Anthony E.

Henry

Henry: Understanding Strategic

Management

Chapter 3: Industry Analysis

© Oxford University Press, 2018. All rights reserved.

 Learning objectives

• Evaluate Porter’s five forces framework as a tool of

industry analysis
• Discuss the value net and the role of complementors
in creating value for organizations
• Analyse strategic groups within an industry
• Explain the impact of hypercompetition and
disruptive innovation on industry dynamics

Henry: Understanding Strategic Management, 3rd edition

 What is Porter’s Five Forces

• Porter's Five Forces is a simple but powerful tool for understanding

the competitiveness of your business environment, and for
identifying your strategy's potential profitability.
• This is useful, because, when you understand the forces in your
environment or industry that can affect your profitability, you'll be
able to adjust your strategy accordingly. For example, you could take
fair advantage of a strong position or improve a weak one, and avoid
taking wrong steps in future.
• It is especially useful when starting a new business or when entering a
new industry sector. According to this framework, competitiveness
does not only come from competitors.

Henry: Understanding Strategic Management, 3rd edition

 Porter’s five forces

• Undertaken at the level of an organization’s strategic

• business unit (SBU)
• An analysis of industry attractiveness
• An industry attractiveness(profit potential) is determined by interaction of
5 competitive forces
✓ The Threat of New Entrants
✓ The Bargaining Power of Buyers
✓ The Bargaining Power of Suppliers
✓ The Threat of Substitute Products and Services
✓ The Intensity of Rivalry among Competitors in an Industry
• It is the combined strength of these 5 forces that
• determine an organization’s return on investment
• If the five forces are intense (e.g. airline industry), almost no company in
the industry earns attractive returns on investments. If the forces are mild
however (e.g. softdrink industry), there is room for higher returns.

Henry: Understanding Strategic Management, 3rd edition

 Porter’s Five Forces Framework

Henry: Understanding Strategic Management, 3rd edition

 The Threat of New Entrants

• Your position can be affected by people's ability to enter your market. So, think about how
easily this could be done. How easy is it to get a foothold in your industry or market? How
much would it cost, and how tightly is your sector regulated?
• If it takes little money and effort to enter your market and compete effectively, or if you have
little protection for your key technologies, then rivals can quickly enter your market and
weaken your position. If you have strong and durable barriers to entry, then you can
preserve a favorable position and take fair advantage of it.

• New entrants will be attracted to industries that earn profits in excess of their cost of capital

• The threat of entry will depend on:

✓ the existence of barriers to entry
✓ the reaction of existing competitors.
• Main barriers to entry include
– Economies of scale
– Capital requirements
– Product differentiation
– Access to distribution channels
– Cost advantages independent of size

Henry: Understanding Strategic Management, 3rd edition

 The Bargaining Power of Buyers

• Here, you ask yourself how easy it is for buyers to drive your prices down. How many
buyers are there, and how big are their orders? How much would it cost them to switch
from your products and services to those of a rival? Are your buyers strong enough to
dictate terms to you?
• When you deal with only a few savvy customers, they have more power, but your
power increases if you have many customers.

• This reflects the extent to which their purchase represents a sizeable proportion
of the organization's overall sales

• Buyer power increases when:

✓ buyers are concentrated
✓ the industry product is standard or undifferentiated
✓ the costs of switching are low
✓ buyers pose a credible threat of backward integration

Henry: Understanding Strategic Management, 3rd edition

 The Bargaining Power of Suppliers

• This is determined by how easy it is for your suppliers to increase their prices. How
many potential suppliers do you have? How unique is the product or service that they
provide, and how expensive would it be to switch from one supplier to another?
• The more you have to choose from, the easier it will be to switch to a cheaper
alternative. But the fewer suppliers there are, and the more you need their help, the
stronger their position and their ability to charge you more. That can impact your
profit.
• The buyer is the firm in the industry and the supplier is the producer of that
firm’s input
• Supplier power increases when:
- the supplier industry is dominated by a few companies
- It is more concentrated than the industry it sells to
- suppliers are faced with few substitutes
- suppliers’ products are differentiated
- suppliers pose a credible threat of forward integration

Henry: Understanding Strategic Management, 3rd edition

 The Threat of Substitutes

• This refers to the likelihood of your customers finding a different

way of doing what you do. For example, if you supply a unique
software product that automates an important process, people
may substitute it by doing the process manually or by
outsourcing it. A substitution that is easy and cheap to make can
weaken your position and threaten your profitability.
• The threat from products and services that can meet similar
needs
• It does not refer to competition from new entrants
• Substitutes limit the potential returns of an industry
• The price/performance ratio of substitute products will determine
the extent of their threat

Henry: Understanding Strategic Management, 3rd edition

 The Intensity of Rivalry

• This looks at the number and strength of your competitors. How many rivals do you
have? Who are they, and how does the quality of their products and services compare
with yours?
• Where rivalry is intense, companies can attract customers with aggressive price cuts
and high-impact marketing campaigns. Also, in markets with lots of rivals, your
suppliers and buyers can go elsewhere if they feel that they're not getting a good deal
from you.
• On the other hand, where competitive rivalry is minimal, and no one else is doing what
you do, then you'll likely have tremendous strength and healthy profits.

This is affected by:

– Numerous or equally balanced competitors
– Industry growth rate
– High fixed costs
– Lack of differentiation or switching costs
– High exit barriers

Henry: Understanding Strategic Management, 3rd edition

 Criticisms of Porter’s Five Forces

• The five forces framework assumes a zero-

sum game
• It is static and assumes stable markets
• Many strategies are not deliberate but
emerge (Mintzberg and Waters, 1985)
• The government might usefully constitute a
sixth force
• The five forces need to approximate more
closely a dynamic theory of strategy

Henry: Understanding Strategic Management, 3rd edition

 Good article with examples - on
Porter's five forces
• https://www.business-to-you.com/porters-five-
forces/

Henry: Understanding Strategic Management, 3rd edition

 The Inclusion of Complementors within
Porter’s Five Forces
• Some critics of Porter’s five forces have suggested that his framework would
benefit from the inclusion of government as a sixth force.
• Porter recognizes that complements have a role to play in competitive analysis.
If we extend Porter’s five forces framework to take account of complements, it
evolves as shown in Figure 3.3.
• The inclusion of complementors into Porter’s five forces makes the framework
more defensible because it adds a dynamic element to the analysis. This allows
organizations in the industry to be more aware of their interdependencies.
• Instead of win–lose, there now exists an explicit recognition that a sustainable
strategy can involve both cooperation and competition. There is cooperation
among suppliers, organizations, and customers to create value, and competition
in how this value is divided up.
• The same holds true for complementors and substitutes. Instead of viewing
substitutes as inherently adversarial and complements as friendly, an
organization can have elements of cooperation in its interactions with its
substitutes and competitive elements with complementors.

Henry: Understanding Strategic Management, 3rd edition

 The Inclusion of Complementors
within Porter’s Five Forces
• Complementors supply complements to an
industry and thereby increase its value

Henry: Understanding Strategic Management, 3rd edition

 Strategic Group Analysis

Strategic groups are:

• Firms in an industry following similar or
identical strategies
• Strategic groups constitute a cluster within an
industry
• Mobility barriers deter movement between
strategic groups
• If strategic groups are moving further apart
‘strategic space’ may exist that can be
exploited
Henry: Understanding Strategic Management, 3rd edition
Henry: Understanding Strategic Management, 3rd edition
 Hyper competition

• Hyper competition is a condition when the competition is so intense,

creating instability in the market. These conditions require companies
to change strategies continuously.

• A relentless mode of competitive behaviour to force competitors out of

the industry

• The market is characterized by constant disequilibrium

• An example is Microsoft in software application

• It requires competitors to constantly upgrade and innovate

• The effect is to erode any competitive advantage

Henry: Understanding Strategic Management, 3rd edition

 Hyper competition

Henry: Understanding Strategic Management, 3rd edition

 Characteristics of hypercompetition

The following is a list of hypercompetitive market characteristics:

High level of rivalry among the players

Strategic maneuvers occur at a quick, intense and unexpected pace

Rapid technological and structural changes

Adoption of flexible strategies is common because the competitive landscape is changing rapidly

Low entry barriers, allowing new players to enter and challenge existing companies.

The competitive advantage is temporary. The new strategic competitiveness would immediately
appear, destroy, and replace the old ones.

Hypercompetition is common in new and emerging industries. An example of a hypercompetitive

industry is the eCommerce industry.

Henry: Understanding Strategic Management, 3rd edition

 Disruptive innovation

• In business theory, a disruptive innovation is an innovation that creates a new

market and value network and eventually disrupts an existing market and value
network, displacing established market-leading firms, products, and alliances.
• Not all innovations are disruptive, even if they are revolutionary. For example,
the first automobiles in the late 19th century were not a disruptive innovation,
because early automobiles were expensive luxury items that did not disrupt the
market for horse-drawn vehicles. The market for transportation essentially
remained intact until the debut of the lower-priced Ford Model T in 1908.[7] The
mass-produced automobile was a disruptive innovation, because it changed the
transportation market, whereas the first thirty years of automobiles did not.
• Disruptive innovations tend to be produced by outsiders and entrepreneurs in
startups, rather than existing market-leading companies.
• First introduced in 1995 by Clayton Christensen
• The term “disruptive” describes a process in which a smaller company with
fewer resources can successfully challenge established incumbent businesses
• Entrants target these neglected segments
• Overtime when mainstream customers start adopting the entrants’ offerings in
volume, disruption has occurred

Henry: Understanding Strategic Management, 3rd edition

 Acknowledgement

• Understanding Strategic Management, Anthony Henry, Oxford University Press,

2018. 3rd edition.
• https://www.mindtools.com/pages/article/newTMC_08.htm
• https://en.wikipedia.org/wiki/Disruptive_innovation
• https://penpoin.com/hypercompetition/

Henry: Understanding Strategic Management, 3rd edition