c ae ee eee WCconomics (GE fe . eae) [eg David Besanke Daud Deanove Mart BAINDUSTRY ANALYSIS SOOO OO RETO ROD 1 Parts One and Two ofthis text, we explored the economics ofthe firm's _elatonshipe wit its upstream and downstream wading parmers aswell swith its, ‘compettrs, Because these chapters introduce so many potentially important con- ‘eps, the stadent could lose sight ofthe key insighs. dustry analy fumeworks, suth as Michael Porters Five Fave and Brandenberger and Nalebu‘?s Value Nes, provide serucuze that enables us to systematically work through these wide ring- {ng and often complex economie issues. An industry analysis based on such frame ‘works faites dhe following importa aks: ‘+ Assessment of industry end firm performance + entifcaton of key fcrors affecting performance ‘+ Determination ofhow changes inthe business envionment mey affect, performance ‘Mosc important, industry analysis is invaluable for assessing the generic business strategie thar we ier in Pare Three ‘Parts One and Two are rooted in microeconomics, particularly the economics ‘of the frm and the economies of industrial organization. Although the roos of these fils canbe traced to the 1930s a earlier, they had tele impace on business seategy until Michael Porter pushed a series of articles inthe 1970s that cli rated inhi pachbreaking bok Compertzve Strategy. Porter presence 2 convenient famework for exploring the economic factors that tet the profis ofan indus. Porters main innovation ist classify these facta nun five major Fores tha: en- compass the verte! chain and market competition. Although itis wo decade old, the five-forcee approsch ir fesble enough to accommodate new economic con- cept as they emerge. In their book Cuopetion, Adam Brandenberger and Barry Nalebuff propose significant improvement to the five-fores framework: They describe the fms "Valve Net" which includes suppliers, dstiburors, and competitors. Whereas 209400 399360 + Chapter HI + Tadustry Analysis ‘Porter describes how suppliers, distibotoss, and competitors might detract from 2 firm's profs, Brandenberger and Nalebutts key insight is that these firms often enbance Sem profits “This chapter shows how to perform a fveforces industry analysis that ac- counts forthe economic principles in Parts One and Two. Taso shows how tex ppand Porce’s ideas to accommodate the “Value Net” principles introduced by Brandenberger and Nalebuff. We lvstrate these ideas by exumining three indus- tres, Hospitals, Banking, and Hawaiian Coes. “The Bre-forces Eamework has several Kmitaions, Fis, it pays limited atten tion to factors that might affect demand oxher than the awilaility and prices of Substewe and complementary products. Ir jgnores changes in consumer income, fuses, and firm strategies for boosting demand, such a advertising, Second, i fo- ‘Coser on whole industry, rather than on chat indsty’s individual firms. ‘Tied, {he famework does not expicily account fr the role of the government, except Sven the govemnmeat is «supplier or buyer. The government as a regulator can profoundly affect industry prostablity, and could be considered a sich fore Bourch, che fiv-forees analysis is qualitative. For example, an analysis of industry ‘sructate may suggest thatthe theet of entry is high, but the framework does ot ‘how how to estimate che probability of entry. Becnase itis qualitative, the frame- ‘Souk is expecially useal for assessing trends—thatis, for deermining whetberin- dase proiability is key wo increase or decrease. a @ 4 6 6 @ PERFORMING A FIVE-FORCES ANALYSIS “Wren performing ¢ five forces analysis, you must remember that i is nota set of {rincples per se. The relevant principles have been developed in preceding chap- fers. ested, the ive-foresframewore isa tool for assuring that yon systemas~ Cally wer these principles to sess the current status and likely evoluson of an indus. ‘As you work through the fve-forees, you should appealto the economic prin ciples a are relevant to each force. For example, when asesing the power of | ‘Sppliers to alfecc industry and Sm performance, you should determine i fmsin the industry have made relaionship-specific investmens vith their suppliers (or “ce versa) and whether they ae protected from potential holdup either by con Trucs of market fores, Inthe following discussion, we wil identify those princi ples that are most relevant o each ofthe forces "The five forces as represented in Figure 111, include: Internal sary, Entry, Subanon and Complomantary prodocts, Syppie power, and Buyer power. Inter= tal rvlsy i in the center becauee fe may be affected by eich ofthe other foros. ‘One asees cach force by asking "Is isuficendy strong to reduce or eliminate industry profs?” To answer this question, ti essential to refer to the economic Drincgles that apply foreach force. In this section, we review these principles ‘The appendix offers a template for doing industry analysis. Internal Rivalry “oneal rivalry refers to the jockeying for share by Gms within « market. Thus, an analysis of internal rivalry most begin by defining the market. Be sure to include fll deme that consiein each other's strategic decision making, as described in