Fundamentals of Strategy

Fifth Edition

Part I
The strategic position

Chapter 3
Industry and sector analysis

© 2021 Pearson Education Limited. All Rights Reserved.

 Learning outcomes
• Define industries and use Porter’s competitive five forces
framework to analyse industries or sectors: rivalry, threat of entrants,
substitute threats, customer’s power and supplier power.
• On the basis of the five competitive forces define industry
attractiveness and identify how the forces can be managed.
• Understand how industries develop and change in industry life
cycles and how to make five force analyses dynamic through
comparative industry structure analysis.
• Analyse strategic and competitor positions in terms of strategic
groups and market segments.
• Use these various concepts and techniques together with
those from Chapter 2 in order to recognise threats and
opportunities in the industry and marketplace.

© 2021 Pearson Education Limited. All Rights Reserved.

 Industries, markets and sectors

An industry is a group of firms producing products and

services that are essentially the same. For example, the
automobile industry and the airline industry.
A market is a group of customers for specific products or
services that are essentially the same (e.g. the market for
luxury cars in Germany).
A sector is a broad industry group (or a group of markets)
especially in the public sector (e.g. the health sector).

© 2021 Pearson Education Limited. All Rights Reserved.

 Competitive forces:
The five forces framework
Porter’s Five Forces Framework helps identify the
attractiveness of an industry in terms of five competitive
forces:
• The threat of entry.
• The threat of substitutes.
• The bargaining power of buyers.
• The bargaining power of suppliers.
• The extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.

© 2021 Pearson Education Limited. All Rights Reserved.

 Defining the industry

• The industry must not be defined too broadly (too wide

to be meaningful) or too narrowly (thus excluding
important competitors).

• The broader industry value chain needs to be

considered – different stages in the value chain should
be treated as separate industries.

• Industries can be analysed at different levels, for

example, different geographies, markets and even
different product or service segments within them
(e.g. airline markets).

© 2021 Pearson Education Limited. All Rights Reserved.

 The five forces framework (1 of 6)

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press by Michael E. Porter 1980.

© 2021 Pearson Education Limited. All Rights Reserved.

 The five forces framework (2 of 6)

Rivalry between existing competitors

Competitive rivals are organisations in the same
industry/market with similar products or services aimed at
the same customer group (distinct from substitutes).

The degree of rivalry depends on:

• Competitor concentration and balance.
• Industry growth rate.
• High fixed costs.
• High exit barriers.
• Low differentiation.

© 2021 Pearson Education Limited. All Rights Reserved.

 The five forces framework (3 of 6)

The threat of entry

Barriers to entry are the factors that need to be overcome
by new entrants if they are to compete. The threat of entry
is low when the barriers to entry are high and vice versa.
The main barriers to entry are:
• Economies of scale/Experience/Network effects.
• Access to supply and distribution channels.
• Differentiation and market penetration costs.
• Legislation or government restrictions
(e.g. licensing).
• Expected retaliation.
• Incumbency advantages.
© 2021 Pearson Education Limited. All Rights Reserved.
 The five forces framework (4 of 6)

The threat of substitutes

Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but have a different nature, that is, they
are from outside the industry.
Customers will switch to alternatives (and thus the threat increases) if:
•The price/performance ratio of the substitute is superior
(e.g. aluminium is more expensive than steel but it is more cost efficient
for car parts).
•The substitute benefits from an innovation that improves customer
satisfaction (e.g. high speed trains can be quicker than airlines
from city centre to city centre on short haul routes).
•Extra-industry effects. Substitutes come from outside the
incumbents’ industry which forces managers to look outside
their own industry to consider more distant threats and
constraints.

© 2021 Pearson Education Limited. All Rights Reserved.

 The five forces framework (5 of 6)

The power of buyers

Buyers are the organisation’s immediate customers, not necessarily the
ultimate consumers.
If buyers are powerful, then they can demand cheap prices or
product/service improvements to reduce profits.
Buyer power is likely to be high when:
• Buyers are concentrated.
• Buyers have low switching costs.
• Buyers can supply their own inputs (backward vertical
integration).
• Low buyer profits (under pressure to improve profits) and
the purchased inputs have a low impact on quality
(can cut costs without loss of quality).

© 2021 Pearson Education Limited. All Rights Reserved.

 The five forces framework (6 of 6)

The power of suppliers

Suppliers are those who supply what organisations need
to produce the product or service. Powerful suppliers can
reduce an organisation’s profits.

Supplier power is likely to be high when:

• The suppliers are concentrated (few of them).
• Suppliers provide a specialist or rare input.
• Switching costs are high (it is disruptive or expensive
to change suppliers).
• Suppliers can integrate forwards (e.g. low-cost airlines
have cut out the use of travel agents).

© 2021 Pearson Education Limited. All Rights Reserved.

 Complementors

An organisation is your complementor if it enhances your

business attractiveness to customers or suppliers.
Demand side: There is complementarity with respect to
customers if they value a product or service more when they
also have the other organisation’s product (e.g. app suppliers
are complementors to smartphone producers).
Supply side: An organisation is a complementor to a supplier if it
is more attractive for the supplier to deliver when it also
supplies the other organisation (e.g. a competing airline
can be a complementor for a supplier like Boeing, as
Boeing may invest more in improvements if they are
supplying both airlines).

© 2021 Pearson Education Limited. All Rights Reserved.

 Network effects

There are network effects in an industry when

one customer of a product or service has a
positive effect on the value of that product for other
customers.
Network effects are very important for eBay and
Facebook (see Illustration 3.2).

© 2021 Pearson Education Limited. All Rights Reserved.

 Implications of five forces analysis

• Which industries to enter (or leave)? Identifies the

relative attractiveness of industries, for example, those
where forces are weak.

• How can the five forces be managed? Managers

should identify strategic positions to defend itself and
exploit forces, for example, building barriers to entry by
becoming more vertically integrated.

• How are competitors affected differently?

Large firms with more resources can often deal
with barriers to entry more easily than small firms.

© 2021 Pearson Education Limited. All Rights Reserved.

 Issues in five forces analysis

• Defining the ‘right’ industry – Applying the model at the

most appropriate level – not necessarily the whole industry.
For example, the European low-cost airline industry rather
than airlines globally.
• Converging industries – particularly in the high tech
arenas – where industries overlap (e.g. digital industries –
mobile phones/cameras/mp3 players).
• Complementary organisations – which enhance the
attractiveness of a business to customers or
suppliers. Microsoft Windows and McAfee
computer security systems are complementors.
This can almost be considered as a sixth force.
© 2021 Pearson Education Limited. All Rights Reserved.
 Steps in an industry analysis

There are several important steps in an industry analysis

before and after analysing the five forces:
•Define the industry clearly.
•Identify the actors of each of the five forces and define
different groups within them and the basis for this.
•Determine the underlying factors of and total strength of
each force.
•Assess the overall industry structure and attractiveness.
•Assess recent and expected changes
for each force.
•Determine how to position your business
in relation to the five forces.

© 2021 Pearson Education Limited. All Rights Reserved.

The industry life cycle

© 2021 Pearson Education Limited. All Rights Reserved.

Comparative industry
structure analysis

© 2021 Pearson Education Limited. All Rights Reserved.

 Strategic groups

Strategic groups are organisations within an industry or

sector with similar strategic characteristics, following similar
strategies or competing on similar bases.

• These characteristics are different from those in other

strategic groups in the same industry or sector.
•There are many different characteristics that distinguish
between strategic groups.
• Strategic groups can be mapped on to
two-dimensional charts (maps).
These can be useful tools of analysis.

© 2021 Pearson Education Limited. All Rights Reserved.

Some characteristics for identifying
strategic groups

© 2021 Pearson Education Limited. All Rights Reserved.

 Uses of strategic group analysis

• Understanding competition – enables focus on direct

competitors within a strategic group, rather than the
whole industry. (For example, Tesco will focus on
Sainsburys and Asda.)
• Analysis of strategic opportunities – helps identify
attractive ‘strategic spaces’ within an industry.
• Analysis of ‘mobility barriers’ – that is, obstacles to
movement from one strategic group to another. These
barriers can be overcome to enter more attractive
groups. Barriers can be built to defend an
attractive position in a strategic group.

© 2021 Pearson Education Limited. All Rights Reserved.

 Market segments

Market segment: group of customers who have similar

needs different from customer needs in other parts of the
market.
•Where these customer groups are relatively narrow, such
market segments are called ‘niches’.
•Not all segments are attractive or viable market opportunities
– evaluation is essential:
‒ Customer needs vary for a variety of reasons. Focusing
on customer needs that are highly distinctive is one
means of building a long-term segment strategy.
‒ Specialisation within a market segment can be an
important basis for a successful ‘niche strategy’.

© 2021 Pearson Education Limited. All Rights Reserved.

Some bases of market segmentation

© 2021 Pearson Education Limited. All Rights Reserved.

 Opportunities and threats

The critical issue in undertaking environmental

analysis is the implications that are drawn from
this understanding in guiding strategic decisions
and choices.
Identifying opportunities and threats is extremely
valuable when thinking about strategic choices.
Opportunities and threats form one half of
the SWOT analysis that shapes strategy.

© 2021 Pearson Education Limited. All Rights Reserved.

 Summary
• The environment influence closest to an organisation includes the industry
or sector.
• Industries and sectors can be analysed in terms of Porter’s five forces –
barriers to entry, substitutes, buyer power, supplier power and rivalry.
Together with complementors and network effects, these determine
industry or sector attractiveness and possible ways of managing strategy.
• Industries and sectors are dynamic, and their changes can be analysed in
terms of the industry life cycle and comparative
five forces radar plots.
• Within industries strategic group analysis and market
segment analysis can help identify strategic gaps or
opportunities.

© 2021 Pearson Education Limited. All Rights Reserved.