Industry analysis

Analyzing competitive advantage

General Environment

Firm

Industry Environment

Porters five forces

Threat of new entrants

Bargaining power of suppliers

Intensity of competitive rivalry

Bargaining power of Buyers

Threat of substitution

Porters five forces

Threat of new entrants

Bargaining power of suppliers

Intensity of competitive rivalry

Bargaining power of Buyers

Threat of substitution

Threat of new entrants

Barriers to entry will increase if there are
High Economies of scale Strong Proprietary product differences Strong Brand identity High Switching costs High Capital requirements Difficult to access distribution channels High absolute cost advantages
Proprietary learning curve Access to necessary inputs Proprietary ( low-cost) product design

High level of Expected retaliation Supportive Govt. / High Govt. Protection

Bargaining power of suppliers

Bargaining power of suppliers will increase if
Highly differentiated inputs Low switching costs for suppliers but high for industry firms Absence of substitute inputs High supplier concentration relative to industry Importance of volume to supplier is low Cost relative to total purchases by the industry is low Supplier input important (price/quality) to Buyer Strong impact of inputs on cost/differentiation High threat of forward integration by suppliers relative to threat of backward integration by industry

Bargaining power of buyers

Intrinsic leverage will increase if
High buyer concentration vis--vis firm concentration Buyer purchases high volumes Low switching costs for buyer relative to firms switching costs High levels buyer information/ expertise Buyer has high ability to integrate backward Several substitute products exist
Price /total purchases is high for buyer Product differences are low Brand identity is weak Low impact on quality performance is low Buyer profitability is low

Price sensitivity will increase if

Threat of substitution
Threat of substitute products increase if
High price performance of substitutes
Low switching costs for buyers High buyer propensity to substitute High Profitability of Producers of substitutes

Intensity of competitive rivalry

Competitive rivalry will be high when
Large # of competitors (Low Concentration Ratio) Slow industry growth rate High ratio of Fixed (or storage) costs / value added Intermittent over capacity exists Low product differences Weak brand identity Easy for buyers switch between rivals products Non-homogenous competitors High corporate stakes Low informational complexity High exit barriers
Highly Specialized assets High Fixed Cost of exit (e.g., labor agreements) High Strategic interrelationships High Emotional barriers High Government and social restrictions

IIM Bangalore

IIM Bangalore

Power of complementors
Complementor power will increase if
Relative buyer-power or switching costs Relative concentration: Few complementors and your industry is fragmented Asymmetric integration threats: Complementor can easily invade your turf but you cannot Ease of unbundling: Customers can purchase &use complement independent of your product Difference in pull-through: Complementor drives customer choice in purchasing bundle Slow market growth rate

Adjacent industries
Those that indirectly affect the industry through second order impact on suppliers, consumers, new entrants, substitutes, regulators and complementors

Government actions
Government can increase industry attractiveness through
High Levels of Industry Protection Low Levels of Industry Regulation Taxation: Low Customs & Tariff Restrictions

Steps in industry analysis

Define the relevant industry: What products are in it? Which ones are part of another distinct industry? What is the geographic scope of competition? Identify participants & segment them into groups, if appropriate: Assess the underlying drivers of each force to determine which are strong or weak and why. Determine overall industry structure, and test the analysis for consistency: Why is level of profitability what it is? Which are the controlling forces for profitability? Is the industry analysis consistent with actual long-run profitability? Are more-profitable players better positioned in relation to the five forces? Analyze recent & likely future changes in each force, both positive & negative. Identify aspects of industry structure that might be influenced by competitors, by new entrants, or by your company

Mistakes to avoid
Defining the industry too broadly or too narrowly.

Paying equal attention to all of the forces rather than digging deeply into most important ones.
Confusing effect (price sensitivity) with cause (buyer economics).

Using static analysis that ignores industry trends.

Confusing cyclical or transient changes with true structural changes. Using the framework to declare an industry attractive/unattractive rather than using it to guide strategic choices

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