The Industry

Environment

Industry & Comp Analysis 1

 Analysis of the industry
Definition
 An industry is a group of firms
producing products that are close
substitutes
 Firms that influence one another
 Includes a rich mix of competitive strategies
that companies use in pursuing strategic
competitiveness & earning above-average
returns.

Industry & Comp Analysis 2

 Definition cont’d …
 Analysis of the industry environment is
focused on the factors & conditions
influencing the firm’s profitability in the
industry.
 Compared to the general environment, the
industry environment has a more direct
effect on the firm’s strategic
competitiveness & capability of earning
above-average returns
Industry & Comp Analysis 3
 Definition cont’d …
It refers to the analysis of:
 Industry trends as a whole;
 Competition within the industry;
 Technologies employed;
 What it takes to succeed – the key success
factors (KSF);
 Comparing the firm, its products, its systems, its
technology etc., with other firms in the industry.

Industry & Comp Analysis 4

Nature And Degree Of Competition

The nature and degree of competition in an

industry hinge on five forces:
1. The threat of new entrants
2. The bargaining power of suppliers
3. The bargaining power of buyers
4. The threat from substitute products
5. Rivalry(competition) among
existing firms
Industry & Comp Analysis 5
Porter’s Forces Driving Industry
Competition
Threat of New Entrants
 Threat of new entrants
◦ new entrants to an industry bring new
capacity, a desire to gain market share and
substantial resources
◦ The threat of entry depends on the
presence of entry barriers and the reaction
that can be expected from existing
competitors.
 Entry barrier
◦ an obstruction that makes it difficult for a
company to enter an industry
Barriers to Entry

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages due to size
Government policies
 Threat of Entry cont’d …
Economies of scale:
 Deter entry by forcing the aspirant either
to come in on large scale or accept a cost
disadvantage.

 Scale of economies in production, research,

marketing, and service are probably the key
barriers to entry in the mainframe
computer industry, as Xerox and GE
discovered.
Industry & Comp Analysis 9
 Threat of Entry cont’d …
Product differentiation:
 Brand identification creates a barrier by
forcing entrants to spend heavily to
overcome customer loyalty.
 Factors fostering brand identification are
being first in the industry, advertising,
customer service, and product differences.
 Product differentiation is perhaps the most
important barrier in soft drinks, cosmetics,
and investment banking.

Industry & Comp Analysis 10

 Threat of Entry cont’d …

Capital requirements:
 The need to invest large financial resources
in order to compete creates a barrier to
entry.
 Capital is necessary not only for fixed
facilities but also for customer credit,
inventories, and absorbing start-up loses.
 The huge capital requirements in certain
fields, such as computer manufacturing and
mineral extraction, limit other entrants.

Industry & Comp Analysis 11

 Threat of Entry cont’d …
Cost disadvantages independent of scale:
 Entrenched companies may have cost advantages
not available to potential rivals, no matter what
their size and economies of scale.

 These advantages can stem from the effects of:

◦ the learning curve, and proprietary technology,
◦ access to the best raw material sources,
◦ assets purchased at pre-inflation prices,
◦ government subsidies, favorable location, and
◦ official rights (patents)

Industry & Comp Analysis 12

 Threat of Entry cont’d …

Access to distribution channels:

 Affects new entrants since the new product
must displace others via price breaks,
promotions, and intense selling efforts.

 When there are limited wholesale or retail

channels and the existing competitors
occupied them, entry into the industry will
be tougher.

Industry & Comp Analysis 13

 Threat of Entry cont’d …

Government policy:
 The government can limit or even foreclose entry
to industries with such controls as license
requirements and limits on access to raw materials.

 The government also can play a major indirect role

by effecting entry barriers through controls such
as air and water pollution standards and safety
regulations.

Industry & Comp Analysis 14

 Threat of Entry cont’d …
Expected Retaliation
 Existingfirms might respond in
different ways when new comers inter
in to the market.

 Responses by existing competitors

may depend on a firm’s present stake
in the industry and available business
options
Industry & Comp Analysis 15
? Analyze Some Industries in our
Country where you believe there
are some barriers to entry

Industry & Comp Analysis 16

 Powerful Suppliers
 Suppliers can exert bargaining
power on participants in an
industry by raising prices or
reducing the quality of purchased
goods and services affecting the
profitability of the industry.

Industry & Comp Analysis 17

 Powerful Suppliers cont’d …
Supplier power increases when:
 Suppliers are large and few in number
 Suitable substitute products are not available
 Individual buyers are not large customers of
suppliers and there are many buyers
 Suppliers’ goods are critical to buyers’ marketplace
success
 Suppliers’ products create high switching costs
 Suppliers pose a threat to integrate forward into
buyers’ industry

Industry & Comp Analysis 18

 Powerful Buyers
 Customers can force down prices, demand
higher quality or more service, and play
competitors off against each other – all at
the expense of industry profits.
 The product buyers’ purchase from the
industry is standard or undifferentiated.
◦ In this situation, the buyers are always
sure that they can find alternative
suppliers, may play one company against
another.

Industry & Comp Analysis 19

 Powerful Buyers cont’d …
Buyer power increases when:
 Buyers are large and few in number
 Buyers purchase a large portion of an
industry’s total output
 Buyers’ purchases are a significant portion of
a supplier’s annual revenues
 Buyers can switch to another product without
incurring high switching costs
 Buyers pose threat to integrate backward into
the sellers’ industry

Industry & Comp Analysis 20

 Threat of Substitute Products
 The threat of substitute products
increases when:
◦ Buyers face few switching costs
◦ The substitute product’s price is lower
◦ Substitute product’s quality and
performance are equal to or greater than
the existing product

Industry & Comp Analysis 21

 Rivalry among Existing Firms
 In most industries, corporations are
mutually dependent.
 A competitive move by one firm can be
expected to have a noticeable effect on its
competitors and thus may cause retaliation.
 Rivalry among Existing Firms
Number of Rate of Product or
service
competitor industry characteristi
s growth cs
Height of
Amount of
Capacity exit
fixed costs
barriers

Diversity of
rivals
Relative Power of Other
Stakeholders
 A sixth force that should be added to
Porter’s list to include a variety of
stakeholder groups from the task
environment.
 Government
 Local communities
 Creditors
 Trade associations
 Special interest groups
 Unions
 Shareholders
 Industry Evolution
 Over time, most industries evolve through a series of
stages from growth through maturity to eventual decline.
 The industry life cycle is useful for explaining and
predicting trends among the six forces that drive industry
competition.
 Fragmented industry
◦ no firm has a large market share and each firm only serves a
small piece of the total market in competition with other
firms
 Consolidated industry
◦ domination by a few large firms, each struggles to differentiate
products from its competition
 Categorizing International Industries
 According to Porter, world industries vary on a
continuum from multidomestic to global.
 Multi-domestic industries
◦ specific to each country or group of countries
◦ This type of international industry is a collection of
essentially domestic industries.
 Global industries
◦ operate worldwide with multinational companies making
only small adjustments for country-specific circumstances
 Regional industries
◦ multinational companies primarily coordinate their activities
within regions
 Continuum of
International Industries

Figure 2-3
Continuum of
international
industries
Strategic Groups
 Strategic group
◦ a set of business units or firms that pursue
similar strategies with similar resources
 Companies or business units belonging to
a particular strategic group within the
same industry tend to be strong rivals
◦ Thus, tend to be more similar to each other
than to competitors in other strategic groups
within the same industry.
 Strategic Types
 A strategic type is a category of firms based on a
common strategic orientation and a combination of
structure, culture, and processes consistent with
that strategy.
 Defenders
◦ focus on improving efficiency
 Prospectors
◦ focus on product innovation and market opportunities
 Analyzers
◦ focus on at least two different product market areas
 Reactors
◦ lack a consistent strategy-structure-culture relationship
 Hypercompetition
 Most industries today are facing an ever-increasing level of
environmental uncertainty.

 Market stability is threatened by short product life cycles,

short product design cycles, new technologies, frequent
entry by unexpected outsiders, repositioning by
incumbents and tactical redefinitions of market boundaries
as diverse industries merge.

 In hypercompetitive industries, competitive advantage

comes from an up-to-date knowledge of environmental
trends and competitive activity coupled with a willingness
to risk a current advantage for a possible new advantage.
 Interpreting Industry Analyses

Low entry barriers

Suppliers & buyers Unattractive

have strong positions
industry
Strong threats from
substitute products

Intense rivalry Low profit

among competitors potential

Industry & Comp Analysis 31

Interpreting Industry Analyses cont’d …

High entry barriers

Suppliers & buyers Attractive

have weak positions
industry
Few threats from
substitute products

Moderate rivalry High profit

among competitors
potential

Industry & Comp Analysis 32

Competitor
Analysis
Industry & Comp Analysis 33
 Competitor Analysis
 Competitor analysis focuses on
each company against which a
firm directly competes.

 Analysisof competitors is focused

on predicting the dynamics of
competitors' actions, responses &
intentions

Industry & Comp Analysis 34

Competitive Intelligence
 Competitive intelligence
◦ a formal program of gathering information
on a company’s competitors
◦ also called business intelligence
Sources of competitive intelligence:
 Information brokers
 Internet
 Industrial espionage
 Investigatory services
 Competitor Analysis cont’d …
 Competing firms are keenly
interested in understanding each
other’s objectives, strategies,
assumptions and capabilities.

 Furthermore, intense rivalry creates

a strong need to understand
competitors.

Industry & Comp Analysis 36

 Competitor Analysis cont’d …
In a competitor analysis, the firm seeks to
understand:
 What drives the competitor, as shown by its future
objectives.
 What the competitor is doing and can do, as
revealed by its current strategy.
 What the competitor believes about its own firm
and the industry, as shown by its assumptions.
 What the competitor’s capabilities are, as shown
by its strengths and weaknesses.

Industry & Comp Analysis 37

Competitor analysis components

Industry & Comp Analysis 38

 Competitor Analysis cont’d …
 Competitor intelligence is used to get
data and information about
competing firms.

 Competitor intelligence is the set of data

and information the firm gathers to better
understand and better anticipate
competitor’s objectives, strategies,
assumptions and capabilities.

Industry & Comp Analysis 39

 Competitor Analysis cont’d …
 Information about these different
dimensions helps the firm to prepare
an anticipated response profile for
each competitor.

 Thus, the result of an effective

competitor analysis helps a firm to
understand, interpret and predict its
competitors’ actions and responses.
Industry & Comp Analysis 40
 Competitor Array
One common and useful technique is constructing
a competitor array. The steps include:
1. Define your industry - scope and nature of the
industry
2. Determine who your competitors are
3. Determine who your customers are and what
benefits they expect
4. Determine what the key success factors are in
your industry

Industry & Comp Analysis 41

 Competitor Array cont’d …
5. Rank the key success factors by giving each one
a weighting - The sum of all the weightings must
add up to one.
6. Rate each competitor on each of the key
success factors
7. Multiply each cell in the matrix by the factor
weighting.
8. Sum columns for a weighted assessment of the
overall strength of each competitor relative to
each other

Industry & Comp Analysis 42

 Using Key Success Factors to
Create
an Industry Matrix
 Key success factors
◦ variables that can significantly affect the overall
competitive positions of companies within any
particular industry
◦ They are usually determined by the economic and
technological characteristics of the industry and by
the competitive weapons on which the firms in the
industry have built their strategies.
 Industry Matrix
 Industry matrix
◦ summarizes the key success factors within a
particular industry

Table 2-3 Industry Matrix

 This can best be displayed on a two dimensional matrix - competitors
along the top and key success factors down the side. An example of a
competitor array follows:

Key Industry Competitor Competitor Competitor Competitor

Weighting
Success Factors #1 rating #1 weighted #2 rating #2 weighted

1. Extensive
distribution
.4 6 2.4 3 1.2

2. Customer focus .3 4 1.2 5 1.5

3. Economies of scale .2 3 .6 3 .6

4. Product innovation .1 7 .7 4 .4

Total 1.0 20 4.9 15 3.7

Industry & Comp Analysis 45

THANK YOU!

Industry & Comp Analysis 46