The output for this exercise should be created individually, but you should feel free to discuss both general and industry-specific ideas with your peers, including feedback on your thinking. The final product should be solely your own writing, even though your insights may be based on discussions with others.
See Blackboard for due date and means of submission.
You must use the accompanying Word document for your assignment. Be sure to include your name in the document file name and in the document itself! Please try to keep your work in each of the Five Forces to the single page that is provided in this document. You may need 2 pages for the first part where you are defining/describing the Industry. Exercise 1 may have shown you that clarity and brevity make your work better!
Assignment
Remember: The purpose of any analysis is to help us find meaning – not to simply perform the analysis.
Porter indicates that these Five Forces act to “Shape strategy” within an industry. We want to dig to see how the competition value around each force shapes the behavior of firms and thus, the strategy of the industry.
In past semesters I have translated this goal into the following question:
How does this industry work and make a profit? Answering that means asking (for example):
- What is the balance of forces (and factors within forces) that allows the industry to be profitable?
- What might be the few fundamental drivers that make it profitable?
- What are the greatest challenges to industry profitability?
While that still applies, this semester I have put more attention on the linkage between the concept of Added Value and Five Forces. I think that the broad question that Added Value sets up for each Force might help you get into a bit more detail and insight. I’ll restate those questions below.
Step 1 – Select a target industry and “define” the industry
You should pick an industry that you find interesting. Feel free to choose one where you have direct experience. You will need to work hard to understand your industry, so be sure you choose an industry worth your time and effort.
Think carefully about how you define the industry and make that clear on the first page. There often will be options. For example, if your general industry is “airlines”, you may decide to look at the global airline industry, the US airline industry, maybe a subset of the US industry (e.g., western regional airlines, national hub/spoke airlines serving “all markets”). Our general definition of an industry is firms that make/sell similar product/services, purchasing from the same set of suppliers, and selling to the same set of buyers. Since an industry typically has several supplier groups and buyer groups, you should choose (and specify) which one you will cover in your analysis.
The first page of the assignment template gives you several sections you can use to define the industry and its boundaries. Please try to keep this to no more than 2 pages.
As you do your work you may find that your initial definition is problematic – especially if it is too broad. You are free to adjust your definition. Part of the learning experience is to see how the industry definition may affect the rest of you analysis. If you encounter this late in your work, at least try to point out where your definition creates challenges.
You will need to do some research into the industry to discover the information that you will use for the assignment. Don’t overdo this – insight often comes more from careful thinking than piles of data. Look broadly for information – analyst reports, popular press, may be as or more useful than 10-K’s. Don’t assume that any single source/perspective tells the full story. Similarly, don’t assume that you will find the “answers” in your sources. You will have to blend information together and do your own synthesis of the material. Remember, you are performing an industry analysis, not a firm analysis. You may have to find information on a firm level, but we are trying to combine that information to understand how the industry is structured.
Step 2 – Evaluate each of the Five Forces
The Word document asks you to structure your analysis as follows:
- Factor or factors – these are the contributing factors (e.g., switching costs, industry growth, capital requirements) that help us understand each force. You should include at least three (preferably 5) that you think are most important, per force. You may want to start with a list of more than 5 and eliminate those that turn out to be less important. If they are tightly linked you can treat them as a group of factors – an example would be: industry economy of scale, high capital investment and high value of brand identity all work together to raise barriers to entry.
- Reasoning, with factual details – Why do you believe this factor is important? How does it help us see that firms in the industry are generally able to Create Value and Capture it (or not)? A few sentences or bullet points that explain why the factor acts as it does, supported with industry-specific facts or details. This does not have to extensive, but it is insufficient to say “buyers have the ability to backwards integrate”. You should give some reason why we should believe they can backwards integrate.
- Help/Hurt Industry Profitability – does this factor(s) work to help the industry be more profitable (allow it to raise prices or lower costs ¯) or hurt (by tending to push down prices ¯ or raise costs ). Remember, the forces first act on price and cost, and through that, profitability. You will likely have some factors that help profitability and some that hurt.
In the analysis of each Force we are always working from the perspective of the INDUSTRY. When we are looking at Supplier Power, the Industry is a “buyer” from those Suppliers. When we are looking at Buyer Power, the Industry is a “supplier” to those Buyers.
You can use your understanding of how/why each stage of the value chain creates and captures value to help you reason about the dynamic competition for value/profit. I find it helpful to ask, “if the industry were suddenly more profitable, would any of the factors suggest that the industry would lose much of that profit?” We are essentially asking, do any of the factors suggest that other players have a reasonable ability to “claim” some of the additional profit.
For each Force you should reach a conclusion about the collective, combined effect of factors into a message of how and why the force influences industry profitability. The isn’t a summary or repeat of your list of factors, but an explanation of how they combine to shape the impact of the force on industry profitability. The grading rubric for this summary focuses on your synthesis of the facts to find meaning (i.e., how does this force affect competition for value and profits?) Please reflect on our experiences using structure and brevity to enhance communication!
Here are the Added Value questions that I think might help – slightly different between each of the forces because the focus of the competition for value differs. You can use them to help think about each factor and the combination of factors.
- Nature of Rivalry: Do firms have unique Added Value?
- Can firms in the industry avoid price-based competition? How do they compete?
- Supplier Bargaining Power: Do suppliers have unique Added Value?
- Can we force suppliers to compete on price? Is our cost set by negotiation or ”commodity” markets
- Buyer Bargaining Power: How much value do we have to share to get their business?
- Can the industry convince buyers the firms deliver unique Added Value?
- Threat of New Entrants: Can others enter and quickly be profitable?
- Threat of Substitutes: Can existing/emerging alternatives become attractive to current customers?
- Will those substitues find a new source of Added Value?
Use these questions to help might also ask is this one of the one or two most (or least) important forces? What does this tell us about the industry’s ability to capture value? About the general Added Value of the industry?
Step 3 – Combine your understanding of the separate forces – how does the industry work?
With each Force analyzed independently, you now need to explain the industry structure: “how the industry makes money (or doesn’t)”. Again, this is a synthesis, not a repetition of what you may have said about each force.
What should someone know about this industry and either a) how it is able to be profitable, b) why it is difficult to be profitable? Is there anything interesting about this industry that might apply to other industries?
You might focus which of the 5 forces are the most critical in shaping profitability. It is usually helpful to identify if/how two or more forces interact. For example, Buyer Power tends to more damaging to profits if the Nature of Rivalry means that firms cannot avoid price-based competition.
Your industry conclusion should tell us something interesting (and possibly not obvious) about the industry. Try to identify what you see as the essence of what the industry does to be profitable (alternatively, why it struggles to be profitable). We will be looking for well structured, direct communication of your conclusions. Longer answers generally contain less actual meaning,
Reminders:
- This process of synthesizing to find meaning is not easy. That’s why we are practicing it! Give it a few tries before settling on your answer. It is often the case that you only figure out what you want to say by writing something, then either editing or rewriting from scratch.
- Try to make it easy for the reader to understand your message. Use structure (paragraphs, bullet points, etc) to assist.
Grading process
One of course TA’s will read your entire submission. We are looking for three things:
- Use/understanding of the Five Forces Framework
- Identification and linkage of relevant facts from your industry to the framework
- Writing clarity and synthesis of meaning
