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Introduction
Introduction
Module II
Module II

Module I

 
 
  Module III Module IV  
  Module III Module IV  

Module III

Module IV

 
 
Module V Roll-out Qtr 1 Qtr 2 Qtr 3 Qtr 4 Action 1 Action 2
Module V
Roll-out
Qtr 1
Qtr 2
Qtr 3
Qtr
4
Action 1
Action 2
Action 3
Action 4
Action 5
Module VI
Module VI

Conclusion

Module II

Structure and dynamics of

the industry

4 Action 1 Action 2 Action 3 Action 4 Action 5 Module VI Conclusion Module II

Contents of Module II

Introduction

Industry structure

Players analysis

Strategic group analysis

Substitution analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Industry analysis frameworks

Structure-conduct-performance

The five forces

The strategic triangle

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

2

Introduction

Schedule for the A.T. Kearney Business Unit Strategy Training Program

Time Monday Tuesday Wednesday Thursday Friday 8-9 Introduction 9-10 10-11 Module II Module III Module
Time
Monday
Tuesday
Wednesday
Thursday
Friday
8-9
Introduction
9-10
10-11
Module II
Module III
Module V
Final presentation
11-12
Module I
12-1
Conclusion
1-2
Lunch
Lunch
Lunch
Lunch
Lunch
2-3
Module VI
Guest Speaker
3-4
Module IV
Guest Speaker
4-5
Case preparation
Case preparation
Case preparation
5-6
Strategy literature
review
6-7
Case presentation
Case presentation
Case presentation
Case Dinner preparation
7-8
8-9
Dinner
Dinner
Dinner
Dinner
9-10
10-?
Source: A.T. Kearney
A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING
Module II

3

Introduction

Positioning of Module II in the overall training context

Module I Identification of the key issues of the engagement

Module II Structure and dynamics of the industry

engagement Module II Structure and dynamics of the industry Module III Characteristics and dynamics of the
engagement Module II Structure and dynamics of the industry Module III Characteristics and dynamics of the
engagement Module II Structure and dynamics of the industry Module III Characteristics and dynamics of the

Module III Characteristics and dynamics of the individual companies

Module V Definition and evaluation of strategic alternatives

V Definition and evaluation of strategic alternatives Module IV Execution capacity of the client Module VI
V Definition and evaluation of strategic alternatives Module IV Execution capacity of the client Module VI

Module IV Execution capacity of the client

alternatives Module IV Execution capacity of the client Module VI Implementable recommendations Roll-out Qtr 1
alternatives Module IV Execution capacity of the client Module VI Implementable recommendations Roll-out Qtr 1
Module VI Implementable recommendations Roll-out Qtr 1 Qtr 2 Qtr 3 Qtr 4 Action 1
Module VI
Implementable
recommendations
Roll-out
Qtr 1
Qtr 2
Qtr 3
Qtr 4
Action 1
Action 2
Action 3
Action 4
Action 5

Note: The order of presentation of the curriculum elements should not be interpreted as a sequential guideline for a strategy engagement. Different elements of the program may be referenced at different times in the engagement

Source: A.T. Kearney

at different times in the engagement Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

at different times in the engagement Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

at different times in the engagement Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

4

Introduction

Module II teaches techniques and frameworks used to analyze the structure and dynamics of the industry

Generate an understanding of the environment in which the client and its competitors

compete

Establish an overview of the specifics of the industry in which the client acts

Ensure an understanding of the competitive rivalry

Source: A.T. Kearney

an understanding of the competitive rivalry Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

an understanding of the competitive rivalry Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

an understanding of the competitive rivalry Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

5

Introduction

Deliverables and techniques in Module II

Deliverables

Techniques

Industry structure

Players analysis

Strategic group analysis

Substitution threat analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Industry life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Demand and supply economics

 

Structure-conduct-performance

Industry analysis frameworks

The five forces

The strategic triangle

Source: A.T. Kearney

five forces • The strategic triangle Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

five forces • The strategic triangle Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

five forces • The strategic triangle Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

6

Contents of Module II

Introduction

Industry structure

Players analysis

Strategic group analysis

Substitution analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Industry analysis frameworks

Structure-conduct-performance

The five forces

The strategic triangle

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

7

Industry structure

Introduction

Describing the industry in which the client is acting establishes the boundaries of the competitive arena

Understanding the industry structure

Establishes a foundation for many other analyses

related to the industry and competing companies

Creates a point-of-departure for related analyses

Reveals the context in which the client competes

Identifies basic information about the competition

Suggests an appropriate positioning of the client company’s offering

Identifies opportunities for growth into related areas

Source: A.T. Kearney

opportunities for growth into related areas Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

opportunities for growth into related areas Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

opportunities for growth into related areas Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

8

Industry structure

Introduction

An industry is a group of companies that offer a product or range of products that are close substitutes for each other

Definition

“Economists define an industry as a group of companies that supply a market where a market is defined in terms of substitutability, both on the demand side and the supply side”

Source: Grant, R.M. (1995); Contemporary Strategy Analysis

Source: Grant, R.M. (1995); Contemporary Strategy Analysis A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 9

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Source: Grant, R.M. (1995); Contemporary Strategy Analysis A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 9

Module II

Source: Grant, R.M. (1995); Contemporary Strategy Analysis A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 9

9

Industry structure

Introduction

An industry can be defined from two perspectives, both of which are based on the concept of substitute products

Product point-of-view (supply side)
Product point-of-view
(supply side)
Market point-of- view (demand side)
Market point-of-
view (demand side)

Analyze companies

offering:

The same product

A similar product range

Analyze companies catering to:

The same need

The same customer group

Source: A.T. Kearney

same need • The same customer group Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING This definition creates four levels of “industry”

This definition creates four

levels of “industry” based on the concept of product or market substitution

Module II

definition creates four levels of “industry” based on the concept of product or market substitution Module

10

Industry structure

Introduction

An industry can be defined on four different levels and its scope can vary considerably, depending on which perspective is taken

Product approach (supply side)

The automaker, Cadillac, can have four different levels of competition

Manufacturers of full-size luxury automobiles such as Lincoln, BMW, Same Mercedes and Lexus products Similar
Manufacturers of full-size luxury
automobiles such as Lincoln, BMW,
Same
Mercedes and Lexus
products
Similar product
or product range
All automobile manufacturers
Products that serve
All automobile manufacturers, and
same needs
manufactures of motorcycles, bicycles
and trucks
Products competing for
the spending of the same
All companies selling major consumer
durables, such as new homes, household
customer group
appliances, etc.

Market approach

(demand side)

Source: Kotler, P. (1997); Marketing Management

(demand side) Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

(demand side) Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

(demand side) Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

11

Industry structure

Introduction

Defining the industry from a product perspective versus a market perspective

Company

Product perspective

Market perspective

Revlon

We make cosmetics

We sell hope

Missouri - Pacific Railroad

We run a railroad

We are a people and goods mover

Xerox

We make copying equipment

We help improve office productivity

Standard Oil

We sell gasoline

We supply energy

Columbia pictures

We make movies

We market entertainment

Encyclopedia Britannica

We sell encyclopedias

We distribute information

Carrier

We make air conditioners and furnaces

We provide climate control in the home

Source: Kotler, P. (1997); Marketing Management

in the home Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

in the home Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

in the home Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

12

Industry structure

Introduction

From a theoretical perspective, five different types of industry structures exist

 

Type

 

Characteristics

Example

 

A

pure monopoly exists when only one company provides a

 

Pure monopoly

certain product or service in a certain country or area

Local electricity company

 

A

pure oligopoly consists of a few companies producing

 

Pure oligopoly

essentially the same commodity

Oil and steel

 

A

differentiated oligopoly consists of a few companies

 

Differentiated oligopoly

producing partially differentiated products

Autos and white goods

 

A

monopolistic competitive industry consists of many

 

Monopolistic competition

competitors able to differentiate their offerings in whole or parts

Restaurants and beauty shops

 

A

pure competitive industry consists of many competitors

 

Pure competition

offering the same product and service

Table salt

Source: Kotler, P. (1997); Marketing Management

Table salt Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Table salt Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

Table salt Source: Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

13

Contents of Module II

Introduction

Industry structure

Players analysis

Strategic group analysis

Substitution analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Industry analysis frameworks

Structure-conduct-performance

The five forces

The strategic triangle

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

14

Industry structure

Players analysis

Description

An overview of the different players’ positions and directions provides an

understanding of the players’ current objectives, strategies, and capabilities

Current strategy

Strategic intent Information on the company’s intended direction Realized strategy

Information on capital

investment decisions, product lines, mergers, acquisitions and alliances, and advertisement and promotion indicate the

realized strategy

Objectives

Does the current performance meet objectives in terms of profitability, market share, growth, R&D,

performance, etc?

Will the current objectives

change in the future?

Capabilities

How serious is the potential challenge from this competitor?

Financial reserves

Capital equipment

Work force

Brand loyalty

Management

Alliances

• Brand loyalty • Management • Alliances What changes in competitors’ strategies are likely as a

What changes in competitors’ strategies are likely as a result of the client’s strategic initiatives?

Note: Also see Module III, Purpose of the organization Source: A.T. Kearney

Module III, Purpose of the organization Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Module III, Purpose of the organization Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

Module III, Purpose of the organization Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

15

Industry structure

Players analysis

Usage

A players analysis enables a company to better understand the behavior of its

competition

Purpose of players analysis

• Forecast competitors’ future strategies and decisions

• Predict competitors’ reactions to the client’s strategy and competitive initiatives

• Determine how competitors’ behavior patterns can be influenced

• Gain insights into competitors’ competitive advantages and use this information to improve the client’s chances of success

Questions to answer

Who are the competitors?

What are their objectives?

What are their strategies?

What are their reaction patterns?

What are their strengths and weaknesses?

Source:

Grant, R.M. (1995); Contemporary Strategy Analysis; Kotler, P. (1997); Marketing Management

Strategy Analysis; Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 1

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Strategy Analysis; Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 1

Module II

Strategy Analysis; Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 1

16

Industry structure

Players analysis

Usage

A players analysis makes competitor responses more predictable which enables

the client to optimize its strategic initiative

Predict behavior

Define relevant competitors

Define the strategic shifts a competitor might initiate

Define potential retaliatory actions a competitor may take against the client’s

proposed strategy

How should client respond

Determine the most effective actions

with respect to competitors' positions

Determine how the client should communicate information to competitors. “Signaling” can be used to influence competitor perceptions and behavior to stimulate or suppress specific reactions from competitors

Source: A.T. Kearney; Hail, O. and Robertson, T. (1991); Toward a Theory of Competitive Market Signaling

T. (1991); Toward a Theory of Competitive Market Signaling A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

T. (1991); Toward a Theory of Competitive Market Signaling A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

T. (1991); Toward a Theory of Competitive Market Signaling A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

17

Industry structure

Players analysis

Example

All relevant competitors should be analyzed to generate a complete picture of the competitive rivalry

Listing of key players

Intended and realized strategy offensive/defensive?

Does the current performance meet goals?

How serious is the potential challenge?

Strong

Weak

Size

Business areas

Other

Source: A.T. Kearney

Overview of Nestlé and Danone Player Current strategy Objectives Capabilities Other Nestlé Strategic intent •
Overview of Nestlé and Danone
Player
Current strategy
Objectives
Capabilities
Other
Nestlé
Strategic intent
• To realize the USD 100
• The world’s largest food
• Revenue: USD 45 bill.
To develop the position
as the world’s largest
food company
Realized strategy
billion revenue target in
year 2000
company with more than
490 factories in 70
countries
• Net profit: USD 2.6 bill.
• Employees: 221,144
• Business areas:
Growth by strategic
acquisitions
Hot and cold
beverages
Milk products
Joint venture with
General Mills
• Very strong brands such
as Nescafe, KitKat, Lion,
After Eight, and
Nestlé
Chocolate and
Growth by exploiting
existing brands in new
growth areas
• World no.1 in mineral
water, milk powder and
dried milk
confectionery
Convenience and
prepared foods
• No. 2 in ice cream
Pharmaceutical
• Generally a dominating
products
player in Europe
Danone
Strategic intent:
• To reverse a four year
• The world’s largest
producer of fresh dairy
products
• Revenue: USD 13.6 bill.
To become one of the
world's leading food
companies
Realized strategy:
decline in operating
margins by 1998
• Net income: USD 550
mill.
• Strong brands such as:
• Employees: 81,579
Evian, Volvic,
Kronenburg, etc.
• Business areas:
• Focus on a limited
number of core
businesses
– Diary products
• Mainly a European
vendor, except for dairy
– Grocery
– Biscuits
• Focus on developing
products and mineral
– Beer
synergies between
– Mineral water
activities
water, where Danone has
a strong global presence
– Containers
Source: A.T. Kearney
3
A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING
Module II
18

Industry structure

Players analysis

Methodology

Methodology for using the players analysis

 

Input

 

Issue analysis

Client

data/interviews

Customer and

supplier

surveys/interviews

Annual reports

Analyst reports

SEC filings*

Industry reports

Expert interviews

1 Define players
1
Define players
2 Analyze players
2
Analyze players
3 Summarize competitive environment
3
Summarize
competitive
environment

Trade Journals

 

Press clippings

List all potential competitors

Identify most important

Determine the strengths and weaknesses of individual

Purpose of the organization

Identify key information:

competitors

Revenue

Create a matrix of

players:

 

Profit

relevant information

Revenue and profit by

Size

Define the competitors

business

Products

on the basis of their

Cash flow position

Customers

industry and market

Experience curve

 

Stakeholders

perspective

Stock price performance

Mission/vision

Define in which segments they operate

• Assess players’

capabilities

Financial return measures

Product/market

performance

Output

Industry description

Key success factors of the industry

Game theory

Decision tree

End game analysis

• Players’ focus and competitive positioning/strengths/

weaknesses vis-à-vis

the client

* Reports filed by publicly held companies with the Securities and Exchange Commission: e.g., 10K, 10Q

Source: A.T. Kearney

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

19

Industry structure

Players analysis

Conclusion

Conclusion

Key points

Use purpose of the organization from Module III, which examines vision/mission, objectives,

strategies, and value propositions, as a point of departure

• Be careful not to neglect examination of “peripheral” players

• Player’s analysis is a fundamental techniques with many uses: overview of competitive structure, predicting competitive behavior, alliance opportunities, etc.

The scope of the project will determine the depth of the analysis required

Strengths

Establishes overview of industry situation

Predicts competitor behavior

Useful starting point for many other techniques

Weaknesses

 

References

Grant, R.M. (1995); Contemporary Strategy Analysis - Concepts, Techniques, Applications;

Blackwell Business

 

Hail, O. and Robertsen, T. (1991); Toward a Theory of Competitive Market Signaling; Strategic

Management Journal, 12

Johnson, G. and Scholes, K. (1984); Exploring Corporate Strategy; Prentice Hall

Kotler, P. (1997); Marketing Management - Analysis, Planning, Implementation and Control;

Prentice Hall

Source: A.T. Kearney

and Control ; Prentice Hall Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

and Control ; Prentice Hall Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

and Control ; Prentice Hall Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

20

Contents of Module II

Introduction

Industry structure

Players analysis

Strategic group analysis

Substitution analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Industry analysis frameworks

Structure-conduct-performance

The five forces

The strategic triangle

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

21

Industry structure

Strategic group analysis

Description

A strategic group is part of the substructure of an industry

Definition*

A strategic group is a group of companies in an

industry following the same or a similar

strategy along relevant strategic directions

A strategic group has common specific assets and thus follows common strategies in setting key decision variables

* The strategic group concept was developed at Harvard Business School

Source:

Grant, R.M. (1995); Contemporary Strategy Analysis Kotler, P. (1997); Marketing Management

Strategy Analysis Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 2

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Strategy Analysis Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 2

Module II

Strategy Analysis Kotler, P. (1997); Marketing Management A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 2

22

Industry structure

Strategic group analysis

Description

Strategic group analysis is a commonly used technique for analyzing players’

positions in the competitive environment

Strategic groups can be created based on many different factors

groups can be created based on many different factors • Specialization • Brand identification • Push

Specialization

Brand identification

Push vs pull

Channel selection

Product quality

Technological position

Vertical integration

Cost position

Service

Price policy

Financial or operating leverage

Parent company relationship

Government relationship

Parent company relationship • Government relationship • Most of the empirical research into strategic groups

Most of the empirical research into strategic groups has focused on the differences in profitability between companies in different groups It can often be very useful to generically differentiate the groups based on “How they compete” and “Where they compete”

Source: A.T. Kearney

compete” and “Where they compete” Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

compete” and “Where they compete” Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

compete” and “Where they compete” Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

23

Industry structure

Strategic group analysis

Description

A goal of strategic group analysis is the comprehension of the underlying factors that determine a company’s profitability

Profitability Spread Spread within Specific company within strategic group profitability industry Determinants
Profitability
Spread
Spread within
Specific company
within
strategic group
profitability
industry
Determinants
• Industry wide elements of
• Strategic group specific elements
• Company specific elements that
structure that determine the
of structure that apply differently
apply differently to companies
competitive forces and that
apply equally to all
companies in the industry
to companies in different strategic
groups
within a strategic group
– Height of mobility barriers
– Rate of growth in demand
– Potential for
differentiation
– Bargaining power of suppliers
and customers
– Scale of companies relative to
others in the group (if
economies of scale are an issue)
– Substitution threat
– Cost of entry into the group
(e.g. via a company’s position
– Structure of supplier
– Exposure to rivalry from other
in another industry)
industries
groups
– Ability to implement the
common strategy of the
strategic group
Source: A.T. Kearney
A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING
Module II

24

Industry structure

Strategic group analysis

Usage

The strategic group analysis enables consultants to more easily identify potential

strategies and to better predict competitors’ responses to the client’s strategic initiatives

Key strategic questions

• What are the directions of competitors’ strategic movements over time?

Are there uncovered and attractive market segments

on the strategic map?

• How can we exploit the client’s competitive advantage to move toward an uncovered segment?

Are there barriers against these strategic movements? Can they be overcome?

• What are competitors’ likely responses to the

client’s strategic moves? Do they face mobility

barriers?

Establish which dimensions differentiate companies or groupings of companies from each other
Establish which
dimensions
differentiate companies
or groupings of
companies from each
other
Assess current and potential strategic moves of the client and of other competitors in the
Assess current and
potential strategic
moves of the client and
of other competitors in
the market

Source: A.T. Kearney

and of other competitors in the market Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

and of other competitors in the market Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Module II

and of other competitors in the market Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

25

Industry structure

Strategic group analysis

Usage

A strategic group analysis provides a useful means to assess competitive dynamics

Isolating Dimension mechanisms Industry Strategic group Strategic group Mobility
Isolating
Dimension
mechanisms
Industry
Strategic
group
Strategic
group
Mobility

barriers

Individual player

Dimension

group Mobility barriers Individual player Dimension Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY

Source: A.T. Kearney

Individual player Dimension Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING • There

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

There should be a correlation between the key success factors and the dimensions in focus

The sustainability of the groups will depend on the:

Mobility barriers of each group (the barriers that characterize each group and how easily these can be penetrated)

Isolating mechanisms of each company (the unique resources of the company that will aid in preserving advantage) or position within a group

(the unique resources of the company that will aid in preserving advantage) or position within a

Module II

(the unique resources of the company that will aid in preserving advantage) or position within a

26

Industry structure

Strategic group analysis

Usage

The strength of a strategic group depends on its mobility barriers and isolating

mechanisms

Sources of mobility barriers

Market-related strategies

Product line

User technologies

Market segmentation

Distribution channels

Brand names

Geographic coverage

Selling systems

Industry supply characteristics

Economies of scale (in production, marketing,

administration, etc.)

Manufacturing processes

R&D capability

Marketing and distribution system

Characteristics of companies

Ownership

Organizational structure

Control systems

Management skills

Boundaries of the company (diversification, vertical integration)

Company size

Relationships with influence groups

Company size – Relationships with influence groups Sources of isolating mechanisms • Sunk costs and

Sources of isolating mechanisms

Sunk costs and limited markets

Switching costs and search costs

Consumer and producer learning

Team embodied skills

Unique resources

Special information

Patents and trademarks

Reputation and image

Source: A.T. Kearney

trademarks • Reputation and image Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

trademarks • Reputation and image Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

trademarks • Reputation and image Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

27

Industry structure

Strategic group analysis

Example

By mapping the industry players into strategic groups, the client’s closest competitors are defined

Dimensions should differentiate the players into groups relevant to the issues. Choosing appropriate dimensions may required trial and error

Global players where the economies of operating in a particular market depend not only on what the company is doing in that market, but on its worldwide activities

Local players with a very focused product range

Source: A.T. Kearney

Strategic grouping of food and beverage industry players • CPC International • Danone (BSN) •
Strategic grouping of food and beverage industry players
• CPC International
• Danone (BSN)
Kellogg's
• Quaker Oats
• Nestlé
PepsiCo
• Sara Lee
• Philip Morris (Kraft Jacobs Suchard)
Carlsberg
• Heinz
• Unilever
Coca Cola
• RJR Nabisco
• Proctor & Gamble
• Bols Wessanen
Seagram
• Cadbury Schweppes
Bongrain
• GrandMet
Beesnier
• United Biscuits
Heineken
• Bahlsen
• LVMH
MD Foods
• Albert Fisher
• Conagra
Firesland Dairy Foods
• Tate & Lyle
Danish Crown
• Eridania Beghin-Say
Allied Domecq
• Tomkins
• Dalgety
Lindt & Sprüngli
Irish Dairy Board
Dairy Crest
Soiaal
Unigate
Südfleisch
Avonmore
Danisco
• Associated British Foods
Coberco
Pernod Ricard
• Orkla
• Hillsdown
Socopa
Südzucker
• Saint Louis
• Northern Foods
BASS
Moksel
• Parmalat
Guinness
Pripps
Interbrew
Booker
Campina Melkunip
Whitbread
Scottish & Newcastle
Focused
Product range
Wide
3
Source: Datamonitor; A.T. Kearney
A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING
Module II
Geographic scopeLow
High

28

Industry structure

Strategic group analysis

Example

Strategic groups might become evident when evaluating an industry using matrices with “how to compete” and/or “where to compete” factors as dimensions

The cookie industry consists of five major strategic groups Source: A.T. Kearney 3

The cookie industry consists of five major strategic groups

Source: A.T. Kearney

3

Choose “how to compete” and/or “where to compete” factors as the generic matrix dimensions Snackwells
Choose “how to
compete” and/or
“where to compete”
factors as the generic
matrix dimensions
Snackwells
Nips
McViti’s
Nilla
Wafers
Mother’s
Entenmann’s
Freyhofers
Pepperidge
Farms
Blue chip
Mrs
Field’s
Sunshine
David’s
Hydrox
Strategic groups will
generally become clear
within the matrix
Follower
Pricing policy
Leader
Relative health value
HighLow

Source: A.T. Kearney

Leader Relative health value HighLow Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Leader Relative health value HighLow Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

Leader Relative health value HighLow Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

29

Industry structure

Strategic group analysis

Example

The strategic group analysis can also be applied to analyze development over a period of time

Shifts in the strategic intent of a strategic group can be captured on such a matrix given that the dimensions are relevant to the developments

Source: A.T. Kearney

Development of the food industry in the 1980s • Unilever • Danone • Nestlé Multinational
Development of the food industry in the 1980s
• Unilever
• Danone
• Nestlé
Multinational
major brands
Minor
• United Biscuits
• Colmans
national
brands
• Unigate
• ABF
National
National
major brands
own labels
• Hillsdown
• Booker
Focused
Wide
Marketing intensity*
* Marketing costs as a percentage of sales
Source: Datamonitor; A.T. Kearney
3
A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING
Module II
30
Geographical coverageLow
High

Industry structure

Strategic group analysis

Example

Companies in the same industry may follow very different strategies

Group A

Narrow line

Lower manufacturing costs

Very high service

High price

Group B

Moderate line

Medium manufacturing costs

Medium service

Medium price

Group C

Full line

Low manufacturing cost

Medium price

Group D

Broad line

Medium manufacturing costs

Low service

Low price

Source: A.T. Kearney

Strategic grouping of food and beverage industry players Group A Mobility barriers • Product line
Strategic grouping of food and beverage industry players
Group A
Mobility barriers
• Product line
• Brand names
Group B
Mobility barriers
• Economics of
scale
• Expertise
• Relationships
with private
Group C
label dealers
Group D
High
Vertical integration
3
Source: Kotler, P. (1997); Marketing Management
Quality
High
Kotler, P. (1997); Marketing Management Quality High Low Low A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module
Kotler, P. (1997); Marketing Management Quality High Low Low A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module
Low Low
Low
Low
P. (1997); Marketing Management Quality High Low Low A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

P. (1997); Marketing Management Quality High Low Low A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

P. (1997); Marketing Management Quality High Low Low A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

31

Industry structure

Strategic group analysis

Methodology

Methodology for using a strategic group analysis

 

Input

Players analysis

SEC filings

Annual reports

Client

 

data/interviews

Expert interviews

Analyst reports

Trade journals

Press clippings

Trends analysis

Substitution threat

analysis

Source: A.T. Kearney

1 2 3 Determine Group players Evaluate group dimensions mobility and direction
1
2
3
Determine
Group players
Evaluate group
dimensions
mobility and
direction

Identify players (see players analysis)

Choose the most relevant dimensions that define how the players compete Ensure that the dimensions

correlate with the

issues analysis

that the dimensions correlate with the issues analysis • • Position client and competitors in the

Position client and competitors in the matrices

Group players with

common

characteristics

Evaluate strategic intent of individual companies to

determine potential

movements within

and between

groups

Study industry

trends to

understand

direction of groups

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

of groups A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Output • Understanding of player characteristics

Output

Understanding of player characteristics

and interaction and reactions to a strategic initiative

Module II

• Understanding of player characteristics and interaction and reactions to a strategic initiative Module II 3

32

Industry structure

Strategic group analysis

Conclusion

Conclusion

Key points

Profitability may at a corporate view be the driver for strategic groups. However, at a business

unit level, other dimensions might be more important determinants of strategic groups

Dimensions whereby strategic groups are identified must be carefully selected to be of relevance

Strategic group dimensions should be chosen on the basis of the identified issues

There are not simply two generic dimensions that can characterize groups from all industries; there are many

Strengths

Assesses strategic dynamics and shifts in the industry

Defines the nearest competitors of the client

Weaknesses

• “Wrong” dimensions will not differentiate groups into useful categories

May require trial and error to find useful dimensions

References

Grant, R.M. (1995); Modern Contemporary Analysis

Kotler, P. (1994); Marketing Management

McGee, J. and Howerad, T. (1986); Strategic Groups: Theory, Research and Taxonomy

Oster, S.M. (1994); Modern Competitive Analysis

Source: A.T. Kearney

S.M. (1994); Modern Competitive Analysis Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

S.M. (1994); Modern Competitive Analysis Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

S.M. (1994); Modern Competitive Analysis Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

33

Contents of Module II

Introduction

Industry structure

Players analysis

Strategic group analysis

Substitution analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Industry analysis frameworks

Structure-conduct-performance

The five forces

The strategic triangle

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

34

Industry structure

Substitution analysis

Description

Substitute products are alternative solutions that meet a particular customer

demand

Definition

Substitute products are those that can perform the same function or satisfy the same need as the given

product of an industry. Substitution

threat analysis identifies three important criteria about products and their substitutes:

The relative value delivered and the price of a substitute when compared

to the existing product

The cost of switching to the substitute product

• The buyer’s tendency to switch between substitute products

Purpose

The goal of the analysis is to understand what products constrain the ability of companies in the

industry to substantially raise their

prices?

Source:

Oster, S.M. (1994); Modern Competitive Analysis Porter, M.E. (1980); Competitive Strategy

Analysis Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 3 5

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Analysis Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 3 5

Module II

Analysis Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 3 5

35

Industry structure

Substitution analysis

Description

By offering an alternative, substitute products limit the potential returns of an industry by placing a ceiling on the price companies in the market can charge

A need for warmth can be satisfied by

Blankets and clothes

Heaters - electric, gas and other

Building insulation

Exercise

– “Warming” food and drink

Increased body fat

Substitutes never offer exactly the same level of functionality - they may provide:

More functionality - e.g. a computer spreadsheet program as a substitute for a calculator

Less functionality - e.g. a type-writer as a substitute for a word- processor

Substitute products also influence the market price in certain cases; e.g. printer industry (laser printers have become cheaper, because of the low cost of ink jets, which offer comparable print quality)

Substitute products play an

uneven role in industry structure analysis

In highly competitive industries or during periods of excess capacity, substitute products play a very modest role

In times of rapidly increasing demand or in industries in which there are few competitors, substitute products may become quite important

Source: A.T. Kearney

products may become quite important Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

products may become quite important Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

products may become quite important Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

36

Industry structure

Substitution analysis

Description

The wider the definition of the “need,” the greater the number of possible substitutes (and any complementary products)

Potential substitutes for metal downhill skis Epoxy and fiberglass skis Cross country skis Winter sports
Potential substitutes for metal downhill skis
Epoxy and
fiberglass
skis
Cross country skis
Winter sports equipment
Leisure products that
can be used in winter
The buyer taking more leisure
time in summer than in winter

Source: A.T. Kearney; Oster, S.M. (1994); Modern Competitive Analysis

A.T. Kearney; Oster, S.M. (1994); Modern Competitive Analysis A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. Kearney; Oster, S.M. (1994); Modern Competitive Analysis A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

A.T. Kearney; Oster, S.M. (1994); Modern Competitive Analysis A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

37

Industry structure

Substitution analysis

Description

The value of the link between industry definition and substitutes should not be understated

Industry definition

1 2 3
1
2
3

4

Source: A.T. Kearney

Substitutes by segment

1 2 3 4
1
2
3
4

Segment C (e.g., coal fuels)

Drivers
Drivers

Value

• Clients don’t often think through to level 4

• Promotes “out of the box” thinking

• Forces thinking about “what business are we really in” and “who are our real competitors

Segment B

(e.g., natural gas

fuels)

Segment A (e.g., refined oil fuels)

(e.g., natural gas fuels) Segment A (e.g., refined oil fuels) A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

(e.g., natural gas fuels) Segment A (e.g., refined oil fuels) A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Module II

(e.g., natural gas fuels) Segment A (e.g., refined oil fuels) A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

38

Industry structure

Substitution analysis

Usage

Substitution analysis is the basis for identifying threats and opportunities in strategy engagements

Defend against substitution Promote substitution • Target switchers early: – Invest in advertising to let

Defend against substitution

Promote substitution

• Target switchers early: – Invest in advertising to let buyers know about the products
• Target switchers early:
– Invest in advertising to let buyers know
about the products
– Improve offering in the areas where own
product offers the greatest relative value to
buyers
• Reduce or eliminate switching costs
• Selective forward integration to create pull-
through demand
• Promote improvements in complementary
products and infrastructure

Improve the value of own products relative to all

substitutes

Redefine competition away from the strengths of the substitute

Enlist suppliers in the defense

Focus on segments least susceptible to substitution

Use

substitutio

n analysis

actively

Source: Porter, M.E. (1985); Competitive Advantage

n analysis actively Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

n analysis actively Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Module II

Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 3 9

39

Industry structure

Substitution analysis

Example

A value/cost matrix can be used to map substitutes

By mapping substitutes, one can determine a product’s optimal

value/cost combination

Value can sometimes be stated in financial terms, but is most often qualitative or based on an arbitrary scale

The diagonal line suggests that there is a level of value/cost equivalence

S1, S2, S3, and S4 deliver more value than

cost. Products S1 and

S3 present the greatest substitution threat

S5 and S6 cost more than the value that they deliver

Products S1 and S3 deliver the most value to the customer with respect to cost

Products S1 and S3 deliver the most value to the customer with respect to cost

Mapping of dairy products

* What customers get relative to next best option

Source: A.T. Kearney

3

get relative to next best option Source: A.T. Kearney 3 S3 S4 S1 Value to customer
S3 S4 S1 Value to customer (match with the S2 underlying need)* S5 S6 Cost
S3
S4
S1
Value to customer
(match with the
S2
underlying need)*
S5
S6
Cost to customer

Note: Such analysis can be related to conjoint analysis Source: A.T. Kearney

can be related to conjoint analysis Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

can be related to conjoint analysis Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

can be related to conjoint analysis Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

40

Industry structure

Substitution analysis

Example

Costs are incurred by customers when they switch among substitutes

Primary switching costs for an international food manufacturer Installation costs Complementary product costs

Primary switching costs for an international food manufacturer

Installation costs
Installation
costs
Complementary product costs Complexity cost Switching costs Service and maintenance costs over the lifetime of
Complementary
product costs
Complexity cost
Switching
costs
Service and
maintenance costs
over the lifetime
of the products
Decommissioning
costs

Purchasing

costs*

Source: A.T. Kearney

3

Each of these switching costs must be addressed both when promoting substitution and defending against it

A next step could

involve a

quantification of

each switching cost

to determine their

impact on the

company

each switching cost to determine their impact on the company * Including delivery to the point

* Including delivery to the point of need at a specific time Source: Porter, M.E. (1985); Competitive Advantage

time Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

time Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

Module II

time Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

41

Industry structure

Substitution analysis

Example

Buyers’ tendency to switch products or services might differ considerably

If up-front investments are needed to use the substitute, buyers without access to

financing might be

restricted from

switching

Risk averse buyers are unlikely to switch

Some buyers are more comfortable

trying new products

and are more likely to switch

Buyers who have experience switching are more likely to change products than buyers who have never switched before

Assessment of switching requirements for a small dairy company contemplating manufacturing a new soft drink

Assessment of switching requirements for a small dairy company contemplating manufacturing a new soft drink

Buyer characteristic

Effect on likelihood of buyer switch from dairy to soft drink

Access to financing

Low to moderate as products are priced competitively

Risk profile

Low as there is no risk associated with buying a new soft drink

Behavior

Moderate as it can be difficult to “persuade” people to try new brands

Previous experience of switching

Moderate as there will always be a group of buyers “shopping around”

Source: A.T. Kearney

3

buyers “shopping around” Source: A.T. Kearney 3 Source: Porter, M.E. (1985); Competitive Advantage A.T.
buyers “shopping around” Source: A.T. Kearney 3 Source: Porter, M.E. (1985); Competitive Advantage A.T.
buyers “shopping around” Source: A.T. Kearney 3 Source: Porter, M.E. (1985); Competitive Advantage A.T.
buyers “shopping around” Source: A.T. Kearney 3 Source: Porter, M.E. (1985); Competitive Advantage A.T.

Source: Porter, M.E. (1985); Competitive Advantage

3 Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

3 Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

Module II

3 Source: Porter, M.E. (1985); Competitive Advantage A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

42

Industry structure

Substitution analysis

Methodology

Methodology for performing a substitution analysis

Input

SEC filings*

Annual reports

Analyst reports

Expert interviews

Client data/interviews

Trade journals

Customer surveys

Strategic groups

Players analysis

1 2 3 Define industry Determine Assess market boundaries substitution opportunities threats
1
2
3
Define industry
Determine
Assess market
boundaries
substitution
opportunities
threats

Define industry boundaries by analyzing companies offering a similar product range

Define industry boundaries from a market perspective

based on common needs

of customers

Assess the value delivered by different products relative to cost

Determine

switching costs

Analyze buyers

tendencies to

switch

Assess threat of substitution

Identify opportunities for client’s product in areas traditionally

considered outside

the market

Output

Industry description

Understanding of customer needs

New entrant threats

New market opportunities

* Reports filed by publicly held companies with the Securities and Exchange Commission: e.g., 10K, 10Q

Source: A.T. Kearney

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

43

Industry structure

Substitution analysis

Conclusion

Conclusion

Key points

A substitution threat analysis can identify the:

Relative value of products

Switching costs

– Buyers’ tendency to switch products

A substitution threat analysis can be used to:

Promote substitution

Defend against substitution

Strengths

Raises focus on all products competing for the customer - not just those similar to the client’s own products

Particularly useful where industries are going through radical changes

Can add considerable value to the client by redefining competition in value/cost terms

Weaknesses

Not a science - some degree of ambiguity always remains

Can be difficult to quantify the costs of promoting or defending against a substitute product

References

Oster, S.M. (1994); Modern Competitive Analysis

Porter, M.E. (1980); Competitive Strategy

Source: A.T. Kearney

M.E. (1980); Competitive Strategy Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

M.E. (1980); Competitive Strategy Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

Module II

M.E. (1980); Competitive Strategy Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 4

44

Contents of Module II

Introduction

Industry structure

Players analysis

Strategic group analysis

Substitution analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Industry analysis frameworks

Structure-conduct-performance

The five forces

The strategic triangle

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

45

Industry structure

Supply chain analysis

Description

To understand the dynamics of an industry, it is necessary to analyze the entire

supply chain

Definition

The supply chain is a series of inter- linked processes that are performed in a given sequence to efficiently acquire raw materials and then convert them into products and transport them to customers for use in producing final products for end-users

The supply chain describes the activities- from raw material to the end-customer and therefore spans
The supply chain
describes the activities-
from raw material to the
end-customer and
therefore spans several
industries

Source: A.T. Kearney

and therefore spans several industries Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

and therefore spans several industries Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

and therefore spans several industries Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

46

Industry structure

Supply chain analysis

Description

A supply chain describes a relationship among a group of integrated industries that together work to transform a set of raw materials into final products*

Raw Manufac- material Suppliers Distributors Retailers Customers turers sources
Raw
Manufac-
material
Suppliers
Distributors
Retailers
Customers
turers
sources

An “industry” consisting of several

companies**

* A supply chain is not necessarily linear. The structuring of a supply chain as a linear diagram forces a consultant to simplify a relationship among industries that might be extremely complicated

* * Supply chain analysis should not be confused with the term value chain analysis. The value chain disaggregates a company’s activities into strategically relevant steps to understand the behavior of costs and the existing and potential sources of differentiation (See Module III)

Source: A.T. Kearney

of differentiation (See Module III) Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

of differentiation (See Module III) Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

of differentiation (See Module III) Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

47

Industry structure

Supply chain analysis

Usage

A supply chain facilitates an understanding of the industry structure

Key outcome of a supply chain analysis

Analysis of linkages to suppliers and customers

Analysis of the value generated at each step in the supply chain

Analysis of the degree of vertical (backward and forward)

integration

Analysis of the structures and level of company concentration at each stage in the supply chain

Source: A.T. Kearney

at each stage in the supply chain Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

at each stage in the supply chain Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Module II

at each stage in the supply chain Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

48

Industry structure

Supply chain analysis

Usage

An analysis of the strengths and power of a client’s buyers and suppliers is

essential for understanding the client’s degrees of freedom

Suppliers are powerful if:

Their industry is dominated by a few companies and is more concentrated than the industry it sells to

Their product is unique or at least differentiated, or if it has built up switching costs

They are not obliged to contend with other products for sale to the industry

They pose a credible threat of integrating forward into the client’s business

The client industry is not an important customer of the supplier group

Client “industry”
Client
“industry”

Buyers are powerful if:

They are concentrated or purchase in large volumes

• The products purchased from the client’s industry are standard or undifferentiated

• The products purchased from the client’s industry are a component of their products and represent an insignificant fraction of costs

They earn low profits, which creates great incentive to lower their purchasing costs

• The client’s product is unimportant to the quality of the buyers’ products or services

• The client’s products do not save the buyer money

The buyers pose a credible threat of integrating backward to make the client’s product

Source: A.T. Kearney

backward to make the client’s product Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

backward to make the client’s product Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

backward to make the client’s product Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

49

Industry structure

Supply chain analysis

Example

A supply chain can be drawn to illustrate the amount of value captured by each step in the process

The amount of value captured by the client’s industry is shrinking Actual retail sales; DEM/kg

The amount of value captured by the client’s industry is shrinking

Actual retail sales; DEM/kg

Supply chain analysis for the German flour industry

Retailers

Client industry

Transportation

Grain suppliers

Source: A.T. Kearney

100% = 1.50 100% = 1.40 1.50 1.40 29% 32% 1.06 0.95 14% 27% 0.76
100% = 1.50
100% = 1.40
1.50
1.40
29%
32%
1.06
0.95
14%
27%
0.76
5%
0.66
0.69
8%
0.54
49%
36%

End-user

0.40 0.19 1990 1996
0.40
0.19
1990
1996

1990

1996

Raw material

3

Indicate the actual level of value added

Raw material 3 Indicate the actual level of value added Split the supply chain into its
Raw material 3 Indicate the actual level of value added Split the supply chain into its

Split the supply

chain into its relevant

industries

Illustration of the supply chain over time provides an opportunity to understand how the client’s industry has performed

to understand how the client’s industry has performed Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY

Source: A.T. Kearney

the client’s industry has performed Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

the client’s industry has performed Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

the client’s industry has performed Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

50

Industry structure

Supply chain analysis

Example

A supply chain can be drawn to illustrate the profit levels attained by the players across the various steps

Grain supply represents the most profitable industry in the supply chain Source: A.T. Kearney 1996

Grain supply represents the most profitable industry in the supply chain

Source: A.T. Kearney

1996

Grain supply represents the most profitable industry in the supply chain Source: A.T. Kearney 1996 Cost

Cost

Profit

3

The cost incurred at a specific level of the supply chain in preparing the input
The cost incurred at a
specific level of the
supply chain in
preparing the input
for sale represents
the value added at
that level
100% = 1.40
Value-
Profit
Added
1.40
0.10
1.30
Retailers
0.35
0.95
0.05
0.90
Client industry
0.14
0.76
Total cost per step
includes the cost of
the input from the
preceding step plus
the expenses incurred
to add additional
value
Transportation
0.73
0.03
0.69
0.04
0.39
Grain suppliers
0.30
0.30

Total value added to the product equals the sum of the shaded areas

Source: A.T. Kearney

equals the sum of the shaded areas Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

equals the sum of the shaded areas Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Module II

equals the sum of the shaded areas Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

51

Industry structure

Supply chain analysis

Example

An illustration of an industry that is being threatened by its suppliers and buyers

The industry is under pressure from both its suppliers and customers Suppliers Client “industry” •

The industry is under pressure from both its suppliers and customers

Suppliers

Client

“industry”

The suppliers are very concentrated - only two players

generate approximately 80

percent of output

The suppliers have created high switching costs, especially due to legislation

Source: A.T. Kearney

Customers

Four customers control the market and determine price setting

• The customers use the client’s product as a loss leader to attract their customers

The customers are seriously considering a direct relationship with the client’s suppliers

3

Through an analysis

of the suppliers’ and

customers’ strengths, the vulnerability of the industry’s position becomes

evident

vulnerability of the industry’s position becomes evident Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY

Source: A.T. Kearney

industry’s position becomes evident Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

industry’s position becomes evident Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

Module II

industry’s position becomes evident Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

52

Industry structure

Supply chain analysis

Example

The degree of vertical integration can be presented along side the supply chain to show the activities that the players perform in-house

Overview of the supply chain

Mapping the

different players

Source: A.T. Kearney

Degree of vertical integration of different food players Suppliers Manufacturers Distributors Retailers Degree of vertical

Degree of vertical integration of different food players

Suppliers

Manufacturers

Distributors

Retailers

Degree of vertical integration of different players

Consumers

Player A Player B Player C Player D Player E Player F
Player A
Player B
Player C
Player D
Player E
Player F

Source: A.T. Kearney

3

C Player D Player E Player F Source: A.T. Kearney 3 A.T. KEARNEY BUSINESS UNIT STRATEGY
C Player D Player E Player F Source: A.T. Kearney 3 A.T. KEARNEY BUSINESS UNIT STRATEGY
C Player D Player E Player F Source: A.T. Kearney 3 A.T. KEARNEY BUSINESS UNIT STRATEGY

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

C Player D Player E Player F Source: A.T. Kearney 3 A.T. KEARNEY BUSINESS UNIT STRATEGY

Module II

C Player D Player E Player F Source: A.T. Kearney 3 A.T. KEARNEY BUSINESS UNIT STRATEGY

53

Industry structure

Supply chain analysis

Example

Another analysis indicates the degree of vertical integration of the players and their relative positions in each stage of the supply chain

This technique

provides an opportunity to analyze the level of market concentration at each stage of the

supply chain

The client is in this case heavily

involved in two

stages of the supply chain. However, its position differs considerably in each step

Source: A.T. Kearney

Concentration and vertical integration of food players in the supply chain Suppliers Manufacturers Distributors Retailers

Concentration and vertical integration of food players in the supply chain

Suppliers

Manufacturers

Distributors

Retailers

Market share

100%

 

C

Other

F

 

D

H

 

G

 

B

F

 

E

E

 

C

D

 

Client

 

B

 

Client

 

A

D

 

A

0%

Note: Letters refer to different companies Source: A.T. Kearney

Consumer

Other

3

companies Source: A.T. Kearney Consumer Other 3 A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5
companies Source: A.T. Kearney Consumer Other 3 A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5
companies Source: A.T. Kearney Consumer Other 3 A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

companies Source: A.T. Kearney Consumer Other 3 A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

Module II

companies Source: A.T. Kearney Consumer Other 3 A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

54

Industry structure

Supply chain analysis

Methodology

Methodology for using a supply chain analysis

 

Input

Client data/

interviews

Annual reports

Expert interviews

Analyst reports

SEC filings*

Trade journals

Customer surveys

Value chain

Trends analysis

Substitution analysis

Players analysis

1 2 3 4 Identify Identify supply Develop value- added structure Identify players at each
1
2
3
4
Identify
Identify supply
Develop value-
added structure
Identify players
at each step
relationships
chain activities
within/across
steps

Identify the end product

• Define “raw materials” required to produce the end product

Define the intermediate steps required to transform raw materials into the final product

A step should be composed of players producing products that are equivalent or substitutes of each other

Determine the

value-added by each step of the supply chain. This

can be determined by taking the selling price, less retail margin,

minus the input price

Determine costs and margins within each segment

Group players that produce equivalent or substitute products

Determine the

concentration of competitors at each

step

Analyze specific

relationships

among players

Assess the degree

of vertical integration among players in the various steps

Output

Linkages to suppliers

and customers

Value-added analysis

Degree of vertical integration

Substitution threats

Exit and entry barrier assessment

Cost and margin

driver analysis

Value-added

structure

* Reports filed by publicly held companies with the Securities and Exchange Commission: e.g., 10K, 10Q

Source: A.T. Kearney

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

Module II

and Exchange Commission: e.g., 10K, 10Q Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module

55

Industry structure

Supply chain analysis

Conclusion

Conclusion

Key points

A supply chain analysis provides:

An overview of linkages to suppliers and customers

An assessment of the value generated at each stage at the supply chain

A determination of the degree of vertical integration

An analysis of the concentration of players at each step of the supply chain

Strengths

• Provides an overview of the company’s supply chain mechanisms, and generates an understanding of the company's relative strengths and weaknesses

Weaknesses

Difficult to obtain exact quantifiable data for a cost analysis

 

Oster, S.M. (1994); Modern Competitive Analysis, Oxford University Press

References

Poirer, C. and Reiter, S.E. (1996); Supply Chain Optimization, Berret-Koehlers Publishers, Inc.

Porter, M.E. (1979); How Competitive Forces Shape Strategy, Harvard Business Review, March/April

Porter, M.E. (1980); Competitive Strategy - Techniques for Analyzing Industries and Competitors, The Free Press

Source: A.T. Kearney

and Competitors, The Free Press Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

and Competitors, The Free Press Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

and Competitors, The Free Press Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

56

Contents of Module II

Introduction

Industry structure

Players analysis

Strategic group analysis

Substitution analysis

Supply chain analysis

Exit and entry barrier assessment

Development of the industry

Industry strategic era analysis

Life cycle analysis

Trends analysis

Product/market analysis

Size and growth of the market

Product/market segmentation

Demand and supply economics

Industry analysis frameworks

Structure-conduct-performance

The five forces

The strategic triangle

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

• The five forces • The strategic triangle A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

57

Industry structure

Exit and entry barrier assessment

Description

Comprehension of entry and exit barriers is key to industry analysis

Entry barriers
Entry
barriers
Exit barriers
Exit
barriers

Entry barriers are economic, strategic, and emotional factors that keep companies from entering a business even though they might earn high or adequate returns on investments

Exit barriers are economic, strategic, and emotional factors that keep companies competing in a business even though they might earn low or even negative returns on investments

Source: Porter, M.E. (1980); Competitive Strategy

investments Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

investments Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

Module II

investments Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 5

58

Industry structure

Exit and entry barrier assessment

Description

Structural barriers and behavioral barriers represent the two types of entry barriers

Type

Comment

Structural barriers

Structural barriers exist as a result of differences in the structure between the companies under consideration - the incumbent and the new entrant

Behavioral barriers

Behavioral barriers exist as a result of expected changes in competitive

behavior of the incumbents that run counter to the interests of the entrant

Source: A.T. Kearney

counter to the interests of the entrant Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

counter to the interests of the entrant Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Module II

counter to the interests of the entrant Source: A.T. Kearney A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

59

Industry structure

Exit and entry barrier assessment

Description

Seven types of structural entry barriers exist

Economies of scale

Economies of scale deter entry by forcing the newcomer to enter the market at a large scale and thus risk strong reaction from existing companies or enter the market at small scale and accept a cost disadvantage, both undesirable options

Product differentiation

Product differentiation results in a barrier to entry by forcing entrants to expend significant resources to overcome existing customer loyalties, which stem from advertising, customer service, product differences, or from simply being the first into the industry

Capital requirements

The need to invest large financial resources to compete creates a barrier to entry, particularly if the capital is required for risky or unrecoverable up-front advertising or research and development

Switching costs

A barrier to entry is created by the presence of switching costs (e.g. employee retraining costs, cost of new equipment, cost and time in testing or to qualify a new source, need for technical help as a result of reliance on seller engineering aid, product redesign), that is, one-time costs facing the buyer that switches from one product to a new one

Access to distribution channels

• A barrier to entry can be created by the new entrant’s need to secure distribution channels. To the extent that distribution channels for the product have already been monopolized by established companies, the new company must persuade distributors to accept its product through price breaks and co-operative advertising allowances, which reduce profits

Cost disadvantages independent of scale

Barriers to entry can result from proprietary product technology (product know-how or design characteristics), favourable access to raw materials, favourable locations, government subsidies, learning or experience curve effects (there is an tendency for unit costs to decline as the company gains more cumulative experience in producing a product), etc.

Government policy

Governments can limit or even prohibit entry into industries with controls such as licensing requirements and limits on access to raw material (like coal lands or mountains on which to build ski areas)

Source: Porter, M.E. (1980); Competitive Strategy

ski areas) Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

ski areas) Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

Module II

ski areas) Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II

60

Industry structure

Exit and entry barrier assessment

Description

Four types of behavioral entry barriers are also likely to exist

History

A history of vigorous retaliation by incumbents against new entrants

Incumbents have significant sunk costs*

Established companies with substantial resources to fight back, including: excess production capacity, unused borrowing capacity, and significant leverage with distribution channels or customers

Threats of aggressive response from incumbent

Established companies with great commitment to the industry and highly illiquid assets employed in it

Slow industry growth

• Slow growth, which limits an industry’s ability to absorb a new company without negatively impacting the performance of established companies

* Sunk costs are non-recoverable costs Source: Porter, M.E. (1980); Competitive Strategy

costs Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 6

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

costs Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 6

Module II

costs Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 6

61

Industry structure

Exit and entry barrier assessment

Description

Exit barriers restrict companies from discontinuing operations in an industry despite poor earnings

Specialized assets

Assets highly specialized to the particular business or location have low liquidation values or high costs of transfer or convert

Fixed cost of exit

These include labor agreements, resettlement costs, maintaining capabilities for spare parts,

etc.

Strategic interrelationships

Interrelationships between the exiting business unit and other business units in the company in terms of image, marketing ability, access to financial markets, shared facilities, etc.

Emotional barriers

• Management’s unwillingness to make economically justified exit decisions caused by identification with the particular business, loyalty to employees, fear for one’s own career, pride or other reasons

Government and social restrictions

These restrictions involve government denial or discouragement of exit out of concern for job loss and regional economic effects

Source: Porter, M.E. (1980); Competitive Strategy

effects Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 6

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

effects Source: Porter, M.E. (1980); Competitive Strategy A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING Module II 6