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Forces at Work & Structure Conduct Performance (SCP)

WHO DO WE THANK (OR BLAME) FOR THE FORCES AT WORK FRAMEWORK?

"The essence of formulating competitive strategy is relating a company to its environment"

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MICHAEL E. PORTER Competitive Strategy: Techniques for Analysing Industries and Competitors, 1980
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ELEMENTS OF THE FORCES AT WORK FRAMEWORK

Potential Entrants
What is the threat ?
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Suppliers
What is their bargaining power?

Industry competitors
How intense is the rivalry ?

Buyers
What is their bargaining power?

Substitutes
What is the threat?

WHO ARE THE PLAYERS IN THE AUTOMOBILE MANUFACTURING INDUSTRY?

NON-EXHAUSTIVE

Potential Entrants
Motorcycle and truck manufacturers...

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Suppliers
Parts manufacturers, steel mills, labor unions...

Industry competitors
Daimler-Chrysler, Ford, GM, Toyota...

Buyers
Households, governments, rental car companies...

Substitutes
Manufacturers and operators of trains, buses, airplanes, motorcycles...

WHO ARE THE PLAYERS IN THE DESTINATION THEME PARK INDUSTRY?

NON-EXHAUSTIVE

Potential Entrants
Regional theme parks, other large entertainment companies...
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Suppliers
Park employees, food suppliers, construction companies...

Industry competitors
Disney, Universal,...

Buyers
Families, travel agencies, business event planners...

Substitutes
Disney Quest, Sony virtual reality, other destinationbased resorts...

STRUCTURAL FACTORS IN INDUSTRY RIVALRY

Basis of competition
(e.g., quality, price, service) Industry growth Product differentiation Brand identity/loyalty Switching costs Fixed cost/value added Nature of capacity (shortage/excess) Concentration of production Exit barriers Corporate stakes (e.g., strategic importance, reputation) Diversity of competitors Information complexity/transparency
Potential Entrants

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Suppliers

Industry competitors

Buyers

Substitutes

DETERMINANTS OF BUYER POWER

Bargaining leverage
Buyer concentration vs. firm concentration Buyer volume Buyer switching costs Buyer information Ability to backward integrate Availability of substitute products

Potential Entrants

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Suppliers

Industry competitors

Buyers

Price sensitivity
Price/total purchases Product differences Brand identity/ quality perception Buyer income/profits Decision makers incentives
Substitutes

DETERMINANTS OF SUPPLIER POWER

Differentiation of inputs Switching costs of suppliers and

competitors in the industry Availability of substitute inputs Supplier concentration Importance of volume to supplier Cost relative to total purchases in the industry Threat of forward integration relative to threat of backward integration by firms in industry
Potential Entrants

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Suppliers

Industry competitors

Buyers

Substitutes

DETERMINANTS OF BARRIERS TO ENTRY

Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Proprietary learning curve Access to necessary inputs Proprietary, low-cost product design Government policies/regulation Expected retaliation

Potential Entrants

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Suppliers

Industry competitors

Buyers

Substitutes

DETERMINANTS OF SUBSTITUTION THREAT

Potential Entrants

Relative price performance

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of substitutes Switching costs Buyer propensity to substitute

Suppliers

Industry competitors

Buyers

Substitutes

PRESENTATION OVERVIEW

Overview of the forces at work framework

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Examples of forces at work framework Steps for creating a forces at work framework

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FORCES AT WORK IN THE SUPER PREMIUM ICE CREAM INDUSTRY

Little supplier power

Suppliers

New entrants Some barriers to entry

Significant economies of scale

in production High capital requirements Established brand equities No significant proprietary product difference Low barriers for other dairy companies
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Low input differentiation Low switching costs for inputs Highly dependent on volume No input impact on differentiation Low impetus for forward integration

Intense competition

Little industry growth Recent excess capacity Little product differentiation No switching cost Some brand equity

Substitutes
Significant threat of substitution
Large substitution threat from
unbranded ice cream, other milk products No switching cost to consumer

Buyers
Substantial buyer power
Immense distributor concentration Little buyer switching cost Product costs passed through to
consumer

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FORCES RESHAPING THE ROLLING STOCK INDUSTRY

Current barriers to entry are high but are falling due to adoption of technical standards High capital requirements for R&D efforts Development of modular platforms will reduce R&D costs and will increase economies of scale

Although increasing, suppliers bargaining power remains low Highly fragmented supply chain Bargaining power is increasing due to growing upstream integration between manu-facturers and suppliers

Intense rivalry based largely on non-price competition Product differentiation achieved via technical innovation, integrated systems, and project financing Large but infrequent orders Excess production capacity

Buyers have significant buying power Highly concentrated buying power (top 4 companies represent 67% of market) Growing preference for turnkey solutions 20% - 40% price reductions observed from 1990 to 1994

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Product innovation in the rail transportation industry has reduced the threat of substitutes High speed rail networks have outperformed air travel for shorter trips (under 3 hours) Urban railway systems preferred in many regions with road congestion and pollution 12

PRESENTATION OVERVIEW

Overview of the forces at work framework?

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Examples of forces at work framework Steps for creating a forces at work framework

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Six steps for building a forces at work framework

Define the industry that you will analyze using the framework

4 Synthesize your findings into

summary messages for each category. Include prioritized bullet points under each summarized message
Entrants New entrants
Suppliers Competitors Buyers Working Draft - Last Modified 5/26/2008 3:45:40 AM

Create an exhibit that explicitly identifies competitors, customers, suppliers, potential new entrants and substitutes

Industry competitors
Substitute s

Suppliers Intensity of rivalry

Buyers

Review trade press, financial reports, market research, broker reports and interview notes, organizing key information into the major categories of forces

Substitutes

5 Create an exhibit lead that

captures the key message of the framework

6 Review exhibit for quality control

purposes

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SITUATION ANALYSIS STRUCTURE-CONDUCT-PERFORMANCE (SCP) FRAMEWORK

Structure

Conduct

Performance

$
Rigorous approach to analyze industry structure Emphasis on conduct as key determinant of economic returns Performance defined from the rational shareholder perspective

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THE ELEMENTS OF THE S-C-P FRAMEWORK INDUSTRY STRUCTURE

Structure
Economics of demand Availability of substitutes Differentiability of products Rate of growth Volatility/cyclicality Economics of supply Concentration of producers Import competition Diversity of producers Fixed/variable cost structure Capacity utilization Technological opportunities Shape of supply curve Entry/exit barriers Industry chain economics Bargaining power of input suppliers Bargaining power of customers Information market failure Vertical market failure

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THE ELEMENTS OF THE S-C-P FRAMEWORK PLAYERS CONDUCT

Structure

Conduct
Cooperation versus Rivalry Marketing Pricing Volume Advertising/promotion New products/R&D Distribution

Vertical integration Forward/backward integration Vertical joint ventures Long-term contracts

Internal efficiency Cost control Logistics Process R&D Organization effectiveness Capacity change Expansion/contraction Entry/exit Acquisition/merger/ divestiture
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THE ELEMENTS OF THE S-C-P FRAMEWORK PLAYERS PERFORMANCE

Structure

Conduct

Performance
Financial Profitability EBIT ROS Margins Value creation EVA ROE TRS

Non-financial Technological progress Employment objectives Customer value/service

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STATIC VS. DYNAMIC SCP

Today Future

Historical data

Expected external events

C
Feedback

SCP provides MECE organizing framework

Identifies key issues Highlights information gaps Creates understanding of links between S,
C, and P Descriptive

SCP provides forcing device to speculate about how expected external shocks may affect the future of an industry

Initial impact on S Resultant impact on C Ultimate impact on P Feedback effects Actions

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