The analysis of industry & competition: application

Hello and welcome to this series of introductory talks on business strategy. My name is Robert Grant. I'm a professor of strategic management at Bocconi University in Milan, Italy. I'm also the author of Contemporary Strategy Analysis, a leading strategic management textbook used in business programmes throughout the world.

How do we use this analysis? The main purpose is to be able to predict an industry's profitability. There are three stages to this analysis. First, perform a Five Forces Analysis to understand why the industry's current level of profitability is what it is. That way, we can identify the structural features of the industry that are responsible for its profitability being either high or low. Second, identify likely changes in industry structure, for example, is new entry likely? Will concentration increase as a result of mergers and acquisitions? Will additions to industry capacity outpace the growth of demand? Will innovation create new substitutes? Finally, we can then use the Five Forces Framework to predict the impact of these structural changes on competition and profitability.

Let's take an example of this. Several companies have recently entered the video streaming industry, notably Disney, Comcast and AT&T. Others are contemplating entry. The stock market appears to be signalling that this is going to be a very profitable industry, despite the fact that so far profitability has been low. Applying our analysis, let's look at the current situation. At the end of 2020, the industry as a whole was barely profitable. Netflix was profitable. Most of the other companies were making losses. Why such dismal performance? First, industry rivalry is strong. Although there's not a large number of players, there's significant differentiation in their offerings. Price competition has been strong, mainly due to the desire of the companies to grow their market share in order to exploit scale economies. Hence, they have been setting subscription rates below cost. Second, in terms of vertical bargaining power, suppliers, especially content owners and production companies, are very powerful. Conversely, the other end, buyers, the viewers, have very little bargaining power. Third, entry barriers are high. The investment costs of entry are certainly high, and entrants must establish a market presence in order to cover their costs. However, the potential entrants are mostly large media companies. They can surmount these barriers. Their substitutes include broadcast TV, cable TV, DVDs, cinema, and other forms of entertainment. During the current pandemic, several of these substitutes have been absent. How will competition and profitability change in the future? Over the next few years, the industry structure is bound to change. First, industry rivalry will be affected by possible consolidation amongst the players, increased differentiation of their offerings, and less pressure for competition as each player becomes more established in the market. Second, supplier power will continue to be strong but may moderate as the streaming companies increasingly backward integrate into producing their own content. Third, buyer power will remain weak. Indeed, it may weaken as viewers become increasingly loyal to a particular provider. Fourth, the threat of entry will probably decline once most media companies have entered and the market matures. Finally, substitute competition will grow additionally once the pandemic ends but subsequently will decline along with the anticipated decline in broadcast, cable TV, DVDs and cinema visits. The net result is likely to be decreased intensity of competition and increased industry profitability. However, it's not apparent that the industry will produce the kind of profit bonanza that the current share prices of industry players are anticipating. The traditional industry model,