ANALYZING INDUSTRY

ENVIRONMENT
What is an Industry

• identify firms that produce products

that are close substitutes. Must look
beyond the product's physical
characteristics to function when
defining industry. Eg. A garden store
that sells grass seeds, turf, shrubs, is
really in the business of ``delivering''
beautiful lawns and gardens to
households.
Understanding the Competitive
Environment

What is competition?
When organizations battle for some desired object
or outcome
Customers
Market share
Survey rankings
Needed resources
Hypercompetition
A situation of intense and continually increasing levels of
competition in today’s business environment
 Understanding the Competitive
Environment

Who are our competitors? -- 3 Perspectives

(1) Industry perspective
Identifies competitors as firms that are making the same
products or providing the same service
Describes industries according to number of sellers &
the similarities or differences in the products or services
• The number of sellers & level of product-service differences
will affect how intensely competitive the industry is
• See Figure 6-2
Who are our Competitors?

(2) Marketing perspective

Competitors are firms that satisfy the same
customer needs
Intensity of competition depends on
How well the customer need is understood or defined
How well different firms are able to meet that need
 Who are our Competitors?

(3) Strategic Group Perspective

Competitors are firms that follow similar strategies
Strategic group is a set of firms competing within
an industry that have similar strategies &
resources
An single industry could have a few or several
strategic groups depending on what strategic
factors are important to different group of
customers
Who are our Competitors?

Strategic Group Perspective (cont’d)

Firms in same strategic group have two or more
competitive characteristics in common
Sell in same price/quality range
Cover same geographic areas
Be vertically integrated to the same degree
Have comparable product line breath
Emphasize same types of distribution channels
Offer buyers similar services
Use identical technological approaches
Who are our Competitors?

Strategic Group Perspective (Cont’d)

Constructing a strategic group map
Identify competitive characteristics that differentiate
firms in an industry from one another
Plot firms on a two-variable (X-Y) map using pairs of
these differentiating characteristics
Assign firms that fall in about the same strategy
space to same strategic groups
Draw circles around each group, making circles
proportional to size of group’s respective share of
total industry sales
Who are our Competitors?

Strategic Group Perspective (Cont’d)

Guidelines for constructing SGM
Variable selected as axes should not be highly
correlated
Variables chosen as axes should expose big
differences in how rivals compete
Variables do not have to be either quantitative or
continuous
Drawing sizes of circles proportional to combined
sales of firms in each strategic group allows map to
reflect relative sizes of each strategic group
If more than two good competitive variables can be
used, several maps can be drawn
What Factors Are Driving Industry Change and
What Impacts Will They Have?
 Industries change because forces
are driving industry participants
to alter their actions
 Driving forces are the
major underlying causes
of changing industry and
competitive conditions
 Where do driving forces originate?
Outer ring of macroenvironment
Inner ring of macroenvironment
Analyzing Driving Forces:
Three Key Steps
STEP 1: Identify forces likely to exert
greatest influence over next 1 - 3 years
 Usually no more than 3 - 4 factors
qualify as real drivers of change
STEP 2: Assess impact
 Are the driving forces acting to cause
market demand for product to increase or
decrease?
 Are the driving forces acting to make
competition more or less intense?
 Will the driving forces lead to higher or lower
industry profitability?
Common Types of Driving Forces

Emerging new Internet capabilities and

applications
Increasing globalization of industry
Changes in long-term industry growth rate
Changes in who buys the product and how
they use it
Product innovation
Common Types of Driving Forces
(con’t)

Entry or exit of major firms

Diffusion of technical knowledge
Changes in cost and efficiency
Consumer preferences shift from
standardized to differentiated products (or
vice versa)
Changes in degree of uncertainty and risk
Regulatory policies / government
What Strategic Moves Are
Rivals Likely to Make Next?
A firm’s best strategic moves are
affected by
Current strategies of competitors
Future actions of competitors
Profiling key rivals involves gathering
competitive intelligence about
Current strategies
Most recent actions and public announcements
Resource strengths and weaknesses
What Are the Key
Factors for Competitive Success?
 KSFs are those competitive factors most affecting
every industry member’s ability to prosper
 KSFs concern
 Specific strategy elements
 Product attributes
 Resources
 Competencies
 Competitive capabilities
that a company needs to be competitively
successful
 KSFs are attributes that spell the difference
between
Identifying Industry Key Success Factors

 Pinpointing KSFs involves determining

On what basis do customers choose
between competing brands of sellers?
What resources and competitive capabilities
does a seller need to have to be competitively
successful?
What does it take for sellers to achieve a
sustainable competitive advantage?
 KSFs consist of the major determinants for
success
Example: KSFs for Beer Industry
Full utilization of brewing capacity –
to keep manufacturing costs low

Strong network of wholesale

distributors –
to gain access to retail outlets

Clever advertising –
to induce beer drinkers to
buy a particular brand
Example: KSFs for Apparel
Manufacturing Industry
 Appealing designs and
color combinations –
to create buyer appeal

 Low-cost manufacturing
efficiency – to keep selling
prices competitive
Example: KSFs for Tin and
Aluminum Can Industry
Locating plants close to end-use
customers –
to keep costs of shipping empty cans low

Ability to market plant output within

economical shipping distances
Does the Outlook for the Industry Present an
Attractive Opportunity?

Involves assessing whether the industry

and competitive environment is attractive
or unattractive for earning good profits
Under certain circumstances, a firm
uniquely
well-situated in an otherwise
unattractive industry can still earn
unusually good profits
Attractiveness is relative, not absolute
Factors to Consider in
Assessing Industry Attractiveness
 Industry’s market size and growth potential
 Whether competitive forces are conducive to
rising/falling industry profitability
 Whether industry profitability will be favorably or
unfavorably impacted by driving forces
 Degree of risk and uncertainty in industry’s future
 Severity of problems facing industry
 Firm’s competitive position in industry vis-à-vis rivals
 Firm’s potential to capitalize on
vulnerabilities of weaker rivals
 Whether firm has sufficient resources to
defend against unattractive industry factors
Core Concept: Assessing
Industry Attractiveness
The degree to which an industry is
attractive or unattractive is not the
same for all industry participants
or potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
Competitor Analysis

Sizing up strategies and competitive

strengths and weaknesses of rivals
involves assessing
Which rival has the best strategy? Which
rivals appear to have weak strategies?

Which firms are poised to gain

market share, and which ones
seen destined to lose ground?

Which rivals are likely to rank among the

industry leaders five years from now? Do any
Things to Consider in
Predicting Moves of Rivals
 Which rivals need to increase their unit sales and
market share? What strategies are rivals most likely
to pursue?
 Which rivals have a strong incentive, along with
resources, to make major strategic changes?
 Which rivals are good candidates to be acquired?
Which rivals have the resources to acquire others?
 Which rivals are likely to enter new geographic
markets?
 Which rivals are likely to expand their product
offerings and enter new product segments?
For Discussion: Your Opinion

Why does a company need to bother with

studying competitors and trying to predict
what moves rivals will make next? Why
can’t it just choose whatever strategy it
wants or make whatever moves in the
marketplace it wishes without first worrying
about what rivals are going to do?
 Quality of business environment
Porter’s Diamond

Source: Professor Michael E. Porter, Harvard Business School, Advanced Management Program, April 15, 2009
Frameworks to analyze macro environment
Porter’s Diamond

• Factor Conditions
• Nation does not inherit but instead creates the most important factors of production
• Stock of factor less important than the rate & efficiency with which it creates, upgrades & deploys them
in particular industries
• Most important factors are those that involve sustained & heavy investment and are specialized to an
industry’s specific needs
 Factors which are scarce, more difficult for foreign competitors to imitate
 Competitive advantage results from the presence of world-class institutions that first create specialized
factors & continually work to upgrade them (Denmark has specialized institutions that research diabetes –
Denmark is also world’s leading exporter of Insulin, Holland – Flower etc)
Frameworks to analyze macro environment
Porter’s Diamond

• Demand Conditions
• Composition & Character of the home market effect how companies perceive, interpret & respond to
global buyer needs
• Companies gain competitive advantage where the home demand gives them clear understanding of
emerging buyer needs
• Demanding buyers, pressure companies to innovate faster & achieve more sophisticated competitive
advantages than their foreign rivals
 If domestic buyers are the world’s most sophisticated & demanding buyers
 Stringent needs arise from local values & circumstances
 Local buyers – help companies to anticipate global trends/needs (Denmark’s Environmentalism, US – Fast
Food/Credit Card
• When the industry in home country is large – companies have a competitive advantage
• Demand conditions force companies to respond to tough challenges
Frameworks to analyze macro environment
Porter’s Diamond

•Related & Supporting Industries

• Presence of supporting /downstream industries which are internationally competitive
 Deliver most cost-effective inputs
 Provide innovation & upgrading (short lines of communication) – companies have the opportunity to
influence their suppliers (test sites for R&D accelerating the pace of innovation)
 Home based related industry results in embracing of new skills also brings in new ways of competing
Frameworks to analyze macro environment
Porter’s Diamond

•Firm Strategy, Structure & Rivalry

• How companies are created, organized & managed
 Small/medium sized – Privately owned & operated as extended families – good for companies which
emphasizes focus, customized products, niche marketing, rapid change & flexibility
 Hierarchical managers with technical backgrounds – good for companies which are technical/engineering
oriented
 National capital markets & compensation practices for managers
 Germany/Switzerland – Banks comprise a substantial part of nation’s shareholders, shares held for long
term appreciation – Mature industries
 US – Risk capital, Widespread trading, Compensation based on individual results – new industries
 Competitive in activities that people admire or depend on (Switzerland – Banking, Isreal – Defense)
 Presence of strong rivals
 Local rivals push each other to lower costs, improve quality & service & create new products & services
 Geographic concentration
 Look for more sustainable competitive advantage
The Five Competitive Forces That Shape Strategy - Video

http://www.youtube.com/watch?v=mYF2_FBC
vXw&feature=related
Structural Analysis of Industries

• The essence of developing a business strategy is ``relating

the company to its environment.''
• The long-term profitability of a business depends on variety
of factors each of which determines the competitiveness of
the industry.
• Because competition among firms in an industry drives
down the rate of return on capital, the better off
shareholders are, the better the firm is shielded from
competition.
• A goal of a business strategy is to develop a plan for
defending the firm's position from competitive forces or to
reposition the firm to a position where it can better defend
itself from competition. To this end, and before such a
strategy can be devised, the firm must analyze the
 As rivalry among competing firms
intensifies, industry profits decline, in
some cases to the point where an
industry becomes inherently
unattractive.
 Profitability of US Industries (selected industries only)

Median return on equity (%), 1999-2005

Household & Personal Products 22.7 Gas & Electric Utilities 10.4
Pharmaceuticals 22.3 Food and Drug Stores 10.0
Tobacco 21.6 Motor Vehicles & Parts 9.8
Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7
Securities 18.9 Railroads 9.0
Diversified financials 18.3 Insurance: Life and Health 8.6
Beverages 18.8 Packaging & Containers 8.6
Mining & crude oil 17.8 Insurance: Property & Casualty 8.3
Petroleum Refining 17.3 Building Materials, Glass 8.3
Medical Products & Equipment 17.2 Metals 8.0
Commercial Banks 15.5 Food Production 7.2
Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6
Apparel 14.4 Semiconductors &
Computer Software 13.9 Electronic Components 5.9
Publishing, Printing 13.5 Telecommunications 4.6
Health Care 13.1 Communications Equipment 1.2
Electronics, Electrical Equipment 13.0 Entertainment 0.2
Specialty Retailers 13.0 Airlines (22.0)
Computers, Office Equipment 11.7
The Profitability of Global Industries: Return on Invested Capital, 1963-2003
Utilities 6.2

Telecom s ervices 6.5

Trans poration 6.9

Energy 7.7

Materials 8.4

OVERALL AVERAGE 9

Retailing 9

Cons um er durables and apparel 9.5

Food retailing 9.6

Capital goods 9.9

Autom obiles and com ponents 9.9

Technology hardware and equipm ent 10.3

Hotels , res taurants , leis ure 10.3

Food, beverages , tobacco 11

Healthcare equipm ernt and s ervices 11.3

Sem iconductors 11.9

Com m ercial s ervices 12.8

Media 14.7

Com puter s oftware and s ervices 15

Hous ehold and pers onal products 15.2

Pharm aceuticals 18.4

0 5 10 15 20

Average ROIC 1963-2003 (%)

The Determinants of Industry
Profitability

3 key influences:
 The value of the product to customers

 The intensity of competition

 Relative bargaining power at different levels

within the value chain.
 The Spectrum of Industry Structures

Perfect
Oligopoly Duopoly Monopoly
Competition

Concentration Many firms A few firms Two firms One firm

Entry and Exit No barriers Significant barriers High barriers

Barriers

Product Homogeneous
Differentiation Potential for product differentiation
Product

Perfect
Information Imperfect availability of information
Information flow
Models of market dynamics
S-C-P model

Basic Conditions: factors which shape the market

of the industry, e.g. demand, supply, political
factors
Structure: attributes which give definition to the
supply-side of the market, e.g. economies of scale,
barriers to entry, industry concentration, product
differentiation, vertical integration.
Conduct: the behavior of firms in the market, e.g.
pricing behavior advertising, innovation.
Performance: a judgement about the results of
market behaviour, e.g. efficiency, profitability,
fairness/income distribution, economic growth.
Structure-Conduct-Performance Paradigm
Models of market dynamics
S-C-P model

Market Power is a measure of seller

concentration in the industry & barriers to
entry in the industry

Seller concentration:
• Number & Size of firms
• Coordinate their pricing behavior
• Collusion

• Conditions of Entry
• Extent of barriers to entry
 Economies of Scale
 Product Differentiation
 Absolute Cost Advantages
 Drawing Industry Boundaries :
Identifying the Relevant Market

 What industry is BMW in:

 World Auto industry
 European Auto industry
 World luxury car industry?

 Key criterion: SUBSTITUTABILITY

 On the demand side : are buyers willing to substitute between
types of cars and across countries
 On the supply side : are manufacturers able to switch
production between types of cars and across countries

 We may need to analyze industry at different levels of

aggregation for different types of decision
 Identifying Key Success Factors

Pre-requisites forsuccess
Pre-requisites for success

What do How does the firm

customers want? survive competition

Analysis of competition
Analysis of demand
• What drives competition?
• Who are our •• What
What are
drives
the competition?
main
customers? • What are the
dimensions of main
competition?
dimensions of competition?
• What do they want? •How
• Howintense
intenseisiscompetition?
competition?
• Howcan
•How canweweobtain
obtainaasuperior
superior competitive
competitive position? position?

KEY SUCCESS FACTORS

 Identifying Key Success Factors
by Analyzing Profit Drivers: Retailing

Sales mix of products

Avoiding markdowns through

Return on Sales
tight inventory control

Max. buying power to minimize

cost of goods purchased
ROCE
Max. sales/sq. foot through:
*location *product mix
*customer service *quality control

Sales/Capital Max. inventory turnover through

Employed electronic data interchange, close
vendor relationships, fast delivery

Minimize capital deployment

through outsourcing & leasing
Profit Pools are the total profits earned in an
industry at all points along the value chain
U.S. Consumer Photographic
Industry Profit Pool

Operating Margin
40% Total profit =
$1.9B

30
Operating profit

20

10

0
Film Film Photofinishing Photofinishing
mfg
Camera
retail
Camera

Photofinishing
equipment

Enhanced
services
retail manu- retail wholesale
facturing
Share of Industry Revenue

Profit pools answer the question: “Where and how is money

being made?”
Convergence blurs business boundaries
creating new opportunities

IT

Pharmacogenomics drug Disease management (e.g. Pfizer)

e.g Herceptin antibody therapy (e.g. Genentech)

Diagnostics Rx

(e.g. Ortho Evra/J&J Alza)

Remote patient monitoring

Smart Drug Delivery

(e.g Medtronic, Guidant

End-to-end diabetes solution

(e.g. Novo Nordisk)
Artificial Pancreas
e.g Medtronic, Roche

Drug-eluting stent
(e.g. J&J Cordis)
Drug
Medical
Delivery
Devices Implantable drug pumps
(e.g Medtronic, Amgen)
SUMMARY: What Have We Learned?
Forecasting Industry Profitability
 Past profitability a poor indicator of future profitability.
 If we can forecast changes in industry structure we can
predict likely impact on competition and profitability.

Strategies to Improve Industry Profitability

• What structural variables are depressing profitability?
• Which can be changed by individual or collective strategies?

Defining Industry Boundaries

• Key criterion: substitution
• The need to analyze market competition at different levels of
aggregation (depending on the issues being considered)

Key Success Factors

• Starting point for the analysis of competitive advantage
 Ford Case
 Why has profitability in the auto industry
declined from 10% from 1965-1972 to 4%
today?
 How is the structure of the industry likely to
change in the next five years?
 Is the industry going to be more or less
profitable in the next five years?
 Which companies are going to be more
profitable?
 What should Ford in the next five years?
 SWOT is a useful tool for examining both
internal and competitor situations
Internal

S
trengths W eaknesses

O T
External

pportunities hreats

Given this competitive position, what are the

implications for your own business?
 SWOT Matrix

Strengths Weaknesses
-Human Resource -Competitive
-Customer Base vulnerability
-Market Position -Low profit margins
-Financial Resources -Sales channel
-Products/Services conflicts

Opportunities Threats
-Economy
-Complimentary market -New Govt. regulations
-Strategic alliances -Lose of key staff
-Competition weakness - New technology

51
What makes up SWOT?

Strengths
Positive tangible and intangible attributes, internal to an organization.
They are within the organization’s control.

Weakness
Factors that are within an organization’s control that detract from its ability to
attain the desired goal.
Which areas might the organization improve?

Opportunities
External attractive factors that represent the reason for an organization to exist and
develop.
What opportunities exist in the environment, which will propel the organization?
Identify them by their “time frames”

Threats
External factors, beyond an organization’s control, which could place the
organization mission or operation at risk.
The organization may benefit by having contingency plans to address them if they
should occur.
Classify them by their “seriousness” and “probability of occurrence”.
Strengths analyze internal abilities and
associated competitive advantages

Strengths
• What does the competitor do well? Do best?
• What are the competitor’s advantages?
• What relevant resources does the competitor have?
• How much better are the competitor’s advantages/resources
relative to other market players?

How do your competitor’s strengths adversely

affect your own competitive position?
Weaknesses analyze internal limitations and
associated competitive disadvantages

Weaknesses
• What does the competitor do poorly?
• What does the competitor need to improve?
• What resources does the competitor lack?
• What market segments does the business avoid?
• Does the competitor have bad debt or cash flow problems?
• How much worse are the competitor’s disadvantages relative to
other market players?

How do your competitor’s weaknesses create

potential share gain opportunities for you?
Opportunities analyze external trends
and associated competitive prospects
Opportunities
• What external trends could competitor use to build competitive
advantage?
• Are the required specifications for the competitor’s
products/services changing in a potentially beneficial manner for
the competitor?
• Is changing technology aiding the competitor?
• Is the competitor relatively more affected by these trends than
other market players?

How may these opportunities for your

competitor shift competitive dynamics in your
market?
Threats analyze external trends and
associated competitive obstacles
Threats
• What external obstacles does the competitor face?
• Are the required specifications for the competitor’s
products/services changing in a potentially disadvantageous way
for the competitor?
• Is changing technology threatening the competitor?
• Is the competitor relatively more affected by these trends than
other market players?

How do these threats to your competitor shift

competitive dynamics in your market?
Strategies from SWOT- TOWS Matrix
WT ST
• Minimize Weaknesses & Threats  Use Strengths to minimize threats
• Merger/cut back operations
SO
WO  Use strengths to exploit opportunities
• Minimize weaknesses & maximize
opportunities
• Weaknesses prevent the company
from taking advantage of opportunities
• Alliances/Acquisition
• Hire talent