Structural analysis of industry

The structure of an industry is determined by the key features, upon which the success and failure of the
companies engaged in competition, is based. So it is these features or structural aspects that determine the
profitability of any firm competing for the market space in a given industry. Knowledge of ones company’s
position with respect to other players in the industry comes from a thorough dissection of the key features that
define and have the potential to alter the very structure of the industry. The first step in the process of
analyzing the industry structure is defining the industry. Unless there is clarity on where the boundaries lie,
there cannot be any judgment or assessment on the key competitive forces that are shaping the industry with
out any ambiguity.

Industry definition

It is common to find people getting confused between industry definition and business definition. As a general
rule the business definition is about creating focus. It is about focusing on the products, customers and
markets that the firm competes in. Business definition brings components of present competition to the fore
that a firm must unmistakably concentrate on. On the other hand industry definition must go beyond the limits
of current competitive pressures. It encapsulates not only the process by which the products are made and
delivered but also alternate processes that can be adopted for making similar products so that efficiencies and
effectiveness of various processes is always monitored, not only products but also functional aspects of the
products that the firm makes so that substitutes and firms producing them are always tracked, not only current
players indulging in the competition but also suppliers and buyers, so that relationships and linkages along the
value chain are continuously assessed.

Identification of the key characteristic features of the industry

Based on where the industry boundary is drawn, identify the critical factors / key features that determine the
profitability of the firms falling with in the boundaries of the industry and find out how the performance / position
of the firms with respect to these factors can be measured or assessed.
Taking the hypothetical case of iron ore mining industry of India, broadly the industry can be structured based
on the size and purpose of mining of the firms, as shown below:
 Large miners
 Captive miners
 Small and medium miners
Here captive miners are differentiated from other categories as they use iron ore as input for their down stream
core business of iron / steel making. And other categories of miners are thriving on the global demand for rich
Indian iron ore. What could have been the key factors on the basis of which industry players are categorized as
above? Basically to understand the structure at this level, it is important to note that Government exercises fair
amount of control on the industry and has every reason to do so – availability of rich iron ore is a natural
competitive advantage of the nation. Some of the key factors that are possibly shaping the industry structure
could be huge global demand, revenue generation for Government, Operational efficiencies – technological
and environmental, long term economical perspective of steel production versus iron ore exports etc. These
are the factors on which the future policies of Government may depend. In other words these factors might
influence the competitive rules for the players in the industry. So an objective analysis of such factors, enable
the players in the industry to position themselves to take the maximum advantage of the opportunity available
today and future stand that Government might most likely take.

Quantification – cornerstone of analysis

Objective analysis depends upon the quantification of performance of players in each segment with respect to
the key factors identified and evolving relationships on current and future profitability. Quantifying the industry
attributes at a macro levels aids in understanding the forces that are active in industry, which may help a firm in
charting a direction for the future. The key to enhancing competitiveness in the current time frame can be
discovered by evaluating the performance of the firm by carrying the analysis dep into the industry structure.

In-depth industry analysis

It is advisable to define the industry in the broadest sense and then gradually narrow down on to specific
groups of firms based on the technological issues, customer segments served, product mix delivered, degree
of vertical integration, logistics and so on and so forth. Continuing our example, having analysed the industry at
a very macro level, narrowing down the industry definition to small and medium miners, the key structural
components can be further classified as quality of ore, lease period, location with respect to the nearest ports
etc. Such analysis can help dissecting the competitiveness with respect to similar competitors and draw an
action plan for enhancing current competitiveness. As we take the structural analysis to greater depth along
the industry structure at each stage, we arrive at a group of players whose basis for competition / strategy
deployment is more and more identical in nature and dissection of key features at each stage opens up
opportunity for improving competitiveness.
Michael Porters' work on competitive strategy

The Structure of Competitive Strategy

Competitive Strategy is written in three sections:

1. General Analytical Techniques
2. Generic Industry Environments
3. Strategic Decisions
Competitive Strategy Part I General Analytical Techniques
It is this section which introduces two of Michael Porter’s most famous ideas:
1. The five forces of competition
2. Generic competitive strategies
If you have an interest in either, then this is very close to the beginning of the development of these ideas
unless you want to read a 1979 Harvard Business Review article.

Five Forces of Competition

Michael Porter has issued a new Harvard Business Review in 2008 updating and extending his original 1979
article with more modern examples.
You may have already been introduced to the five forces but as a brief reminder, Michael Porter argued that
industry profits and the intensity of competition were determined by five forces drawn from classical
economics:
 The buying power of customers
 The power of suppliers to squeeze profits
 The threat of new entrants coming into the industry
 The threat of substitute products
 The rivalry between existing competitors

Generic Strategies
In Competitive Strategy Michael Porter identified three generic competitive strategies for business success:
 Cost leadership – you have the lowest costs
 Differentiation – your products and services are recognised as superior
 Focus – you concentrate on a small group of customers (relative to the total market) and provide them
with the price / value combination they want.
Michael Porter has been criticised for saying that failure to choose mean that customers would be “stuck in the
middle” and condemn themselves to inadequate performance.
There are some special cases which Michael Porter has addressed which do make it possible to have a
differentiation advantage and a cost advantage at the same time.

Other Techniques For Analysing Industries and Markets

Less well known but equally valuable is guidance on how to prepare a competitor analysis so that you can
understand what your competitors are trying to achieve, their likely moves and how they are likely to react to
your moves.
Unfortunately it is a failing in the application of strategy in business that there is a tendency to ignore the plans
and intentions of competitors.
Sounds crazy but busy managers prefer the step 1, 2, 3… approach which produces a strategic plan at the end
rather than what can be endless debate about the possible actions and reactions in the market.
Unfortunately this act of management hubris of ignoring the very people you are trying to beat, leads to under-
performance and criticism of the strategic planning process.
Other items covered in this first section of the book are:
1. Signalling to competitors – there are some great game theory applications on this that aren’t covered
in the book but are fascinating – look for details on the prisoner’s dilemma and chicken.
2. Competitive moves
3. Strategies towards buyers and suppliers
4. Structural forces within industries which introduces the concept of strategic groups of competitors
who have broadly similar strategies
5. Industry evolution and movements through the product life cycle

Competitive Strategy Part II Generic Industry Environments

Different industries develop different structures which was well illustrated by a little known concept (outside of
strategy specialists) called the Strategic Environments Matrix by the Boston Consulting Group.

This identified four main industry types – fragmented, specialised, volume and stalemate based on the size
and variety of competitive advantages available. While Michael Porter doesn’t pick up on the Strategic
Environments Matrix in Competitive Strategy he does have chapters on:
1. Fragmented industries – local suppliers, no competitor dominates. Michael Porter looks at why
industries stay fragmented and at the opportunities for a dynamic competitor to consolidate and
acquire a critical competitive advantage.
2. Emerging industries – some new products are so innovative that they create new industries. For
example before mobile cell phones, who was aware of Nokia but it rapidly became a household
name. Michael Porter explains the underlying forces which determine industry evolution as the new
product becomes more established.
3. Industry maturity – after a new industry goes through a rapid growth stage, the industry matures
which presents new challenges for management.
4. Declining industries – some industries are able to constantly renew themselves within the existing
technology eg the motor industry but others find their technology and product offerings obsolete or
only appealing to a small number of die-hards. In this chapter Michael Porter looks at the issues of
how you can decide whether you exit a declining industry early or stay around to reap “last man
standing” profit.
5. Global industries – Michael Porter turned much more of his attention to the forces for globalisation
later in his career but this is still a great source of the strategic drivers which determine why some
industries do become global.
Competitive Strategy Part III – Strategic Decisions
In the last section of Competitive Strategy, Michael Porter looks at the factors that would help you to make key
strategic decisions:

1. Vertical integration – moving forward into your customers’ markets or backwards to compete with
suppliers.
2. Capacity expansion – you sell more, you want to expand but over-capacity is one of the most
destructive contributors to intense competition in an industry as competitors get greedy and want
more of the market or mis-read the market growth prospects, perhaps because they haven’t
recognised the threat of an up and coming substitute.
3. Entry into new businesses – this may be through internal development or acquisition but Michael
Porter examines the factors to establish whether diversification makes sense.

Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors

by Michael E. Porter