and relatively few
constraints.
– More mature markets tend to be more
consolidated, with more homogenous products,
fewer niches, and more intense competition
amongst the remaining firms.
– Declining industries can be fiercely competitive --
if exit barriers are high -- or more relaxed, if
attention is elsewhere.
29. Industry Dynamics
• But increasing numbers of industries evolve
and change so quickly, that a life cycle
analysis can be misleading.
• Theorists like D’Aveni have labeled fast-
moving industries with unstable
technological foundations hypercompetitive.
– In hypercompetitive industries, everything
speeds up, companies compete on many fronts at
once and leapfrog each other in a breathless
race towards an ever-receding goal.
30. Industry Dynamics
• In hypercompetitive environments:
– Advantages erode constantly.
– Driving firms to risk huge new investments -- eg.,
betting the firm on a new information technology
or chip design.
– Or pushing firms to shift competition from
competitive arena to competitive arena -- first
trying to improve quality, then trying to build
deep pockets, to buy experience, etc.
• In the end, as the such industries descend
into the world of perfect competition, only
deep pockets survive....
31. Tool: Four Arena Analysis
• One tool for studying trends and looking
for discontinuities is D’Aveni’s Four-Arena
Analysis.
• He argues that firms can compete in four
arenas -- cost/quality; timing/know-how;
barriers to entry; and deep pockets --
• And that competition in each arena
escalates up a ladder of intensity until
competitors fall out, or shift arenas.
32. Tool: Four Arena Analysis
• Thus the analysis consists of:
– identifying which arenas are hot;
– tracing the ladder of escalation;
– trying to predict when the competition might
shift into a new arena;
– trying to predict the next hot arena.
• An obvious strategy for a new entrant is to
stake out a new arena of competition
before the established players move.
33. Tool: Four Arena Analysis
• Cost & Quality
– Cost leadership vs
differentiation
• Timing & Know-how
– First mover advantages
vs fast-follower
advantages
– Experience Curve
• Barriers to Entry
– Knowledge, capital barriers, etc
(often built with timing & know-
how)
– Patents & other legal walls.
– Distribution agreements or
patterns.
– The competitive landscape.
• Deep Pockets
– Brawn often overcomes position
and brains and speed.
34. Case: Four-Arena Analysis of the
Uniform Services Industry
• Rental of uniforms, rags, mats.
• Blue collar origins.
– From auto repair shops to corporate logos.
• Dispersed but consolidating.
– Due to government regulation and technological
change.
• Players:
– Cintas, Aramark, Unitog, Unifirst, G&K, many
others.
35. Some high points:
1977 - Splash! Aramark Enters
And shakes up a sleepy industry.
1986 - Slosh! Uncle Sam Wades In
With the Clean Water Act, making Deep Pockets essential.
1992 - Gasp! Recession & the Clean Air Act
Accelerate consolidation.
Whewie! 30 Years of High Margins
For the survivors.
Case: Four-Arena Analysis of the
Uniform Services Industry
36. Case: Four-Arena Analysis of the
Uniform Services Industry
• Each color is a strategic move (purchases, new plants,
new routing systems...) in a given arena.
• Cintas’ 50 moves, mostly in Cost-Quality & Timing-Know-
how, set the pace; Aramark’s 25 moves provided the
drama; G&K was surprisingly aggressive.
Cintas Aramark Unifirst Unitog G&K
0
5
10
15
20
25
Cintas Aramark Unifirst Unitog G&K
C/Q T/K SH DP
37. • This tracks change in the Timing-Know-how arena.
• Each color is an type of innovation, in logistics or plant
design or service.
• Note the decreasing amount of time it takes for imitation
or replication. It’s time to shift arenas.
Case: Four-Arena Analysis of the
Uniform Services Industry
1970 1975 1980 1985 1990 1995 2000
G&K
Unifirst
Unitog
Aramark
Cintas
38. • This tracks change in the deep-pockets arena. For a variety of
reasons, the industry was consolidating.
• Despite its lead in other arenas, and its 55 small purchases,
Cintas was being outclassed by Aramark’s 7 huge purchases of
market share and know-how. Who will be bought next?
- 50,000
100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000
Cintas
55
Aramark
7
Unitog
15
Unifirst
8
G&K
2
1991 1992 1993 1994 1995 1996
Case: Four-Arena Analysis of the
Uniform Services Industry
39. • Conclusions:
– There were some geographical, market-segment and
service-based strongholds
– But all were eroding as the industry consolidated and
know-how was developed or bought.
– Still, the strongest three or four had built formidable
barriers to entry, mostly in the form of layers of
advantage in know-how and service and operations.
– Which meant very high stakes -- $70 million per year in
capital expenditures just to stay in the game.
– Forcing new entrants to partner with one of the big few,
or shift the rules of the game dramatically.
Case: Four-Arena Analysis of the
Uniform Services Industry
40. • The competitor table introduced in the last set of
notes is a good place to start a competitor analysis.
• The table simply summarizes the main players and
their central modes of competing (or their
strengths and weaknesses, or other important
dimensions).
Competitor Analysis
Market
Share
Quality Cost
Timeli-
ness
Notes
Competitor1 15% H H M
Competitor2 25% L L H v. aggressive
Competitor3 5% M M H
Competitor4 20% L L H quality slipping
Competitor5 15% M M H
41. • Sometimes it is useful to subdivide industries into
strategic groups -- ie., groups of firms that pursue
similar strategies with similar resources.
Competitor Analysis: Strategic
Groups
Price
Selection
Arby’s, Burger King,
Domino’s, Hardees,
McDonalds, Taco Bell,
Wendy’s
ChiChi’s, Olive Garden,
Red Lobster
Country Kitchen,
Denny’s, Diners,
Shoney’s
42. • While useful, the competitor table and the
strategic groups are, like Porter’s Analysis,
essentially static.
• Just as the Four-Arena Analysis is useful for using
history to make guesses about the future --
especially about how trends might stop and the
ground might shift --
• Hamilton et al’s Core Competency Strategic Intent
matrix is useful for tracing -- and predicting --
shifts in competitors’ relative power.
Dynamic Competitor Analysis
43. Tool: CCSI Matrix
• The CCSI matrix works like a flip-book to bring
inter-firm dynamics alive.
• Matrices are made at regular intervals
– Yearly or quarterly depending on how fast things are
changing
• The two dimensions of the matrix are:
– Core Competency: firms’ relative capacity -- as measured
by Tobin’s Q or market/book value or defect rates or as
rated by industry experts.
– Strategic Intent: firms’ relative aggressiveness -- as
measured by R&D expenditures or capital investments or
analysis of press releases.
45. • Each competitor is
mapped as a circle:
– the size of which
reflects sales or
capitalization or assets
– and the pie slice in
which reflects free
cash or other available
resources
Tool: CCSI Matrix
46. Case: CCSI Analysis of the early
90s Automobile Industry
• Flip the through the following three slides
fast, noting:
– The decline of Honda & Toyota
– The ascendancy of Ford
– General Motors unsucessful run at leadership
– Chrysler’s repositioning as an up and coming
star.
50. From Analysis to Strategy
• Most of these analytic tools support
different approaches to strategy.
• The next set of notes will begin to discuss
strategy: The process of pursuing the
organization’s mission -- while managing the
relationship of the organization to its
environment.
52. Bibliography
• Richard D’Aveni, Hypercompetition (Free Press: 1994).
• Pankaj Ghemawat, Strategy and the Business Landscape (Prentice Hall,
2001).
• Robert Hamilton lecture notes, 1998.
• Robert Hamilton, E. Eskin, M. Michael, "Assessing Competitors: The Gap
between Strategic Intent and Core Capability", International Journal of
Strategic Management-Long Range Planning, Vol. 31, No. 3, pp. 406-417,
1998
• TL Hill lecture notes, 1999, 2001.
• J. D. Hunger & T.L. Wheelan, Essentials of Strategic Management (Prentice
Hall, 2001).
• Sharon Oster, Modern Competitive Analysis, 2nd
Edition (Oxford University
Press, 1994), for Porter and other economics-based strategy.
• Henry Mintzberg & James Brian Quinn, Readings in the Strategy Process,
3rd
Edition (Prentice Hall, 1998).
• Michael Porter, Competitive Advantage (Free Press, 1985).
Editor's Notes
Analysing hypercompetition starts with looking back
to look forward.
Here’s a brief history:
1977 - Aramark
1986 - Clean Water and deep pockets.
1992 - Consolidation accelerates.
Throughout, good margins...for the big fish.
During the past 30 years,
--Cintas has set the strategic pace with 50 moves.
--Aramark has moved less often but always more dramatically.
--G&K has been surprisingly aggressive.
The march of manufacturing illustrates the relentless march
up the Operational Effectiveness ladder.
Most notable is the increase in the pace of change:
--There has been more change in the past 5 years than in the
preceding 20.
--And the pace is likely to continue to increase as the end of
the ladder nears.
Consolidations show a different pattern.
--While Cintas makes many small purchases,
--Aramark makes periodic huge purchases
of knowhow as well as reach.
Projecting the pattern ahead,
--Aramark will soon make another large purchase, which will
--further reduce the viable options
--for Cintas and the rest of the industry.
In summary:
On the C/Q & T/K fronts:
--Nearing the ends of the OE and M&A ladders.
--Next hot areas of competition likely to be:
--Direct Sales
--Leveraged Distribution (add-ons)
--CAnada
-- Possibly overseas
Meanwhile, Cintas is losing
--its strongholds, if
--not yet its deep pockets to
G&K’s nibbling and Aramark’s huge bites.
Cintas has its strategic work cut out for it to escape these trends.
Here’s Jim to talk about Cintas’s strategic options.
In summary:
On the C/Q & T/K fronts:
--Nearing the ends of the OE and M&A ladders.
--Next hot areas of competition likely to be:
--Direct Sales
--Leveraged Distribution (add-ons)
--CAnada
-- Possibly overseas
Meanwhile, Cintas is losing
--its strongholds, if
--not yet its deep pockets to
G&K’s nibbling and Aramark’s huge bites.
Cintas has its strategic work cut out for it to escape these trends.
Here’s Jim to talk about Cintas’s strategic options.
In summary:
On the C/Q & T/K fronts:
--Nearing the ends of the OE and M&A ladders.
--Next hot areas of competition likely to be:
--Direct Sales
--Leveraged Distribution (add-ons)
--CAnada
-- Possibly overseas
Meanwhile, Cintas is losing
--its strongholds, if
--not yet its deep pockets to
G&K’s nibbling and Aramark’s huge bites.
Cintas has its strategic work cut out for it to escape these trends.
Here’s Jim to talk about Cintas’s strategic options.