Welcome back in the second session
of the industry analysis
While in the second session of the industry analysis,
we are going to apply
the industry structure framework
to the real-world case
And also, we are going to find out
any unique market position in a given industry
Finding market position in a given industry is also very important,
and this session will be very helpful for you as an entrepreneur
Michael Porter said it again
He said
strategy can be viewed as
building defense against the competitive forces
or
as finding a position
in an industry where the forces are weakest
Again
once the industry structure is established
then the relationship
is surprisingly sticky
So as an individual company,
it is almost impossible to change
the given relationship in a given industry
The only thing that you can do as a startup
is to find out some kind of
very unique position in a given industry
where the forces are weakest
Then you can gain competitive advantage
Although you are in a declining or
not profitable industry,
if you are able to find out a unique position,
then you can gain competitive advantage
This is what we can do as a startup
Let's look at the early personal computer industry together
The personal computer industry
was a dynamic and fast-growing business
The personal computer industry just started from
the late 1970s
Then this industry grew dramatically
This graph illustrates the personal computer market size from 1982 to 1998
As you can see in the graph,
you feel that the industry itself grew dramatically
This yellow line represents the worldwide personal computer market
and the personal computer industry
The blue line illustrates
the US alone personal computer industry
But by the early 1980s,
the personal computer industry was in chaos
without any market standard
There was no standard
Different companies produced different types of personal computers
There are a bunch of different types of
personal computers out there in the market, in the industry
Look at these pictures
The first picture is Altea 8800
Altea 8800 is the first personal computer
developed and invented by Ed Roberts
Ed Roberts can be considered
the father of the personal computer
He founded the company MITS
MITS has nothing to do with MIT University
But anyway, he established MITS as a company
And then he produced some kind of DIY toolkit
of the personal computer
It looks like a machine
Not too many people understand what it is,
but only a few hobbyists understand
And they were enthusiastic on the personal computer
One of them is
Bill Gates
Bill Gates was passionate about personal computers
So he tried to develop some
running software for Altea 8800
So when he saw the news of Altea 8800
through the computer magazine at Harvard University,
then he quit his study and
went to Albuquerque, New Mexico,
where MITS is located
So he started his company, Microsoft
to supply the software to Altea 8800
So Ed Roberts, who is the founder of Altea 8800,
later became a medical doctor
It was a very interesting career path
Anyway, look at the picture in the middle
This is Apple II, which is the best-selling computer
in the early personal computer industry
You know who made Apple II?
Yes, of course, Steve Jobs
and Steve Wozniak made Apple I and Apple II
Basically, they made the first Apple I personal computer
in Steve Jobs' mom's garage
And he asked his friends to assemble 50 of them
And then they sold the first Apple I computer
to the nearby computer stores
Okay, this is the start of the Apple computers
This is Apple II
Later, they raised outside venture capital fund
Then they assembled the Apple II
So they sold a lot of Apple II computers
And thanks to the success of Apple II,
the Apple computer went to IPO
within four or five years later
Then the last picture is IBM 5150
Well, traditionally, IBM was a computer company,
but their computers were not personal usage computers
Their computers were the workstation computers
Workstation computer means
it's a very big computer for
not for the individual
but for the company, but for the university
So at that time
each university has one or two workstation computers
Okay, think about it
Really big
And IBM acquired
tons of market share out of those types of industries
So IBM was a computer company,
but IBM did not consider
personal usage computers
But IBM felt that,
wait a minute
there are many personal computer companies out there
And Apple, for example,
already started the personal computer industry,
and they dominated the market share
So it's kind of late for us
to jump in this market
So we should be in a hurry
So IBM, because they have technology,
they have a team, they have money,
they quickly made a team for the personal computer market
So they developed new types of personal computers very quickly
So this is IBM's first personal computer,
which is IBM 5150
So IBM 5150 adopted MS-DOS
as an operating system
and also adopted Intel microprocessor
as a main chip
Well, this IBM 5150 achieved huge success
I will explain in more detail about it
You know, this is IBM 5150
IBM launched this personal computer in 1981,
and it targeted 240,000 units
sold within five years
But the result was it sold out within one week
It means that there are so many, so many consumers
already waiting for the IBM 5150
It was a jackpot, a huge success
And then one year later,
Time magazine covered this story
And then they said that this is the machine of the year
For the first time,
Time magazine announced the machine
on the cover story
However, think about it
PC makers come to suffer from low profitability
Although the market was growing dramatically,
the computer makers
suffer from low profitability
Isn't it interesting?
So why is this happening?
So the first reason was
because of the huge success of IBM 5150,
there is a huge demand for similar computers
I need IBM types of computers
Why?
Why? Because of the compatibility
What do you mean by compatibility?
Have you heard the name of the compatibility, the term?
Okay, compatibility means
we are able to do the job
on a certain computer
Then later, we should be able to proceed this task on a different computer
This is called compatibility
In order to achieve the compatibility,
both computers have the same
kind of software
And right now, we have compatible computers out there
There's no problem for us to work on different computers
But at that time, again,
the different computers have different systems,
different software,
different structures
So that's why not too many computers can have compatibility
But after IBM 5150's success,
consumers need compatibility
So they need particular types of computers,
which is IBM computers
But again,
IBM cannot make endless computers
They have a fixed amount of capacity
So in the market, there is a shortage of IBM computers
Then again, so many other computer companies
try to copy IBM computers
We say it is IBM clones,
which is copycat companies,
copycat computers of IBM PCs
They basically perform the same,
but they run most of the same software,
same programs as IBM models,
but at far less cost
Look at this picture
This machine is kind of a first portable computer machine
developed by Compaq
So we say it is a Wintel standard
Consumers need Wintel standards
in order to achieve the compatibility
Again, for the compatibility,
computers have the same structure, same system
The most important component
that makes computers compatible,
there are the Intel microprocessors
and there are Microsoft operating systems
So we need to have the same microprocessor
and same operating system
It is called the Wintel standard,
Windows and Intel standard
Due to the shortage of IBM PCs,
consumers started purchasing IBM clones
This graph illustrates the growth of IBM PCs
and IBM clones
Let's apply the Porter's 546 analysis
into the PC industries
What about the current competitors?
Current competitors
Consumers need compatibility,
as I already mentioned that
And then if they need the same computers,
then there could be lack of differentiation
If there's a lack of differentiation,
no different computers out there,
then computer makers
can only fight in the prices
We say it's a kind of a chicken game
They engage in chicken game
In other words, there is a fierce competition in price
Right?
So inside the competitors, among the competitors,
they fight each other in price only
And industry grows rapidly
It means component prices,
component prices decline very fast
There are many chips,
there are many components inside the computers
But these chips are getting old,
getting old very quickly
So the price is going down
Right?
It means computers can be
perishable
like a vegetable and fruit
Think about it
If you deal with the perishable products,
such as vegetable, fruit,
then
then your strategy is to sell very quickly
If you cannot sell your product,
then you should raise down your prices
You know what I mean?
Because your product is a perishable product
So in this case,
there's a fierce competition in price
because each PC maker raises down the prices
in order to sell their product very quickly
So overall,
the competitors' power is really high
Competitors are very threatful
Fierce competition exists
Another one
What about the future competitors?
Everybody can make computers
Very easy
So the capital cost of the manufacturing of the computers
is very low
Think about Dell
Michael Dell
We are going to talk about Dell case later today
But, you know,
Dell started assembling the computers in his dorm room
So as long as you have relevant chips,
relevant software,
then you can make your own computers
You know, in Korea in the 1980s,
in the Yongsan area,
there are tons of small computer makers
And they assembled the components,
over there by themselves very quickly
Right?
And also,
so many computer makers tried to jump in this market
And for example,
the Chinese factory in Asia,
Chinese factory tried to make their own computers
Same thing happened in Korea
There are many Korean computer makers
Right?
And most inputs are available
Perfectly available
So,
the competitors,
future competitors,
future competitors
can join this industry very easy
So,
look at the market share
from 1980s to 1989
Well, in the 1980s,
before the IBM entered this industry,
Apple gained around 30% of the market share
And AST, Tandy,
acquired around 40% of market share
And other computer companies
got around 30% of market share
But three years later,
what happened?
After IBM jumped in this industry,
IBM acquired around 40% of the market share
And Apple's market share decreased to 20%
And other companies' market share increased
to 33%
Then four years later,
Apple's market share decreased again
And IBM's market share also decreased
On the other hand,
other companies,
which is new entrance,
okay, new competitors,
other market shares increased 48%
Two years later,
1989,
then others' market share increased to 60%
It's all because of the IBM clones
and consumers' need of the compatibility
and easy to jump in this market
So, what about the threat of new entrance,
threat of future competitors?
I think it's kind of moderate or high
Right?
Well, what about the consumers?
Consumers need what?
Consumers need Wintel standard
If they need particular functions,
Wintel standard,
then they don't have any,
high level of switching cost over the particular brand
Low switching cost
Low switching cost means
they are always,
able to change their brand
As long as the particular computer
follows the Wintel standard,
they can choose these computers
For them,
PCs are the same
So, again,
the low switching cost
For them,
PCs are also very expensive
It's very expensive
And it,
it accounts for a huge portion
from their incomes
So,
we say this type of product
is a high involvement product
high involvement product
If you deal with the consumer
who can purchase a high involvement product,
then you should be very careful
because consumers are very sensitive
Right?
So, the consumer's threat
is probably higher over you
Right?
They have more power over you
because they don't have any
sticky brand
and they are really careful with their prices
because it is very expensive,
which is a high involvement product
Right?
And they are
all well-educated consumers
in terms of the computers
So, dealing with those types of consumers,
it is not easy
Right?
Let's move on
Suppliers
Well,
consumers need for the compatibility,
which is the Intel standard
So, they particularly need
Intel microprocessor
and the Microsoft Windows operating system
So, who are major suppliers
for the PC makers?
Yes, of course,
Intel
and Microsoft
Right?
And,
for the PC makers' point of view,
it is not easy
to switch the suppliers,
to switch the,
to switch Intel,
to switch Microsoft
Why?
Because consumers need
And there's only one company
to produce Intel microprocessor, only Intel
There's only one company to produce
the window operating system
It's Microsoft
Okay
So the major suppliers such as Intel and Microsoft
dominate this market
So we say
the power of suppliers is very high, very high
It's very high, very high
In particular, those two suppliers
So look at this graph
The blue bar represents Intel's profit margin
and the red bar represent Microsoft's profit margin
In 1999,
Microsoft enjoyed around 40% of the market share
and Intel at the same time,
around more than 25% market share
So they enjoyed above normal profit
given such a poor performing industries,
which is the PC industry
Although the other PC makers
suffer from lack of the profitability,
but the suppliers, Intel and Microsoft
enjoyed above normal profits
because of their power
Substitute
This is the last one
At that time, the network PC is rising
and there's a workstation PCs,
but substitute power is not very high
It's kind of a middle, right?
So we can analyze,
we can analyze the early PC market,
PC industry based on Porter's 546 analysis
So let's evaluate again
Current rivals, very high
What about future rivals?
Future rivals is middle or high
Consumers, consumers power, yes, high
Suppliers power, very high
Substitute power is kind of middle
Then we can make it this sentence,
this word
to the numbers from one to five
and the current rivals, yes, mark five
and future rivals mark around the 3.5
and the consumers, consumers mark four
and suppliers mark, yes, of course, mark five
and substitute mark, it's kind of a middle,
so plus three
So put together how much?
Okay, 9, 12, 17
Wow, 20.5 out of 25
20.5
You know what I mean by that?
Outside the five forces
they have a 20.5 score out of 25
Again, the more powerful the forces,
the less attractive for you
It's the big number or small number,
20.5 score out of 25
which is huge numbers
It means, five forces
in the computer industry,
five forces have big numbers
It means this industry is not attractive to you, right?
So we can confirm that why the PC makers
suffer from the lack of the profitability
It is all because of powerful forces
I want to introduce Michael Dell
Okay, Dell
Have you heard about the Dell computer?
Right?
Dell computer started as a computer company,
in 1980s
As a freshman, I mean, college dropout,
he started this company,
well, actually the nearby University of Texas
Well, before then, he was a pre-med student
in the University of Texas, Austin,
and he lived in the dormitory, Dobby Hall
And over there, right, over there,
he didn't study at all
Instead, he assembled a computer
And basically he took order from his friend
and he personalized his friend's computers
Right?
So he made a lot of money
So he started his businesses
Well, Dell was very successful
because Dell has grown at over 55% or 60% every year
in revenue and net income,
respectively from 1987 to 1997
Think about the blue bar represent the gross ratio,
gross ratio of the Dell
Dell achieved at least 50%, at least 50% every year
They increased, they grew 50% every year
But what about the other computer company?
Well, the yellow, I mean, the orange bar represent Apple
You know, 1996, 1997, Apple shrinked, Apple declined
Not too many people believe that
But around that time
we are worried about the Apple's bankruptcy, right?
1996, 1997
And what about the other computers?
IBM, 1993, IBM did not grow
1994, IBM grew a little bit
So think about the other computer makers
Computer makers suffer from
lack of the profitability and they don't grow
Only Dell grew dramatically, only Dell
So we need to find out the key secret,
how it is happening for the Dell computer
Dell became later the world's largest PC makers,
PC producers
Dell thrived in the PC industry again
And this is a stock market prices of the Dell computer
And when Dell went to IPO,
then the Dell stock prices increased,
increased sharp, okay?
Well, I prepared for the short video clip
to explain the Dell's history
Please take a look at the video together
before we proceed the lecture
Let's take a look at the video together
What do you think of the Dell's history?
Isn't it interesting?
So you understand how Dell
run his own businesses
and how did position the computer company,
position the company in a given industry?
I want to summarize
Dell's history and Dell's approach
and Dell's strategy in a given poor performing industry,
which is the PC industry
Right, okay, so Michael Dell said,
the idea was to sell computers directly to the end users
without the markup of dealers
So it means we don't have dealers
Dealer means big stores
We don't have big stores
We do not contract with the big stores, okay?
And also we don't have a high level of inventory
We keep very low level of inventory
and also we provide high level of service
These are differentiators, okay?
These are differentiators of the Dell computer
Look at the traditional computer purchasing,
experience, think about it
Personal computer,
when we think about the personal computer,
we think about the computers at home, right?
We need a personal computer at home
My house, we have one or two personal computers, okay?
This is the picture
This is a typical picture
The people use the computer at home, right?
So when we need a personal computer,
then where do you go to purchase personal computer?
Yes, of course, you should stop by the specialized stores
or big discount stores such as Costco
or such as Best Buy or such as Walmart
You stop by Walmart or Best Buy,
to purchase computer
And of course, over there, there are a lot of computers
and the employees,
probably employees will explain,
the very detail about each computers, okay?
Then where these big box retailers
or Best Buy or Walmart get the computers?
Yes, of course, computer makers
Computer makers have a factory
and computer makers have employees
and they have raw materials
So they assemble the computer in their factory
Then later, they ship their finished good,
finished computer to the Best Buy or Walmart
as the, you know, dealers
We say it's the dealers
So the computer makers just contact with the dealers
or stores, and then they just shake hands
Then they don't care the end users
End users like us just meet
employees of the stores, right?
Because the stores take care of everything
Take care of selling, service, something like that
So the Best Buy will sell the computer to the end users,
right?
This is the typical process of computer purchasing
But Michael Dell thought differently
Okay, wait a minute
This is the personal computer
for just a home
It is a home personal computer
Yes, it is a home market, okay?
So far, we just focused on home personal computer market
But in a PC industry,
there are kind of additional market can exist
Additional place that need the personal computer,
additional place beyond the home
Think about where it is
Where it is?
Where we need the personal computer?
Beyond the home
Yes, of course, the companies
Yes, right?
Inside the companies,
there are tons of the personal computers
We work at the personal computers, right?
Each, every single household
need just one or two computers,
but each company need 5,000, 10,000 computers,
They need 5,000, 10,000 PCs, right?
This is additional market
This is another market,
which is enterprise market
And also, what other places need personal computer?
What other places?
Yes, of course, university, right?
Inside the university, how many computer we need?
In Hanyang University,
how many computers do we have?
We have a lot of departments
We have a lot of professors
We have a lot of students
And also, we have a computer lab
and the computer classes, right?
And we have a classroom with many computers
So, how many computers we need in each university?
This is the university market, right?
There are different market
in a given personal computer industry
And what else?
What kind of other place
that need personal computer?
Yes, government, right?
The Department of Labor or Pentagon in America
So many people work there
In other words, so many computer we need, right?
This computer would be the personal computers
So, this is a government market
So, Michael Dell did not focus on home PC market
Instead, he identified
three big consumer segments
The first one, enterprise consumer segment
Second one, university consumer segment
Third one is government consumer segment
So, Michael Dell tried to send out his salesperson
to each segment
For example, enterprise market
Dell sent out his salesperson to GE
GE Manhattan
Hey GE, you need computers
How many computers do you need?
What kind of functions do you need?
How many, I mean,
what about your
the kind of sound or graphic important for you?
Then we can provide some kind of relevant chip,
relevant types of the computer for you
Do you need wide screen?
Yes, we can provide wide screen for you, right?
So, okay, let's make a contract with us
Then GE orders 10,000,
10,000 PCs to Dell computers
So, the Dell computer, once they received the order
from the GE, then they started making the computer
for only GE
It is a personalized computer for GE
And then what about university?
Dell sent out the salesperson
to the Harvard University
Hey, Harvard University, you have many department
and what kind of a computer you need?
Yes, of course, you are kind of a scientific,
the university
So, probably you need to have a high level of capacity
to analyze your data
So, we can provide those types of computer for you
How many computers you need?
Well, Harvard University said,
well, we need at least 8,000 of them
So, yes, we can make 8,000 computers for you
So, once Dell computer received the order from the GE,
they started making, no, I'm sorry,
taking orders from the Harvard University,
they started making
the Harvard University types computer,
highly personalized
computer for the Harvard University
Same thing happened to the government, right?
So, in this case,
Dell doesn't need dealers
because they can deliver the computer
directly from factory to the company,
to the university, to the government side
So, they eliminated the middleman
Instead, they deliver the computer from the factory
directly to the end users
which is the three big segment
Then later,
Dell established the website
and started taking order from the home PC markets
Then they tried to deliver the computers
from the factory to each household
This is a key secret
how Dell was successful
given poor performing industry
So, key idea to the Dell computer
was to approach different market
among the same PC industry
Dell identified that there are two different types
of industry, I mean
two different types of market, I'm sorry
So far, we discussed about the industry
Again, industry refers to the group of company,
producing similar
or substituted product and services
But what about market?
Market, market is a kind of the group of consumers
In a single and same industry,
there are different types of
the market exist, like a home PC market,
enterprise PC market, university PC market,
and the government PC market, like this
So, Dell identified there are two different types
of PC market exist, okay, simplify
He simplified two different types of the PC market
The first one is PC markets for enterprises,
PC market for university, PC market for the government
And on the other side was a traditional PC market
for home, right?
And then PC market for enterprises,
there are IBM
PC market for home, there are Apple
And then compact in the middle
And then Dell position itself
as a PC for enterprises,
like this, very similar to the IBM
And then what is the difference between Dell and IBM?
So we can draw the y-axis
Y-axis, we say it is a personalization
There are high personalized PCs and low personalized PC
Dell focused on high personalized PC
So the Harvard University specific PC, GE specific PC,
and the Department of Labor specific PC
And Dell tried to make their own personalized PC
IBM, IBM just provide the standard PC,
regardless of their need, regardless of their types
of company, their types of organization
So we can position these companies again,
based on the graph
So the Apple positioned itself
PC for home and highly personalized area
On the other hand, IBM positioned itself
as a PC for enterprise and standardized
On the other hand, Dell
located itself in the PC for enterprise area
and highly personalized
So that's why Dell has, Dell achieved very unique position
in a given PC industry
So why is this important?
This unique position heavily shaped
the existing industry structure
I will show you
This is the traditional industry structure
for PC makers
Of course, most of the forces
have more power over PC makers,
but the Dell's unique position changed this relationship
For example,
Dell, we can assess the relationship
between Dell and current competitors
Current competitors just focused
on home PC market, but Dell started focusing
on different market
So in a different market, in an enterprise market
and in a university market and in a government market,
and there are not too many PC makers over there
So the current competitors' power
is relatively low, right?
It's relatively low, middle or low
What about future competitors?
In a traditional PC market for home,
the future competitors easily join this market,
but this is not the PC market for home
This is a PC market for enterprise,
PC market for university
So Dell started this market
and Dell initiated this market
So by making strong relationship between Dell
and the enterprise consumers and university consumers
So, penetrating the already existing,
network, already existing relationship,
it's not easy
So it is kind of Dell's strong relationship
between the consumers,
so there's entry barrier
So not too many, the future competitors
can join this market easily
So we say future rival's power will be low
What about consumers, right?
So Dell provides a personalized PC for each consumers
So in this case, the situation changes
In a normal market,
consumer has power over the PC makers
because consumer don't have any switching cost
of a particular brand
But right now,
in GE and in Harvard University,
the situation changed, right?
Because only Dell can provide
the personalized computer for us
So in this case, who has a power?
Yes, of course, Dell has a power
over the consumer
So the consumer's power relatively low, right?
So from high to middle
What about suppliers?
Yes, probably Dell should get
the Intel microprocessor
and also Dell should adopt the
Microsoft Window program as operating system
Yes, the situation same,
but Dell's consumers
are not just individual home market
Dell's consumers are
big company or big university
So that has a bargaining power
Bargaining power over suppliers
Hey, Microsoft, we have a lot of consumers
We have big consumers
We cannot make consumers disappointed
And also we have bargaining power
So please cut the prices and please deliver fast
So please make our order priority
So in this case
supplier power is kind of decreased dramatically
So the supplier power can be middle or kind of high
And substitute,
and there is not too many substitute over there
So substitute power would be middle
So we can make those
those words to the numbers
So we can make a number
Do you remember the traditional
PC market, PC industries
546 number?
There was a 20.5 out of 25
Let's calculate Dell's 546 numbers
What about 5.5 and
8.5, 10.5?
Yes, around 14, right?
Think about it, 14 out of 25
Less than half
A little bit half, a little bit half
And compared to the traditional 546,
traditional 546 have 20.5
And we have, we have how much?
14, right?
14 out of 25, 14, 20.5
So Dell has
Dell's 546 has less numbers
Less powerful
The rule of thumb is the more powerful the forces,
the less attractive to you
In other words, the less powerful forces,
the more attractive to you
So in this case, Dell's 546 has less powerful, right?
It is all because of Dell's unique position
So as a startup
when you decide to enter a certain kind of industry,
then first thing to do,
you need to analyze the industry's attractiveness
based on Porter's 546
You can easily assess the relationship, right?
Then later, you need to find out the unique position
in a given industry
Although you assess your industry
and you got huge number,
then, do not be panic
Do not be panic
Then you need to find out any unique position
available out there like Dell
Then once you,
if you find out unique position,
then you have incentive to join the market
and you can have competitive advantage
in a given poor performing industry, okay?
This is what the startup founders should do,
in terms of the industry analysis
and market analysis
Thank you for listening