Industries Many firms simultaneously participate in multiple industries Classifying industries General concept of industry Player could refer to an entire firm or to a division of the Set of players that sell more or less the same thing firm Example non alcoholic drink industry o Coca cola carbonated beverages juice water and other drinks o Pepsico nonalcoholic beverages carbonated juice water and other drinks and snacks lays o One is an entire firm Coke while the other is not the entire firm but just the division that makes and sells beverages 2 divisions PepsiCo beverages north America and PepsiCo International The federal gov has developed systems to classify firms into one or more industries o Standard Industrial Classification SIC o 1997 North American Industrial Classification System NAICS to replace the SIC o The SEC still uses the SIC so it hasn t vanished Federal perspective Substitutability approach to identify industries Firms in the same industry are likely to demonstrate demand side substitutability or supply side substitutability or both o Demand side substitutability possibility of customers switching between suppliers Burgerking wendys mcdonalds o Supply side substitutability similarity of technology used by producers Perspective Implications Availability of critical information Demand side substitutability From buyers perspective What alternate firms exist from whom I as a buyer may purchase the product Usually relatively easy to determine which producers make substitute products Supply side substitutability From seller s perspective What other firms make OR have the ability to make the same product as I as a producer make and sell Usually relatively difficult to determine which firms have the technology to make product that they currently are not making Which definition is better It depends on the question being asked From a seller s perspective the supply side approach considers those players currently making the product and also potential new players This is important when the seller tries to estimate their future demand From a buyer s perspective the supply side approach may not help much if you want the product today o If you can delay your purchase it may be useful because in the future new sellers may emerge If so you may have more choice of suppliers If the new player s product is more or less the same as the current one then prices may tend down If the new product has some new set of attributes then you may find a product better suited to your interests o However if you cannot or will not delay your purchase then from the buyers perspective the demand side approach has more appeal DSS provides a narrower definition of industry than SSS Atkin prefers supply side approach Public has more info about DSS than SSS That is outsiders to the firm usually have more and better info about the firm s product than about its technologies Use both approaches o 2 firms are DSS we consider them to be in the same o 2 firms in SSS we consider them to be in the same industry industry o Will produce some inconsistencies Industry boundaries and related topics Industry boundaries Industries don t have exact boundaries they can be defined at different levels depending on the question we ask Rivals are a special type of competitor namely those competitors that sell what you sell Firms in different industries Benefits of focus doing one business exceedingly well and the avoidance of risk o If your firm is in one business then you may do very well but something outside of your control might happen to disrupt the business and then the firm has no fallback o Fallback could be in a second business but if your firm does two things its hard to do both equally well lose benefit in of focus o Firms in more than one business area diversified o Firms in one business focused o The business could be in same or a closely related industry to the first OR the second business could be in a totally different industry If similar some spillover effects of focus how to do business 1 helps you do business 2 Risk failure in business 1 may be similar to risks that affect business 2 If unrelated less likely for spillover effects but things that may kill one business may not effect the other Related business related diversification Not related business unrelated diversification o A firm in one business gets the max impact of focus but also the greatest risk exposure A firm in many unrelated areas may reduce its risk exposure but loses the benefits of focus An intermediate position occurs when firms are in multiple related businesses In practice then all firms need to decide where on this tradeoff frontier they believe best balances focus and risk Industry analysis process of systematically analyzing an industry Porters five forces model Standard approach to industry analysis best known system Porter s question what are the basic factors that affect the profitability or attractiveness of an industry o Answer the competitive situation in the industry o Which leads to the question what affects the competitive situation in an industry assume greater competition usually lowers prices and reduces industry profitability o Five forces that affect the competitive situation Competition from rivals selling similar products Competition from new entrants players that could sell similar products Competition from substitutes Relative power of customers Relative power of suppliers How these forces affects industry competition o Competition from rivals When there are many rivals and small perfect comp the greater the degree of competition This is intensified if Demand is shrinking or flat or growing slowly Industry has excess capacity more than demand especially when shutting down the excess capacity is expensive High exit costs leaving the industry we expect competition among rivals Bottom line are greater when There are many small producers Weak or negative growth in demand Excess capacity that is expensive to shut down High exit costs All things equal greater competition would be expected to reduce the profitability or attractiveness of the industry o Competition from new entrants There are entry barriers inhibit the ease of entering the industry Can the firm obtain the needed technology How much does it cost to enter Are there economies of scale are there major unit cost advantages to a big entry rather than a small entry which will raise the entry costs Do current customers exhibit brand loyalty to the existing