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Lecture: 3
Industry & Competitive Analysis

Introduction
Crafting strategy needs solid analysis of a company’s’ external & internal situation. Two most
important situational considerations are :
• Industry and competitive conditions
• Company’s own competitive capabilities, resources, strengths, weaknesses, and market
position.
Industry & competitive analysis refers to assessing the most strategically relevant aspects of a single
business company’s macro environment. Accurate diagnosis of the company’s situation is a
necessary managerial preparation for deciding on a sound long term direction, setting appropriate
objectives and crafting a winning strategy.

Strategic thinking & analysis to lead good strategic thinking

• Ist step: Method of Industry and Competitive analysis:
• 2nd step: Companys’ own situation:
• 3rd step : What strategic options does the company realistically have?
• 4th step: What is the best strategy?

Ist step: Method of Industry and Competitive analysis:

1. Overview of industry’s dominating economic feature.
2. Discovering the main sources of competitive pressure & strengths of the competitive forces.
3. Identifying the driving forces (causes of changes in the industry’s competitive structure and
business environment).
4. Studying the market position of the rival companies (strongest or weakest position)
5. Monitoring competitor’s strategic moves.
6. Identifying the industry’s key success factors.
7. Assessing the industry’s overall attractiveness and profitability prospects.
The collective answers to these questions build understanding of a firm’s surrounding environment
and form the basis for matching strategy to changing industry conditions and competitive forces.

2nd Step: Companys’ own situation:

1. How well is the company’s present strategy working?
2. What are the company’s resource strengths and weakness and its opportunities and threats?
3. Is the company’s cost competitive with rivals?
4. How strong is the company’s competitive position?
5. What strategic issues need to be addressed?

3rd step:
1. What strategic options does the company realistically have?
2. Is it locked into improving the present strategy or is there any room to make major strategy
changes?
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4th Step: What is the best strategy?

1. Does it have good fit with the company’s situation?
2. Will it help build a competitive advantage?
3. Will it help improve company performance?

Details of the Steps for Industry & Competitive Analysis.

► Dominant Economic Characteristics of Industry:
1. Market size
2. Competitive rivalry (local, national, international, global)
3. Market growth & position in the business
4. Number of rivals & relative size and strength
5. Number of buyers and size
6. Backward & forward integration of the rivals.
7. Distribution channels.
8. Pace of technological change
9. Highly differentiated or weakly differentiated products.
10. Economies of scales in purchasing, manufacturing, transportation, marketing etc.
11. Placement of industries in a particular situation.
12. Capacity utilization rate.
13. Capital requirement and entry / exit barriers
14. Industry profitability

► How strong are each of the competitive forces:

Five forces model of competition by Michael E Porter
1. The rivalry among competiting sellers in the industry
2. The potential entry of new competitors
3. Attempts to win customers for substituted products by companies
4. Competitive pressure generated from supplier-seller collaboration & bargaining.
5. Competitive pressure generated from seller-buyer collaboration & bargaining.
(See Text book page: 81)

Five Forces Model of Competition (In details)

1. Rivalry among competing seller
Rivalry increases:
• As the number of competitors increase & becomes more equal in size.
• When demand of the product is growing slowly
• When there is price cut or other weapons to boost sales volume
• When customers cost to switch brand is low.
• When payoff is positive from a successful strategy
• When cost is more to get out of business than to stay in business.
• When unrealted diversification move by a company appears to be very strong to takeover
lead in that particular industry.
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2. Potential entry of new competitors:

A barrier to entry prevails whenever it is hard for a newcomer to break into the market. There are
several types of entry barrier as follows:
• Economics of scale
• Cost and resource disadvantages independent of size
• Learning and experience curve effects
• Inability to match the technology & specialized know-how of existing firms
• Brand preference & customer loyalty
• Capital requirement
• Access to distribution channels
• Regulatory policies
• Tariffs and international trade restrictions

3. Competitive pressure from the substituted products

(Ex: The sugar industry competes with companies producing artificial sweeteners.)
Depend on three factors:
• Whether attractively priced substitutes are available.
• When substitutes are viewed as having satisfactory performance.
• Whether buyers can switch to substitutes easily.

4. Competitive pressure generated from supplier-seller collaboration & bargaining.

Depends on:
• How supplier bargaining power can create competitive forces
• How collaborative partnerships between sellers and suppliers can create competitive forces.

5. Competitive pressure generated from seller-buyer collaboration & bargaining.

Depends on :
• How buyers’ bargaining power can create competitive pressures.
• How collaborative partnerships between sellers and buyers can create competitive pressure.

Strategic Implications of the Five Competitive Force Model:

• The model is a powerful tool for competitive insight of the strategy makers.
• The stronger the collective impact of competitive forces, the lower the combined profitability
of participant firms.
• When forces are not collectively strong, the industry is “favourable” or “attractive” for
earning superior profit.
• Startegies should be crafted that shield the firm as much as possible from competitive forces.

► Identifying the driving Forces:

Other than life-cycle stage of an industry, the following are the “driving forces” to bring changes in
the industry:
• The internet & e-commerce opportunities
• Increasing the globalization of the industry
• Changes in the long-term industry growth rate
• Changes in who buys the product & how they use it
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• Product innovation
• Technological change
• Marketing innovation
• Entry & exit of major firms
• Diffusion of technical know how across more companies
• Changes in cost & efficiency
• Growing buyer preference for differentiated product
• Regulatory influences & govt. policy
• Changing societal concerns, attitude & lifestyle
• Reduction in uncertainty & business risk.

► Competitive Analysis:
The strength of competitive forces need to be analyzed. Such analysis is important to discover the
main sources of competitive pressures and how strong they are. Attempt is made to study the market
position of rival companies by “Strategic Group Mapping”.

Strategic group mapping (SGP)

A strategic group consists of those rival firms with similar competitive approaches and positions in
the market. Companies in the same strategic group can resemble one another in any of several ways:

• Comparable product line breadth

• Using same kind of distribution channels
• Offering buyers similar services and technical assistance
• Using essentially the same product attributes
• Depending on identical technological approaches or
• Selling in the same price / quality range.

Procedure for constructing a SGP

a. Identify the competitive characteristics firms in the industry (variables: price, quality range,
geographical coverage, degree of vertical integration, product line breadth, use of distribution
channels, degree of service offered)
b. Plot the firms on a two-variable map using pairs of these differentiating characteristics.
c. Assign firms in that fall in about the same strategy space to the same strategic group.
d. Draw circles around each strategic group, making the circles, proportional to the size of the
group’s respective share of total industry sales revenues.

Implications of SGP
The closer strategic groups are to each other on the map, the stronger competitive rivalry among
member firms tends to be. The next closest rivals are in the immediately adjacent groups.
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► Key Success Factors (KSF) for Competitive Success

A sound strategy incorporates industry key success factors. However, KSFs vary from industry
to industry and even from time to time as driving forces and competitive conditions change.
a. Technology
b. Manufacturing
c. Distribution
d. Marketing
e. Skill
f. Organizational capability
g. Overall low cost
h. Convenient locations
i. Skilled & sincere employee
j. Patent protection etc.

►Industry attractiveness
The strategists review the overall industry situation and develop logical conclusions about the
relative attractiveness or unattractiveness of the industry, both short-term and long-term. The factors
to analyze include:
a. Industry’s growth potential
b. Industry’s profitablity affected by the prevailing driving forces
c. Potential entry exit of major firms
d. Companys competitive position in the industry.
e. Stability and or dependability of demand
f. Possibility of competitive forces becoming stronger or weaker
g. Severity of problems/issues confronting the industry as a whole
h. Degree of risk and uncertainty in the industry’s future
i. Companys’potential to capitalize on the vulnerability of weaker rivals.

A company’s macro environment:

• Economy
• Legislation & regulation
• Population demography
• Societal values & life styles
Immediate industry & competitive environment
• Suppliers
• Substitutes
• Rival firms
• New entrants
• Buyers

Questions:
• Sketch the five forces model of competition (by Porter). What are the implications of Porters’model.
• What are the key success factors for competitive success?
• What is strategic group mapping? What factors are considered to formulate such mapping?
• What are the factors considered to perform industry & competitive analysis.
• What are the dominant economic features of a country.