« environment analysis« environment analysis » m1 ‘14 – class 5 date 9th october 2014...

« Environment Analysis »

M1 ‘14 – Class 5 Date 9th October 2014

15/10/14 MISM 2014 -‐ Strategy -‐ Pr Bruno M.WATTENBERGH -‐ © 1

MISM 2014 -‐ Strategy -‐ Pr Bruno M.WATTENBERGH -‐ © 15/10/14 2

Give me some takeaway from the previous course ! Come on ! Dare … J

Types of industry ? •  Hypercompetitive industries - where the

frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change. •  Hypercompetition often breaks out in otherwise

oligopolistic industries (e.g. mobile phones). •  Organisations interact in a series of competitive

moves in hypercompetition which often becomes extremely rapid and aggressive as firms vie for market leadership.


Airlines Industry 5 Forces ?


Airlines industry: 5 forces 1.  Power of the categories of buyers ?

–  What is the power of the end consumer ?

–  What is the power of the channels ?



What is the power of the channels ? –  Aggregator website have concentrated consumers' buying power : easy

comparison, transparency of prices.

–  Global distributions systems (GDSs) have made it very easy for new aggregator websites to enter the market. 3 dominant GDSs.

–  Travel agents now often represent the entire demand of large corporate clients, with significant power to move demand across carriers. Corporate policies more price oriented.



What is the power of the End Consumer ? –  Air travel for leisure customers is a significant discretionary spending item,

increasing price sensitivity.

–  Switching costs are very low for leisure customers. Loyalty programs primarily matter to those who are traveling extensively on business.

–  Frequency of a particular route is the key (and probably the only) differentiator among airlines of a similar type for a given connection for business travelers.


Airlines industry: 5 forces 1.  Power of buyers ?

–  Online-comparison easy & transparent

–  Powerful channels concentrated = Strong intermediaries

–  Price sensitive / low differentiation


Airlines industry: 5 forces 2.  Power of the suppliers ?

–  Who are the suppliers from your point of view ?



–  Airframe & engine manufacturers

–  Labor

–  Airports


2.  Power of suppliers à Airframe & Engine manufacturers ?

–  Highly concentrated globally (Airbus / Boeing) à high bargaining power.

–  Switching costs between airframes and engines are low. Time to deliver is a switching barriers.

–  Alternate markets : defense equipment. –  Airframe manufacturers have exploited their bargaining power to

shift most of the market risk associated with aircraft purchases to airlines.

–  The aggressive competition between aircraft manufacturers has encouraged aggressive capacity buildup and reducing barriers to entry into the airline industry.


2.  Power of suppliers à Labor ?

–  Dependence on skilled employees, pilots and technical personnel (overall for network airlines operating in hubs) à powerful unions à kind of local monopolies. Union power increases as companies mature à eroding industry structure and encouraging new entrants … or bankruptcy.

–  One of the groups of employees usually captures a significant part of the value created by the industry.

–  Union power and regulation have led to significant lack of downward flexibility in staffing levels and wages, especially for legacy airlines.

–  Significant cost differences between new entrants, companies in bankruptcy protection, and unionized incumbents.


2.  Power of suppliers à Airports ?

–  Many local monopolies with limited competition from nearby secondary airports. Few new airports.

–  Pricing power that the local monopoly gives to an airport depends significantly on the potential traffic flows to which it provides access. Many US & European airports are used by local governments to foster economic development through subsidizing airlines' operations.

–  Airport switching costs are high, especially for network airlines that are focused on providing connections. Lower switching costs for low cost carriers (LCC).

–  Airports marginally better profitability compared to airlines indicates that their effective bargaining power has been limited.




–  Labor

–  Airports


Airlines industry: 5 forces 3.  Threat of substitutes ?

–  Time and inconvenience of security measures have reduced the overall attractiveness of scheduled airlines transport relative to substitutes.

–  Greatest substitute for business travellers = no travel à videoconferencing of better quality and lower cost.

–  For short-haul connections, punctuality is an issue out of reach for airlines.

–  Substitutes for short-haul customers : trains, high-speed trains, cars, ferries !


Airlines industry: 5 forces 4.  Threat of entry ?

? New entrants ?

+- 1.300 new airlines established in the past 40 years (on av. +- 30/y). Very cyclical. No slowing down … despite low industry profitability !


Airlines industry: 5 forces 4.  Threat of entry new airline (Porter’s article) ?

1)  Economies of scale on the demand-side ? 2)  Supply-side economies of scale ? 3)  Customer switching costs ? 4)  Incumbency advantage ? à Slots ? 5)  Access to distribution channel ? 6)  How to finance an airplane ? 7)  Government policy ?



1)  Economies of scale on the demand-side ? Yes but … ! 2)  Supply-side economies of scale ? Limited … 3)  Customer switching costs ? No (except loyalty program) 4)  Incumbency advantage ? à Slots ? (deregulation) 5)  Access to distribution channel ? à No 6)  How to finance an airplane ? à easier 7)  Government policy ? à deregulation



Few barriers to entry

Strong deregulation

Easy to use variable cost instead of fixed costs


Airlines industry: 5 forces 5.  Intensity of the rivalry ? 1)  Perishable Product : unfilled airline seat cannot be stored. Costs for providing capacity are thus

largely sunk in the short term thus creating severe pressure on price discounting.

2)  Undifferentiated Product : The product offered is highly similar across airlines as new product features (flat bed, entertainment system etc.) are quickly imitated among peers.

3)  Low Marginal Cost Structure : High fixed costs exist at the level of individual aircraft, marginal costs for adding additional customers are very low, which further reinforces price discounting.

4)  High Exit Barriers : The disappearance of capacity and exit of companies are two key adjustment mechanisms through which other industries support normal returns. In the airline industry, neither of the two adjustment mechanisms work:

5)  Aircraft capacity can easily be deployed to different geographic markets. Thus, even if particular companies might leave the market, airline capacity usually stays in the market, and disappears only in the long run.


Where is the value on the chain ?


Please read …

Exam question : explain the migration

of the value along the value chain of an

industry …


Exercise on Porter’s 5 Forces ? Read carefully the HBR case “Cola Wars Continue : Coke and Pepsi in 2010” by David B. YOFFIE & Renee KIM.

•  Abstract : The competition between Coca-Cola and Pepsi is a classic corporate battle that began in America a century ago and has expanded into global competitive warfare. In the discussion of this case, you will discover how the dynamics of competition between Coke and Pepsi have shaped the soft drink industry.

Study Questions using the 5 Forces of Porter (potential exam questions) :

1.  Why, historically, has the soft drink industry been so profitable ?

2.  Compare the economics of the concentrate business to that of the bottling business : Why is the profitability so different ?

3.  How has the competition between Coke and Pepsi affected the industry’s profits ?


5 Forces of Porter … Critics ? Main attacks : •  Some have criticized its weak theoretical foundations, arguing that the

structure-conduct-performance approach to industrial organization that underlies it lacks rigor (especially when compared with the logical robustness of game theory).

•  Others have noted its empirical weaknesses.

•  It appears that industry environment is a relatively minor determinant of a firm's profitability. Studies of the sources of inter-firm differences in profitability have produced very different results but all acknowledge that industry factors account for a minor part (less than 20%) of variation in return on assets among firms.


Cycles of Industry ? Cycles of

competition Source : Adapted with the permission of The Free Press, a Division of Simon & S c h u s t e r , I n c . , f r o m Hypercompetitive Rivalries: C o m p e t i n g i n H i g h l y Dynamic Environments by Richard A. D’Aveni with Robert Gunther. Copyright © 1994, 1995 by Richard A. D’Aveni. All rights reserved


Cycles of Competition


The Industry Life Cycle ?


Key Success Factors ? •  The 5 Forces framework of Michael Porter allows us to determine an

industry's potential for profit but NOT how is this profit shared between the different firms competing in that industry ?

•  When assessing a company or an industry, it is also mandatory to look explicitly at the sources of competitive advantage within an industry.

•  To survive and prosper in an industry, a firm must meet 2 criteria : 1.  it must supply what customers want to buy … 2.  it must survive competition.


Key Success Factors ? (2) •  Customers : they are the raison d'être

of the industry and its underlying source of profit. Who are our customers ? What are their needs ? How do they choose between competing offerings ? Once we recognize the basis of customers' preferences we can then identify the factors that confer success upon the individual firm.

•  Nature of competition in the industry : How intense is competition and what are its key dimensions ?


Strategic Groups Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.

•  These characteristics are different from those in other strategic groups in the same industry or sector.

•  There are many different characteristics that distinguish between strategic groups.

•  Strategic groups can be mapped on to two dimensional charts – maps. These can be useful tools of analysis.


Characteristics to identify strategic groups


Example of Strategic groups in the Indian pharmaceutical industry


Uses of strategic group analysis ? •  Understanding competition - enables to focus on direct (relevant)

competitors within a strategic group, rather than the whole industry. (E.g. Tesco will focus on Sainsburys and Asda)

•  Analysis of strategic opportunities - helps identify attractive “strategic spaces” within an industry (the industry is usually not homogeneous.

•  Analysis & evaluation of “mobility barriers” i.e. obstacles to movement from one strategic group to another. These barriers can prevent you to enter more attractive groups. Barriers can be built to defend an attractive position in a strategic group.


Market segment A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.

•  Where these customer groups are relatively small, such market segments are called “niches”.

•  Customer needs vary. Focusing on customer needs that are highly distinctive is one means of building a secure segment strategy.

•  Customer needs vary for a variety of reasons – these factors can be used to identify distinct market segments.

•  Not all segments are attractive or viable market opportunities – evaluation is essential.


Some Bases of market segmentation (1)


Who are the strategic customers? A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased. Examples : •  For a food manufacturer it is the multiple retailers (e.g.

Tesco) that are the strategic customers not the ultimate consumer.

•  For a pharmaceutical manufacturer it is the health authorities and hospitals not the final patient.


Notion of “complementors” ? •  Industry analysis can be influenced another force

called “Complementor” …

•  An organization is a complementor if : –  A player is a complementor if customers value your

product more when they have the other player’s product than when they have your product alone. (Oscar Mayer and Coleman’s)

–  A player is a competitor if customers value your product less when they have the other player’s product than when they have your product alone. (Pepsi and Coke)


Examples of Complementors ? •  Microsoft & McAfee ? •  Intel & Microsoft ? •  Batteries suppliers & electronic device ? •  Car & insurance / leasing companies •  TV Shows & TV guides • 


Complementor ? à “Value Net”


Figure 2.3 : The value net Reprinted by permission of Harvard Business Review. From ‘The Right Game’ by A. Brandenburger and B. Nalebuff, July–August 1996, pp. 57–64. Copyright © 1996 by the Harvard Business School Publishing Corporation. All rights reserved

Other support •  Video The Five Competitive Forces That Shape Strategy :

http://www.youtube.com/watch?v=mYF2_FBCvXw

•  HBR Article on the 5 Competitive Forces that shapes strategy.


Chapter Summary ? •  Environmental influences can be thought of as layers around an

organisation, with the outer layer making up the macro-environment, the middle layer making up the industry or sector and the inner layer strategic groups and market segments.

•  The macro-environment can be analysed in terms of the PESTEL factors, from which key drivers of change can be identified. Alternative scenarios about the future can be constructed according to how the key drivers develop.

•  Industries and sectors can be analysed in terms of Porter’s five forces – barriers to entry, substitutes, buyer power, supplier power and rivalry. Together, these determine industry or sector attractiveness.


Chapter Summary (2) ? •  Industries and sectors are dynamic, and their changes can be

analysed in terms of the industry life cycle, comparative five forces radar plots and hypercompetitive cycles of competition.

•  In the inner layer of the environment, strategic group analysis, market segment analysis and the strategy canvas can help identify strategic gaps or opportunities.

•  Blue Ocean strategies characterised by low rivalry are likely to be better opportunities than Red Ocean strategies with many rivals.

•  The most important reason for environmental analysis is to identify OPPORTUNITIES AND THREATS.


Assignment Next Course •  Readings


Assignment Next Course •  Preparation


Integrative Case 1.  Draft a quick PESTEL analysis

2.  Work out a 5 Forces analysis

3.  What is the maturity of this industry ?

4.  Try to identify strategic groups in this industry

5.  Who are the strategic customers in this industry ?

6.  Check the performance of this industry and comment on the intensity of the rivalry ?

7.  Are there some complementor on this industry ? Draft a value net ….


Potential Exam Questions •  Explain the reasons why the analysis of the environment is a key task for

strategists ? •  Describe the different layers of the environment and the respective

methodologies to understand them ?

•  What would be the advises you would give to anybody using the Pestel analysis ?

•  What is the interest to study the industry and what is an industry ? •  Explain the differences of performances within and betwwen different

industries ? Why do you have those differences in a perfect competition situation ?

•  What are the weaknesses of PESTEL vs 5 Forces ?


Potential Exam Questions (2) •  Describe the 5 Forces in details ? Give some examples ? •  Describe and explain the 7 main barriers to entry ? Give some

examples •  Describe and explain the factors affecting the bargain power of

Customers / Suppliers ? Give some examples … •  Describe and explain the types of industries regarding their

intensity of competition ? •  In the airline industry, explain the migration of value along the

the value chain of the industry ? •  Explain the main critics of the 5 Forces of M. PORTER ?


Potential Exam Questions (3) •  Describe the entrance of a new player on the market and the

reaction of the incumbent (based on Richard d’Aveni and Clayton Christensen theories) ?

•  Describe and explain the life cycle of an industry ? •  Describe what is a strategic group and how you can use this

methodology ? •  What are the difference between a strategic group and a market

segment ? •  Describe and explain the notion of complementor and value net

and give some examples ?


Potential Exam Questions (4) Read carefully the HBR case “Cola Wars Continue : Coke and Pepsi in 2010” by David B. YOFFIE & Renee KIM.

•  Abstract : The competition between Coca-Cola and Pepsi is a classic corporate battle that began in America a century ago and has expanded into global competitive warfare. In the discussion of this case, you will discover how the dynamics of competition between Coke and Pepsi have shaped the soft drink industry.

Study Questions using the 5 Forces of Porter (potential exam questions) :

1.  Why, historically, has the soft drink industry been so profitable ?

2.  Compare the economics of the concentrate business to that of the bottling business : Why is the profitability so different ?

3.  How has the competition between Coke and Pepsi affected the industry’s profits ?


Relevant book sections •  Pages 48 to 81 •  Read the section 2.3.2. about the dynamics of the industry

structure and overall the “Value Net” with the “complementors” theory (Figure 2.3), the Industry Life Cycle (Figure 2.4) and the Cycles of Competition (Figure 2.6).

•  You don’t need to read the “Blue Ocean Thinking fort this part (covered later).

•  Read “How much industry matter” in the Key Debate Section (Page 75).

•  Don’t forget to read the summary (Page 76)


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