Industry Analysis

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timer Asked: Feb 1st, 2021

Question Description

To prepare for this assignment, review Figures 3.1, 3.2, 3.3, 3.5, and 3.6 from your textbook. Select a Saudi Arabian company, identify the industry in which it competes, and identify its three main competitors. Complete an Industry Analysis by answering the following questions.

  1. Analyze and predict industry profitability:
    1. Apply a detailed Porter’s Five Forces framework with a graphic representation (Figure 3.3) and written explanation for your selected company in relation to the Five Forces.
    2. Given the Five Forces analysis outcomes, predict the level of industry profitability expressed as high, intermediate, or low.
  2. Implications for strategy:
    1. What strategies can the rival companies adopt to reduce competitive pressure and improve industry profitability?
    2. Which strategies do you recommend for your company to improve its competitiveness, position, and earnings?
  3. Identifying Key Success Factors (KSFs)—What are the KSFs of your company?
    1. See Figure 3.6. Who are the customers and what do they want?
    2. See Figure 3.6. How does the company survive competition?
    3. Has your company’s KSFs changed over time?

Your well-written paper should meet the following requirements:

  • Be 6 to 7 pages in length, which does not include the required title and reference pages, which are never a part of the content minimum requirements.
  • Use Saudi Electronic University academic writing standards and APA style guidelines.
  • Support your submission with course material concepts, principles, and theories from the textbook and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.
  • It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before submitting it to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step instructions.
  • Review the grading rubric to see how you will be graded for this assignmentRequiredRecommended
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CONTEMPORARY STRATEGY ANALYSIS tenth edition Robert M. Grant John Wiley & Sons Ltd., 2019 Chapter 3 Industry Analysis: The Fundamentals 1 Industry Analysis: the Fundamentals OUTLINE • Introduction / Objectives • From environmental analysis to industry analysis • Analyzing industry attractiveness • Applying industry analysis to forecast industry profitability • Using industry analysis to develop strategy • Defining industries: Where to draw the boundaries • Identifying Key Success Factors Copyright (© 2019 John Wiley & Sons, Inc. INTRODUCTION / OBJECTIVES The Objectives of Industry Analysis • To understand how industry structure drives competition, which determines the level of industry profitability. • To assess industry attractiveness • To use evidence on changes in industry structure to forecast future profitability • To formulate strategies to change industry structure to improve industry profitability • To identify Key Success Factors Copyright (© 2019 John Wiley & Sons, Inc. FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS At the Core of the Macro Environment is the Industry Environment The national/ international economy Technology Government & Politics The natural environment THE INDUSTRY ENVIRONMENT • Suppliers • Competitors • Customers Demographic structure Social Socialstructure structure The Macro Environment impacts the firm through its effect on the Industry Environment Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS Profitability of Selected US Industries (median ROCE) HIGH PROFITABILITY % LOW PROFITABILITY % Tobacco 59.9 Food and Drug Stores 10.2 Computer Software 29.8 Utilities: Gas and Electric 9.6 Household, Personal Care 25.2 Telecom Services 9.5 Semiconductors 22.5 Agricultural Processing 9.5 Pharmaceuticals 21.3 Petroleum 9.2 Entertainment 20.7 Insurance 9.1 Aerospace, Defense 19.9 Food Retailing 9.1 Beverages 19.2 Trucking 9.1 Chemicals, Specialty 18.2 Hotels, Casinos 9.0 Food Processing 18.0 Motor Vehicle Parts 9.0 Medical Products 17.5 Electrical Power 6.0 Engineering/Construction 16.8 Motor Vehicles 5.7 Restaurants/Catering 16.6 Airlines 5.1 Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS The Determinants of Industry Profitability 3 key influences: 1. The value of the product to customers 2. The intensity of competition 3. Relative bargaining power at different stages of the value chain Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS The Spectrum of Industry Structures Perfect Competition Oligopoly Concentration Many firms A few firms Entry and Exit Barriers No barriers Product Differentiation Homogeneous Product Potential for product differentiation Information availability Perfect Information Imperfect availability of information © 2019 Robert M. Grant www.contemporarystrategyanalysis.com Duopoly Two firms Significant barriers Monopoly One firm High barriers ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Threat of POTENTIAL ENTRANTS new entrants Threat of Rivalry among existing firms Bargaining power of buyers BUYERS Copyright (© 2019 John Wiley & Sons, Inc. substitutes SUBSTITUTES ANALYZING INDUSTRY ATTRACTIVENESS The Structural Determinants of Competition SUPPLIER POWER • Buyers’ price sensitivity • Relative bargaining power THREAT OF ENTRY • Capital requirements • Economies of scale • Absolute cost advantage • Product differentiation • Access to distribution channels • Legal/ regulatory barriers • Retaliation INDUSTRY RIVALRY • Concentration • Diversity of competitors • Product differentiation • Excess capacity and exit barriers • Cost conditions BUYER POWER • Buyers’ price sensitivity • Relative bargaining power Copyright (© 2019 John Wiley & Sons, Inc. SUBSTITUTE COMPETITION • Buyers’ propensity to substitute • Relative prices & performance of substitutes ANALYZING INDUSTRY ATTRACTIVENESS Threat of Substitutes Extent of competitive pressure from producers of substitutes depends upon: • Buyers’ propensity to substitute • The price-performance characteristics of substitutes. Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS Threat of New Entry Entrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are: • Capital requirements • Economies of scale • Absolute cost advantage • Product differentiation • Access to channels of distribution • Legal and regulatory barriers • Retaliation Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS Bargaining Power of Buyers The extent to which buyers are able to depress profitability in an industry depends upon: Buyer’s price sensitivity • Importance of item in relation to buyers’ total costs. • Differentiation of the purchased item • Intensity of competition among buyers • Whether item is critical to the quality of buyers’ own output Copyright (© 2019 John Wiley & Sons, Inc. Relative bargaining power • Size and concentration of buyers relative to sellers. • Buyer’s information . • Ability to backward integrate. NOTE: analysis of supplier power is symmetric ANALYZING INDUSTRY ATTRACTIVENESS Rivalry Between Established Competitors The extent to which industry profitability is depressed by aggressive price competition depends upon: ▪ Concentration (number and size distribution of firms) ▪ Diversity of competitors (differences in goals, costs strategies, etc.) ▪ Product differentiation ▪ Excess capacity and exit barriers ▪ Cost conditions » Ratio of fixed to variable costs » Extent of scale economies Copyright (© 2019 John Wiley & Sons, Inc. APPLYING INDUSTRY ANALYSIS TO FORECAST INDUSTRY PROFITABILITY Applying Five-Forces Analysis to Forecast Industry Profitability • Perform a Five Forces Analysis to understand why the industry’s current level of profitability is what it is • Identify the changes in industry structure that are likely to occur over the next few years. E.g. – Is new entry likely? – Will concentration increase as a result of mergers and acquisitions? – Will additions to industry capacity outpace the growth in demand? – Will innovation create new substitutes? • Use the Five Forces Framework to predict the impact of these structural changes on competition and profitability Copyright (© 2019 John Wiley & Sons, Inc. USING INDUSTRY ANALYSIS TO DEVELOP STRATEGY Using Industry Analysis to Develop Strategy Strategies to Improve Industry Profitability • Which of the structural variables that are depressing profitability can we change by individual or collective strategies? Strategic Positioning • Once we know which structural features of the industry support profitability and which depress profitability, we can choose a favorable positioning within the industry. Copyright (© 2019 John Wiley & Sons, Inc. DEFINING INDUSTRIES Drawing Industry Boundaries ▪ What industry is Ferrari in? – – – – The Motor Vehicle industry (SIC 371) The Automobile industry (SIC 3712) The sports car industry Is its industry global, regional (Europe) or national (Italy)? ▪ Key criterion: SUBSTITUTABILITY – On the demand side : are buyers willing to substitute between types of cars and across countries – On the supply side : are manufacturers able to switch production between types of cars and across countries We may need to draw industry boundaries differently for different types of decision Copyright (© 2019 John Wiley & Sons, Inc. IDENTIFYING KEY SUCCESS FACTORS Identifying Key Success Factors Pre-requisites for success What do customers want? How does the firm survive competition Analysis of competition Analysis of demand • Who are our customers? • What do they want? • What drives competition? What are drives •• What the competition? main • What are the dimensions of main competition? dimensions of competition? •How • Howintense intenseis iscompetition? competition? • Howcan canwe weobtain obtainaasuperior •How superior competitive competitive position? position? KEY SUCCESS FACTORS Copyright (© 2019 John Wiley & Sons, Inc. IDENTIFYING KEY SUCCESS FACTORS KSFs in Steel, Fashion Clothing, and Supermarkets WHAT DO CUSTOMERS WANT? Steel Fashion clothing Supermarkets • • • • Low price Product consistency Reliability of supply Specific technical specifications for special steels • Demand segmented by garment type, style, quality, color HOW FIRMS SURVIVE COMPETITION? KEY SUCCESS FACTORS • Strong price competition • Cost efficiency requires either and cyclical demand require large plants in low-cost locations, low costs and financial or hi-tech, flexible, mini-mills strength close to customers • Quality and service differentiation • Intensely competitive due to • Combining differentiation with low entry barriers, low seller low-costs concentration, and strong • Key differentiation variables: retail buying power • Price premium for brand, design, speedy to fashion trends, style, exclusivity, and quality • Differentiation can yield brand reputation, quality substantial price premium, • Mass market highly price • Cost efficiency requires low labor but imitation rapid sensitive costs • Low prices • Markets localized • Convenient location • Intensity of price • Wide product range adapted competition depends on to local tastes number and proximity of competitors • Fresh produce, good service, pleasant ambience, easy • Bargaining power essential parking to low input costs Copyright (© 2019 John Wiley & Sons, Inc. • Low-costs require operational efficiency, efficient supply chain, buying power, low wage costs. • Differentiation requires wide product range (hence, large stores), convenient location, easy parking IDENTIFYING KEY SUCCESS FACTORS Identifying KSFs Through Modeling Profitability: The Airline Industry Profitability = Income ASMs = • Strength of competition on routes. • Responsiveness to changing market conditions • % business travelers. • Achieving differentiation advantage Yield x Load factor - Unit Cost Revenue x RPMs RPMs ASMs - Expenses • Price competitiveness. • Wage rates. • Efficiency of route planning. • Flexibility and responsiveness. • Customer loyalty. • Meeting customer requirements. • Fuel efficiency of planes. • Employee productivity. • Load factors. • Administrative overhead. NOTE: ASM = Available Seat Miles; RPM = Revenue Passenger Miles Copyright (© 2019 John Wiley & Sons, Inc. IDENTIFYING KEY SUCCESS FACTORS Identifying KSFs by Analyzing Profit Drivers: Retailing Sales mix of products Return on Sales Avoiding markdowns through tight inventory control Max. buying power to minimize cost of goods purchased ROCE Max. sales/sq. foot through: *location *product mix *customer service *quality control Sales/Capital Employed Max. inventory turnover through electronic data interchange, close vendor relationships, fast delivery Minimize capital deployment through outsourcing & leasing © 2019 Robert M. Grant www.contemporarystrategyanalysis.com INDUSTRY ANALYSIS: THE FUNDAMENTALS Summary From Environmental Analysis to Industry Analysis: • The industry is the core of a firm’s external environment. Political, economic, social, and technological forces impact the firm through its industry : Forecasting Industry Profitability • • Past profitability a poor indicator of future profitability. If we can forecast changes in industry structure we can predict likely impact on competition and profitability. Strategies to Improve Industry Profitability • • Influencing industry structure by individual or collective strategies Positioning the firm to shelter from the forces of competition Defining Industry Boundaries • Key criterion: substitution • Industry definition depends upon the strategic issues being considered Key Success Factors • Gateway to the analysis of competitive advantage Copyright (© 2019 John Wiley & Sons, Inc. CONTEMPORARY STRATEGY ANALYSIS tenth edition Robert M. Grant John Wiley & Sons Ltd., 2019 Chapter 3 Industry Analysis: The Fundamentals 1 Industry Analysis: the Fundamentals OUTLINE • Introduction / Objectives • From environmental analysis to industry analysis • Analyzing industry attractiveness • Applying industry analysis to forecast industry profitability • Using industry analysis to develop strategy • Defining industries: Where to draw the boundaries • Identifying Key Success Factors Copyright (© 2019 John Wiley & Sons, Inc. INTRODUCTION / OBJECTIVES The Objectives of Industry Analysis • To understand how industry structure drives competition, which determines the level of industry profitability. • To assess industry attractiveness • To use evidence on changes in industry structure to forecast future profitability • To formulate strategies to change industry structure to improve industry profitability • To identify Key Success Factors Copyright (© 2019 John Wiley & Sons, Inc. FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS At the Core of the Macro Environment is the Industry Environment The national/ international economy Technology Government & Politics The natural environment THE INDUSTRY ENVIRONMENT • Suppliers • Competitors • Customers Demographic structure Social Socialstructure structure The Macro Environment impacts the firm through its effect on the Industry Environment Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS Profitability of Selected US Industries (median ROCE) HIGH PROFITABILITY % LOW PROFITABILITY % Tobacco 59.9 Food and Drug Stores 10.2 Computer Software 29.8 Utilities: Gas and Electric 9.6 Household, Personal Care 25.2 Telecom Services 9.5 Semiconductors 22.5 Agricultural Processing 9.5 Pharmaceuticals 21.3 Petroleum 9.2 Entertainment 20.7 Insurance 9.1 Aerospace, Defense 19.9 Food Retailing 9.1 Beverages 19.2 Trucking 9.1 Chemicals, Specialty 18.2 Hotels, Casinos 9.0 Food Processing 18.0 Motor Vehicle Parts 9.0 Medical Products 17.5 Electrical Power 6.0 Engineering/Construction 16.8 Motor Vehicles 5.7 Restaurants/Catering 16.6 Airlines 5.1 Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS The Determinants of Industry Profitability 3 key influences: 1. The value of the product to customers 2. The intensity of competition 3. Relative bargaining power at different stages of the value chain Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS The Spectrum of Industry Structures Perfect Competition Oligopoly Concentration Many firms A few firms Entry and Exit Barriers No barriers Product Differentiation Homogeneous Product Potential for product differentiation Information availability Perfect Information Imperfect availability of information © 2019 Robert M. Grant www.contemporarystrategyanalysis.com Duopoly Two firms Significant barriers Monopoly One firm High barriers ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Threat of POTENTIAL ENTRANTS new entrants Threat of Rivalry among existing firms Bargaining power of buyers BUYERS Copyright (© 2019 John Wiley & Sons, Inc. substitutes SUBSTITUTES ANALYZING INDUSTRY ATTRACTIVENESS The Structural Determinants of Competition SUPPLIER POWER • Buyers’ price sensitivity • Relative bargaining power THREAT OF ENTRY • Capital requirements • Economies of scale • Absolute cost advantage • Product differentiation • Access to distribution channels • Legal/ regulatory barriers • Retaliation INDUSTRY RIVALRY • Concentration • Diversity of competitors • Product differentiation • Excess capacity and exit barriers • Cost conditions BUYER POWER • Buyers’ price sensitivity • Relative bargaining power Copyright (© 2019 John Wiley & Sons, Inc. SUBSTITUTE COMPETITION • Buyers’ propensity to substitute • Relative prices & performance of substitutes ANALYZING INDUSTRY ATTRACTIVENESS Threat of Substitutes Extent of competitive pressure from producers of substitutes depends upon: • Buyers’ propensity to substitute • The price-performance characteristics of substitutes. Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS Threat of New Entry Entrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are: • Capital requirements • Economies of scale • Absolute cost advantage • Product differentiation • Access to channels of distribution • Legal and regulatory barriers • Retaliation Copyright (© 2019 John Wiley & Sons, Inc. ANALYZING INDUSTRY ATTRACTIVENESS Bargaining Power of Buyers The extent to which buyers are able to depress profitability in an industry depends upon: Buyer’s price sensitivity • Importance of item in relation to buyers’ total costs. • Differentiation of the purchased item • Intensity of competition among buyers • Whether item is critical to the quality of buyers’ own output Copyright (© 2019 John Wiley & Sons, Inc. Relative bargaining power • Size and concentration of buyers relative to sellers. • Buyer’s information . • Ability to backward integrate. NOTE: analysis of supplier power is symmetric ANALYZING INDUSTRY ATTRACTIVENESS Rivalry Between Established Competitors The extent to which industry profitability is depressed by aggressive price competition depends upon: ▪ Concentration (number and size distribution of firms) ▪ Diversity of competitors (differences in goals, costs strategies, etc.) ▪ Product differentiation ▪ Excess capacity and exit barriers ▪ Cost conditions » Ratio of fixed to variable costs » Extent of scale economies Copyright (© 2019 John Wiley & Sons, Inc. APPLYING INDUSTRY ANALYSIS TO FORECAST INDUSTRY PROFITABILITY Applying Five-Forces Analysis to Forecast Industry Profitability • Perform a Five Forces Analysis to understand why the industry’s current level of profitability is what it is • Identify the changes in industry structure that are likely to occur over the next few years. E.g. – Is new entry likely? – Will concentration increase as a result of mergers and acquisitions? – Will additions to industry capacity outpace the growth in demand? – Will innovation create new substitutes? • Use the Five Forces Framework to predict the impact of these structural changes on competition and profitability Copyright (© 2019 John Wiley & Sons, Inc. USING INDUSTRY ANALYSIS TO DEVELOP STRATEGY Using Industry Analysis to Develop Strategy Strategies to Improve Industry Profitability • Which of the structural variables that are depressing profitability can we change by individual or collective strategies? Strategic Positioning • Once we know which structural features of the industry support profitability and which depress profitability, we can choose a favorable positioning within the industry. Copyright (© 2019 John Wiley & Sons, Inc. DEFINING INDUSTRIES Drawing Industry Boundaries ▪ What industry is Ferrari in? – – – – The Motor Vehicle industry (SIC 371) The Automobile industry (SIC 3712) The sports car industry Is its industry global, regional (Europe) or national (Italy)? ▪ Key criterion: SUBSTITUTABILITY – On the demand side : are buyers willing to substitute between types of cars ...
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