IndustriesMany firms simultaneously participate in multiple industriesClassifying industriesGeneral concept of industrySet of players that sell more or less the same thing“Player” could refer to an entire firm or to a division of the firmExample – non alcoholic drink industryCoca cola – carbonated beverages, juice, water, and other drinksPepsico – nonalcoholic beverages (carbonated, juice, water, and other drinks) and snacks (lays)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)Federal perspectiveThe federal gov has developed systems to classify firms into one or more industriesStandard Industrial Classification (SIC)1997 – North American Industrial Classification System (NAICS) to replace the SICThe SEC still uses the SIC so it hasn’t vanishedSubstitutability approach to identify industriesFirms in the same industry are likely to demonstrate demand side substitutability or supply side substitutability or bothDemand side substitutability – possibility of customers switching between suppliersBurgerking, wendys, mcdonaldsSupply side substitutability – similarity of technology used by producersDemand side substitutabilitySupply side substitutabilityPerspectiveFrom buyers perspectiveFrom seller’s perspectiveImplicationsWhat alternate firms exist from whom I (as a buyer) may purchase the product?What other firms make OR have the ability to make the same product as I (as a producer) make and sell?Availability of critical informationUsually relatively easy to determine which producers make substitute productsUsually relatively difficult to determine which firms have the technology to make product that they currently are not makingWhich definition is better? It depends on the question being askedFrom 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 demandFrom a buyer’s perspective, the supply side approach may not help much if you want the product todayIf you can delay your purchase, it may be useful because in the future new sellers may emergeIf so, you may have more choice of suppliersIf the new player’s product is more or less the same as the current one, then, prices may tend downIf the new product has some new set of attributes, then you may find a product better suited to your interestsHowever, if you cannot or will not delay your purchase, then from the buyers perspective, the demand side approach has more appealDSS provides a “narrower” definition of industry than SSSAtkin prefers supply side approachPublic 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 technologiesUse both approaches2 firms are DSS  we consider them to be in the same industry2 firms in SSS  we consider them to be in the same industryWill produce some inconsistenciesIndustry boundaries and related topicsIndustry boundariesIndustries don’t have exact boundaries – they can be defined at different levels depending on the question we askRivals are a special type of competitor, namely, those competitors that sell what you sellFirms in different industriesBenefits of focus (doing one business exceedingly well) and the avoidance of riskIf 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 fallbackFallback 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.Firms in more than one business area – diversifiedFirms in one business – focusedThe 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 #2Risk – failure in business #1 may be similar to risks that affect business #2If unrelated – less likely for spillover effects, but things that may kill one business may not effect the otherRelated business – related diversificationNot related business – unrelated diversificationA 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 businessesIn practice, then all firms need to decide “where” on this tradeoff frontier they believe best balances focus and riskIndustry analysis – process of systematically analyzing an industryPorters five forces modelStandard approach to industry analysis – best known systemPorter’s question: what are the basic factors that affect the profitability (or attractiveness) of an industry?Answer: the competitive situation in the industryWhich leads to the question: what affects the competitive situation in an industry? (assume greater competition usually lowers prices and reduces industry profitability)Five forces that affect the competitive situationCompetition from rivals – selling similar productsCompetition from new entrants – players that could sell similar productsCompetition from substitutesRelative power of customersRelative power of suppliersHow these forces affects industry competitionCompetition from rivalsWhen there are many rivals and small (perfect comp), the greater the degree of competitionThis is intensified if…Demand is shrinking or flat or growing slowlyIndustry has excess capacity (more than demand, especially when shutting down the excess capacity is expensiveHigh exit costs (leaving the industry)Bottom line: we expect competition among rivals are greater whenThere are many small producersWeak or negative growth in demandExcess capacity that is expensive to shut downHigh exit costsAll things equal, greater competition would be expected to reduce the profitability (or attractiveness) of the industryCompetition from new entrantsThere are entry barriers – inhibit the ease of entering the industryCan 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