Industry Analysis:

The Fundamentals
The Firm within Its External Environment, Industry, and
Strategic Group, Subject to PESTEL Factors
FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS

At the Core of the Macro Environment

is the Industry Environment
The national/ The natural
international environment
economy
THE INDUSTRY
ENVIRONMENT
Demographic
Technology • Suppliers structure
• Competitors
• Customers
Government
Social
Socialstructure
structure
& Politics

The Macro Environment impacts the firm through its effect

on the Industry Environment
ANALYZING INDUSTRY ATTRACTIVENESS

The Determinants of Industry Profitability

3 key influences:
1. The value of the product to customers

2. The intensity of competition

3. Relative bargaining power at different

stages of the value chain.
 ANALYZING INDUSTRY ATTRACTIVENESS

The Spectrum of Industry Structures

Perfect
Competition Oligopoly Duopoly Monopoly

Concentration Many firms A few firms Two firms One firm

Entry and Exit No barriers Significant barriers High barriers

Barriers

Product Homogeneous
Differentiation Potential for product differentiation
Product

Information Perfect
Imperfect availability of information
Information
ANALYZING INDUSTRY ATTRACTIVENESS

Porter’s Five Forces of Competition

Framework
SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS

POTENTIAL Threat of Threat of

SUBSTITUTES
ENTRANTS new entrants substitutes
Rivalry among
existing firms

Bargaining power of buyers

BUYERS
 ANALYZING INDUSTRY ATTRACTIVENESS

The Structural Determinants of Competition

SUPLIER POWER
• Buyers’ price sensitivity
• Relative bargaining
power

THREAT OF ENTRY SUBSTITUTE

• Capital requirements INDUSTRY RIVALRY
• Concentration COMPETITION
• Economies of scale
• Diversity of • Buyers’ propensity
•Switching cost
•Product differentiation competitors to substitute
• Brand Identity • Product differentiation • Relative prices &
• Access to distribution • Excess capacity and performance of
channels exit barriers substitutes
• Legal/ regulatory barriers

BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
Knowledge, Big Buyer,
Switch Substitute
ANALYZING INDUSTRY ATTRACTIVENESS

Threat of New Entry

Entrants’ threat to industry profitability depends
upon the height of barriers to entry.
The principal sources of barriers to entry are:
• Capital requirements
• Economies of scale
• Switching Cost
• Product differentiation
• Brand Identity
• Access to channels of distribution
• Legal and regulatory barriers
ANALYZING INDUSTRY ATTRACTIVENESS

Threat of Substitutes

Extent of competitive pressure from producers

of substitutes depends upon:

• Buyers’ propensity to substitute

• The price-performance characteristics of

substitutes.
ANALYZING INDUSTRY ATTRACTIVENESS

Rivalry Between Established Competitors

The extent to which industry profitability is depressed
by aggressive price competition depends upon:
 Concentration (number and size distribution of
firms)
 Diversity of competitors (differences in goals, costs
strategies, etc.)
 Product differentiation
 Excess capacity and exit barriers
APPLYING INDUSTRY ANALYSIS

Applying Five-Forces Analysis to Forecast

Industry Profitability and Develop Strategy
Forecasting Industry Profitability
• If we can forecast changes in industry structure we can
predict likely impact on competition and profitability.

Strategic Positioning
• Once we know which structural features of the industry
support profitability and which depress profitability, we
can choose a favorable positioning within the industry.

Strategies to Improve Industry Profitability

• Which of the structural variables that are depressing
profitability can we change by individual or collective
strategies?
DEFINING INDUSTRIES

Drawing Industry Boundaries

 What industry is Ferrari in?
• The Motor Vehicle industry (SIC 371)
• The Automobile industry (SIC 3712)
• The sports car industry
• Is its industry global, regional (Europe) or national (Italy)?

 Key criterion: SUBSTITUTABILITY

– On the demand side : are buyers willing to substitute between
types of cars and across countries
– On the supply side : are manufacturers able to switch production
between types of cars and across countries

We may need to draw industry boundaries differently for

different types of decision
IDENTIFYING KEY SUCCESS FACTORS

Identifying Key Success Factors

Pre-requisites for success

What do How does the firm

customers want? survive competition

Analysis of competition
Analysis of demand
• What drives competition?
• Who are our • What are
drives competition?
the main
customers? • What are the
dimensions of main
competition?
dimensions of competition?
•How
• What do they want? • Howintense is competition?
intense is competition?
•How
Howcan
canweweobtain
obtainaasuperior
competitive position? position?
superior competitive

KEY SUCCESS FACTORS