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ANALYSIS OF INDUSTRIALAND OPERATINGENVIRONMENT

Dr. Sasmita Palo


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Strategy is a

choice

- Michael Porter


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External analysis

General Environment (macro factors)

Industry and CompetitiveEnvironment (micro factors)


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Industry Competition and the IO

Industry: A group of firms producing products

(goods and/or services) that aresimilar to each other.

Structure-Conduct-Performance(SCP) model The primary contribution of the

Industrial Organization (IO) economics

model Structure: Structural attributes of an

industry


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The Structure-Conduct-Performance Paradigm:

Basic Conditions: factors which shape the market of the

industry, e.g. demand, supply, political factorsStructure: attributes which give definition to the supply-side of the market, e.g. economies of scale, barriers toentry, industry concentration, product differentiation,vertical integration.

Conduct: the behavior of firms in the market, e.g. pricingbehavior advertising, innovation.

Performance: a judgment about the results of marketbehaviour, e.g. efficiency, profitability, fairness/incomedistribution, economic growth.


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Basic Conditions

Structure : no of firmsand concentration, entry conditions, level of verticalintegrationand diversification

Conduct: goals of the firm,, price andoutput decision, , degree of co-operation andinterdependence, anti

Performance: output, growth,profitability, employment and efficiency

Government


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Five Forces Framework

Translated and extended fromthe SCP model in 1980 by MichaelPorter.

A key proposition: The focal firms performance critically

depends on the degree ofcompetitiveness of the five forces

within an industry. The stronger and more competitive

these forces are, the less likely thefocal firm is able to earn above-


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Defining Industry

Business strategists have turned the SCPmodel from IO economics upside down, bydrawing on its insights to help firmsperform better.

This transformation is the heart of this.


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What is a 5 Forces Analysis?

Based on premise that:

competition in an industry is rooted in the underlyingeconomics, competitive forces or structures thatcollectivelydetermine theprofit potentialof the industry.


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Two Key QuestionsTwo Key Questions

1. How structurally attractive is

the industry?2. What is the companys relative

position within the industry?


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Source: Michael Porter, How Competitive Forces Shape Strategy, Harvard Business Review, March-April 1979, andViewers Guide, Michael Porter on Competitive Strategy, Nathan/Tyler, 1988.

Rivalry AmongExisting

Com etitors

BargainingPower

BargainingPower

Threat ofNew Entrants

Threat ofSubstitutes

Determinants of Buyer PowerBargaining leverageBuyer concentration vs. industryBuyer volumeBuyer switching costsPrice/total purchasesProduct differences

Brand identityDeterminants ofSubstitution ThreatRelative price performanceof substitutesSwitching costsBuyer propensity to substitute

Determinants of Supplier PowerDominated by few companiesDifferentiation of product (inputs) causeshigh switching costsFew substitute inputsSupplier concentrationImportance of volume to supplier

Cost relative to total purchases in theindustryThreat of forward integration relative to

threat of backward integration by firms in theindustry

Entry BarriersEconomies of scaleProprietary product differencesBrand identityCapital requirementsAccess to distributionGovernment policyExpected retaliation

Rivalry DeterminantsIndustry growthDemand conditions(overcapacity)Exit barriers (corporate stakes,

high fixed costs)

Product differencesBrand identityConcentration and balance


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Potential Competitors are companies thatare not currently competing in an industry buthave the capability to do so if they choose.Barriers to new entrants include:

Risk of Entry by Potential Competitors


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Scale-based low cost advantages(economies ofscale)- as firms expand output unit costs fall via:Cost reductions through mass productionDiscounts on bulk purchases of raw material andstandard partsCost advantages of spreading fixed and

marketing costs over large volumeNon-scale-based low cost advantages (proprietarytechnology / know-how / access to raw materials andchannels / good locations).

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Government Policy

Ex ected retaliation

Barriers toEntry


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Industry Competitive StructurevNumber and size distribution of companiesvConsolidated versus fragmented industries

Demand ConditionsvGrowing demand tends to moderate competition and reduce rivalry

vDeclining demand encourages rivalry for market share and revenue

Cost ConditionsvHigh fixed costs profitability leveraged by sales volume

Lack of Differentiation ot low switching cost

High strategic stakes

Height of Exit Barriers prevents companies from leavingindustryvHigh fixed costs of exitvWrite-off of investment in assetsvLow scrap value

Rivalry Among Established CompaniesCompetitive Rivalry refers to the competitivestruggle between companies in the same industryto gain market share from each other. Intensity of

Emotional attachment toindustry


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Five Forces Framework:Intensity of Rivalry among Competitors

Conditions leading to a high degree ofrivalry:The more concentrated an industry is, the

fewer the competitors are, and the morelikely that competitors will recognize theirmutual interdependence and so restraintheir rivalry.

Competitors of similar size, market

influence, and product offerings vigorouslycompete with each other.

In big ticket industries where products


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Red Ocean

Blue Ocean


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Industry Buyers may be the consumers or end-userswho ultimately use the product or intermediariesthat distribute or retail the roducts. These bu ers

Bargaining Power of Buyers

1. Buyers concentration ratio is high

2. Buyers purchase in large quantities.v Buyers have purchasing power as leverage for price

reductions.

3. The industry is dependant on the buyers.v Buyers purchase a large percentage of a companys total

orders.

4. Switching costs for buyers are low.v Buyers can play off the supplying companies against each

other.5. Buyers can purchase from several supplyingcompanies at once.


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Suppliers are organizations that provide inputs suchas material and labor into the industry. Thesesu liers are most owerful when:

Bargaining Power of

1. The product supplied is vital to the industry andhas few substitutes.

2. The industry is not an important customer tosuppliers.

v

Suppliers are not significantly affected by the industry.3. Switching costs for companies in the industry are

significant.v Companies in the industry cannot play suppliers against each

other.

4. Suppliers poses a credible threat to integrate

forward into the buyers industry

b i d


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Substitute Products are the products fromdifferent businesses or industries that can

satisf similar customer needs.

Substitute Products

1. The existence of close substitutes is astrong competitive threat.

v Substitutes limit the price thatcompanies can charge for their product.

Substitutes are a weak competitive force ifan industrys products have few closesubstitutes.

v Other things being equal, companies inthe industry have the opportunity to

raise prices and earn additional profits.n Substitutes are particularly threatening:

If substitutes are superior to existingproducts in quality and function.

If switching costs are low.


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Interpreting Industry

The collective strength of these forcesdetermines the ultimate profit

potential of an industry.The stronger each of these forces the

more limited industries are in theirability to raise prices and increase

profits


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In general,a firm is likel to be more rofitable if:

the less intense is the rivalry in its industry; the less danger of potential entrants & the

higher the barriers to entry; the less numerous and less aggressive the firms

that sell substitute products, and the morenumerous and more aggressive the firms thatsell complementary products;

the weaker the bargaining power ofclients/customers; and

the weaker the bargaining power of suppliers.

In industry and competitive analysis, firmsexamine their positions along these linesand seek ways to change conditions to be


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High entry barriers

UnattractiveUnattractive

IndustryIndustry

Suppliers and buyershave strong positions

Strong threatsfrom substituteproducts

Intense rivalryamongcompetitors

Low profit


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Five Forces Framework: Lessons fromthe Five Forces Framework

Not all industries are equal in termsof their potential profitability.

The task for strategists is to assessthe opportunities (O) and threats (T)underlying each competitive forceaffecting an industry, and then

estimate the likely profit potential ofthe industry.


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Summary

Industry Analysis is a powerful toolfor analyzing industry structures Identify profit opportunity

Identify suitable position strategy BUT less emphasis on choice & innovation

Static model


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Concept of sixth force

Role of a complementor


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STRATEGIC GROUP


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Three Strategic Groups in the Global AutomobileIndustr

Figure


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Critical Evaluation of Comp.

Innovation and industry structure

Company differences

Competitive changes during anindustrys evolution


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Implications of Strategic Groups

1.Intensity of competition among thecompanies within the group.

2.Each Strategic Group can have different

competitive forces and may face adifferent set of opportunities and threats.

3.Competition between the groups

Mobility Barriers


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Competitive Advantage

Performing activities better than competitors

Activities that create value in eyes ofconsumers


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The process of identifying keycompetitors; assessing theirobjective, strategies, strengths and

weaknesses & reaction patterns; andselecting which competitors to attackor avoid.

Competitive Analysis

(Source: Principles of Marketing by: Philip Kotler and Gary Armstrong


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Steps in the Process:

IdentifyingCompetitors

AssessingCompetitors

SelectingCompetitors

to Attack orAvoid

Firms face a wide rangeof competitionBe careful to avoidcompetitor myopia

Methods of identifyingcompetitors:

Industry point-of-viewMarket point-of-view

(Source: Principles of Marketing by: Philip Kotler and Gary Armstrong


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Sources of Competitive

COSTADVANTAGE

DIFFERENTIATION

COMPETITIVE

Similar

atlow

er

Pricefrom

unique


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Porters Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COSTDIFFERENTIATION

COMPETITIVE LEADERSHIP

SCOPESingle Segment F O C U S


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CompetitiveAdvantages(Sources of Rates of Profit

in Excess of the Competitive

AvoidCompetito

Be BetterThan

Attractive

Attractive Cost

AdvantagDifferentiati

on

Attractive

Strategic

Entry

Barriers

Mobility

Barriers

Mechanism

Sou rces of Compet iti veAdvanta ge


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Competi tiv e Advant ages asthe Sour ce of Super ior

Competitive advantages work in two basic ways

avoiding competitors

outperforming competitors (ie. productivityand efficiency/distinctive competencies)


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Sour ces of SuperiorPr ofita bilit y

A business can achieve a higher rate of profit(or potential profit) over a rival in one of twoways:

supplying an identical product/service at

a lower cost (cost-based advantage) supplying a differentiated product/service

in such a way that the customer is willingto pay a price premium that exceeds thecost of the differentiation

(differentiation-based advantage) These two sources of competitive

superiority define fundamentally different


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Market Share

Low High

Profitabilit

Low

High

Differentiation-based

Low CostLeadership

Stuck-in-the-Middle

Market Share-ProfitabilityRelationship:


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Porters Generic Strate ies


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ANALYSIS OF COMPETITOR

ENVIRONMENT


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FUTURE AGENDACURRENT STRATEGYASSUMPTIONSCAPABILITIES

Competitor Analysis

Competitor Analysis Components


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Competitor Analysis Components


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The Competitive Profile


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Thank ou

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