Formation 2

Module II
Structure and dynamics of

the industry
Introduction
Module I
Module II
Module III
Module V
Roll-out
Qtr 1
4
Qtr 2
Qtr 3
Qtr
Action 1
Action 2
Action 3
Action 4
Action 5
Module VI
Conclusion
Module IV
Contents of Module II
Introduction
Industry structure
Players analysis
Strategic group analysis
Substitution analysis
Supply chain analysis
Exit and entry barrier assessment
Development of the industry

Industry strategic era analysis
Life cycle analysis
Trends analysis
Product/market analysis
Size and growth of the market
Product/market segmentation
Demand and supply economics
Industry analysis frameworks

Structure-conduct-performance
The five forces
The strategic triangle
A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING
Module II
Introduction
Schedule for the A.T. Kearney Business Unit Strategy Training Program
Time
Monday
Tuesday
Wednesday
Thursday
Friday
Module II
Module III
Module V
Final presentation
8-9
Introduction
9-10
10-11
11-12
12-1
Module I
1-2
Lunch
Conclusion
Lunch
Lunch
Lunch
2-3
3-4
Module VI
Guest Speaker
Module IV
Guest Speaker
4-5
Case preparation
Case preparation
Case preparation
Strategy literature
review
7-8
Case presentation
Case presentation
Case presentation
Case Dinner
preparation
8-9
Dinner
Dinner
Dinner
Dinner
5-6
Lunch
6-7
9-10
10-?
Source: A.T. Kearney
Module II
Introduction
Positioning of Module II in the overall training context

Module II
Structure and
dynamics of the
industry
Module I
Identification of the key
issues of the
engagement
Module III
Characteristics and
dynamics of the
individual companies
Module V
Definition and
evaluation of strategic
alternatives
Module VI
Implementable
recommendations
Roll-out
Qtr 1
Qtr 2
Qtr 3 Qtr 4
Action 1
Action 2
Action 3
Action 4
Action 5
Module IV
Execution
capacity of the
client
Note: The order of presentation of the curriculum elements should not be interpreted as a sequential guideline for a strategy engagement. Different
elements of the program may be referenced at different times in the engagement
Module II
Introduction
Module II teaches techniques and frameworks used to analyze the structure and
dynamics of the industry
Generate an understanding of the environment

in which the client and its competitors
compete
Establish an overview of the specifics of the
industry in which the client acts
Ensure an understanding of the competitive
rivalry
Module II
Introduction
Deliverables and techniques in Module II
Deliverables
Techniques
Industry structure
Players analysis
Substitution threat analysis

Industry life cycle analysis
Trends analysis

The five forces
Module II
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
Industry structure
Introduction
Describing the industry in which the client is acting establishes the boundaries of
the competitive arena
Understanding the industry structure
Establishes a foundation for many other analyses

related to the industry and competing companies
Creates a point-of-departure for related analyses
Reveals the context in which the client competes
Identifies basic information about the competition
Suggests an appropriate positioning of the client
companys offering
Identifies opportunities for growth into related areas
Module II
Industry structure
Introduction
An industry is a group of companies that offer a product or range of products that

are close substitutes for each other
Definition
Economists define an industry as a group of

companies that supply a market where a market is
defined in terms of substitutability, both on the
demand side and the supply side
Source: Grant, R.M. (1995); Contemporary Strategy Analysis

Module II
Industry structure
Introduction
An industry can be defined from two perspectives, both of which are based on the
concept of substitute products
Product point-of-view
(supply side)
Analyze companies
offering:
The same product
A similar product
range
This definition creates four

levels of industry based on
the concept of product or
market substitution
Market point-ofview (demand side)
Analyze companies
catering to:
The same need
The same customer
group
Module II
10
Industry structure
Introduction
An industry can be defined on four different levels and its scope can vary
considerably, depending on which perspective is taken
Product approach
(supply side)
The automaker, Cadillac, can have

four different levels of competition
Same
products
Similar product
or product range
Products that serve

same needs
Products competing for

the spending of the same
customer group
Manufacturers of full-size luxury

automobiles such as Lincoln, BMW,
Mercedes and Lexus
All automobile manufacturers
All automobile manufacturers, and

manufactures of motorcycles, bicycles
and trucks
All companies selling major consumer
durables, such as new homes, household
appliances, etc.
Market approach
(demand side)
Source: Kotler, P. (1997); Marketing Management
Module II
11
Industry structure
Introduction
Defining the industry from a product perspective versus a market perspective
Company
Product perspective
Market perspective
Revlon
We make cosmetics
We sell hope
Missouri - Pacific Railroad
We run a railroad
We are a people and goods mover
Xerox
We make copying equipment
We help improve office productivity
Standard Oil
We sell gasoline
We supply energy
Columbia pictures
We make movies
We market entertainment
Encyclopedia Britannica
We sell encyclopedias
We distribute information
Carrier
We make air conditioners and furnaces
We provide climate control in the home

Module II
12
Industry structure
Introduction
From a theoretical perspective, five different types of industry structures exist
Type
Characteristics
Example
Pure monopoly
A pure monopoly exists when only one company provides a

certain product or service in a certain country or area
Local electricity company
Pure oligopoly
A pure oligopoly consists of a few companies producing

essentially the same commodity
Oil and steel
Differentiated oligopoly
A differentiated oligopoly consists of a few companies

producing partially differentiated products
Autos and white goods
Monopolistic competition
A monopolistic competitive industry consists of many

Restaurants and beauty shops
competitors able to differentiate their offerings in whole or parts
Pure competition
A pure competitive industry consists of many competitors

offering the same product and service
Table salt

Module II
13
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
14
Industry structure
Players analysis
Description
An overview of the different players positions and directions provides an

understanding of the players current objectives, strategies, and capabilities
Current strategy
Objectives
Capabilities
Strategic intent
Information on the
companys intended
direction
Realized strategy
Information on capital
investment decisions,
product lines, mergers,
acquisitions and alliances,
and advertisement and
promotion indicate the
realized strategy
Does the current

performance meet
objectives in terms of
profitability, market share,
growth, R&D,
performance, etc?
Will the current objectives
change in the future?
How serious is the potential

challenge from this
competitor?
Financial reserves
Capital equipment
Work force
Brand loyalty
Management
Alliances
What changes in competitors strategies are likely as a

result of the clients strategic initiatives?
Note: Also see Module III, Purpose of the organization
Module II
15
Industry structure
Players analysis
Usage
A players analysis enables a company to better understand the behavior of its

competition
Purpose of players analysis

Forecast competitors future strategies and
decisions
Predict competitors reactions to the clients
strategy and competitive initiatives
Questions to answer
Who are the competitors?
What are their objectives?
Determine how competitors behavior

patterns can be influenced
What are their strategies?
Gain insights into competitors competitive

advantages and use this information to
improve the clients chances of success
What are their strengths and weaknesses?
What are their reaction patterns?
Source: Grant, R.M. (1995); Contemporary Strategy Analysis;

Kotler, P. (1997); Marketing Management
Module II
16
Industry structure
Players analysis
Usage
A players analysis makes competitor responses more predictable which enables

the client to optimize its strategic initiative
Predict behavior
How should client respond
Define relevant competitors

Define the strategic shifts a competitor
might initiate
Define potential retaliatory actions a
competitor may take against the clients
proposed strategy
Determine the most effective actions

with respect to competitors' positions
Determine how the client should
communicate information to
competitors. Signaling can be used
to influence competitor perceptions and
behavior to stimulate or suppress
specific reactions from competitors
Source: A.T. Kearney; Hail, O. and Robertson, T. (1991); Toward a Theory of Competitive Market Signaling
Module II
17
Industry structure
Players analysis
Example
All relevant competitors should be analyzed to generate a complete picture of the

competitive rivalry
Overview of Nestl and Danone

Listing of key
players
Player
Intended and
realized strategy
offensive/defensive?
Size
Business areas
Other
Objectives
Capabilities
Other
Nestl
Strategic intent
To develop the position
as the worlds largest
food company
Realized strategy
Growth by strategic
acquisitions
Joint venture with
General Mills
Growth by exploiting
existing brands in new
growth areas
To realize the USD 100

billion revenue target in
year 2000
The worlds largest food

company with more than
490 factories in 70
countries
Very strong brands such
as Nescafe, KitKat, Lion,
After Eight, and
Nestl
World no.1 in mineral
water, milk powder and
dried milk
No. 2 in ice cream
Generally a dominating
player in Europe
Danone
Strategic intent:
To become one of the
world's leading food
companies
Realized strategy:
Focus on a limited
number of core
businesses
Focus on developing
synergies between
activities
To reverse a four year

decline in operating
margins by 1998
The worlds largest

producer of fresh dairy
products
Strong brands such as:
Evian, Volvic,
Kronenburg, etc.
Mainly a European
vendor, except for dairy
products and mineral
water, where Danone has
a strong global presence
Revenue: USD 13.6 bill.

Net income: USD 550
mill.
Employees: 81,579
Business areas:
Diary products
Grocery
Biscuits
Beer
Mineral water
Containers
Does the current

performance meet
goals?
How serious is the
potential challenge?
Strong
Weak
Current strategy
Revenue: USD 45 bill.

Net profit: USD 2.6 bill.
Employees: 221,144
Business areas:
Hot and cold
beverages
Milk products
Chocolate and
confectionery
Convenience and
prepared foods
Pharmaceutical
products
Module II
18
Industry structure
Players analysis
Methodology
Methodology for using the players analysis
Output
Input
Issue analysis
Client
data/interviews
Customer and
supplier
surveys/interviews
Annual reports
Expert interviews
Analyst reports
SEC filings*
Industry reports
Trade Journals
Press clippings
Purpose of the
organization
Define players
List all potential competitors

Identify key information:
Revenue
Profit
Size
Products
Customers
Stakeholders
Mission/vision
Analyze players
Identify most important

competitors
Create a matrix of
relevant information
Define the competitors
on the basis of their
industry and market
perspective
Define in which
segments they operate
Assess players
capabilities
Summarize
competitive
environment
Industry description
Key success factors
of the industry
Game theory
Decision tree
End game analysis
Players focus and
competitive
positioning/strengths/
weaknesses vis--vis
the client
Determine the strengths and

weaknesses of individual
players:
Revenue and profit by
business
Cash flow position
Experience curve
Stock price performance
Financial return measures
Product/market
performance
* Reports filed by publicly held companies with the Securities and Exchange Commission: e.g., 10K, 10Q
Module II
19
Industry structure
Players analysis
Conclusion
Conclusion
Key points
Use purpose of the organization from Module III, which examines vision/mission, objectives,
strategies, and value propositions, as a point of departure
Be careful not to neglect examination of peripheral players
Players analysis is a fundamental techniques with many uses: overview of competitive
structure, predicting competitive behavior, alliance opportunities, etc.
The scope of the project will determine the depth of the analysis required
Strengths
Establishes overview of industry situation

Predicts competitor behavior
Useful starting point for many other techniques
Weaknesses
References
Grant, R.M. (1995); Contemporary Strategy Analysis - Concepts, Techniques, Applications;

Blackwell Business
Hail, O. and Robertsen, T. (1991); Toward a Theory of Competitive Market Signaling; Strategic
Management Journal, 12
Johnson, G. and Scholes, K. (1984); Exploring Corporate Strategy; Prentice Hall
Kotler, P. (1997); Marketing Management - Analysis, Planning, Implementation and Control;
Prentice Hall
Module II
20
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
21
Industry structure
Description
A strategic group is part of the substructure of an industry
Definition*
A strategic group is a group of companies in an
industry following the same or a similar

strategy along relevant strategic directions
A strategic group has common specific assets
and thus follows common strategies in setting
key decision variables
* The strategic group concept was developed at Harvard Business School

Source: Grant, R.M. (1995); Contemporary Strategy Analysis
Module II
22
Industry structure
Description
Strategic group analysis is a commonly used technique for analyzing players

positions in the competitive environment
Strategic groups can be created based on

many different factors
Specialization
Brand identification
Push vs pull
Channel selection
Product quality
Technological position
Vertical integration
Cost position
Service
Price policy
Financial or operating leverage
Parent company relationship
Government relationship
Most of the empirical research

into strategic groups has
focused on the differences in
profitability between companies
in different groups
It can often be very useful to
generically differentiate the
groups based on How they
compete and Where they
compete
Module II
23
Industry structure
Description
A goal of strategic group analysis is the comprehension of the underlying

factors that determine a companys profitability
Profitability
Spread
within
industry
Determinants
Spread within
strategic group
Industry wide elements of

structure that determine the
competitive forces and that
apply equally to all
companies in the industry
Rate of growth in demand
Potential for
differentiation
Structure of supplier
industries
Strategic group specific elements

of structure that apply differently
to companies in different strategic
groups
Height of mobility barriers
Bargaining power of suppliers
and customers
Substitution threat
Exposure to rivalry from other
groups
Specific company
profitability
Company specific elements that

apply differently to companies
within a strategic group
Scale of companies relative to
others in the group (if
economies of scale are an issue)
Cost of entry into the group
(e.g. via a companys position
in another industry)
Ability to implement the
common strategy of the
strategic group
Module II
24
Industry structure
Usage
The strategic group analysis enables consultants to more easily identify potential
strategies and to better predict competitors responses to the clients strategic
initiatives
Key strategic questions

What are the directions of competitors strategic
movements over time?
Are there uncovered and attractive market segments
on the strategic map?
How can we exploit the clients competitive
advantage to move toward an uncovered segment?
Are there barriers against these strategic
movements? Can they be overcome?
What are competitors likely responses to the
clients strategic moves? Do they face mobility
barriers?
Establish which
dimensions
differentiate companies
or groupings of
companies from each
other
Assess current and

potential strategic
moves of the client and
of other competitors in
the market
Module II
25
Industry structure
Usage
A strategic group analysis provides a useful means to assess competitive dynamics
Individual player
Isolating
mechanisms
Dimension
Industry
Strategic
group
Strategic
group
Dimension
There should be a correlation

between the key success factors
and the dimensions in focus
The sustainability of the groups
will depend on the:
Mobility barriers of each
group (the barriers that
characterize each group and
how easily these can be
penetrated)
Isolating mechanisms of each
company (the unique resources
of the company that will aid in
preserving advantage) or
position within a group
Mobility
barriers
Module II
26
Industry structure
Usage
The strength of a strategic group depends on its mobility barriers and isolating
mechanisms
Sources of mobility barriers
Sources of isolating mechanisms
Market-related strategies
Product line
User technologies
Market segmentation
Distribution channels
Brand names
Geographic coverage
Selling systems
Industry supply characteristics
Economies of scale (in production, marketing,
administration, etc.)
Manufacturing processes
R&D capability
Marketing and distribution system
Characteristics of companies
Ownership
Organizational structure
Control systems
Management skills
Boundaries of the company (diversification,
vertical integration)
Company size
Relationships with influence groups
Sunk costs and limited markets

Switching costs and search costs
Consumer and producer learning
Team embodied skills
Unique resources
Special information
Patents and trademarks
Reputation and image
Module II
27
Industry structure
Example
By mapping the industry players into strategic groups, the clients closest
competitors are defined
Local players with a

very focused product
range
Kellogg's
PepsiCo
Carlsberg
Coca Cola
CPC International
Quaker Oats
Sara Lee
Heinz
RJR Nabisco
Seagram
Bongrain
Beesnier
Heineken
MD Foods
Firesland Dairy Foods
Danish Crown
Allied Domecq
Bols Wessanen
Cadbury Schweppes
GrandMet
United Biscuits
Bahlsen
Albert Fisher
Tate & Lyle
Eridania Beghin-Say
Tomkins
Dalgety
LVMH
Conagra
Lindt & Sprngli
Dairy Crest
Unigate
Avonmore
Coberco
Socopa
BASS
Guinness
Interbrew
Campina Melkunip
Scottish & Newcastle
High
Geographic scope
Global players where

the economies of
operating in a
particular market
depend not only on
what the company is
doing in that market,
but on its worldwide
activities
Strategic grouping of food and beverage industry players
Low
Dimensions should
differentiate the
players into groups
relevant to the issues.
Choosing appropriate
dimensions may
required trial and error
Irish Dairy Board

Soiaal
Sdfleisch
Danisco
Pernod Ricard
Sdzucker
Moksel
Pripps
Booker
Whitbread
Focused
Orkla
Saint Louis
Product range
Danone (BSN)
Nestl
Philip Morris (Kraft Jacobs Suchard)
Unilever
Proctor & Gamble
Associated British Foods

Hillsdown
Northern Foods
Parmalat
Wide
3
Source: Datamonitor; A.T. Kearney
Module II
28
Industry structure
Example
Strategic groups might become evident when evaluating an industry using matrices
with how to compete and/or where to compete factors as dimensions
Snackwells
Nips
McVitis
Nilla
Wafers
Mothers
Entenmanns
Freyhofers
Pepperidge
Farms
Low
Relative health value
Choose how to
compete and/or
where to compete
factors as the generic
matrix dimensions
High
The cookie industry consists of five major strategic groups
Blue chip
Mrs.. Fields
Sunshine
Davids
Hydrox
Follower
Leader
Pricing policy
Strategic groups will

generally become clear
within the matrix
Module II
29
Industry structure
Example
The strategic group analysis can also be applied to analyze development over a
period of time
Development of the food industry in the 1980s
High
Geographical coverage
Low
Shifts in the strategic

intent of a strategic
group can be
captured on such a
matrix given that the
dimensions are
relevant to the
developments
Unilever
Danone
Nestl
Minor
national brands
National
own labels
Focused
Colmans
ABF
Multinational
major brands
United Biscuits
Unigate
National
major brands
Hillsdown
Booker
Marketing intensity*
Wide
* Marketing costs as a percentage of sales

Source: Datamonitor; A.T. Kearney
Module II
30
Industry structure
Example
Companies in the same industry may follow very different strategies
Group C
Full line
Low manufacturing
cost
Medium price
Group D
Broad line
Medium manufacturing
costs
Low service
Low price
High
Group A
Mobility barriers
Product line
Brand names
Group B
Mobility barriers
Economics of
scale
Expertise
Relationships
with private
label dealers
Group C
Low
Group B
Moderate line
Medium manufacturing
costs
Medium service
Medium price
Strategic grouping of food and beverage industry players
Quality
Group A
Narrow line
Lower manufacturing
costs
Very high service
High price
Group D
Low
High
3
Module II
31
Industry structure
Methodology
Methodology for using a strategic group analysis
Input
Players analysis
SEC filings
Annual reports
Client
data/interviews
Expert interviews
Analyst reports
Trade journals
Press clippings
Trends analysis
Substitution threat
analysis
Output
Determine
dimensions
Identify players
(see players
analysis)
Choose the most
relevant
dimensions that
define how the
players compete
Ensure that the
dimensions
correlate with the
issues analysis
Group players
Position client and

competitors in the
matrices
Group players with
common
characteristics
Evaluate group
mobility and
direction
Understanding of
player
characteristics
and interaction
and reactions to a
strategic
initiative
Evaluate strategic
intent of individual
companies to
determine potential
movements within
and between
groups
Study industry
trends to
understand
direction of groups
Module II
32
Industry structure
Conclusion
Conclusion
Key points
Profitability may at a corporate view be the driver for strategic groups. However, at a business
unit level, other dimensions might be more important determinants of strategic groups
Dimensions whereby strategic groups are identified must be carefully selected to be of relevance
Strategic group dimensions should be chosen on the basis of the identified issues
There are not simply two generic dimensions that can characterize groups from all industries;
there are many
Strengths
Assesses strategic dynamics and shifts in the industry

Defines the nearest competitors of the client
Weaknesses
Wrong dimensions will not differentiate groups into useful categories

May require trial and error to find useful dimensions
References
Grant, R.M. (1995); Modern Contemporary Analysis

McGee, J. and Howerad, T. (1986); Strategic Groups: Theory, Research and Taxonomy
Oster, S.M. (1994); Modern Competitive Analysis
Module II
33
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
34
Industry structure
Description
Substitute products are alternative solutions that meet a particular customer

demand
Definition
Purpose
Substitute products are those

that can perform the same function or
satisfy the same need as the given
product of an industry. Substitution
threat analysis identifies three
important criteria about products and
their substitutes:
The relative value delivered and the
price of a substitute when compared
to the existing product
The cost of switching to the
substitute product
The buyers tendency to switch
between substitute products
The goal of the analysis is to

understand what products constrain
the ability of companies in the
industry to substantially raise their
prices?
Source: Oster, S.M. (1994); Modern Competitive Analysis

Porter, M.E. (1980); Competitive Strategy
Module II
35
Industry structure
Description
By offering an alternative, substitute products limit the potential returns of an

industry by placing a ceiling on the price companies in the market can charge
A need for warmth can be satisfied by

Blankets and clothes
Heaters - electric, gas and other
Building insulation
Exercise
Warming food and drink
Increased body fat
Substitutes never offer exactly the same level of functionality they may provide:
More functionality - e.g. a computer spreadsheet program as a
substitute for a calculator
Less functionality - e.g. a type-writer as a substitute for a wordprocessor
Substitute products play an

uneven role in industry structure
analysis
In highly competitive
industries or during periods of
excess capacity, substitute
products play a very modest
role
In times of rapidly increasing
demand or in industries in
which there are few
competitors, substitute
products may become quite
important
Substitute products also influence the market price in certain cases;

e.g. printer industry (laser printers have become cheaper, because
of the low cost of ink jets, which offer comparable print quality)
Module II
36
Industry structure
Description
The wider the definition of the need, the greater the number of possible
substitutes (and any complementary products)
Potential substitutes for metal downhill skis
Epoxy and
fiberglass
skis
Cross country skis
Winter sports equipment
Leisure products that

can be used in winter
The buyer taking more leisure

time in summer than in winter
Source: A.T. Kearney; Oster, S.M. (1994); Modern Competitive Analysis

Module II
37
Industry structure
Description
The value of the link between industry definition and substitutes should not be
understated
Industry definition
Substitutes by segment
Segment C
(e.g., coal fuels)
1
2
Drivers
Segment A
(e.g., refined oil
fuels)
Value
Segment B
(e.g., natural gas
fuels)
Clients dont often think through to

level 4
Promotes out of the box thinking
Forces thinking about what business
are we really in and who are our
real competitors
Module II
38
Industry structure
Usage
Substitution analysis is the basis for identifying threats and opportunities in

strategy engagements
Defend against substitution
Promote substitution
Improve the value of own products relative to all

substitutes
Redefine competition away from the strengths of
the substitute
Enlist suppliers in the defense
Focus on segments least susceptible to
substitution
Use
substitutio
n analysis
actively
Target switchers early:

Invest in advertising to let buyers know
about the products
Improve offering in the areas where own
product offers the greatest relative value to
buyers
Reduce or eliminate switching costs
Selective forward integration to create pullthrough demand
Promote improvements in complementary
products and infrastructure
Source: Porter, M.E. (1985); Competitive Advantage

Module II
39
Industry structure
Example
A value/cost matrix can be used to map substitutes
By mapping substitutes,
one can determine a
products optimal
value/cost combination
Products S1 and S3 deliver the most value to the customer with respect to cost
Mapping of dairy products
Value can sometimes

be stated in financial
terms, but is most often
qualitative or based on
an arbitrary scale
The diagonal line
suggests that there is a
level of value/cost
equivalence
S3
S4
S1
Value to customer
(match with the
underlying need)*
S2
S5
S1, S2, S3, and S4

deliver more value than
cost. Products S1 and
S3 present the greatest
substitution threat
S5 and S6 cost more
than the value that they
deliver
S6
Cost to customer
* What customers get relative to next best option
Note: Such analysis can be related to conjoint analysis

Module II
40
Industry structure
Example
Costs are incurred by customers when they switch among substitutes
Primary switching costs for an international food manufacturer
A next step could

involve a
quantification of
each switching cost
to determine their
impact on the
company
Complementary
product costs
Installation
costs
Each of these
switching costs must
be addressed both
when promoting
substitution and
defending against it
Complexity cost
Purchasing
costs*
Switching
costs
Decommissioning
costs
Service and
maintenance costs
over the lifetime
of the products
* Including delivery to the point of need at a specific time

Module II
41
Industry structure
Example
Buyers tendency to switch products or services might differ considerably
If up-front
investments are
needed to use the
substitute, buyers
without access to
financing might be
restricted from
switching
Assessment of switching requirements for a small dairy company contemplating

manufacturing a new soft drink
Buyer characteristic
Risk averse buyers
are unlikely to
switch
Some buyers are
more comfortable
trying new products
and are more likely
to switch
Buyers who have
experience switching
are more likely to
change products than
buyers who have
never switched
before
Effect on likelihood of buyer switch

from dairy to soft drink
Access to financing
Low to moderate as products are

priced competitively
Risk profile
Low as there is no risk associated

with buying a new soft drink
Behavior
Previous experience of
switching
Moderate as it can be difficult to

persuade people to try new
brands
Moderate as there will always be
a group of buyers shopping
around

Module II
42
Industry structure
Methodology
Methodology for performing a substitution analysis
Input
SEC filings*
Annual reports
Analyst reports
Expert interviews
Client data/interviews
Trade journals
Customer surveys
Strategic groups
Players analysis
Output
Define industry
boundaries
Define industry
boundaries by analyzing
companies offering a
similar product range
Define industry
boundaries from a
market perspective
based on common needs
of customers
Determine
substitution
threats
Assess the value

delivered by
different products
relative to cost
Determine
switching costs
Analyze buyers
tendencies to
switch
Assess threat of
substitution
Assess market
opportunities
Understanding of
customer needs
New entrant threats
New market
opportunities
Identify
opportunities for
clients product in
areas traditionally
considered outside
the market
Reports filed by publicly held companies with the Securities and Exchange Commission: e.g., 10K, 10Q
Module II
43
Industry structure
Conclusion
Conclusion
Key points
A substitution threat analysis can identify the:

Relative value of products
Switching costs
Buyers tendency to switch products
A substitution threat analysis can be used to:
Promote substitution
Defend against substitution
Strengths
Raises focus on all products competing for the customer - not just those similar to the clients
own products
Particularly useful where industries are going through radical changes
Can add considerable value to the client by redefining competition in value/cost terms
Weaknesses
Not a science - some degree of ambiguity always remains

Can be difficult to quantify the costs of promoting or defending against a substitute product
References

Module II
44
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
45
Industry structure
Description
To understand the dynamics of an industry, it is necessary to analyze the entire

supply chain
Definition
The supply chain is a series of interlinked processes that are performed in a

given sequence to efficiently acquire raw
materials and then convert them into
products and transport them to customers
for use in producing final products for
end-users
The supply chain

describes the activitiesfrom raw material to the
end-customer and
therefore spans several
industries
Module II
46
Industry structure
Description
A supply chain describes a relationship among a group of integrated industries that

together work to transform a set of raw materials into final products*
Raw
material
sources
Suppliers
Manufacturers
Distributors
Retailers
Customers
An industry
consisting of
several
companies**
* A supply chain is not necessarily linear. The structuring of a supply chain as a linear diagram forces a consultant to simplify a relationship among industries
that might be extremely complicated
* * Supply chain analysis should not be confused with the term value chain analysis. The value chain disaggregates a companys activities into strategically
relevant steps to understand the behavior of costs and the existing and potential sources of differentiation (See Module III)
Module II
47
Industry structure
Usage
A supply chain facilitates an understanding of the industry structure
Key outcome of a supply chain analysis
Analysis of linkages to suppliers and customers

Analysis of the value generated at each step in the supply
chain
Analysis of the degree of vertical (backward and forward)

integration
Analysis of the structures and level of company concentration
at each stage in the supply chain
Module II
48
Industry structure
Usage
An analysis of the strengths and power of a clients buyers and suppliers is

essential for understanding the clients degrees of freedom
Client
industry
Suppliers are powerful if:

Their industry is dominated by a few
companies and is more concentrated than the
industry it sells to
Their product is unique or at least
differentiated, or if it has built up switching
costs
They are not obliged to contend with other
products for sale to the industry
They pose a credible threat of integrating
forward into the clients business
The client industry is not an important
customer of the supplier group
Buyers are powerful if:

They are concentrated or purchase in large
volumes
The products purchased from the clients
industry are standard or undifferentiated
The products purchased from the clients
industry are a component of their products and
represent an insignificant fraction of costs
They earn low profits, which creates great
incentive to lower their purchasing costs
The clients product is unimportant to the
quality of the buyers products or services
The clients products do not save the buyer
money
The buyers pose a credible threat of
integrating backward to make the clients
product
Module II
49
Industry structure
Example
A supply chain can be drawn to illustrate the amount of value captured by each
step in the process
The amount of value captured by the clients industry is shrinking

Actual retail sales; DEM/kg
Indicate the actual

level of value added
Supply chain analysis for the German flour industry

100% = 1.50
100% = 1.40
1.50
Split the supply

chain into its relevant
industries
Retailers
29%
1.40
32%
1.06
Client industry
0.95
14%
27%
0.66
Transportation
End-user
5%
0.76
0.69
0.40
0.19
1990
1996
8%
0.54
49%
Illustration of the
supply chain over
time provides an
opportunity to
understand how the
clients industry has
performed
Grain suppliers
36%
1990
1996
Raw material
Module II
50
Industry structure
Example
A supply chain can be drawn to illustrate the profit levels attained by the players
across the various steps
Grain supply represents the most profitable industry in the supply chain
Cost
The cost incurred at a

specific level of the
supply chain in
preparing the input
for sale represents
the value added at
that level
Profit
100% = 1.40
1.40
1.30
Total value added to

the product equals
the sum of the
shaded areas
ValueAdded
0.10
Retailers
0.35
Client industry
Total cost per step

includes the cost of
the input from the
preceding step plus
the expenses incurred
to add additional
value
Profit
Transportation
0.95
0.90
0.05
0.76
0.73
0.69
0.03
0.14
0.04
0.39
Grain suppliers
0.30
0.30
1996
Module II
51
Industry structure
Example
An illustration of an industry that is being threatened by its suppliers and buyers
Through an analysis
of the suppliers and
customers strengths,
the vulnerability of
the industrys
position becomes
evident
The industry is under pressure from both its suppliers and customers
Suppliers
Client
industry
The suppliers are very

concentrated - only two players
generate approximately 80
percent of output
The suppliers have created high
switching costs, especially due to
legislation
Customers
Four customers control the

market and determine price
setting
The customers use the clients
product as a loss leader to attract
their customers
The customers are seriously
considering a direct relationship
with the clients suppliers
Module II
52
Industry structure
Example
The degree of vertical integration can be presented along side the supply chain to
show the activities that the players perform in-house
Degree of vertical integration of different food players

Overview of the
supply chain
Suppliers
Manufacturers
Distributors
Retailers
Consumers
Degree of vertical integration of different players

Player A
Player B
Player C
Mapping the
different players
Player D
Player E
Player F
Module II
53
Industry structure
Example
Another analysis indicates the degree of vertical integration of the players and their
relative positions in each stage of the supply chain
This technique
provides an
opportunity to
analyze the level
of market
concentration at
each stage of the
supply chain
Concentration and vertical integration of food players in the supply chain
Suppliers
Manufacturers
Market share
100%
Distributors
Retailers
Other
H
G
F
E
D
The client is in
this case heavily
involved in two
stages of the
supply chain.
However, its
position differs
considerably in
each step
Consumer
Client
Other
B
Client
A
A
0%
Note: Letters refer to different companies

Module II
54
Industry structure
Methodology
Methodology for using a supply chain analysis
Input
Output
Client data/
interviews
Annual reports
Expert interviews
Analyst reports
SEC filings*
Trade journals
Customer surveys
Value chain
Trends analysis
Players analysis
Linkages to suppliers
and customers
Value-added analysis
Degree of vertical
integration
Substitution threats
Exit and entry barrier
assessment
Cost and margin
driver analysis
Value-added
structure
Identify supply
chain activities
Identify the end product

Define raw materials
required to produce the
end product
Define the intermediate
steps required to
transform raw materials
into the final product
A step should be
composed of players
producing products that
are equivalent or
substitutes of each other
Develop valueadded structure
Determine the
value-added by
each step of the
supply chain. This
can be determined
by taking the
selling price, less
retail margin,
minus the input
price
Determine costs
and margins within
each segment
Identify players
at each step
Group players that

produce equivalent
or substitute
products
Determine the
concentration of
competitors at each
step
Identify
relationships
within/across
steps
Analyze specific
relationships
among players
Assess the degree
of vertical
integration among
players in the
various steps
Module II
55
Industry structure
Conclusion
Conclusion
Key points
A supply chain analysis provides:

An overview of linkages to suppliers and customers
An assessment of the value generated at each stage at the supply chain
A determination of the degree of vertical integration
An analysis of the concentration of players at each step of the supply chain
Strengths
Provides an overview of the companys supply chain mechanisms, and generates an

understanding of the company's relative strengths and weaknesses
Weaknesses
Difficult to obtain exact quantifiable data for a cost analysis
References
Oster, S.M. (1994); Modern Competitive Analysis, Oxford University Press

Poirer, C. and Reiter, S.E. (1996); Supply Chain Optimization, Berret-Koehlers Publishers, Inc.
Porter, M.E. (1979); How Competitive Forces Shape Strategy, Harvard Business Review,
March/April
Porter, M.E. (1980); Competitive Strategy - Techniques for Analyzing Industries and
Competitors, The Free Press
Module II
56
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
57
Industry structure
Description
Comprehension of entry and exit barriers is key to industry analysis
Entry
barriers
Entry barriers are economic, strategic, and emotional factors that keep
companies from entering a business even though they might earn high or
adequate returns on investments
Exit
barriers
Exit barriers are economic, strategic, and emotional factors that keep
companies competing in a business even though they might earn low or
even negative returns on investments
Source: Porter, M.E. (1980); Competitive Strategy

Module II
58
Industry structure
Description
Structural barriers and behavioral barriers represent the two types of entry
barriers
Type
Structural barriers
Comment
Structural barriers exist as a result of differences in the structure between the
companies under consideration - the incumbent and the new entrant
Behavioral barriers
Behavioral barriers exist as a result of expected changes in competitive

behavior of the incumbents that run counter to the interests of the entrant
Module II
59
Industry structure
Description
Seven types of structural entry barriers exist

Economies of scale
Economies of scale deter entry by forcing the newcomer to enter the market at a large scale
and thus risk strong reaction from existing companies or enter the market at small scale and
accept a cost disadvantage, both undesirable options
Product differentiation
Product differentiation results in a barrier to entry by forcing entrants to expend significant

resources to overcome existing customer loyalties, which stem from advertising, customer
service, product differences, or from simply being the first into the industry
Capital requirements
The need to invest large financial resources to compete creates a barrier to entry,
particularly if the capital is required for risky or unrecoverable up-front advertising or research
and development
Switching costs
A barrier to entry is created by the presence of switching costs (e.g. employee retraining costs,
cost of new equipment, cost and time in testing or to qualify a new source, need for technical
help as a result of reliance on seller engineering aid, product redesign), that is, one-time costs
facing the buyer that switches from one product to a new one
A barrier to entry can be created by the new entrants need to secure distribution channels.
To the extent that distribution channels for the product have already been monopolized by
established companies, the new company must persuade distributors to accept its product
through price breaks and co-operative advertising allowances, which reduce profits
Barriers to entry can result from proprietary product technology (product know-how or design
characteristics), favourable access to raw materials, favourable locations, government
subsidies, learning or experience curve effects (there is an tendency for unit costs to decline
as the company gains more cumulative experience in producing a product), etc.
Access to
distribution channels
Cost disadvantages
independent of scale
Government policy
Governments can limit or even prohibit entry into industries with controls such as licensing
requirements and limits on access to raw material (like coal lands or mountains on which to
build ski areas)

Module II
60
Industry structure
Description
Four types of behavioral entry barriers are also likely to exist
History
A history of vigorous retaliation by incumbents against new entrants
Incumbents have significant

sunk costs*
Established companies with substantial resources to fight back, including: excess production
capacity, unused borrowing capacity, and significant leverage with distribution channels or
customers
Threats of aggressive
response from incumbent
Established companies with great commitment to the industry and highly illiquid assets
employed in it
Slow industry growth
Slow growth, which limits an industrys ability to absorb a new company

without negatively impacting the performance of established companies
Sunk costs are non-recoverable costs

Module II
61
Industry structure
Description
Exit barriers restrict companies from discontinuing operations in an industry

despite poor earnings
Specialized assets
Assets highly specialized to the particular business or location have low liquidation values or
high costs of transfer or convert
Fixed cost of exit
These include labor agreements, resettlement costs, maintaining capabilities for spare parts,
etc.
Strategic interrelationships
Interrelationships between the exiting business unit and other business units in the company
in terms of image, marketing ability, access to financial markets, shared facilities, etc.
Emotional barriers
Managements unwillingness to make economically justified exit decisions caused by

identification with the particular business, loyalty to employees, fear for ones own career,
pride or other reasons
Government and social

restrictions
These restrictions involve government denial or discouragement of exit out of concern for job
loss and regional economic effects

Module II
62
Industry structure
Usage
Entry and exit barriers are analyzed to gain an understanding of the industry
structure and dynamics
Entry barriers
Exit barriers
Identify current entry barriers

To understand potential industry
profitability
To understand how high prices can
be set without attracting new
entrants
Identify exit barriers to understand

industry profitability and attractiveness
Identify exit barrier when considering
exit to allow for action to be taken in
reducing them
Develop actions to change situation

Raise entry barriers to prevent new
entrants (as an incumbent)
Lower entry barriers (as a new
entrant)
Module II
63
Industry structure
Example
Entry and exit barriers are important factors, which can help to explain the
performance of companies within an industry
When both entry and exit
barriers are high, profit
potential is high, but is
usually accompanied by
more risk. Although
entry is deterred,
unsuccessful companies
will stay and fight
Positioning of industries in terms of entry and exit barriers
High
The most attractive
segment - few new
companies can enter and
poorly-performing
companies can easily
exit
The case of low entry
and exit barriers is
uncommon
Here entry is relatively

easy and will be attracted
by upturns in economic
conditions or other
temporary windfalls.
However, capacity will
not leave the industry
when results deteriorate
Local food players

Dairy producers
Pharmaceutical
Multinational food
players
Automobile
manufacturing
Aerospace
Mining
Entry barriers
Food stands
Grocery store
Financial services
PC assembly
Low
Low
High
Exit barriers
10
* These expressions are generic in nature and can vary considerably depending on the specific industry situation
Source: A.T. Kearney; Porter, M.E. (1980); Competitive Strategy
Module II
64
Industry structure
Example
Entry barriers exist in almost every industry . . .
Industry
Example of entry barrier
Comment
Cosmetics
Heavy advertising
Telecom
Capital requirements for a new

project
Incumbent telecom companies find it easier to find financing

for new projects than a new entrant would
Utility
Switching costs for customers
Moving between electricity and gas for heating requires

a significant expenditure on new equipment
Consumer
Access to distribution channels
Soap powder manufacturers (P&G and Unilever) have wide

access to distribution through the retail chains. Often
they can stop new entrants from gaining access hindering
smaller producers from being able to compete
Software
Cost advantages based on scale
Software manufacturers in China and India have a major cost

advantage (independent of scale) over American and
European software producers
Multimedia
Government policy
Licenses for radio broadcasting in most countries are

restricted. Without a license, new entrants cannot broadcast
(legally)

Module II
65
Industry structure
Example
. . . as do exit barriers
Industry
Example of exit barrier
Comment
Coal industry
Fixed costs of exit e.g. labor

redundancy settlements and
environmental clean-up costs
The coal industry in most countries has traditionally been

highly unionized and required major redundancy settlement
for non-profitable mines to be shut down
Family owned companies
Emotional barriers loyalty to

employees, status, etc.
Many community based companies with strong local links,

e.g. family companies in many countries
Companies from previous Government and social restrictions

socialist countries
governments often intervene to
prevent companies from closing
down to safeguard jobs
This situation is becoming less true world-wide as countries

move toward market economies. However, companies are
still influenced by governments and prevented from
closing, e.g. Japanese and Korean financial institutions
Retail clothing
Promise to shareholders or to corporate management might

prevent withdrawal from otherwise unpromising markets
Company political barriers

Module II
66
Industry structure
Methodology
Methodology for performing an exit and entry barrier assessment
Input
Output
Client
data/interviews
Expert interviews
Analyst reports
SEC filings*
Annual reports
Players analysis
Strategic group
analysis
Supply chain
analysis
Degree of industry
vulnerability to new
entrants
Assessment of
sustainability of
present competitive
structure
Cost and margin
driver analysis
Understanding of
profitability structure
Identification of
barriers
Determine the factors

that make an industry
accessible or
inaccessible to new
entrants
that would restrict a
players departure
from an industry
Analysis of
barrier sizes
Quantify the
resources,
relationships or scale
required to
successfully overcome
the entry barriers
Determine both the
direct and residual
costs associated with
leaving the industry
Determination
of barrier
significance
Compare the levels of

resources, skills,
technology, etc. against
those required to
overcome the entry
barriers
Determine steps required
for incumbents to raise
entry barriers
Compare the cost of exit
against the benefit
Determine steps required
to lower exit barriers
Module II
67
Industry structure
Conclusion
Conclusion
Key points
Provides an understanding of industry attractiveness and profitability and thus the likelihood of
new entrants or players leaving the industry
Strengths
Easily understood as an explanation of above normal returns in an industry

Combines several different concepts into one technique for understanding the entire industry
Strong technique if the barriers can be quantified
Weaknesses
Not easily translated into impact on price without significant analysis, as many barriers are not
easily quantifiable
References

Scherer, F.M. and Ross, D. (1980); Industry Market Structure and Economic Performance
Module II
68
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
69
Introduction
Development of an industry must be understood by the company seeking to remain

competitive
Strategic era analysis
Industry life cycle analysis
Trends analysis
Summarizes the past
Examines where the

industry is today
Studies what the industry

is moving towards
Comments on where the

industry might be headed,
given its past
Sheds light on the drivers

of change
Present
Future
Tells us how the industry

arrived at its present
structure
Past
Module II
70
Introduction
Defining the industry structure

Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
71
Description
An industry strategic era analysis is a time line that is segmented based on shifts in
strategic paradigms
Definition
Purpose
A time line segmented by eras

corresponding to major shifts in
the key success factors of an
industry
A summary of an industry's
relevant history
To gain a big picture

introduction to an industry
To understand an industrys
development and situation
To uncover and present industry
background facts
To determine the industry
inflection points that mark
significant change
Module II
72
Usage
An industry strategic era analysis is useful to learn about an industrys background
Modes of usage
Creating an appreciation of a client
perspective via a historical understanding
Briefing colleagues about an industry of
concern
Understanding why a company did or did not
succeed or excel in certain period
Introduction to a company presentation
Module II
73
Example
An industry strategic era analysis as it would be presented internally or externally
Dates and names of eras
The food industry has undergone continuous change

Description of the major
strategic paradigm(s) of the
industry and the KSF
Mention the key events that

characterized the era or led
to its beginning or end. One
can give specific dates for
specific events (e.g.,
mergers, political events of
significance, etc.), or provide
general statements
summarizing the key events*
Freedom to have one or

more (or no) categories
concerning relevant
information about the
client, major trends, etc.
1958
1981
Growth
1989
Diversification
Consolidation
Strategic paradigm
Meet local/specific
customer needs
Industry characterized by Industry characterized by

regional or international
multinational and global
players with a somewhat
players with a broad but
diversified product range directed product range
Focus on diversifying
Attacking the entire market
product offering
with an array of core
competence based product lines
Key events
Product development
Internationalization
Diversification
Key players
Many national players

with limited
international exposure
A range of both regional Unilever

and international players Danone
Masterfoods
Key success factors
Focus on costs
Gain market share
Globalization

Economies of scale
.
Note: See strategic era analysis in Module III for an era analysis for key events with specific dates
Module II
74
Methodology
The analysis phase of an industry strategic era analysis aims to reveal not only
how the KSFs have changed, but also why they have changed
Methods of investigation
Consider the drivers of change by looking directly at the
shifts in the key success factors (Changes in the strategic
gameboard)
The segment (Where to compete?)

The value chain (How to compete?)
Consider the drivers of change by using frameworks to
identify fundamental shifts in the strategy of an industry
Structure-conduct-performance analysis*
The five forces model*
* Explanation located later in module

Module II
75
Methodology
Methodology for creating an industry strategic era analysis
Input
SEC filings*
Annual reports
Strategic paradigms
Key events
Key products
Players analysis
Analyst reports
Player chronologies
(from investor
reports)
Company anniversary
report
Key success factors
Output
Fact finding
Introduction to the
industry
History of industry
development
Trends
Defining strategic
paradigms
Compile data from sources Identify the past

about:
drivers of the industry
Industry founding
Product evolution
Competitive structure
Sales growth
Key events affecting or
characterizing change
Key players
Key success factors
Define and
characterize
eras
Segment the industry

history into eras
Each era should have a
title and dates
Begin analysis with
industry founding and end
with the present
List characterizing
strategies, facts, events
and conditions
corresponding to each era
Include greater detail as
the present is approached
Module II
76
Conclusion
Conclusion
Key points
Strengths
Provides a useful overview of the industry

Gives a presentation of background facts and summarizes an industry's relevant history
Provides a clear presentation/confirmation of A.T. Kearneys understanding of the industry
Weaknesses
Can be difficult to obtain the information required to construct an industry strategic era analysis
Do not let specific time periods control the strategic eras

Gives a quick industry overview
Important to emphasize the key drivers in each era and which drivers make the era shift
Especially valuable in an industry going through significant change
References
Module II
77
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
78
Life cycle analysis
Description
Definition of the industry life cycle analysis
Definition
The life cycle model is a concept used to characterize
common strategic issues corresponding to different
stages of the development of an industry. A life cycle
is drawn by plotting sales of an industry with respect
to time. A life cycle analysis is based on the
hypothesis that the sales pattern/history of every
industry, product, or brand passes through four stages,
which are defined by an S-shaped curve
Module II
79
Life cycle analysis
Description
A life cycle analysis is based on the hypothesis that the sales pattern/history of
every industry, product, or brand passes through four stages, which are defined by
an S-shaped curve
Life cycle stages
Sales
Introduction
Growth
Maturity
Decline
Assumptions
All industries have limited life spans
Industry sales pass through distinct
stages, each posing different
challenges to the seller
Profits rise and fall at different
stages of the industry life cycle
Time
Sales
Costs
Buyers
Profits
Competitors
Products
Marketing
Strategy
Low
High cost
Innovators
High Price/Margins
Few
Poor quality
High advertising
Gain share
Rapidly rising
Decreasing avg. cost

Early adopters
Rising profits
Growing number
Quality differentiation
High advertising
Good marketing
Peak
Low cost
Middle majority
High profits
Stable number
Superior quality
Segmentation
Gain cost advantage
Declining sales
Low cost
Laggards
Declining profits
Declining number
Lower quality
Low advertising
Harvest & divest
Players require different strategies in

each stage of their industrys life
cycle
Source: A.T. Kearney; Kotler P. (1997); Marketing Management; Porter, M.E. (1980); Competitive Strategy
Module II
80
Life cycle analysis
Description
The particular stage of the industry life cycle influences business unit strategy
Sales
Introduction
Growth
Maturity
Decline
Possible life cycle extension
New entrants
Shakeout
Market share
Production costs
Profit
Market structure
Sole supplier
Competitive
penetration
Share
stability
Commodity
competition
Time
Withdrawal
Source: A.T. Kearney; Kotler, P. (1997); Marketing Management

Module II
81
Life cycle analysis
Usage
The industry life cycle model can be used as an input to strategy formulation
Modes of usage
In interpreting product/market dynamics

As a comparative tool, to measure against
past product performance
As a planning tool to identify challenges

and alternatives
Source: Day, G.S. (1986); Analysis of Strategic Market Decisions

Grant, R.M. (1995); Contemporary Strategy Analysis
Ohmae, K. (1976); The Mind of the Strategist
Module II
82
Life cycle analysis
Usage
The duration of a life cycle stage can often be estimated given the nature of the
product/industry
Life cycle stage
Length
If product characteristics are
Development
Long
High-tech
Introduction/growth
Short
Not requiring new

Transportation mechanisms
Services
Communication
Readily accepted and promoted
Interesting to consumers
Maturity
Long
Fairly stable with regard to

consumer demands and product
technology
Decline
Long
High brand loyalty

Slow technology changes
High exit barriers
Compare industry
sales data to that of
related industries to
learn of special
characteristics or
anomalies within the
life cycle

Module II
83
Life cycle analysis
Example
Life cycles can have different scopes and some life cycles are subsets of others
Demand life cycle

Humans have needs
that change over time
(and are met by
products)
Life cycles related to food storage

Sales
Demand-technology
life cycle
Each succeeding
technology that better
satisfies a need has a
life cycle
Food storage
Product life cycle

A succession of
products can be
redeveloped within a
given demandtechnology
Mini-bar
Brand life cycles

Each product then has
brands each with its
own life cycle
Refrigerators
GE
Time
Source: Kotler P. (1997); Marketing Management

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Life cycle analysis
Example
Industry life cycles rarely conform exactly to the theoretical shape. Here are some
common variants
Sales
Growth-slump-maturity
Equilibrium (petrified) level is

sustained by early adopters
replacing the product and by late
adopters, who are buying it for
the first time
Characteristic for small kitchen
appliances (e.g. electric knives)
Sales
Style
Time
Sales
Cycle-recycle
Primary cycle
Recycle
Time
As sales decline, the company (or

companies) gives the product a
new promotional push
Second cycle is usually smaller in
size and duration
Typical of pharmaceutical
companies promoting a drug
Sales
Fashion
Time
Sales
Scalloped
A style is a basic, distinctive mode of

expression
A style appears in a field of human
endeavor (home, clothing, art)
A style can endure for generations,
cycling up and down
A fashion is a currently accepted or

popular style. e.g. jeans are a fashion in
todays clothing
A fashion has stages: distinctiveness
emulation mass-fashion decline
A fashion grows slowly, becomes
popular for a while, then decline slowly
Time
Sales pass through a succession of

life cycles based on discovery of
new uses, characteristics or users of
the product
An example is nylon sales and
application: Parachutes hosiery
shirts carpets
Sales
Fad
A fad is a fashion that develops quickly, is

adopted with great zeal, peaks early, and
declines rapidly, e.g. pet rocks
A fad does not survive, because it does not
satisfy a strong need
Time
Time
Source: Kotler P. (1994); Marketing Management

Module II
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Life cycle analysis
Methodology
Methodology for using an industry life cycle
Input
Sales data
Sales data from
closely related
industries
Analyst reports
SEC filings*
Annual reports
Client
data/interviews
Trade journals
Industry strategic
era analysis
Output
Graph
sales over
time
Obtain sales data

and graph over
time
Study industry
history
Account for
inconsistencies or
anomalies due to
special circumstances
Study the industry
strategic era analysis
to place the sales
growth in a historical
context
Draw
conclusions
Review
periodically
Determine the
industrys present
stage in its life cycle
Compare sales history
to that of similar
products or industries
to understand how they
relate
Assess the ability of
existing factors to alter
the life cycle
Reevaluate the life

cycle periodically to
consider new factors
that might alter position
or length of stages
Segmentation
analysis
Penetration
analysis
Pricing strategy
Module II
86
Life cycle analysis
Conclusion
Conclusion
Key points
Important to recognize that the duration of the life cycle stages can differ significantly between
industries, products, or brands
Important to understanding the potential for and implications of prolonged and renewed life cycles
Important to recognize the life cycle as a deterministic approach to strategy development, not merely
an evolutionary one that is unaffected by individual company actions
Strengths
Provides insight into potential structure of an industry

It provides implications of the key success factors
It provides an impetus to shift strategy
Weaknesses
Highly variable in shape and duration

Difficult to identify current stage (what is seen as maturity may really be a temporary plateau in
growth)
Potentially a consequence of strategy rather than an unchangeable course (self-fulfilling prophesies)
References
Day, G.S. (1980); Analysis of Strategic Market Decisions

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Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
88
Trends analysis
Description
Definition of a trend
Definition
A trend is a direction or a sequence of

events which have some momentum and
durability. A trend is not a fad, forecast,
or a prediction, but a stable movement
that is a gradual progression

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89
Trends analysis
Description
Distinguishing among fad, trend, and megatrend

Category
Fad
Description
Unpredictable
Short-lived
Without social, economic or political significance
e.g. Cabbage-patch dolls, Tamaguchis
Trend
Predictable (within certain limitations)

Durable impact on industry structure and where
demand is headed
Observable across several market areas and consumer
activities
Consistent with other significant indicators
occuring/emerging at the same time
Megatrend
Social, economic, political or technological changes

with high impact
Slow to form
Once in place, has a long-lasting influence (~7 or

more years)
Module II
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Trends analysis
Description
Trends can be grouped into one of six macro-environmental forces which together
shape customer preferences
Political
End-user
preferences
Technological
Economic
Industry
Natural
Cultural
Demographic

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Trends analysis
Description
Trends within any of the macro-environmental forces can have a significant impact
on an industry
Forces
Example of trends
Implications
Political
Increasing deregulation of the

telecommunications industry
Companies are forced to transform their

scope and partnerships to compete in a
more competitive business environment
Economic
Increasingly weak currency
Foreign markets are exploitable
Cultural
Development of subcultures
with strong identities such as
Hells Angels, Episcopalians or
teenagers
Marketers should monitor these

subcultures as these groups demonstrate
common preferences and behaviors
Demographic
Ethnicities in the US are not

integrating - salad bowl
society
Products can specifically be directed to

one or more of these groups
Natural
Increasing public concern about

the environment
A large market for pollution limiting

solutions will exist (e.g. alternative
packaging, recycling centers)
Technological
Development of products that

allow us to work from home the electronic cottage
Working from home will create a need

for additional home-centered
entertainment products

Module II
92
Trends analysis
Usage
Trends analysis allows companies to better understand their business environment
Trends reflect changes in end-user preferences

Increasing quality/lifestyle
orientation
Increasingly
differentiated brand
preference
Increasing health/environment
consciousness
Polarization of
customers
Increasing cost consciousness
Increasingly
differentiated price
preference
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93
Trends analysis
Example
Trends can simply be represented in raw form when their implications are obvious
Total sales are expected to increase significantly in the coming years

400
340
320
280
CAGR**
= 26%
Gives an
indication of future
levels of activity
Makes it possible
to (re)-direct
resources to other
segments
200
140
100
1997
1998
1999*
2000*
2001*
2002*
2003*
* Projected
** CAGR = Compounded Annual Growth Rate
Module II
94
Trends analysis
Example
Numerous trends can be grouped together to present an overall portrait of an

industrys development
Simple listing of
trends allows an
overall picture to
be easily grasped
Different
segments, which
influence each
other, can be
positioned together
Key trends for the consumer catering industry

Trends
Sector
Positive
Negative
Fast food
Snacking
Brand identity
Franchising
Corporate-funded
expansion
Increase in consumption
by 25-35 age group
Growth in home delivery

restaurants
Growth in supermarket preprepared foods
Increase in number of
convenience stores
Consumers trading up to
restaurant food
Restaurants
Variety and choice of food

demanded by customers
Faster service
Increase in number of
customers
Reduction in average consumer

expenditure per visit
Smaller meals
Lower consumption of drinks
Hotel restaurants
Growth in international
travel
Some hotel restaurants
have decreased prices
Growth
Business entertainment cutbacks

Over-priced image
More adventurous tourists
Highly volatile
Module II
95
Trends analysis
Example
It is often useful to rate trends in terms of their significance

The clients
objective should first
be recognized
Trends of
significance within
the six macroenvironmental forces
should be recognized
via research
Trends of significance with respect to a European dairy company that

specializes in organic products and seeks to enter the mainstream Western
marketplace
Define essential trends in the business environment and evaluate whether the described trend constitutes a threat (-2) or an
opportunity (+2) to the company in the relative assessment sheet (1/2)
Importance
7
5
The impact of the

trends to the client
and its competitors
can also be rated
Company
Trends within Political Environment:

General increase in strictness of drugs
Trends in Economic Environment:
Strong US economy
EU moving forward with integration
Trends in cultural environment:
More biologically literate environment
Increased health consciousness
Increased dependency on and faith in medicine for healing
Trends within Demographic environments:
Slow population growth
Aging baby boomers of US and Europe
Trends in Natural Environment:
El Nio causing strange weather patterns
Development in technological environment:
Genetically engineered foods decrease need for pesticides
10
The significance of
the trends to the
industry should be
rated
Evaluation criteria
8
10
8
5
8
3
5
Score: weight
10: Very important criteria
5: Important criteria
0: Unimportant criteria
Score:
Opportunity
Threat
Large +2
Large -2
Competitor
Big
Small
+2
-2
+1
+1
+1
+1
+1
+1
-1
+1
+2
+2
-2
-2
+2
+1
+1
+2
+1
+2
+1
+2
+1
+2
-2
-1
-2
+1
+1
+1
Small +1
Small -1
Module II
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Trends analysis
Methodology
Methodology for using a trends analysis
Input
Issue analysis
Client
data/interviews
Analyst reports
Annual reports
SEC filings*
Expert interviews
Trade journals
Periodicals
Press clippings
Customer surveys
Output
End game
Scenario planning
1
Define the
industry and the
client situation
Identify trends
of relevance
Assess the
significance of
trends
Evaluation of
product/market
segments
Strategic era analysis
SWOT
Refer to issue
analysis
Determine industry
boundaries and
how they have
changed
Locate trends within

the industry or external
ones that may impact it
Determine the
magnitude and
duration of the trends
Assess and rank

the importance of
trends with respect
to the client and its
competitors
Analyze threats
and opportunities
Module II
97
Trends analysis
Conclusion
Conclusion
Key points
Fads should not be mistaken for trends

Trends should not be confused with prospects or with speculation about the future
Most trends have generally been identified by experts - it is the consultants job to uncover the
ones of greatest relevance to the client
Remember that trends are movements already under way that have momentum
Strengths
Forces strategists to look ahead in formulating strategy

Little analysis is required, mostly research intensive
Weaknesses
Does not convey information that could warn of future shocks or sudden strange occurrences
Requires much education to comprehend implications of trends
References

Naisbit, John (1990); Megatrends
Popcorn, Faith (1996); The Popcorn Report
Module II
98
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
99
Introduction
Determining where to compete requires an assessment of the size and growth of

the overall market and an understanding of its segments as they relate to the
industrys offerings
Market A
as seen by competitor 1
Market A
as seen by competitor 2
Size and growth of the market - reflects market potential

Product/market segmentation - characterizes end-users
Well-performed product/market analysis can lead to a
competitive advantage by providing superior understanding of
customers
Module II
100
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
101
Description
An analysis of the size and growth of the market is a measure of how much the
players in the industry sell and how fast that is changing over time
Year 5
Year 1
The market
The market
It is imperative that a
client know the size
and forecasted growth
rate of its market for
strategic planning
purposes
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102
Description
There are two main ways to measure the size of the market - both must be
considered when drawing conclusions about the performance of a business unit
Units
Revenues
Size of the market
Size of the market
Unit sales millions
Revenue USD millions
14.2
8.7
10.8
1997
1996
4.5
1996
1997
Profit?
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103
Description
The growth of the market is the percentage change in its size
200
175
175
Comment
CAGR
= 19%
100
100
1994
1995
Year to year
growth
0%
1996
75%
1997
0%
It is easy to manipulate
growth rates by varying the
years of data included in the
calculation
CAGR 1996 - 1998: 7%
CAGR 1995 - 1998: 26%
CAGR 1994 - 1998: 19%
1998E
14%
Module II
104
Usage
Changes in the size of the market or in its particular segments are starting points
for many revealing analyses
Size of the market
Customer
segment
A
Customer
segment
B
Customer
segment
A
Size of the market

Product
segment 1
Product
segment 1
Customer
segment
B
Product
segment 2
Customer
segment
C
Customer
segment
C
Product
segment 3
1996
1997
1996
Product
segment 2
Product
segment 3
1997
Module II
105
Usage
Penetration levels can be useful indicators of the size of the market
Low penetration
High penetration
If a product has a high penetration rate,

(e.g. televisions) the majority of target
consumers own the item
Penetration rates can be useful in analyzing
and predicting the potential size and
growth of the market in a given area
Introduction
Growth
Maturity
Decline
A new or growing market

should have low penetration
rates
A mature/declining market
will have high penetration
rates
Extremely high growth rates

come from adding new
customers (e.g., by introducing
a new product)
Establishing a high rate of

repeat customers is key to
slowing product demand in the
decline stage
Such periods of high growth

do not last indefinitely
Module II
106
Usage
An analysis of market size and growth with respect to penetration rates can reveal
the potential for growth or profit in a market or a certain segment
Mobile telephone penetration, 1997
Key observations
Switzerland
Norway
GDP/
per capita
Denmark
Sweden
US
Japan
Germany
Finland
Finland has the highest mobile phone

penetration in the world, followed by
Sweden
Denmark and Norway are similar
nations in terms of GDP, geography,
population, and culture; however,
Denmark has significantly lower
penetration
Key conclusions
Namibia
Degree of penetration
Given that the present sizes of the

mobile phone markets in Denmark
and Norway are small, a high growth
rate therein would reflect a potential
for significant increase in size, given
the close similarities with Sweden and
Finland
This means that Denmark are Norway
are particularly attractive market
segments
Module II
107
Example
A demonstration of the size and growth of a clients market
Growth can be
graphically depicted
Total consumption of dietary supplements in California

USD Million
1,400
1,250
1,150
40.8%
1,000
920
Vitamin supplements as
a part of the entire
market
The entire size of
market, the overall
market
The number of years

displayed can affect the
growth rate and the
message conveyed by
the slide
Vitamins
Other
supplements
CAGR =
11%
40.1%
38.2%
39.1%
39.0%
61.0%
1994
60.9%
1995
61.8%
1996
59.9%
1997
59.2%
1998B
Note:The category other supplements is composed primarily of protein or energy supplements, but also includes other
products such as fiber, crack cocaine, etc.
Module II
108
Example
A breakdown of the overall market into the clients targeted market gives clientspecific insight
Daily multi-vitamins accounted for 18% of dietary supplement market in 1997

This figure is taken
from the present year
of the slide depicting
size over time
(previous page)
USD Million
1,400
300
1,100
400
700
350
The clients specific

market is graphically
depicted as a portion of
the entire market
A percentage can be
calculated of the clients
specific market as a share
of the overall market
150
200
Total
Retail
dietary
profits
supplement
turnover
excluding
VAT
Wholesale Prescribed
turnover
suppleof dietary ments
supplements
Supplements for
commercial use
Exports of
supplements for
commercial use
All single
Daily
vitamin/
multimineral
vitamins
supplements,
and other
excluding
daily multivitamins
3
Module II
109
Methodology
Methodology for finding the size and growth of the market
Input
Output
Client
data/interviews
Analyst reports
Industry reports
SEC filings*
Expert interviews
Trade journals
Periodicals
Players analysis
Customer
surveys
Segmentation
analysis
An understanding
of growth potential
Competitive
structure
Obtain size of
overall market
Find data for years

deemed relevant
Market size is usually
presented over a three
to five year scope
It is useful to create
subsets within the
overall market to
differentiate between
the clients actual
market and its potential
ones
Determine future
growth rates both by
extrapolation and by
studying projections
Calculate
growth rate
Growth rate can be

calculated using
compound annual
growth rate (CAGR) or
average annual growth
rate (see next page for
comparison)
Calculate
clients specific
market size
Beginning with the

size of the overall
market, reduce its size
by segments not
directly related to the
clients business
The waterfall graph
is useful to portray
this information
Calculate the
clients market as
a percent of the
overall market
Divide size of the

clients specific market
by the size of the
overall market for that
year
Perform this calculation
for several years to
illustrate trends in the
sizes of the relative
markets
Module II
110
Methodology
Compound annual growth rate calculation vs. average annual growth rate
calculation
CAGR formula
Example
1
n-1
) -1 ] X 100
[( Last year )
First year
1
5-1
)-1 ] X 100 = 18.9%
[( 200 )
100
Average annual growth formula
Example
( Last year - first year ) n X 100

First year
( 200-100 ) 5 X 100 = 20.0%

100
Note: See chart from the description section of this technique for the source of the numbers
Module II
111
Conclusion
Conclusion
Key points
Size of the market should account for imports/exports when using overall sales of individual
companies to calculate
Markets should be properly subdivided when calculating size of the market and the percentage
composition of sub-markets. (e.g. beverages into alcoholic vs. non alcoholic)
Strengths
Necessary point of departure for many other analyses such as segmentation

Allows market share to be calculated
Weaknesses
Data is not always available

Data must often be extrapolated, leading to inaccuracies
References
Module II
112
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
113
Description
Channels
The Market
1997
USD 1,300 mill.
Geographic segments
Segmentation is the process of dividing the overall market into groupings along the
dimensions most relevant to maximizing profit in the industry
Product segments
Module II
114
Usage
Markets can usually be segmented along four generic dimensions
Segmentation category
Description
Products
Different types available to the customers: size, technology,

cost structure, types, package, etc.
Customer
Clusters of users divided according to: demographics,

behavior, economic characteristics, etc.
Geography
Different areas where the customers are present on a spatial

level: regional, national, international, etc.
Various means of reaching the customers: wholesalers,

national chains, specialty stores, mail orders, etc.
Module II
115
Usage
Segments must meet fundamental requirements
Requirement
Comment
Relevance
How much and what the segmentation adds to our

understanding of customers behavior and
attitudes
Measurability
The degree to which the size and purchasing

power of segments can be measured
Accessibility
The degree to which the segments can be

effectively reached and served
Substantiality
The degree to which the segments are large and/or

profitable enough to be worth considering for
separate marketing attention
Durability
The degree to which segments will diminish as the

product category or industry matures
Module II
116
Example
A product segment map gives an overview of the various offerings and their place
within the overall industry
An overall, broad
industry definition
provides a context for
a specific offering
Product segments in the confectionery industry

USD Mill.
Pick & Mix

100% = 3,300
The position of the

specific market of
relevance
Other
25%
Gummi-products
30%
15%
Filled chocolate
5%
Pure chocolate
Licorice
5%
10% 10%
Sugar
Toffee
Module II
117
Example
Customer segments, on a generic level, illustrate characteristics about the

consumer
A segmentation can
be performed in a
number of ways. It
is the strategists job
to find the most
meaningful depiction
of the market
components
Characteristics about
the consumer
highlight challenges
or opportunities
within the market
Danish consumer habits - mixed candy bags

Percent
29%
Frequency
17%
22%
19%
11%
0%
Daily/
almost
daily
01
1%
3-4
1-2
1-3 1-5 times Rarely
times a times a times a per half
week
week month
year
Never
42%
26%
22%
Unanswered
75-80% percent of the

consumers buy mixed
candy in bags
More than half of the
consumers choose
among different
products/brands
Loyalty
6%
4%
Stick to Shift
Choose Do not
brand among 2- among all know
3 brands brands
Never
use
Source: 100% = 4,428 respondents

Source: A.T. Kearney; Index DK/Gallup marketing
Module II
118
Example
Geographic segmentation can prove to be very revealing depending on the industry
Consumption of sugar goods is greatest in Denmark, Ireland, and Germany

Kg. per capita 1994
100%= 15.44
Geographic segments
can be useful both for
benchmarking against
neighboring areas or
to reflect market
opportunities abroad
13.89
12.89
Sugar
Goods
9.85
12.44 12.17
5.81
6.13
4.36
11.80
11.53
10.71
2.91
2.63
10.12 10.12 10.03
9.62
5.04
5.31
8.04
4.18
5.22 5.08
7.67
5.53
Source: Leatherhead Food; IOCCC
4.63 4.49
4.27 4.04
2.13
2.13
3.31
4.59
2.54
2.77
1.77
Japan
Brazil
2.14 1.50
1.18
1.00
Italy
2.50
France
Finland
4.09 3.41
The Netherlands
Australia
Sweden
USA
Belgium
5.40 4.90 5.04 5.85
Austria
Great Britain
Switzerland
6.76
Norway
Germany
Ireland
Areas of particular
interest or potential
(e.g., the
Scandinavian market)
can be highlighted
6.76
6.59
Denmark
Chocolate
Goods
8.90
8.08
Spain
9.26
8.08
3.09
Greece
4.63
Module II
119
Example
Distribution of confectionery products by wholesale channel
Supermarkets distribute approx. twice as much candy

as convenience stores do
Tons
can often be the
lifeline of a product
100% =
30,707
Metro and others
6.0
Dagrofa kiosk
8.8
Sgro
Convenience store sector

Supermarkets
27,384 tons
5.6
8.2
7.2
Total market share 33.9%
9.6
9.6
Lekkerland
12.6
Vibham
4.5
6.5
Dagrofa
Dansk Supermarked*
7.6
Other discount chains**
16.2
5.6
7.7
8.8
16.0
Groupings of
can highlight the
potential market areas
that offer significant
expansion
opportunity
FDB Group***
* Excl. Netto
** Aldi, Fakta, Netto
*** Excl. Fakta
Total market share 66.1%
31.3
28.2
Sugar goods
Chocolate
3
Module II
120
Example
Begin the segmentation process by determining the criteria that will be most useful
in grouping customer behavior
The goal of market
segmentation is to
find information
about the customer
that can be used as
criteria to best
explain/ predict sales
A list of possible
criteria should be
evaluated with
respect to fulfillment
of different aspects of
the product offering
The criteria that best

explain the markets
reactions to the
product offering
should be selected for
further analysis
Frequency of movie theater visits is the segmentation criterion that best

correlates with the purchase of confectionery products
Correlation
5 = High
1 = Low
Offering
components
Segmentation
criteria
Price
Service
required
Frequency
of visits
Outlet
range
Frequency of shopping visits
Profession
Income
Family structure
Age
Frequency of movie theater

visits
Segmentation
criteria
Module II
121
Example
Once the most critical segmentation criteria have been chosen, the market should
be divided accordingly into discrete segments
This is the criterion

that was defined to
best describe
consumer behavior in
the preceding
analysis
A cluster analysis reveals four distinct segments of the market
50
Segment
1
45
Plotting the number

of movie-goers
against their total
expenditure on pick
& mix products
makes evident four
distinct groups of
customers
Segment
2
Segment
3
Segment
4
40
35
Number of
people
30
25
20
15
10
This dimension
allows us to
distinguish between
the customers to
whom the company
markets and those
that are most key to
the clients success
5
0
0
100
200
300
400
500
600
700
800
900
1,000
Total expenditure on pick & mix

(DKK per person)
Module II
122
Example
Once the segments have been identified, their worth should be evaluated
The least attractive

segment
An illustration of the confectionery customer segments and their

corresponding consumption of pick & mix products
Expenditure
on pick & mix
100%
The proportion of the

population that offers
disproportionate
expenditure on the
product offering
(20% of movie-goers
make up 57% of
confectionery sales)
92%
Segment
1
57%
35%
The most attractive

segment
Segment
2
Segment
3
Segment
4
20% 25%
50%
75%
100%
% of moviegoing
population
Module II
123
Example
After identifying and evaluating the segments, study them to determine

distinguishing characteristics
The qualities that

would best
characterize the
customers grouped
together by the cluster
analysis
The most important
segment in terms of
per capita expenditure
on pick & mix
Characterization of the four identified confectionery segments
Characteristic
Segment 1
Segment 2
Segment 3
Segment 4
Demographics
40-55
Parents
18-25
55-70
Grandparents
25-40
Large families
Young children
Geography
Urban
sub-urban
Sub-urban
Rural
Urban
residence
Urban
Sub-urban
Behavior
Health conscious Not health Distrust of

conscious
unpackaged
goods
Particular in
taste and style
Particular in
taste and style
Trendy
Educational
background
Mostly college
educated
Varied
Mostly college
educated
Various
Module II
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Methodology
Methodology for performing product/market segmentation
Input
Players analysis
Strategic group
analysis
Trends analysis
Client
data/interviews
Expert interviews
Annual reports
Industry reports
Analyst reports
SEC filings*
Trade journals
Customer surveys
Output
Define the
segmentation
criteria
Survey the market

according to each of the
four generic dimensions
(product, customer,
geography and
distribution channel)
Determine which other
market specific factors
might also be valuable
for the analysis
Apply the market
specific characteristics to
the industry to uncover
segments
Identify the
segments
Isolate the
segments
according to both
the generic and
market specific
dimensions
Value the
segments
Determine the
absolute size of
each segment and
its value in
proportion to that
of the overall
market
Characterize the
segments
Key success
factors
Evaluation of
segment
attractiveness and
development
Substitution threat
analysis
Characterize the
factors that drive
the growth of the
different segments
from a qualitative
perspective
Module II
125
Conclusion
Conclusion
Key points
Not something that can only be done on a generic level - it should be performed to capitalize on
every markets unique characteristics
Requires much practice, experience and effort to perfect
Strengths
A competitive advantage can be built on appropriate market segmentation

Allows for improved product-customer matching
Weaknesses
Can be difficult to acquire data
References
Module II
126
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
127
Description
Demand and supply analysis can provide an understanding of the components of

industry structure
Demand analysis
Supply analysis
The aim of demand analysis is

to understand the structure and
nature of the demand for the
companys product
Provides the basis for analyzing
market influences
Supply analysis helps to

define the economics of
supply and therefore the cost
curve of the industry. The
analysis helps to determine
how companies will choose a
given products market price
Supply affects the number of
producers and their
respective sizes
The sustainability of a
market structure is dependant
on the supply curve
Essential outcomes
Economies of scale
Economies of scope
Experience effects
The effect of pricing
Module II
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Description
Demand and supply curves identify the market equilibrium
Price
Market
equilibrium
Supply
P1
Demand
Demand curve shows the total

quantity demanded at each price (all
other factors held constant)
Supply curve shows the total
quantity supplied at each price (all
other factors held constant). Supply
curve is also called a cost curve
The market equilibrium is the point
where price and quantity reach a
stable state
Quantity
Q1
Module II
129
Usage
The industry demand curve is a depiction of price plotted against volume sold at
that price for a given product
Price
Total quantity demanded depends on:
The products price

The price of substitutes or complements
Product quality
Consumer income
Advertising
Tastes and other factors
Demand Curve
P1
P2
Q1
Q2
Quantity
Module II
130
Usage
The demand curve can shift over time due to changes in the underlying market
characteristics
Possible causes for increase in demand

Price
Increase in product value/quality

Price of substitutes rises
Shift in consumer preferences
Increase in disposable income of
consumers
Decrease in price of complementary
products
Trends (economic, social, cultural,
marketing variables, etc.)
Possible causes of a decrease in demand

Demand Curve
Quantity
Decrease in product value/quality

Increase in value/quality of substitute
products
Increase in price of complementary
products
Trends (economic, social, cultural)
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131
Usage
The demand curve indicates price elasticity, i.e., how the quantity demanded will
respond to a given change in price
Price
Price elasticity
greater than 1
Price
Elastic
Price elasticity
between 0 and 1
Inelastic
Elasticity of demand
The price elasticity of
demand is defined as
the percentage change
in the quantity
demanded divided by
the percentage change
in price
A demand curve that
has a constant 45%
angle represents
elasticity equal to one
Quantity
Price elasticity is
infinite
Price
Price elasticity
equals 0
Price
Perfectly elastic
Perfectly
inelastic
Quantity
Quantity
Quantity
Module II
132
Usage
An understanding of market elasticity helps to predict the impact of changing

market conditions
Enables companies to understand and predict the market response to

Price war
New entrants
Change in supply of substitute products
Enables companies to understand and predict the financial impact of
changes in tactics and strategy:
Profit impact of a product promotion
Volume impact of a price increase
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Usage
The supply curve presents the quantity of goods supplied at each price
Price
Economists use the concept of
supply to describe the quantity of a
good or a service that a company
would like to sell at a particular
price
P2
The market supply of a good is

simply the total quantity of goods
produced by all of the companies in
the economy that are willing to
manufacture and sell at a given price
P1
Q2
Q2
Quantity
Module II
134
Usage
Changes in the underlying market variables can cause the supply curve to shift
over time
Price
Shifts in the supply curve can be caused by

changes in the following factors
S2
S1
P2
P1
Q2
Q1
Quantity
Technology
An improvement in technology will shift
the supply curve to the right because
producers will be able to supply a greater
quantity profitably at each price
Input costs
A reduction in input prices (lower wages,
lower fuel costs, etc.) will induce
companies to supply more output at each
price, shifting the supply curve to the right
Government regulation
Government regulations can sometimes be
viewed as imposing a technological
change that adversely affects producers.
The effect of this regulation would be to
shift the supply curve to the left, reducing
the quantity produced at each price
Module II
135
Usage
The likely behavior of new and existing players to changes in market factors can be
inferred from the supply curve, because it illustrates the cost structure of the
industry
Price
The equilibrium price equals the cost to

produce the unit of product when it is
equal to the maximum price that the
market will pay for that product
When the industry supply curve is flat, it
is more likely that companies will price in
a collectively rational way. When the
curve is steep, it is less likely that
collectively rational pricing will occur
consistently
Demand
Excess supply
P*
Excess demand
A
D
Q*
In terms of production:
Companies A, B and C will produce at full
capacity
Company D will produce at half capacity
Company E will not produce, because it
cannot manufacture cheaply enough to
make a profit
Quantity
Module II
136
Usage
A company has to decide how much to produce by evaluating the cost of

production and the demand structure of the market
Relevant cost
Supply
(cost of
production)
Companies
choose
level of
output
Demand
(Revenue)
Marginal cost refers to the increase in total

cost when output is increased by one unit.
As long as marginal revenue (the increase
in total revenue when output is increased
by one unit) exceeds marginal cost, the
company should increase output
Long-run total cost describes the
minimum cost of producing at each output
level when the company can adjust all
inputs. This full reinvestment cost is
relevant when the company considers to
enter a new line of business
Non-sunk cost refers to all fixed and
variable costs a company can recover, if
operations are discontinued
Source: A.T. Kearney; Begg D. (1994); Economics

Module II
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Usage
The cost structure of a company and the industry is influenced by economies of

scale
Economies of scale
Minimum efficient scale
Economies of scale AC*

exist when long-run
average costs decline
as output rises
(increasing returns to
scale)
Diseconomies of scale
exist when long-run
average costs increase
as output rises
(decreasing returns to
scale)
AC*
Minimum efficient scale (MES) is the

minimum market share (or level of production)
that a company (or a plant) must achieve to
reach a break-even point
Q
Economies of
scale
AC*
Q
AC*
Constant returns to
scale exist when output
has no affect on longrun average costs
Q*
Diseconomies
of scale
MES = Q*/total
market demand. Q*
is the rate of output
at which long-run
average costs are
minimized
Q
* Average cost
Module II
138
Usage
Economies of scope and learning also influence the cost structure of a company
Learning
Economies of scope
Arise when the average cost of producing
declines as the number of different products
manufactured increases
Present when joint output of a single

company is more efficient than production
by a group of specialized companies, each
producing one product
Occurs when the cost to produce a given

level of output falls with an increase in
manufacturing experience
AC*
AC*
AC1
AC2
AC3
Q*
* Average cost
Current
output
1Q* 2Q* 3Q* Cumulative

output
Module II
139
Example
By combining the demand and supply curves, one can realize excess supply, excess
demand, and the equilibrium price in the market
The market for chocolate

FG shows the amount
of excess supply at
the price GBP 0.40
Price
GBP/bar
The market equilibrium

is represented at point
E. At prices below the
equilibrium price,
excess demand will be
present. At prices above
the equilibrium price,
there will exist excess
supply
AB shows the
amount of excess
demand at the price
GDP 0.20
0.50
S
F
0.40
0.30
E
B
0.20
A
0.10
S
D
0.00
0
40
80
120
160
200 Quantity
Million bars/year
Source: Begg, David et. al (1994); Economics
Module II
140
Example
The consequences for the client of market changes can be realized by analyzing
demand curve shifts
At low ice cream prices,

the demand curve for
chocolate is DD and the
market equilibrium
occurs at point E
The chocolate market is highly influenced by the pricing behavior

of ice creams
D
Price
GBP/bar
0.50
D
Higher ice cream prices

raise the demand for
chocolate, shifting the
demand curve from DD
to DD
S
E
0.40
E
0.30
0.20
At the former
equilibrium price,
there would be excess
demand EH, which
gradually bids up the
price of chocolate
until the new
equilibrium is reached
at E
0.10
40
80
120
160
0.00
200
240
280
Quantity
Million bars/year
Module II
141
Example
An understanding of the expected price development can be gained by analyzing

shifts in the supply curve
The new
equilibrium at E is
at a higher price
and a lower
quantity than the
old equilibrium, E
A reduction in the supply of chocolate caused by a shift in the supply

curve will have significant implications for the price level in the industry
D
0.50
Price
GBP/bar
0.40
S
E
0.30
When the supply curve
is initially at SS, the
market equilibrium is
at E. Reduction in the
supply of chocolate
shifts the supply curve
to the left and is shown
by the new supply
curve SS
0.20
0.10
0.00
0
40
80
120
160
200
Quantity
Million bars/year
Module II
142
Methodology
Methodology for using demand and supply economics
Input
Players analysis
Size and growth of the
market
Expert interviews
Analyst reports
SEC filings*
Trade journals
Customer surveys
Output
Construct the
demand curve
Forecast demand by
segment at various
price levels
that shape the demand
curve
Calculate the elasticity
of demand and how it
varies along different
parts of the curve
Construct the
supply curve
Identify units of
capacity and order them
from lowest to highest
cost producers
that shape the supply
curve
Calculate the elasticity
of supply and how it
varies along different
parts of the curve
Determine the
industry impact of
supply/demand
interaction
Price/quantity
relationship
Competitive
structure of the
industry
Changes in
customer needs
Changes in
manufacturing
efficiency
Determine how the

industry dynamics operate
Scale
Scope
Learning
Determine the most
important measure of
cost to industry producers
Marginal cost
Long-run total cost
Non-sunk cost
Reports filed by publicly held companies with the Securities and Exchange Commission: e.g., 10K, 10Q
Module II
143
Conclusion
Conclusion
Key points
Strengths
Weaknesses
Difficult to get data on supply and demand, which often results in having to obtain estimates from
experts or historical data (which might no longer be valid)
When a curve shifts, the new shape might be different from the original one
In monopolistic or oligopolistic markets, the clients strategies have an impact on market structures
and the demand curve, which makes the analysis more complex. The market must be clearly defined
or the wrong supplier may contribute to the curve
Capacity at a plant can be allocated to several different product groups meeting very different needs
Helps to identify value and to depict it graphically
Useful in understanding industry dynamics; even if used in a rough manner
More difficult to use with products that have perceptual needs

Primarily a static description
Assumes that many of the factors are constant - in real life they might be constantly changing
More effective for commodity products
References
Module II
144
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
145
Introduction
Three frameworks are commonly used in business unit strategy engagements to

characterize the industry
Framework
Comments
Structure-conductperformance
Model for analyzing the

industrys performance
The five forces
Analysis of forces determining

industry structural
attractiveness
Strategic triangle focusing on

customer needs, company
strengths, and competitor
positions
Module II
146
Introduction
Industry structure
Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
147
Description
The SCP framework builds on the assumption that performance is dependent on

structure and conduct
Static
SCP
model
Dynami
c SCP
model
Structure
External
shocks
Conduct
Structure
Performance
Conduct
Performance
Module II
148
Description
Elements of the Structure-Conduct-Performance framework and some of the

factors that affect the model
External
shocks
STRUCTURE
CONDUCT
PERFORMANCE
Feedback
Examples of shocks
Technology breakthroughs
Changes in government
policy/regulations
Domestic
International
Changes in tastes/lifestyles
Economics of demand
Availability of substitutes
Differentiation of products
Rate of growth
Volatility/cyclicality
Economics of supply
Concentration of producers
Import competition
Diversity of producers
Fixed/variable cost structure
Capacity utilization
Technological opportunities
Shape of supply curve
Entry/exit barriers
Supply chain economics

Bargaining power of input
suppliers
Bargaining power of
customers
Information market failure
Vertical market failure
Marketing
Pricing
Volume
Advertising/promotion
New products/R&D
Distribution
Profitability
Profitability
Value creation
Technological progress
Employment objectives
Capacity change
Expansion/contract
Entry/exit
Acquisition/merger/
divestiture
Forward/backward
integration
Vertical joint ventures
Long-term contracts
Internal efficiency
Cost control
Logistics
Process R&D
Organization effectiveness
Module II
149
Usage
The SCP model is used for gaining an overall understanding of an industry
Usages
To develop a situational analysis of an industry
To aid in the generation of hypotheses about

future changes in industry structure, conduct,
and performance
To characterize the cascading effects of
particular events on an industry
Module II
150
Example
The SCP analysis provides a dynamic view of industry structure
Begin with situational

analysis. Analyze
shocks that might
influence the industry
The US telecommunications industry after 1995

Externa
l shocks
The structure of the

industry should be
examined with respect
to the identified shocks
Thereafter, the conduct

of the industry players
should be studied
Performance should be
seen not only as a
consequence of
industry structure and
competitor conduct, but
also as a factor in
determining them
Structure
Conduct
Performance
Feedback
US government
Long-distance
Long-distance
Profits remain
deregulates the
players and local
carriers scramble to constant as
telecommunications service providers are enter local markets companies
industry
free to enter each
Local carriers do the restructure
others markets
same to enter long
distance markets
Internet continues Demand for longto penetrate rapidly distance services
Customers demand
continues to rise
full service
rapidly
providers
Many mergers
between longdistance carriers and
local service
providers
Module II
151
Methodology
Methodology for using the SCP framework
Input
Output
Supply and demand

economics
Expert interviews
Trends analysis
Players analysis
Strategic group
analysis
Supply chain
analysis
Value chain analysis
Financial resources
and performance
Analyst reports
Annual reports
Press clippings
Relevant
analyses
Study basic
conditions
Study basic conditions

Study current and past
events relevant to the
course of the industry
Basic conditions
Supply
Demand
Raw materials Price elasticity
Technology
Substitutes
Unionization
Rate of growth
Product
Cyclical and
durability
seasonal
Business
character
attitudes
Purchase
Public politics
method
Marketing type
Examine
industry
structure
Understanding of
industry structure
Understanding of
industry evolution
and direction
Examine and
predict conduct
Study industry reports

Examine recent
changes to the industry
structure
Link changes to
external shocks
Study recent conduct

and identify links to
changes in industry
structure (past or
anticipated)
Predict changes in
conduct
Structure
Conduct
Number of sellers
Entry and mobility
barriers
Exit and shrinkage
barriers
Cost structures
Global reach
Pricing behavior
Product strategy and
advertising
Research and
innovation
Plant investment
Legal tactics
Examine and
predict
performance
Study performance of
individual companies,
linking it to the basic
conditions and the following
structure and conduct
Predict future performance of
the individual companies
Performance
Production and
allocation efficiency
Technological
progress
Profitability
Employment
Source: A.T. Kearney; Scherer, F.M.; Ross, D. (1990); Industrial Market Structure & Economic Performance
Module II
152
Conclusion
Conclusion
Key points
Very useful in showing causality
Strengths
Considered superior to other general models for industry analysis because

Can be used in static and dynamic industry settings. Explicitly treats behavior and
performance of individual companies
Can be widely applied to many industries
Has sound academic, theoretical and empirical backing
Provides framework for integrating other existing economic models
Industry cost curve
Economic value to customer (EVC)
Porter model
Applies well in assignments
Is logical and sensible to clients
Has descriptive and predictive power
Weaknesses
Requires large amounts of analyses
References
Scherer, F.M.; Ross, D. (1990); Industrial Market Structure and Economic Performance
Module II
153
Introduction

Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
154
The five forces
Description
The collective strength of these forces determine the ultimate profit potential of an
industry
Threat of entry
New entrants to an industry bring new
capacity, the desire to gain market share and
often substantial resources
Profitability can thereby be reduced through
the bidding down of prices or the inflation of
cost
Bargaining power of suppliers

Suppliers can exert bargaining
power over participants in an
industry by threatening to raise
prices or reduce the quality of
purchased goods and services
Powerful suppliers can thereby

squeeze profitability out of an
industry unable to recover cost
increases in its own prices
Intensity of rivalry among

existing competitors
Rivalry occurs when one or
more competitors either feel
the pressure or see the opportunity to improve position
Rivalry takes the form of
price competition, advertising
battles, product introductions, etc.
Bargaining power of buyers

Buyers compete with the industry
by forcing down prices, bargaining
for higher quality or more
services, and turning competitors
against each other - all at the
expense of industry profitability
Pressure from substitute products

Substitutes limit the potential
returns of an industry by placing
a ceiling on the prices
companies in the industry can
charge

Module II
155
The five forces
Description
The five forces can be expanded to include other dimensions of specific relevance to
industry profitability
Government
Other
Many consider this sixth

force as unaccounted for in
the five forces model. It is
often a critical factor
Different client industries

may have different forces
that require special
consideration
Global economic
Exit barriers
The global economic

situation can greatly
influence the profitability
of an industry
High barriers to exit may

also have a significant
effect on the structure of an
industry
Module II
156
The five forces
Usage
The five forces framework provides a checklist to analyze the industry structure,
environment, and trends affecting industry profitability
Usages
Identifying the most important

drivers of industry competition
or profitability
Providing a concise overview of
an industry's structural
attractiveness
The goal of this analysis

is to find a position in
the industry where the
company can best
defend itself against the
five competitive forces
or can influence them in
its own favor

Module II
157
The five forces
Example
Such a framework can be presented to the client or simply used for internal
analysis
Threats of new entrants

require barriers to entry
to be examined. Perhaps
threats of sharp
retaliation to entrants
need to be expressed by
incumbents
Overview of competitive dynamics for retail packed milk powder

Entry barriers are low
Large-scale operations and
brand positions are only a
partial barrier if a potential
new entrant has access to
cheap milk
Supplier
strength is low
Cooperatives have direct
access to the milk
Whole milk powder is
sold in bulk as a
commodity on the world
market
Competitor intensity
is high and growing
Low/stagnating growth
Aggressive players
Products with few
differentiating factors
Increasing growth in the
world market due to
population growth
Customer strength
is limited
Distributor's strengths
depends on
The brands strength
of the markets
The number of
alternative
Threat from substitute

products is increasing
This reality will limit the

price that companies can
charge for retail packed
milk powder
Fresh milk is becoming a

threat in selected markets
The threat from UHT
milk and recombined milk
is increasing
Module II
158
The five forces
Example
Often the additional forces might be very relevant in presenting the forces faced by
an industrys competitive environment
It can often be useful to

consider and present
forces outside the
standard five,
depending on the nature
of the clients industry
Overview of competitive dynamics for retail packed milk powder

Stagnant global market
Low growth rate of the
global economy
Supplier
strength is low
Cooperatives have direct
access to the milk
Whole milk powder is
sold in bulk as a
commodity on the world
market
The five forces model

is often criticized for
not including
government as a force
Political uncertainty
GATT will have
negative affect on EU
players
Political instability in
large foreign markets
Entry barriers are low

Large-scale operations and
brand positions are only a
partial barrier if a potential
new entrant has access to
cheap milk
Competitor intensity
is high and growing
Low/stagnating growth
Aggressive players
Products with few
differentiating factors
Increasing growth in the
world market due to
population growth
Threat from substitute

products is increasing
Fresh milk is becoming a
threat in selected markets
The threat from UHT
milk and recombined milk
is increasing
Customer strength
is limited
Distributor's strengths
depends on
The brands strength
of the markets
The number of
alternative
Exit situation is
unattractive
Main customers serve as
suppliers to the
companys other business
3
Module II
159
The five forces
Methodology
Methodology for using the five forces framework
Input
Underlying needs
Supply and demand
economics
Entry and exit
barriers
Players analysis
Strategic group
analysis
Customer surveys
Annual reports
Analyst reports
(See following page
for details)
Output
Define the
industry
Identify the five

forces at work
Define the industry,

seen in this framework
as the group of
companies producing
products that are close
substitutes for each
other
Employ players
analysis and strategic
groups analysis to gain
an understanding of
the competitors
This requires extensive

analysis (See following
page for specific
considerations
regarding each of the
five forces)
List the specific forces
under the five
categories
Make strategic
conclusions
Industry
description
Development of
strategy
Understanding of
the profit structure
of an industry
Evaluate the profit

potential of the industry
Draw strategic
conclusions from the five
forces
Design a strategy that
defends the BU against
threats from each of the
five forces
Module II
160
The five forces
Methodology
A list of potential analyses to perform a five forces analysis

New entrants
Economies of scale
Proprietary product differences
Brand identify
Switching costs
Capital requirements
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Proprietary low-cost product design
Government policy
Expected retaliation
Rivalry Determinants
Industrial growth
Fixed (or storage) costs/value-added
Intermittent overcapacity
Product differences
Brand identify
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
NEW ENTRANTS
Threats of new
entrants
Bargaining power
of suppliers
INDUSTRY
COMPETITORS
Bargaining
power of buyers
SUPPLIERS
BUYERS
Determinants of Supplier Power

Differentiation of inputs
Switching costs of suppliers and
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the
industry
Impact of inputs on cost or differentiation
Threat of forward integration relative to
threat of backward integration by
Intensity of Rivalry
Threats of new
substitutes
SUBSTITUTES
Determinants of
Substitution Threats
Relative price performance
of substitutes
Switching costs
Buyer propensity to
substitute
Determinants of Buyer Power

Bargaining leverage
Buyer concentration versus company
concentration
Buyer volume
Buyer switching costs relative to
company switching costs
Buyer information
Ability to backward integrate
Substitute products
Pull-through
Price sensitivity
Price/total purchases
Product differences
Brand identity
Impact on quality/performance
Buyer profits
Decision-makers incentives
Source: Porter M.E. (1980); Competitive Strategy

Module II
161
The five forces
Conclusion
Conclusion
Key points
Five-forces model is based on the concept that competition in an industry is rooted in its
underlying economic structure
Collective strength of these forces determines the ultimate profit potential in the industry
Strengths
Structures the industry analysis in a logical way
Weaknesses
Static approach
References
Module II
162
Introduction

Players analysis

Life cycle analysis
Trends analysis

The five forces
Module II
163
Description
The strategic triangle (3Cs) is a framework used to establish the competitive

position of the client company in relation to its customers and competitors
Target segments
Company
Customers
Cost
The framework is based

on the premise that
competitive advantage is
determined by the ability
to deliver greater value to
customers at a lower cost
than competitors do
Competitors
Product/service differentiation
Source: Ohmae, K. (1976); The Mind of the Strategist
Module II
164
Usage
The job of the strategist is to find a way to achieve superior performance relative to
the competition, and the 3Cs provide a context for such a mind-set
Identify segments in which

the company can achieve
positive differentiation
Customers
Maximize relative
strengths to best meet
customer objectives
Company
Cost
Competitors
Identify sources of
differentiation
Source: Ohmae, K. (1976); The Mind of the Strategist

Module II
165
Example
Customer-based strategies aim to determine where to compete given a companys

limited resources and inability to access every potential customer
Identify which
segments the
company can serve
Customer-based strategies for a coffee bean refinery

Segmentation by
objectives
High caffeine content

Image
Taste
Targeted
customers
Customer
Cater to the coffee
connoisseurs of
California and Oregon
Customer
coverage
California and Oregon
Northeast
South
Mid-west
Identify segments in
which the company
can achieve positive
differentiation
Module II
166
Example
Company-based strategies are functional in nature
Strategy used by the car maker, Toyota, in the 1970s
Maximize relative
strengths to meet
customer objectives
Identify key functions
Design, engineering, and

manufacturing are the key functions
Selectivity and
sequencing
Entry was made via focusing first on

cost of manufacturing and later shifting
focus to design
Optimize functional
performance
The customers greatest demands from

the product were fuel-efficiency and
affordability
Improve cost
effectiveness
Reduction of overhead was combined

with selectivity in terms of orders
accepted, products offered and
functions performed
Company
Module II
167
Example
Competitor-based strategies seek to identify possible sources of differentiation
Aim to identify
possible sources of
differentiation which
can be in functions
ranging from
purchasing, design,
and engineering to
sales and servicing
Strategy used by the electronics manufacturer, Sony, in the 1970s
Competitor
Any difference
between the company
and its competitors
must be related to
one or more of three
elements that jointly
determine profit:
price, volume, and
cost
Create a superior image
Had a superior image to Panasonic in

the US and sold its products at a much
higher relative price
Exploit tangible
advantages
Focused on service warranties as a key

advantage over other electronics
manufacturers
Exploit profit and cost

advantages
Exploited, profit advantages via

pricing strategies
Module II
168
Methodology
Methodology for using the strategic triangle framework
Input
Client data/
interviews
Annual reports
Analyst reports
Customer surveys
Value chain analysis
Product/market
segmentation
Cost and margin
drivers
Players analysis
Benchmarking
Output
Define
customer-based
strategy
Segment by
customer
objectives
Segment by market
(customer
coverage)
Identify target
segments, those
group(s) whose
needs are catered
to and are also
served by the
company
Define
company-based
strategy
Identify key functional

areas
Improve via
selectivity and
sequencing
Optimize functional
performance of
product
Improve cost
effectiveness
Understanding of
competitive
position and
opportunities
Understanding of
industry dynamics
Define competitorbased strategy
Create a superior
public image
Exploit tangible
advantages
Exploit profit and cost
advantages
Identify sources of
differentiation
Tie-together
Create a coherent
strategy, tying in all three
considerations. This
should be a logical
outgrowth of any one of
the 3Cs due to their
interdependence
Source: A.T. Kearney; Ohmae, K. (1976); The Mind of the Strategist

Module II
169
Conclusion
Conclusion
Key points
Focus on the three individual strategic viewpoints must eventually lead back to its strategic tie-in
with the others
Strengths
Strategies that evolve from this framework are based on gaining competitive advantage ensuring a better or stronger matching of corporate strengths to customer needs than is provided
by competitors
Weaknesses
Easily mistaken as recipes for developing strategies, rather than as simply strategic vantage
points helpful to stimulate thinking about strategy
References
Ohmae, K. (1976); The Mind of the Strategist
Module II
170

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Module II

Structure and dynamics of

Development of the industry

Demand and supply economics

Industry analysis frameworks

Source: A.T. Kearney

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Positioning of Module II in the overall training context

Generate an understanding of the environment

Source: A.T. Kearney

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Deliverables and techniques in Module II

Development of the industry

Industry strategic era analysis

Size and growth of the market

Demand and supply economics

Demand and supply economics

Industry analysis frameworks

Source: A.T. Kearney

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

Development of the industry

Demand and supply economics

Industry analysis frameworks

Understanding the industry structure

Establishes a foundation for many other analyses

Source: A.T. Kearney

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

An industry is a group of companies that offer a product or range of products that

Economists define an industry as a group of

Source: Grant, R.M. (1995); Contemporary Strategy Analysis

This definition creates four

Source: A.T. Kearney

A.T. KEARNEY BUSINESS UNIT STRATEGY TRAINING

The automaker, Cadillac, can have

Products that serve

Products competing for

Manufacturers of full-size luxury

All automobile manufacturers, and

Defining the industry from a product perspective versus a market perspective

Missouri - Pacific Railroad

We are a people and goods mover

We make copying equipment

We help improve office productivity

We make air conditioners and furnaces

We provide climate control in the home

Source: Kotler, P. (1997); Marketing Management

From a theoretical perspective, five different types of industry structures exist

A pure monopoly exists when only one company provides a

Local electricity company

A pure oligopoly consists of a few companies producing

Oil and steel

A differentiated oligopoly consists of a few companies

Autos and white goods

A monopolistic competitive industry consists of many

A pure competitive industry consists of many competitors

Source: Kotler, P. (1997); Marketing Management

Development of the industry

Demand and supply economics

Industry analysis frameworks

An overview of the different players positions and directions provides an

Does the current

How serious is the potential

What changes in competitors strategies are likely as a

A players analysis enables a company to better understand the behavior of its