OS 432 Org Policy and Strategy Clarkson University School of Business Spring 2004 Mike Wasserman

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OS 432Org Policy and StrategyClarkson
University School of BusinessSpring 2004 Mike
Wasserman

• Mon 2/2/04
• Industry Analysis

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Todays Agenda

• Questions for discussion
• Industry Analysis
• In-class analysis
• Begin individual paper company selection
• Assignments for Wednesday

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Questions for Discussion

• 1. What is an industry?
• What is industry structure?
• What is the relationship between industry choice
  and firm performance?
• What are some different ways that you can analyze
  an industry?

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The I-O Economic Approach

• Assumes that firm performance is mainly
  determined by the structure of the industry that
  the firm competes in. Industry structure
  includes the number of and relative size of the
  firms in the industry, entry barriers, etc.
• This is based on the Structure-Conduct-Performanc
  e framework, which suggests that the structure
  of an industry will impact the conduct of firms
  in the industry (rate of innovation, pricing,
  etc) which will impact firm performance
  (profitability).

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Assumptions of the I-O Economic Model

• Assumes industries are easily defined, all
  competitors are known, and firms and industries
  behave in predictable patterns
• Assumes that managers act rationally
• Assumes that incumbents and their rivals play the
  same game, battle on the same turf, and abide by
  the same rules
• But, we know that

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• Industry environments
• can vary enormously...
• Some environments are highly competitive while
  others are much less competitive
• Some industries are emerging while others are
  mature

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Firm performance depends a great deal on the
attractiveness of industry environments

• ROAFIRM f ROAINDUSTRY
• R2 .20

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• Is a firm's performance level 'predetermined' by
  the industry in which it chooses to compete?
• Clearly, industry, while important, is not all
  that matters. McGahan and Porter (1997) found
  that while industry choice determined about 20
  of variation in firm performance, at least 40 of
  variation is determined by firm-specific factors.

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The 16 Question

• Ok, we should now see that there are industry
  factors that impact firm performance.
• So, how can we analyze industry factors, and what
  should we get from the analysis???

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Industry Analysis

• So, now well look briefly at an industry
  analysis tool Porters Five Forces model.
• How does this analysis work?
• What conclusions can be drawn from the results?

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PORTERS FIVE FORCES MODEL

• Examines five factors (forces) that influence
  industry attractiveness
• INTENSITY OF RIVALRY
• THREAT OF NEW ENTRY
• THREAT OF SUBSTITUTE PRODUCTS
• POWER OF SUPPLIERS
• POWER OF BUYERS

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PORTERS FIVE FORCES MODEL
THREAT OF NEW ENTRANTS
POWER OF BUYERS
INTENSITY OF RIVALRY
POWER OF SUPPLIERS
THREAT OF SUBSTITUTE PRODUCTS
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PORTERS FIVE FORCES MODEL...

• is a tool for understanding the attractiveness of
  industry environments. The idea is simple

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PORTERS FIVE FORCES MODEL...

• When any of the forces are present, the industry
  environment is expected to be more hostile and
  less profitable.
• As the number or intensity of forces increases,
  the industry environment becomes more hostile
  overall industry profit is expected to decline
  even further.
• Let's discuss and apply how it works

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In-class writing

• Individually, answer the following two questions
• What issues facing managers today disrupt
  traditional notions of industry structure?

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• What is the long run implication of Porters
  model????

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MANAGERIAL IMPLICATIONS

• According to Porter, executives manage the fit
  between their industries and their firms by
  trying to either alter one of the forces to its
  advantage, or by minimizing the impact of any of
  the five forces.
• The alternative is to diversify away from or exit
  completely from the unattractive industry

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Question for Discussion

• How useful is Porters Five Forces analysis?

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• Porters Five Forces Model is a static model
• useful for analyzing industries at a single point
  in time (snapshots)
• not particularly useful in anticipating future
  industry conditions
• To anticipate changes in business environments,
  we need a dynamic model..well look at this next
  week
• Andall semester, we are going to talk about how
  managers can recognize and respond to disruptions
  in the environment.

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Lessons Learned
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In-class analysis

• On a clean sheet of paper,

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Conclusions?

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Individual Assignment

• Pick your companygive me three choices.

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Assignment for Wednesday

• Read 1. Mr. Nanotech, Forbes, Jun 23, 2003 and
  2. Is fat the next tobacco? Fortune, Feb 3, 2003
• Due A one-page word-processed write-up
  summarizing the two or three key issues in each
  article. Focus on disruptions to the industry
  environment.