Industry Analysis

• Industry is defined as a group of firms producing

products or services that are perceived by
customers as meeting the same need.
• Every industry exists in an industry environment,
which comprises of suppliers, customers and
other firms, including those that may enter the
industry and those that offer either substitute or
complementary products.
The External Environment
The general environment: segments and
elements
WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING,
AND HOW STRONG ARE THEY?

Forces Governing Competition in an Industry

• Industry analysis is a tool to understand how
the profits are distributes among market
participants.
• Defense from negative development
Factors Affecting the Threat of New Entrants
into an Industry
Factors Affecting the Bargaining
Power of Suppliers
Factors Affecting the Bargaining
Power of Buyers
Factors Affecting the Threat of Substitutes
Factors Affecting Rivalry among Competitors
Factors Affecting Complements
Possible Responses to Threats to Profitability
Six-Step Process for
Analyzing an Industry
Some Possible Sources of Industry Information
 What Causes Rivalry to be Intense?

• Numerous competitors or they are roughly equal in size and

power
• Slow growth in industry
• Product lacks differentiation or switching costs
• High fixed costs or perishable product
• Capacity normally augmented in large increments
• High exit barriers
• Rivals are diverse in strategies, origins, and “personalities”
 Barriers and profitability
Exit Barriers
Low High
Low, risky
Low, stable returns
Low returns (textile)
FMCG
Entry barriers High, stable High, risky
returns returns
High Pharma Power
 Summary of 5 Forces
1. If the Threat of New Entrants is High, prices can be bid down and/or
incumbents' costs inflated, reducing profitability.
2. If the Intensity of Rivalry Among Existing Competitors is High, tactics
like price competition, advertising battles, product introductions, and
increased customer service or warranties are common, having
noticeable effects on all competitors.
3. If the Pressure from Substitute Products is High, it limits the potential
returns by placing a ceiling on the prices firms in the industry can
profitably charge. The more attractive the alternative, the firmer the lid
on industry profits.
4. If the Bargaining Power of Buyers is High, Buyers compete by forcing
down prices, bargaining for higher quality or more services, playing
competitors against each other, reducing profitability.
5. If the Bargaining Power of Suppliers is High, Suppliers can exert
bargaining power over participants in an industry by threatening to
raise prices or reduce the quality of purchased goods/services.
 Is the Collective Strength of the Five Competitive Forces
Conducive to Good Profitability?

• Is the state of competition in the industry stronger

than “normal”?
• Can industry firms expect to earn decent profits
given prevailing competitive forces?
• Are some of the competitive forces sufficiently
powerful to undermine industry profitability?
 Industry Analysis can be used to
• To identify opportunities to increase profits
• To discern threats to existing profits and develop ways to
counter them
• To decide whether to enter a market
• To decide whether to exit a market
• To clarify areas where strategic change may yeild highest
payoff
• To assess the effect of a major change (such as deregulation,
new technology, complements, demographic shifts)
• To Shape the industry environment
 QUESTION : WHAT FACTORS ARE DRIVING INDUSTRY
CHANGE, AND WHAT IMPACTS WILL THEY HAVE?

• Strategic Analysis of Industry Dynamics:

1. Identifying the drivers of change.
2. Assessing whether the drivers of change are,
individually or collectively, acting to make the
industry more or less attractive.
3. Determining what strategy changes are needed
to prepare for the impacts of the anticipated
change.
 QUESTION : HOW ARE INDUSTRY RIVALS
POSITIONED—WHO IS STRONGLY POSITIONED
AND WHO IS NOT?

• A Strategic Group
– Is a cluster of industry rivals that have similar
competitive approaches and market positions:
• Have comparable product-line breadth
• Sell in the same price/quality range
• Emphasize the same distribution channels
• Use the same product attributes to buyers
• Depend on identical technological approaches
• Offer similar services and technical assistance
Competitor Analysis Components
 QUESTION: WHAT STRATEGIC MOVES ARE RIVALS LIKELY
TO MAKE NEXT?

• Competitive Intelligence
– Information about rivals that is useful in anticipating their
next strategic moves.
• Signals of the Likelihood of Strategic Moves:
– Rivals under pressure to improve financial performance
– Rivals seeking to increase market standing
– Public statements of rivals’ intentions
– Profiles developed by competitive intelligence units
 QUESTION: WHAT ARE THE KEY FACTORS FOR FUTURE
COMPETITIVE SUCCESS?

• Key Success Factors

– Are the strategy elements, product and service
attributes, operational approaches, resources,
and competitive capabilities that are necessary
for competitive success by any and all firms in an
industry.
– Vary from industry to industry, and over time
within the same industry, as drivers of change
and competitive conditions change.
 QUESTION: DOES THE INDUSTRY OFFER GOOD PROSPECTS
FOR ATTRACTIVE PROFITS?

• Industry Profitability Considerations:

– The industry’s overall growth potential
– Effects of strong competitive forces
– Effects of prevailing drivers of change in the industry
– Competitive strength of the firm: its market position
relative to its rivals, its capability to withstand
competitive forces, and whether its position will change
in the course of competitive interactions
– The success of the firm’s strategy in delivering on the
industry’s key success factors
 3.1 From Thinking Strategically about the Company’s Situation
to Choosing a Strategy

Chapter 3

Thinking
strategically
about a firm’s
external
environment Forming a
Identifying Selecting the
strategic
promising best strategy
vision of
strategic and business
where the
options model for
firm needs
for the firm the firm
Thinking to head
strategically
about a firm’s
internal
environment

Chapter 4
 Apple Inc.
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Design is how it works.”
• “Innovation distinguishes between a leader and a
follower.”
• “It is piracy, not overt online music stores that is
our main competitor.”
• “Sometimes when you innovate, you make
mistakes. It’s best to admit them quickly and get
on with improving your other innovations.”