Industry

Analysis

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 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

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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.

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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

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 Nature cont’d …
How Competitive Forces Shape Strategy
 The essence of strategy formulation is coping with
competition. Competition exists in the fight for market
share.
 Therefore, competition in an industry is rooted in its
underlying economics, and competitive forces.
 In light of this, customers, suppliers, potential entrants,
and substitute products are all competitors that may be
more or less prominent or active depending on the
industry type.
 Thus, the collective strength of these forces determines
the ultimate profit potential of an industry.

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 Nature cont’d …
The weaker the forces collectively the greater
the opportunity for superior performance in the
industry would be.
Thus, to cope with them the strategist must
delve below the surface and analyze the
sources of competition. For example:
◦ What makes the industry vulnerable to entry?
◦ What determines the bargaining power of suppliers?

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 Nature cont’d …
 Knowledge of these underlying sources of competitive
pressure provides the groundwork for a strategic plan
of action to:
◦ Highlight the critical strengths and weaknesses of
the company
◦ Animate the positioning of the company in its
industry
◦ Clarify the areas where strategic changes may yield
the greatest payoff
◦ Highlight the industry trends as either opportunities
or threats
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Threat of Entry
There are six major sources of barriers to
entry:
1.Economies of scale (saving the cost of
production through mass production)
2.Product differentiation
3.Capital requirements
4.Cost disadvantages
5.Access to distribution channels
6.Government policy
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 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
industry.

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 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.

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 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.

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 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)

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 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.

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 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.

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Threat of Entry cont’d …
Expected Retaliation
Existing firms might respond in
different ways when new comers
enter into the market.

Responses by existing competitors

may depend on a firm’s present stake
in the industry and available business
options

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 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.

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 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.
 Theproduct 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.

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

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 Rivalry among Competing Firms
Industry rivalry increases when:
Thereare numerous or equally balanced
competitors
Industry growth slows or declines
There are high fixed costs or high storage costs
There is a lack of differentiation opportunities or
When high exit barriers prevent competitors from
leaving the industry

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 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

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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

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THANK YOU!

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