 Good morning. Today's class will be about understanding a framework that is popularly used to characterize an industry. Any strategy exercise is always a multi-stakeholder approach. Business cannot strategize by analyzing only one input or one stakeholder for that matter. It needs to realize the fact that businesses that are successful are mindful of the fact that there is more than one stakeholder who is responsible for the success or failure of business. So a stakeholder means the customer, the employees of an organization, the suppliers, the existing competitors in the industry, the government, regulators. So it is a mix of various entities who influence the way in which an industry is organized. So when we do a multi-stakeholder approach from a strategic perspective it becomes very necessary to analyze these stakeholders. And at times it is very difficult to analyze each and every stakeholder but at least we have a broad classification by which we can say that a certain set of stakeholders are internal and a certain set of stakeholders are external. So you have an internal stakeholder community and an external stakeholder community and each of them need to be analyzed and when you do an analysis there must be some structured way in which you can conduct this analysis so that the output of such an analysis is a critical input to strategize various options that is available for a business. Now external stakeholder means it could be the government, it could be the society, it could be the regulators, it could be the industry itself in which the business is operating. As against internal stakeholders which primarily is the company itself, the employees of the organization are also to a certain extent the processes of the firm itself. These are internal to the entity. Now in today's class we are concerned about a very critical external stakeholder namely the industry for which there are a number of models that are available to understand how an industry is characterized. The most popularly used model is the Michael Porter's model which presents a competitive model for industry structure analysis. Now before we go to understand what this model is all about, let me first define what an industry is because more often than not I find a lot of students getting confused between the words industry and a single company, a single entity, a single business and they use these interchangeably as well. The technical but not a textbook definition of an industry is a group of businesses that are engaged in similar line of activities, they constitute an industry. For example the automobile industry, the automobile industry is very broad it means it could include two wheelers it could include three wheelers it could include four wheelers. Now if we are going to narrow down and say I am going to talk about the four wheeler automobile industry then it means I am talking about all the firms that are engaged in manufacturing and selling cars. So it would be a Maruti, it would be a Tata Mottas, it would be a Ford or a Hyundai. So all of these individual corporations who are linked by a common thread that they are manufacturing and selling cars, they constitute the four wheeler automobile industry. Now if this is what is an industry then you will understand that an industry is some of all these players and if there is a necessity to understand how each of these players influence and in the process characterize the way in which an industry operates in a business environment. It would be a strategic failure if we just very narrowly view an industry and define competition in a narrow sense that way then we will be limiting our strategic options. The strategic directions that emerge out of such a narrow perspective will be flawed and hence it is not safe to assume that the strategies that evolve out of such a narrow perspective are the best. So we need to broaden our strategic thinking to include not only the firm but also the competition to the firm. In short we need to include the industry per se when we do an analysis to strategize the options that is available. Now it is this extended rivalry that Michael Porto says defines the industry structure and it is this structure that we need to understand through a structured framework for us to fully appreciate the nuances that characterize the industry structure. Now what we do in this model is we try to break an industry into various parts and industry by itself has some critical parts when put together forms the entire body called the industry. Now when we do this we definitely do not miss certain critical inputs or critical parts that we have to analyze when we understand the industry structure which we otherwise would have missed had we just followed a narrow perspective of analyzing an industry. Now what this model puts in place is when we split the industry into various parts and understand how these parts behave and as a result of such a behavior how the industry itself behaves and in the process as somebody who is an existing player in the industry or somebody who wants to enter into the industry as a new player I would be able to understand the competitiveness of the industry and if I am able to understand the competitiveness of the industry I to a reasonable extent can measure the profitability of the industry. The reason being I can come to a conclusion whether this industry is attractive to either enter or to even continue business. Now it is for this purpose that I raise two questions which are broadly the key questions for which the porters five forces industry analysis provide answers. The first question is how structurally attractive is this industry and within the industry what is the relative position that as a company I have and these two questions throw a lot of answers which will set the strategic direction. Now why is that these different parts I already mentioned that there are five forces and as we go I will explain what these five forces are. Now it is important for us to understand that each of these parts when collectively viewed it determines the profit potential of an industry. The industry as I told you is some of all these parts and all of these aggregated together characterize the very basis on which the industry is operational and that is why you find that in some industries because the behavior of these individual parts is different the profitability or the profit potential of that industry is more as again some industries in which there is so much saturation that the profit potential might tend to go down. The parts of these industries remain the same but the way in which they behave particularly within an industry depends on what type of industry we are analyzing and in the process when we see that there are some forces that significantly influence the characteristic of an industry then when it comes to framing strategies we should focus our efforts on those strong forces of significant importance. Now the underlying assumption that we have made is that every industry whether it is an automobile industry or a steel industry or a food and beverages or an aircraft manufacturing whatever be the industry there is a set of underlying parameters which governs or which forms the very DNA of the industry and each of them will have their own technical characteristics and it is these characteristics that we are interested in understanding and how these characteristics define the industry and the process also set the competitive forces in motion. Now it is very important that companies need to understand these characteristics because only businesses that can understand the forces that govern the industry structure will be able to prioritize their strategies Eastman Kodak or Kodak fail to understand the dynamics of the industry what was happening to the industry it is not only these five forces within an industry but also something that happens outside the industry that changes the way in which these five forces behave is also equally important the failure of Kodak is the failure of its understanding the characteristics that pertained to this to its industry as a result of which it was a huge failure likewise contrast that with PC manufacturers the transition of IBM you can see an IBM in 1970 and an IBM today you can understand the transformation and the transition that has happened to IBM one of the main reasons is it was able to understand the way in which the PC industry was making a transition from the age of mainframes today the age of handhelds and desktops and laptops so you can understand that every entity that needs to be a leader in its industry needs to understand these key characteristics that pertains to selling its products or services and the strength of each of these characteristics how it influences the industry behavior now what are these five factors now Porto's competitive model of industry analysis clearly identifies five forces that it believes strongly influences the industry one is the potential new entrant the other is the bargaining power of buyers the third the bargaining power of suppliers fourth substitute products and services and the intra industry rivalry itself that is the rivalry within those existing players in an industry now I will try to expand each of these forces and how each of these forces influence the industry but before we do that let me just give you a quick overview of a few definitions that you need to understand remember the first force was related to a new entrant now a new entrant is an existing company could be an existing company or a startup company which has not previously competed in with the existing players in a given market space for example Facebook entered the social networking Pepsi entered into the bottle water industry now these are all new entrants to a new industry and Pepsi is an existing player in the food and beverages industry and bottle water is a business in the food and beverage industry so I am just giving you two examples for it to understand that a new entrant could be an existing player in an industry who is entering into a new market space or in the case the example that I gave was Pepsi or a Coke as against a new entrant into the industry itself for example how Facebook entered the social networking industry the substitute product or service is again an alternative that exists for a product or a service that it be sold or delivered now how do I qualify that an existing product or a service is a substitute if there are compelling reasons enough for a customer to shift to an alternative choice because the customer believes that the relative price performance of the alternate choice is higher and that there is no switching cost involved then there is and this alternate choice is the substitute product or service now let us begin by understanding these five forces independently the first force before we explain this the basic idea of this five forces model is to see how each of these forces influence the industry and if you feel that each force positively or negatively influences the industry for relative to your position in the industry that is if you are an existing player you have to see whether this force is to your advantage or disadvantage or if you are a new player you will have to understand whether each of these forces is again to your advantage or your disadvantage and the sum of all these pros and cons for each of these force will measure your relative position within the industry both as a player either as a player or as a new entrant when we give when I give you examples in each of these forces you will begin to understand what I am trying to explain now the first force is threat to entry threat from new entrants now why is this very important now assume that you are an existing player and if you have an industry which by its very design protects you from new entrants then your position is better off so you can say that the threat that I will receive from a potential new entrant is low if I am in an industry which is characterized by some four by some forces which significantly impact this threat to entrant factor the result of which I am able to be I am able to enjoy some immunity because it is very difficult for a new entrant to enter into this industry now why do new entrants get into an industry they find that there is a lot of potential there is a lot of market that is untapped or big corporate houses have a lot of capacity have a lot of resources on hand that they would like to invest in new businesses or some businesses would like to exist exit from their existing businesses and enter into new businesses there are various reasons why entities want to start new operations as I explained before diversifying entities like a Pepsi or a Coke which was into the cola industry also entered into the bottle water industry they are also into the snacks industry or Facebook was a new entrant into the social networking industry or Apple though it started as it started in the PC industry it revolutionized the music industry itself and it was a different new entrant into the music industry so different companies have different reasons as a result of which as an existing player in an industry I might get new players entering into the industry now if I am an existing player in an industry when would I think that the sources of entry barriers are very strong what do I mean by that see I had already told you that each industry at the fundamental level will have these five forces but the way in which these five forces behave depends on the industry in which we are doing this analysis so a particular source could build high entry barriers for a new entrant or a particular industry will have lower entry barrier for new entrants so which are all those influencing parameters which either build strong or weak entry barriers and if the entry barriers are very strong then for somebody who is already a player in the industry the relative impact will be less because the threat that I will get from a new entrant is minimal because the entry barriers are very strong now when will an entry barrier be strong or weak we will just break the various sources of entry barriers to understand this for example economies of scale now what do I mean by economies of scale it means that you need a wider base over which your major capital expenditure or fixed cost will get distributed for example let us say the example that I have given is Intel now why is Intel successful now why is that it is difficult for a new entrant to enter into this industry the economies of scale that Intel has built primarily is from the R&D that it has developed you need so much of research and development and that R&D expenditure has to be spread over a wider base which is difficult unless there is enough R&D expenditure that is available for a new entrant it is very difficult for a new entrant to derive benefit from these economies of scale another example could be let us say the logistics or the supply chain or the distribution channel for example the Coca-Cola or the Pepsi-Cola now where do they derive their economies of scale they have a fully integrated distribution system which is very difficult to replicate by a new entrant and it requires huge economies of scale to build such a distribution system as a result of which if I am a Coca-Cola or if I am a Pepsi-Cola I feel that the threat from a new entrant because of the scale that I have built in the distribution is low because a new entrant cannot achieve that scale economy as a result of which my position my relative to a new entrant is better another source of entry barrier could be the brand itself for example let us say we are talking about premium coffee Starbucks is a very powerful brand or here you a cafe coffee day is a powerful brand a barista is a powerful brand likewise a Nike is a powerful brand you go to search engine Google is a powerful brand so there are inherent advantages that Google has or a Nike has which it gets from the power of its brand and to that extent it is difficult for a new brand to enter into the search engine industry or the footwear industry or the premium coffee industry and of course if it is going to be another powerful brand then it no longer is a strong entry barrier but for existing powerful brands there is an inherent weak an inherent advantage by way of a weak by way of a strong entry barrier sorry which is built because such brands are very powerful that existing customers would not shift to an alternate brand so this is one source of entry barrier that gets built because the brand is very strong another entry barrier is a very clear case of proprietary product differences and this is very common in the pharma industry and if you are a pharma player it could be a Novartis or you could be an Elieelie you have proprietary knowledge by way of patents which does not allow any new entrant to enter into that space because you have a patent that protects you as a result of which the threat from a new entrant is little there is literally no threat so there is this characteristic feature which is common in the pharma industry because of the proprietary knowledge that each of the players have builds a very strong entry barrier another source of entry barrier that gets built into an industry is the switching cost why switching cost is an entry barrier and again a classic example is the ERP industry the enterprise resource planning industry suppose you your firm works on an oracle platform another firm works on a SAP platform so you have all of your infrastructure the training of the employees all suited towards either a SAP platform or an oracle platform so suppose I am SAP and I am just trying to see whether in this industry my my the threat from a new entrant is high or low so immediately I would like to see whether the cost of switching from SAP to oracle or any other ERP is high or low if the cost of switching from an existing ERP to another ERP is very high then that is an inherent entry barrier because I would not be the customers would not be willing to invest such huge switching costs unless there are compelling reasons unless the switching cost benefit outweighs then as somebody who has major switching cost built into the business model I would feel that the threat from a new entrant is low so that is why switching cost is another source of entry barrier access to distribution channel is also another entry barrier and this is very very important especially when it comes to the retail industry and that is why you find the ice cream or the packed food industry if you go to any of these shopping malls one of the main the key success factor for the retail industry is shelf space if you do not have shelf space in the retail industry it is very difficult to push your products and this is again linked to the supply chain management linked to the distribution network that you have and if a new entrant is not able to access such competitive distribution networks then for existing players the threat from a new entrant is very low because the access to distribution has built a strong entry barrier unless some radical change happens into the industry that makes this distribution channel itself irrelevant and this happened in the airlines industry in many cases now you find that the role of the travel agent itself is diminishing how because the airlines industry or for a or a different intermediary has emerged whereby you can buy your tickets online and the role of travel agents is getting diminishing so if I am in the travel industry and more specifically the travel agent then I would feel that the threat from a new entrant is very high because no longer is this distribution channel limited no longer are new entrants being restrained from accessing these distribution channels because an alternate distribution channel itself has emerged so access to distribution channels is also a source of entry barrier one of the main important entry barriers is the capital expenditure if the industry requires huge capital expenditure which not many new entrants can afford then existing players will feel that capital expenditure by itself has built a strong entry barrier which means it need not worry about a lot of players trying to get into the industry because by very nature the industry is capital intensive major examples of the aircraft manufacturing industry and that is why you do not find a lot of competition in the aircraft manufacturing industry though there is intense competition in terms of the number of players in the industry you do not find many you just find a Boeing or an Airbus or a Lockheed why because the industry is extremely capital intensive and also the automobile industry or the steel industry these are all industries that are capital intensive and because they are capital intensive there are some inherent entry barriers I am not saying all capital intensive industries do not have any threat from new entrant I am just trying to say that there are some inherent advantages of being a first mover in a capital intensive industry because since it is capital intensive the threat from new entrant is relatively lower as a source of an entry barrier it provides a strong entry barrier as a result of which the threat from a new entrant is minimum there are some industries in which the government policy itself is a source of an entry barrier and these are industries which are highly and heavily regulated the nuclear industry for that matter or very recently the FDI in multi brand retail the liquor industry the airlines industry so various industries which are highly regulated the government policy by itself could be favorably or unfavorably disposed but it is a source of an entry barrier and if it is favorably disposed then it is providing high entry barriers which means new players cannot easily enter and if it is not favorably disposed then the threat from a new entrant is very high the competitive retaliation within an industry itself is a threat for a new entrant suppose I want to enter into a new business and if this industry is prone to very strong retaliation from existing players I would think twice before I enter into this business mobile telephone is a good example the bandwidth business is a very good example today you find lease lines entering into the lease line business suppose there is a new product offering immediately there is retaliation from existing players so the extent to which the existing players can retaliate is by itself a source for an entry barrier and this from a new entrant point of view suppose I am remember we have to do this industry analysis either as somebody who is inside the industry or somebody who wants to enter into the industry and in this case if I am somebody who wants to enter into the industry and if I feel that if I enter into the industry the retaliation from those existing in the industry is going to be very strong then I would think twice which means the source of entry barrier is very strong so this is about the threat to new entrant now why are we doing this this we are doing as I said before to measure to get an understanding suppose I am an existing player in an industry are there different sources of entry barriers which would allow or restrict new entrants and if the aggregate of these sources are in such a way that it builds a lot of entry barriers then the threat I would have from a new entrant is low if the aggregate of all these factors that influence the entry barriers is positioned in such a way that there is a lot of chance that a new entrant can come in then the threat from a new entrant is high and this I will have to do as a player within an industry to understand where I actually stand whether I would be I would be facing a lot of threat from new entrants or not so this is one first factor to do an industry analysis the next is the bargaining power of a buyer now who is a buyer a buyer is the end user or the customer and the end user could be a retail user or could be an institutional customer now buyer has some bargaining power now when does the bargaining power of the buyer is high or low and if it is high how does that characterize the industry if it is low how does that characterize the industry is the issue that we would like to understand now when is the bargaining power of a buyer very high a buyer will have a high a large bargaining power if that buyer is concentrated in its buying power as a result of which it is able to gain a lot of volume discounts now what do I mean by this take for example walmart now walmart is a buyer for from various vendors that it has and every supplier would like to sell its product or supplier its service in a walmart store so look at walmart store as a buyer and imagine the amount of bargaining power that it will have because it has at its disposal the power to buy in huge volumes as a result of which it can practically dictate terms to its suppliers and now if you are talking about the shopping mall industry or the multi brand retail industry walmart is clearly a leader and it knows that it has higher bargaining power so it means that it is relatively better placed than somebody else who wants to just start another competitive business in the same industry because it cannot command such volumes another source another way to see whether the bargaining power of the buyer is high or low is to see what product or service that is being delivered and if that product is a standard product or a undifferentiated product for example let us take the omnibus industry the buyer is the normal passenger unless there is huge differentiation for me going by a particular bus x or a particular bus y does not make a difference if there is no differentiation at all and in these cases the buyer has a higher bargaining power and if I am in the omnibus industry as somebody running buses I should know the fact that a buyer has higher bargaining power because I am delivering a service that is not highly differentiated as a result of which and also there are multiple options available for the buyer as a result of which the buyer can switch over from my bus service to a another bus service the same thing is a bookstore you have a landmark you have an odc you have a crossword unless the buying experience is unique and differentiated and as long as or if it is not and as long if the product is standard then and there are no switching cause then as a buyer I can switch from one product or one service x to another product or another service y and it is in these cases that you would say that the bargaining power of the buyer is high and for players in such an industry they should be mindful of this fact now when we will again the bargaining power of the buyer be high if the switching costs are low take for example the ad agency industry assume that every ad agency is able to give the same level of service in terms of creativity so I can easily switch from a lintas to a be an R K swami or whichever is the ad agency if I feel that all the ad agencies are in terms of the creative differentiation they are the same the switching costs is very low now a buyer will have a high bargaining power if the switching costs from shifting to one service provider or from one product to another service provider or another product is very low and this as somebody who is in participating a player in an industry I should be mindful a buyer will also have a very high bargaining power if it has the propensity to backward integrate what do I mean by backward integration take for example Ford it is in the business of manufacturing and selling cars and let us say the core competency of Ford is its engines and then the rest is all assembly the wiring the auto components suppliers give all those other components it gets steel it get tires from elsewhere now when will Ford have a higher bargaining power as a buyer of tires as a buyer of steel as a buyer of other auto components if it has the propensity to start its own tire manufacturing unit its own steel manufacturing unit for example take the case of Tata Tata motors make its car makes their own cars and if I am a supplier of steel I know pretty well that the buying power of Tata motors when it comes to getting steel from me is very high because it has its own Tata steel from where it can buy of course there is no hard and fast rule that Tata motors should buy steel only from Tata steel because this is a different business entity that is a business in different business entity and both of them are competing fiercely for their own profits and suppose I am steel authority of India and I am aggressively trying to push my steel for Tata motors then I should be mindful of the fact that the bargaining power of Tata motors is high because it has its own steel manufacturing expertise from the Tata group so this is what I mean by the propensity or even the existing backward integration if you find that firms can backward integrate then you should realize that these firms have higher bargaining power because these firms as your buyers as they have higher bargaining power for example ITC if they are in the business of selling tobacco products they can backward integrate and also get into the other small services small products that get into the tobacco product or for example coke they can backward integrate which they are to get into even the bottling industry so these are examples of how the bargaining power of a buyer because of its propensity to backward integrate is very high the buyer also has a significant high bargaining power if the product is very important to the buyers end product for example this is typical for packaging suppose I am selling my product and packaging is just one component to it and it is actually the product that is important and not the packaging that gets into the product and I am buying my packaging material from some vendor I will have more bargaining power because for me the packaging is not important it is the product that is important so I will have better negotiation powers I will have better bargaining powers over the vendor who supplies the packaging material a buyer again has a higher bargaining power if they are large volume buyers and especially this is very very critical in high fixed cost industry and that is why you find in an aircraft industry when India wants to buy aircrafts the companies do not approach the Indian government the president of US or president of France talks to the Prime Minister of India because we are talking about an Airbus and Boeing so you can understand that the bargaining power is very high if you are a buyer in an industry that is also driven by volumes under the same time high fixed cost and this is true if you are in the telecom industry as well or offshore drilling slumber here so these are cases where the volume is also high and at the same time it is high fixed core industry then the bargaining power of the buyer is very high so the second factor is bargaining power of the buyer and again here you have to sit inside if you are a player in this industry to understand who has the higher bargaining power if the buyer has the higher bargaining power then the power shifts to the buyer because he has other choices and is it structurally attractive if you want to enter into the industry you will have to understand this bargaining power of the buyer before you want to enter into the industry as a new entrant so the first factor was threat from new entrant the second one is the bargaining power of the buyer so the next class we will cover the other forces and then take one example to understand how these five forces influence an industry thank you